Process: 80/2014-T

Date: June 30, 2014

Tax Type: IRC

Source: Original CAAD Decision

Summary

Process 80/2014-T addresses a critical dispute regarding the tax deductibility of autonomous taxation charges under Portuguese IRC (Corporate Income Tax) law. A, SGPS, SA, as the dominant company of a tax group (Group B) subject to the special regime under Articles 69 et seq. of the IRC Code, challenged self-assessments for tax years 2010, 2011, and 2012, seeking refunds totaling €125,221.44, €174,466.33, and €213,814.01 respectively. The central legal issue concerns whether autonomous taxation charges paid in those years should be deductible as tax expenses under the general deductibility rule in Article 23(1)(f) of the IRC Code, or whether they fall under the non-deductible expenses exception in Article 45(1)(a). The applicant argued that autonomous taxation has never constituted a tax on corporate income since its introduction by Decree-Law 192/90, but rather serves a different fiscal purpose. These charges apply regardless of IRC exemptions and target different taxable events than profit itself. The company contended that only IRC itself and surcharges should be non-deductible under Article 45(1)(a), not autonomous taxation. A crucial element involves the 2014 legislative reform (Law 2/2014) which repealed Article 45 and introduced Article 23-A, explicitly equating autonomous taxation to IRC for deductibility purposes. The applicant challenged any retroactive interpretation of this amendment as unconstitutional under Article 103(3) of the Portuguese Constitution, which prohibits retroactive tax legislation, arguing the 2014 law had innovative rather than interpretative character. The company also claimed violation of the principle of legitimate expectations derived from the rule of law principle (Article 2 of the Constitution). The arbitral tribunal was constituted under CAAD on April 3, 2014, with the parties waiving the oral hearing and submitting written arguments by June 2014.

Full Decision

ARBITRAL DECISION

REPORT

a) On 02-02-2014, A, SGPS, SA, NIPC …, with registered office at Rua … Lisbon, the dominant company of a group (Group B) subject to the special taxation regime for groups of companies provided for since 2010 to date in Articles 69 et seq. of the IRC Code (in 2009, Article 63 of CIRC); filed with CAAD a request requesting, under the Legal Regime of Arbitration in Tax Matters (RJAT), the constitution of a collective arbitral tribunal (TAC).

b) The request is signed by an attorney whose power of attorney was attached.

THE REQUEST

c) The Applicant raises to the TAC that it should:

a. Declare the illegality and annul the dismissals of the administrative objections that were dismissed insofar as they refused to annul the illegal part, as discussed in administrative objection proceedings, of the self-assessments of corporate income tax and consequent municipal surcharge for the tax years 2010, 2011 and 2012, thereby violating the principle of legality;

b. Declare the partial illegality of these self-assessments (and consequently annul them), in the parts corresponding to the amounts of € 125,221.44, € 174,466.33 and € 213,814.01, respectively for the tax years 2010, 2011 and 2012;

c. Consequently recognize the right to reimbursement of these amounts and, likewise, the right to compensatory interest for the payment of tax unduly assessed.

d) It invokes that the self-assessment acts it carried out in Form 22 declarations for the tax years 2010, 2011 and 2012 are in non-compliance with paragraph a) of Article 45 of the IRC Code combined with paragraph f) of Article 23 of the IRC Code, constituting the defect of violation of law.

e) Insofar as it corresponds to the non-deduction for tax purposes of charges with autonomous taxation of those same tax years.

f) It argues in its submissions that the legislative amendment of 2014 (repeal of Article 45 of the IRC Code and its replacement by the addition of Article 23-A of the IRC Code – by Law No. 2/2014, of January 16) has unequivocally innovative character and, consequently, can only apply from that point forward.

g) Concluding that it would suffer from unconstitutionality, by violation of Article 103, no. 3, of the Constitution (prohibition of retroactivity of tax law), and by violation of the principle of protection of confidence inherent in the principle of the rule of law (in accordance with Article 2 of the Constitution), the interpretation of the norm contained in paragraph a) of no. 1 of Article 23-A of the CIRC, introduced by Law No. 2/2014, of January 16, in the sense that the equalization made there of autonomous taxation to IRC, would apply to tax years prior to 2014, for allegedly having a materially interpretative nature of the former rule it replaced (the norm contained in paragraph a) of no. 1 of Article 45 of the CIRC).

h) Furthermore, it petitions the condemnation of the AT for interest counted from 31.05.2011, 31.05.2012 and 31.05.2013 (deadline dates for official IRC refunds by AT) respectively as to the IRC for the years 2010, 2011 and 2012.

i) The Applicant identifies the tax acts subject to the dispute as follows:

a. The dismissals of administrative objections and, consequently (and in final or ultimate terms), the self-assessment acts of corporate income tax and consequent surcharge relating to tax years 2010, 2011 and 2012 insofar as it corresponds to the non-deduction for tax purposes of charges with autonomous taxation of those same tax years.

b. Intending to submit to the Arbitral Tribunal the legality of these dismissals of administrative objections, insofar as they disregard the recognition of the illegality of that part of the self-assessments of corporate income tax and consequent surcharge, relating to the tax years 2010, 2011 and 2012 of Fiscal Group B and, likewise, the legality of this part of the self-assessments of corporate income tax and consequent surcharge, relating to the tax years 2010, 2011 and 2012, whose amount totals € 125,221.44, € 174,466.33 and € 213,814.01, respectively.

OF THE ARBITRAL TRIBUNAL

j) The request for arbitral pronouncement was accepted by the President of CAAD and automatically notified to the AT on 04.02.2014.

k) By the Deontological Council of CAAD, arbitrators were designated as the signatories of this decision, with the parties being notified thereof on 04.02.2014.

l) By which the Collective Arbitral Tribunal (TAC) has been, as of 03.04.2014, regularly constituted to appreciate and decide on the object of this dispute.

m) All these acts are documented in the communication of constitution of the Collective Arbitral Tribunal dated 03-04-2014 which is hereby reproduced.

n) Since questions are raised in this case that are entirely identical to those already raised in many other cases already decided at CAAD, the TAC by order of 12-05-2014 decided to dispense with the meeting of parties referred to in Article 18 of the RJAT, if the parties did not object thereto.

o) The AT chose not to pronounce on the matter, tacitly agreeing to the position of the TAC. The Applicant through a request of 15-05-2014 came to express its express agreement to the promotion of the TAC, not dispensing with the production of written submissions.

p) By order of 16-05-2014, the parties were granted a period of 10 successive days for the production of final submissions, if they wished.

q) On 23-05.2014 the Applicant presented its submissions. On 05-06-2014 the AT presented its counter-submissions.

r) The AT protested to attach the instructing record, not having attached it until the date, certainly because its content corresponds to the contents of the administrative objections which are at the origin of this request for pronouncement and which were attached by the Applicant with the designation of Document No. 6 to Document No. 11.

PROCEDURAL REQUIREMENTS

s) Legitimacy, capacity and representation - the parties enjoy legal personality and capacity, are legitimate and are duly represented.

t) Principle of contradiction - the AT attached to the case, on 12.05.2014, the response to the request for pronouncement presented by the Applicant. The parties were notified of all acts adopted by the TAC and of the acts carried out by the counterparty.

u) Dilatory exceptions - the case does not suffer from nullities and the request for arbitral pronouncement is timely since it was presented within the prescribed period in paragraph a) of no. 1 of Article 10 of the RJAT.

SUMMARY OF THE APPLICANT'S POSITION

As to the material defect of violation of law

v) It argues that since the appearance of Article 4 of Decree-Law No. 192/90, which provided for the requirement of amounts, as tax, to companies that incurred undocumented (or confidential) expenses, autonomous taxation was never, from its inception, a tax on the company's income.

w) It alleges that in the overwhelming majority of cases, the function of autonomous taxation reveals that the same are not, do not have the nature of a tax on the income (profit) of the legal entity that bears them and constitutes their taxpayer.

x) Moreover, autonomous taxation applies regardless of IRC (as a consequence, precisely because of this different nature and function in comparison with IRC): they apply even (or in the same manner) when there is exclusion of subject matter applicability of IRC, or exemption from IRC, and they apply to a different reality from that (the profit) to which IRC applies, whereby their tax deduction does not generate a vicious circle, as would be the case with a possible deduction of surcharges.

y) It argues that "to charges resulting from autonomous taxation the general rule of deductibility of tax charges provided in Article 23, no. 1, paragraph f), of the CIRC applies".

z) And that the tax charges to which the exception to their deductibility applies, provided in paragraph a) of no. 1 of Article 45 of the CIRC are only the IRC itself assessed, the surcharge known as state surcharge (Article 87-A of the CIRC) and municipal surcharge (Article 14 no. 1 of Law 2/2007, of January 15).

aa) It adduces that the "doctrinal controversy that existed about the (in)deductibility of municipal surcharge and the way it was settled also confirms that, with respect to charges with autonomous taxation the exception provided in paragraph a) of no. 1 of Article 45 of the CIRC to the tax rule of deductibility of taxes does not apply".

bb) Since "living up to their name, autonomous taxation are autonomous, independent, from non-applicability with respect to IRC (a situation even more extreme than exemption)".

cc) It concludes that there is a norm that by the positive prescribes the deductibility of autonomous taxation (Article 23, no. 1, paragraph f), of the CIRC) and there is no norm that by the negative exceptions this deductibility (paragraph a) of no. 1 of Article 45 of the CIRC).

dd) That is, it argues for a reading of the acronym "IRC" used in paragraph a) of no. 1 of Article 45 of the CIRC, in the sense of only encompassing the tax on the company's profits and no longer the amounts resulting from the application of autonomous taxation rates, for the reason that it is an autonomous tax that is not confused with IRC, either from the formal or substantive point of view.

ee) Since autonomous taxation "have nothing to do with the function of IRC".

As to the unconstitutionality of the norm contained in paragraph a) of no. 1 of Article 23-A of the IRC Code as redrafted by Law 2/2014, of January 16

ff) It refers in its submissions that the legislative amendment of 2014 regarding this matter has unequivocally innovative character and, consequently, can only apply from that point forward, from which it concludes that it suffers from unconstitutionality, by violation of Article 103, no. 3, of the Constitution (prohibition of retroactivity of tax law), and by violation of the principle of protection of confidence inherent in the principle of the rule of law (in accordance with Article 2 of the Constitution), the interpretation of the norm contained in paragraph a) of no. 1 of Article 23-A of the CIRC, introduced by Law No. 2/2014, of January 16, in the sense that the equalization made there of autonomous taxation to IRC, would apply to tax years prior to 2014, for allegedly having a materially interpretative nature of the former rule it replaced (the norm contained in paragraph a) of no. 1 of Article 45 of the CIRC) and that did not make such equalization.

SUMMARY OF THE TAX AUTHORITY'S POSITION

As to the material defect of violation of law.

gg) Already on 19.03.2014 the AT attached to the case a request, in accordance with no. 1 of Article 13 of the RJAT communicating the maintenance of the act subject to the request for annulment.

hh) In its Response to the request for pronouncement, the AT begins by referring that even if admitting in theory the deductibility of autonomous taxation, with respect to autonomous taxation on non-deductible expenses, it will never be possible to admit its deductibility insofar as they would configure a tax charge on expenses not essential "for the realization of income subject to tax or for the maintenance of the source of production", whereby they do not fall under paragraph f) of no. 1 of Article 23 of the IRC Code.

ii) As to the possibility of deducting from taxable profit charges with autonomous taxation affecting deductible expenses, it contests the reading that the Applicant makes of the jurisprudence and of the authors it cites in abundance, since none of them pronounce themselves in the sense that autonomous taxation are not, at least formally, IRC, nor do they advocate their deductibility from taxable profit, either by their exclusion from paragraph a) of no. 1 of Article 45 of the IRC Code, or by their inclusion in paragraph f) of no. 1 of Article 23 of the IRC Code.

jj) Nor does it appear acceptable to derive from them, without more, that autonomous taxation, despite the particularities in their determination, are not IRC and that, for this reason, do not fall within the provision of paragraph a) of no. 1 of Article 45 of the IRC Code.

kk) It counters that the Applicant's claim – which is to correct the entry of charges relating to autonomous taxation in field 724 of Form 22 – encounters from the start the literal element of the norm contained in paragraph a) of no. 1 of Article 45 of the CIRC, which refers to charges with IRC.

ll) And this is so because it cannot be denied that autonomous taxation formally integrate into the IRC to be paid by the taxpayer.

mm) Since this observation is not disputed by jurisprudence nor by the prestigious authors that the Applicant cites, which, it should be emphasized, address the question of the specificities of autonomous taxation precisely under the assumption that they formally compose the IRC to be paid by taxpayers.

nn) Concluding that "when the legislator refers to IRC charges, necessarily it is including, even if for now on a literal level, autonomous taxation", whereby "autonomous taxation are a component of IRC to be self-assessed and paid by taxpayers in accordance with the terms and deadlines provided respectively in Articles 89 et seq. (Determination – Chapter V) and 104 et seq. (Payment – Chapter VI) of the IRC Code, which, moreover, refer indifferently to both IRC on profit and to autonomous taxation in the field of IRC".

oo) "The tax on income also contemplates elements of sole obligation, such as liberatory rates of IRS or autonomous taxation rates of IRC".

pp) Its "(in)deductibility ... cannot be placed on the same level as the discussion that in the past occurred around the deductibility of municipal surcharges and which culminated in the solution embodied in the State Budget Law of 1996 (Law No. 10-B/96, of March 23), to which an interpretative nature was conferred, and also in the decision of the Plenary of the STA, of 05-06-2002, delivered in appeal by opposition of judgments in case No. 022155", since "autonomous taxation rates do not share with surcharges the characteristics that make them a distinct and special tax in relation to IRC".

qq) Since from their creation by Article 4 of Decree-Law No. 192/90, of June 9 "even though not formally inserted into the IRS or IRC codes, it was already determined that the product of the application of these rates constituted an additional tax on income to be assessed and paid by the taxpayer".

rr) It concludes that "autonomous taxation are neither, nor have they ever been, a special autonomous tax, as municipal surcharges were and in part still are, nor are they a 'consumption tax' or a 'general tax on consumption' [for this purpose it would suffice only to refer to autonomous taxation on distributed profits provided in no. 11 of Article 88 of the CIRC, which would hardly be considered acts of consumption], but rather an integral component of IRC that constitutes an element of sole obligation."

ss) It reinforces the conclusion referred to above in the fact that the legislator made the amendment introduced by Law No. 2/2014, of January 16, which came to add to that paragraph a) of no. 1 of Article 45 of the IRC Code, which now appears in paragraph a) of no. 1 of Article 23-A, "IRC, including autonomous taxation, (...)", in contrast with the intervention it made to the precept through the aforementioned State Budget Law for the year 1996, when it added to its wording, to include surcharges, "(...) and any other taxes that directly or indirectly affect profits".

tt) Arguing that "the legislator thus comes, with a manifestly clarifying scope, to clarify that it considers autonomous taxation as a component included in the charges borne by way of IRC", being "an interpretative aid that should not be ignored in the task of ascertaining the meaning of the precept under analysis, which corroborates the interpretation that was always made of it both by the Tax and Customs Authority and by the generality of taxpayers in the self-assessment of IRC (namely the present Applicant in arbitration)".

uu) It also refers that "... the total tax to be paid or recovered, is contained in fields 367 and 368, of table 10 (Tax Calculation), of Form 22, consisting such amounts undoubtedly of IRC, which includes autonomous taxation."

vv) And it also concludes: "the thesis that the Applicant pursues would only succeed through a possible restrictive interpretation of paragraph a) of no. 1 of Article 45 of the CIRC, which, be it said, does not appear practicable" being certain that "autonomous taxation share the reasons that justify the non-deductibility of IRC on income" and "from a formal point of view autonomous taxation do not configure a tax distinct from IRC, but rather consist in an additional thereto".

ww) Serving as an argument for the non-deductibility for determination of taxable profit of autonomous taxation, the same reasons for the non-deductibility of IRC in the proper sense, because it is not deductible to itself.

xx) As a final argument against the deductibility of autonomous taxation the AT refers to the practical and functional regime of the process of determination of taxable matter and of assessment of IRC that results from no. 14 of Article 88 of the CIRC, insofar as, before the assessment of autonomous taxation is processed it is necessary to determine if in Form 22 a taxable profit or loss is presented, for which the assessment is always posterior (after the operation of obtaining the taxable matter) to its assessment process. From this deriving an intrinsic connection between the tax process aimed at the assessment of IRC and the tax process applicable to the assessment of each type of autonomous taxation.

yy) It concludes by the lack of merit of the request, including as to compensatory interest, as already occurred in CAAD cases 187/2012-T, 209/2103-T, 210/2013-T, 246/2013-T, 255/2013-T, 260/2013-T and 282/2013-T).

zz) In its submissions the AT maintained the position assumed in its Response and further came to supplement what it had referred to and expressed itself in ss) and tt) above: "The new wording of Article 23A no. 1 paragraph a) introduced by Law 2/2014, of January 16, has a manifest clarifying scope for the future as to the following fact: autonomous taxation are a component included in the charges borne by way of IRC".

As to the unconstitutionality of the norm contained in paragraph a) of no. 1 of Article 23-A of the IRC Code as redrafted by Law 2/2014, of January 16

aaa) The AT concludes in its counter-submissions that the norm in question does not suffer from unconstitutionality since the AT never proposed the application of the new Article 23-A of the CIRC to tax facts occurred and decided during the validity of the former law.

bbb) Arguing for the legality of the tax acts because they constitute a correct application of the law to the facts.

II - QUESTIONS THAT THE TRIBUNAL MUST RESOLVE

The questions that arise for the Tribunal concern only the interpretation and application of legal rules.

On this matter, in particular, the CAAD has already pronounced itself in various decisions in which the underlying question is the same, that is to say, it is discussed, ultimately, the scope of the provision of the norm contained in paragraph a) of no. 1 of Article 45 of the IRC Code, combined with the norm contained in paragraph f) of no. 1 of Article 23 of the IRC Code.

The limit of interpretation is the letter, the text of the norm. It then lacks the "task of interrelation and assessment that escapes the literal domain".

That is, the crux of the question consists in determining in light of the general principle of deductibility of charges demonstrably essential for the realization of income subject to tax or for the maintenance of the source of production, in particular, those of a fiscal and parafiscal nature, that resulted from Article 23, no. 1, paragraph f), of the IRC Code, if the norm contained in paragraph a) of no. 1 of Article 45 of the same Code, whereby they were not deductible for purposes of determination of taxable profit IRC and any other taxes that directly or indirectly affect profits, in its provision, entails the non-deductibility of autonomous taxation.

We are thus, only and solely, within the scope of the activity of interpretation and application of the norms, that is to say, in the task of delimiting the legal-factual situations that should be understood as included in the provision of the norm contained in paragraph a) of no. 1 of Article 45 of the IRC Code, more specifically in the acronym of "Income Tax of Legal Entities": "IRC".

Finally, the question of possible unconstitutionality of the norm contained in paragraph a) of no. 1 of Article 23-A of the IRC Code as redrafted by Law 2/2014, of January 16, by possible violation of Article 103, no. 3, of the Constitution (prohibition of retroactivity of tax law), and by violation of the principle of protection of confidence inherent in the principle of the rule of law (in accordance with Article 2 of the Constitution), in the sense that the equalization made there of autonomous taxation to IRC, would apply to tax years prior to 2014, for allegedly having a materially interpretative nature of the former rule it replaced (the norm contained in paragraph a) of no. 1 of Article 45 of the CIRC) and that did not make such equalization, must also be addressed.

The following are the questions that the TAC must resolve:

  1. In light of the general principle of deductibility of charges demonstrably essential for the realization of income subject to tax or for the maintenance of the source of production, in particular, those of a fiscal and parafiscal nature, that resulted from Article 23, no. 1, paragraph f), of the IRC Code, does the norm contained in paragraph a) of no. 1 of Article 45 of the same Code, whereby they were not deductible for purposes of determination of taxable profit IRC and any other taxes that directly or indirectly affect profits, in its provision, entail the non-deductibility of autonomous taxation?

  2. Does the amendment introduced by Law No. 2/2014, of January 16, which repealed Article 45 of the IRC Code and added Article 23A of the IRC Code, whose paragraph a) of no. 1 now has the following wording: "IRC, including autonomous taxation, (...)", in contrast with the intervention it made to the precept through the State Budget Law for the year 1996, when it added to its wording, to include surcharges, "(...) and any other taxes that directly or indirectly affect profits" have an interpretative nature?

  3. Was the norm contained in paragraph a) of no. 1 of Article 23-A of the IRC Code as redrafted by Law 2/2014, of January 16 applied here by the AT and consequently does the violation of Article 103, no. 3, of the Constitution (prohibition of retroactivity of tax law) and the violation of the principle of protection of confidence inherent in the principle of the rule of law (in accordance with Article 2 of the Constitution) occur?

III. PROVEN AND UNPROVEN FACTS. JUSTIFICATION

Facts considered proven with relevance to the decision to be adopted are these, indicating the respective documents (proof by documents) and/or the articles of the Applicant's request and the AT's response as to facts admitted by agreement, as justification:

Tax year 2010

  1. As to the tax year 2010, the applicant filed on 30.05.2011 the IRC Form 22 declaration, proceeding to replace it on 16.11.2012, in this latter declaration entering in Table 10:

a. In Field 365: 434,258.87 euros of autonomous taxation;

b. And in Field 367: the value of TOTAL IRC TO PAY of 2,505,583.59 euros, including autonomous taxation – As per Documents Nos. 2 and 3 attached with the request for pronouncement and articles 2 and 18 of the request for pronouncement.

  1. In Table 11 of said IRC declaration the Applicant entered:

a. In Field 421: charges with vehicles (Article 88-4): 4,185,813.75 euros - which generated an autonomous taxation of 418,581.38 euros;

b. In Field 414: representation expenses (Article 88-7): 88,222.93 euros - autonomous taxation of 8,322.29 euros;

c. In Field 415: charges with subsistence allowances and compensation for employee travel in private vehicle (Article 88-9): 44,414.12 euros – autonomous taxation of 2,220.71 euros; - As per Documents Nos. 2 and 3 attached with the request for pronouncement and articles 2 and 18 of the request for pronouncement.

Tax year 2011

  1. As to the tax year 2011, the applicant filed on 30.05.2012 the IRC Form 22 declaration, entering in Table 10:

a. In Field 365: 603,933.86 euros of autonomous taxation;

b. And in Field 367: the value of TOTAL IRC TO PAY of 1,124,836.04 euros, including autonomous taxation – As per Document No. 4 attached with the request for pronouncement and articles 2 and 20 of the request for pronouncement.

  1. In Table 11 of said IRC declaration the Applicant entered:

a. In Field 420: charges with vehicles (Article 88-3): 1,171,461.20 euros and;

b. In Field 421: charges with vehicles (Article 88-4): 2,386,589.46 euros – autonomous taxation of 594,464.01 euros;

c. In Field 414: representation expenses (Article 88-7): 64,938.01 euros - autonomous taxation of 6,493.80 euros;

d. In Field 415: charges with subsistence allowances and compensation for employee travel in private vehicle (Article 88-9): 14,632.40 euros - autonomous taxation of 731.62 euros - As per Document No. 4 attached with the request for pronouncement and articles 2 and 20 of the request for pronouncement.

Tax year 2012

  1. As to the tax year 2012, the applicant filed on 30.05.2013 the IRC Form 22 declaration, entering in Table 10:

a. In Field 365: 688,437.87 euros of autonomous taxation;

b. And in Field 367: the value of TOTAL IRC TO PAY of 853,933.10 euros, including autonomous taxation – As per Document No. 5 attached with the request for pronouncement and articles 2 and 22 of the request for pronouncement.

  1. In Table 11 of said IRC declaration the Applicant entered:

a. In Field 420: charges with vehicles (Article 88-3): 1,427,642.72 euros;

b. In Field 421: charges with vehicles (Article 88-4): 2,471,513.06 euros – autonomous taxation of 636,021.02 euros;

c. In Field 414: representation expenses (Article 88-7): 350,320.42 euros – autonomous taxation of 35,032.04 euros;

d. In Field 415: charges with subsistence allowances and compensation for employee travel in private vehicle (Article 88-9): 31,441.48 euros - autonomous taxation of 1,491.98 euros;

e. In Field 424: charges or expenses relating to bonuses and other variable remuneration paid to managers, administrators or directors (Article 88-13-b)): 36,000.00 euros – autonomous taxation 12,600.00 euros - As per Document No. 5 attached with the request for pronouncement and articles 2 and 22 of the request for pronouncement.

  1. On May 30, 2013 the applicant filed an administrative objection against the self-assessment of IRC and consequent municipal surcharge, relating to the tax year 2010 – Document No. 6 attached with the request for pronouncement and article 4 of the same request.

  2. And on August 28, 2013, the applicant filed administrative objections against the self-assessments of IRC and municipal surcharge, relating to the tax years 2011 and 2012 – Documents No. 7 and 8 attached with the request for pronouncement and article 5 of the same request.

  3. On November 14, 2013 the applicant was notified by registered mail of the decisions dismissing administrative objections relating to the tax years 2010 and 2011, by orders issued on November 11, 2013 and November 12, 2013, respectively, by the Head of the Tax Management and Assistance Division of the Large Taxpayers Unit – Documents Nos. 9 and 10 attached with the request for pronouncement and article 6 of the same request.

  4. On December 6, 2013 the applicant was notified by registered mail of the decision dismissing the administrative objection relating to the tax year 2012, by order issued on December 4, 2013 by the Head of the Tax Management and Assistance Division of the Large Taxpayers Unit – Document No. 11 attached with the request for pronouncement and article 7 of the same request.

  5. The Applicant paid on 31.05.2011 and 02-01-2013 the TOTAL IRC self-assessed for the tax year 2010, which included the autonomous taxation assessments referred to in 1) – b. above – Documents Nos. 13 and 14 attached with the request for pronouncement.

  6. The Applicant paid on 31.05.2012 the TOTAL IRC self-assessed for the tax year 2011, which included the autonomous taxation assessments referred to in 3) – b. above – Document No. 16 attached with the request for pronouncement.

  7. The Applicant paid on 31.05.2013 the TOTAL IRC self-assessed for the tax year 2012, which included the autonomous taxation assessments referred to in 5) – b. above – Document No. 19 attached with the request for pronouncement.

  8. The Applicant did not deduct, for purposes of determining the taxable profit of its fiscal group in the aforementioned tax years 2010 to 2012, the charges incurred with said autonomous taxation, instead treating them as if they were IRC or municipal surcharge – Article 24 of the request for pronouncement.

  9. The fiscal impact resulting from not having deducted the charge with autonomous taxation in the determination of IRC, including the state surcharge surcharge and municipal surcharge is 125,221.44 euros for the year 2010, 174,466.33 euros for the year 2011 and 213,814.01 euros for the year 2012, for a total of 513,501.78 euros – articles 26 to 29 of the request for pronouncement and Documents 23 to 25 attached with the request for pronouncement.

There is no other factuality alleged that is relevant to the correct resolution of the dispute, regardless of the direction of the decision to be adopted.

The agreed facts result from admission or from documents attached by the parties whose contents and evidentiary values did not merit any kind of disagreement.

IV. APPRECIATION OF THE QUESTIONS THAT THE TRIBUNAL MUST RESOLVE

  1. In light of the general principle of deductibility of charges demonstrably essential for the realization of income subject to tax or for the maintenance of the source of production, in particular, those of a fiscal and parafiscal nature, that resulted from Article 23, no. 1, paragraph f), of the IRC Code, does the norm contained in paragraph a) of no. 1 of Article 45 of the same Code, whereby they were not deductible for purposes of determination of taxable profit IRC and any other taxes that directly or indirectly affect profits, in its provision, entail the non-deductibility of autonomous taxation?

It should be noted from the outset that the Tribunal decides to adopt, as to the meaning and justification, what was decided in CAAD Case 210/2013-T regarding the object of this dispute.

First of all, it is worth noting that from the formal and literal point of view of the law (and in operational terms), and as to the provision of the norm in question (contained in paragraph a) of no. 1 of Article 45 of the same Code, more specifically the expression "IRC") there is no doubt that it comprises IRC proper and the product of the application of autonomous taxation rates referred to in Article 88 of the IRC Code.

Let us see:

As results from the proven facts (subsections 1) b.; 3) b.; 5) b.; 11), 12) and 13) above) there is no separate payment of IRC and alongside or parallel autonomous payments of the product of the application of autonomous taxation rates. What exists is a single amount of a collection of IRC, encompassing various realities, with distinct processes of incidence (some on expenses), determination of taxable matter and application of rates. When the final phase of assessment/determination of OVERALL IRC is reached, the process is single in the sense that there is only a single collection of IRC.

On the other hand, the Applicant's allegation that the application of autonomous taxation rates applies generically to entities that are not subject to tax and that this proves that autonomous taxation rates are more assimilated to a special tax, autonomous from IRC, does not appear to have support in reality.

Let us examine the case of Political Parties, public associations, which are entities not subject to IRC under no. 1 of Article 10 of Law No. 19/2003, of June 20.

From the very concept of "non-subjectivity" it is derived that these entities do not fall within the provision of Articles 1 and 2 of the IRC Code. On the other hand, in the various numbers of Article 88 of the CIRC their application calls for the recipient to be a "taxpayer" of IRC, that is, to be an entity subject to IRC even though exempted from it.

For this type of entities, taking into account that the assessment of IRC is generally carried out by the taxpayer himself in the declaration referred to in Article 120 of the IRC Code (see paragraph a) of Article 89 of the CIRC), there is not even an obligation to file Form 22 of the IRC, which is derived a contrario from no. 9 of Article 117 of the IRC Code (since only these entities have to file Form 22 of the IRC).

Therefore, except for entities subject to the fiscal transparency regime, entities not subject to IRC will not, for that same reason, be subject to autonomous taxation rates of Article 88 of the IRC Code.

There is thus an intrinsic connection between the regulatory framework of applicability and as to exemptions that is reflected in the application of autonomous taxation rates referred to in Article 88 of the IRC Code.

On the other hand, from an operational point of view, there is the collection of a single IRC collection, which comprises autonomous taxation assessments.

As we referred to above, aimed at standardization and simplification, and because we subscribe to its essential correctness, we will adhere to what is found written in Arbitral Decision CAAD 210/13-T, which we transcribe below:

"The doubt about the deductibility of autonomous taxation in the context of the previous wording of the IRC Code arises as a consequence of the interpretative margin created by the combination of two norms:

On the one hand, the general principle of deductibility of charges demonstrably essential for the realization of income subject to tax or for the maintenance of the source of production, in particular, those of a fiscal and parafiscal nature, that resulted from Article 23, no. 1, paragraph f), of the IRC Code,

On the other hand, the rule of non-deductibility provided in paragraph a) of no. 1 of Article 45 of the same Code, whereby they were not deductible for purposes of determination of taxable profit IRC and any other taxes that directly or indirectly affect profits.

In particular, the doubts arise because the norm provided in paragraph a) of no. 1 of Article 45 of the IRC Code does not expressly mention autonomous taxation and because the general principle in the area of IRC was that of deductibility of charges essential for the realization of income subject to tax or for the maintenance of the source of production.

Thus, in light of a general principle of deductibility of charges and the absence of express reference to autonomous taxation, the doubt arises as to whether the legislator intended to include them in the exception of non-deductibility provided in paragraph a) of no. 1 of Article 45 of the CIRC.

The doubts arising with respect to the deductibility of autonomous taxation in the field of IRC are therefore perfectly justified in light of some uncertainty created by the literal element of the norms stated. Thus, it will be necessary to deepen the analysis beyond its literal element, seeking in the reasons for the autonomous taxation regime the answer to the doubts created.

Autonomous taxation was introduced into the Portuguese legal system through Article 4 of Decree-Law No. 192/90, of June 9, which provided for autonomous taxation, at the rate of 10%, on undocumented or confidential expenses.

Later, autonomous taxation was included in the IRC Code through Law No. 30-G/2000, of December 29, which came to integrate the provision of autonomous taxation into the instrument that regulates IRC.

Since then the regime of autonomous taxation, inserted in the IRC Code, has undergone a process of progressive expansion.

Currently there are several types of autonomous taxation that we find in Article 88 of the IRC Code:

i) Autonomous taxation on undocumented expenses;

ii) Autonomous taxation on charges with vehicles;

iii) Autonomous taxation on representation expenses;

iv) Autonomous taxation on amounts paid or due, in any capacity, to individuals or legal entities resident outside Portuguese territory and there subject to a clearly more favorable tax regime;

v) Autonomous taxation on charges with subsistence allowances and with compensation for the displacement of workers in private vehicles in the service of the employer entity;

vi) Autonomous taxation on profits distributed by entities subject to IRC to taxpayers who benefit from full or partial exemption;

vii) Autonomous taxation on charges or expenses relating to indemnifications or any compensation due not related to the achievement of productivity objectives previously defined in the contractual relationship, when there is the cessation of functions of manager, administrator or director, as well as on charges relating to the part exceeding the value of remuneration that would be received for the exercise of those positions until the end of the contract, when it is a matter of termination of a contract before the deadline;

viii) Autonomous taxation on charges or expenses relating to bonuses and other variable remuneration paid to managers, administrators or directors.

From the analysis of this list we can draw two basic conclusions:

(i) The first is that autonomous taxation applies both to deductible charges and to non-deductible charges;

(ii) The second is that autonomous taxation does not serve only one objective, but two:

Some aim to prevent the erosion of the tax base in the field of IRC, by imposing taxation on charges that may be deducted by IRC taxpayers, but which, if deducted, would transform into an increase in taxation, thus seeking to serve as a disincentive to spending on such charges;

Others aim to penalize behavior that is presumptively evasive or fraudulent.

The first conclusion leads us immediately to a fundamental finding: that if the deductibility of autonomous taxation on non-deductible expenses were admitted, one would be admitting the deductibility of a charge not essential for the realization of income subject to tax or for the maintenance of the source of production.

In fact, if the expense on which autonomous taxation is imposed is not, in itself, deductible, it is because (for the IRC system) the same is not essential for the realization of income subject to tax or for the maintenance of the source of production.

Now, if that is so, the autonomous taxation that is imposed on it also will not be, whereby one would be admitting the deduction of a charge in direct contradiction with the general principle that charges are only deductible in the field of IRC if they have inherent that indispensability for the realization of income subject to tax or for the maintenance of the source of production.

Thus, just as the taxes imposed on facts not related to the realization of income subject to IRC are not deductible, so also autonomous taxation that is imposed on non-deductible expenses must, necessarily, be excluded from taxation under penalty of admitting an obvious systematic contradiction in the IRC Code, which is not to be accepted in light of the interpretative principles enshrined in Article 9, no. 3, of the Civil Code (which the General Tax Law mandates to be applied pursuant to no. 1 of its Article 11), which determine that the interpreter must presume that the legislator 'knew how to express its thought in adequate terms' and 'that it enshrined the most correct solutions'.

In fact, the Applicant does not raise in this case the deductibility of autonomous taxation on non-deductible expenses.

The heart of the question is, in this case, the answer that is given to the following question: as to autonomous taxation that is imposed on deductible expenses should it not be concluded there that, being the expense deductible, should the autonomous taxation itself be deductible, as a charge incurred as a result of carrying out such expense, with the accessory following the principal (acessorium principale sequitur)?

Here, the interpretative question that matters to clarify concerns the definition of the adequate content of the linguistic expression "IRC and any other taxes that directly or indirectly affect profits" (enshrined in paragraph a) of no. 1 of Article 45 of the IRC Code), then deciding whether autonomous taxation should be considered included therein or not.

The Applicant argues that, configuring autonomous taxation a tax, an autonomous tax, that affects the expense and not the income, this taxation cannot be considered "IRC" for purposes of the exclusion of deductibility provided in paragraph a) of no. 1 of Article 45 of the IRC Code.

It is true that autonomous taxation applies when an expense is incurred, but will autonomous taxation still not serve an auxiliary purpose of IRC stricto sensu, being then able to say that, even though operating in a different way, specifically because they are determined in a different way, they integrate into the overall system of the income tax of legal entities?

In other words: will the taxation with aggravation of certain types of deductible expenses not be, still, an indirect form of taxing the income of taxpayers who incur them, thereby incorporating the general objective that presides over IRC and that distinguishes it as an income tax?

And further: will the regime of a tax that is defined as a tax on profits and where, consequently, expenses or charges play a fundamental role in delimiting the taxable matter, not be able to include in itself autonomous taxation on certain types of expenses that, contributing to the reduction of the tax base are, moreover, of questionable business character?

It seems to us that all these questions must be answered affirmatively.

In fact, beyond the case of autonomous taxation imposed on non-deductible expenses whose provision is justified as an anti-evasion mechanism, also in the case of autonomous taxation imposed on deductible expenses the legislator's intention is present to prevent the erosion of the tax base through the carrying out of expenses which, although they cannot be prohibited altogether by the IRC system because, in some cases, they may even be necessary for the realization of taxable income and/or the maintenance of the source of production, are expenses that share among themselves a risk of non-business character, that is, a risk of not being carried out for business purposes, but rather extra-business or private. In such cases, the legislator thus opts to accept their deductibility, but burdening it with autonomous taxation.

In fact, we are, in both cases, before a mechanism whose ultimate objective is to contribute to the "normalization" of taxation in the field of IRC, that is, to the functioning of this tax in its purest form and closest to its roots as a tax on profit obtained by legal entities. In that sense, autonomous taxation are nothing more than auxiliary mechanisms of the central axis of IRC, which is to tax profits allowing the deduction of expenses in which taxpayers must incur with a view to the realization of taxable income.

It is, therefore, nothing more than a mechanism of indirect taxation of income, which aims to prevent the loss of tax revenue due to tax evasion or by confusion of business and private spheres.

Specifically, with respect to autonomous taxation imposed on deductible expenses, they aim to compensate, by this means, the loss of tax revenue that the carrying out and deduction of such expenses would cause in its absence. Thus, while allowing the taxpayer to deduct the expense, the deduction is burdened with autonomous taxation reducing, in this way, the tax revenue lost with the deduction of the expense and discouraging the future use of the type of charges that generated the autonomous taxation.

As the Constitutional Court refers in Decision No. 18/2011, regarding charges relating to vehicles: '[these] refer to deductible charges as costs for purposes of IRC, that is, to charges that were demonstrably essential for the realization of revenues, in light of what is established in Article 23, no. 1, of the CIRC, the taxation provided for in these precepts [current nos. 3 and 4 of Article 88 of the CIRC] being explained by a legislative intent to encourage companies to reduce as much as possible expenses that negatively affect tax revenue'.

In the same sense go the words of Saldanha Sanches when he states that 'In this type of taxation [autonomous], the legislator seeks to respond to the admittedly difficult question of the tax regime that is found in the zone of intersection of the personal sphere and the business sphere, so as to avoid remuneration in kind more attractive for exclusively fiscal reasons or the hidden distribution of profits.' (cf. 'Manual de Direito Fiscal', 3rd Edition, Coimbra Editora, 2007, p. 406).

In light of the above, although it is recognized that the regime of autonomous taxation constitutes, within the framework of IRC, a special regime as to the form of assessment of taxation, this does not remove it from its intrinsic nature as a regime of taxation of income of legal entities.

It is true that this regime may, through this integration and the process of complexification it has been undergoing, have become multifaceted and diversified in its mode of operation, but it nonetheless remains a regime dedicated to the taxation of income of legal entities and to the obtaining of tax revenue in that way. If this is, sometimes, obtained through the taxation of certain expenses that reduce the taxable profit, it is still possible to discern there a form of taxation of that same taxable profit that is proper to the objectives that underlie IRC – moreover, autonomous taxation itself is owed by way of this tax."

The answer to be given to the question posed is in the sense of considering that the norm contained in paragraph a) of no. 1 of Article 45 of the same Code (in force until 2013), whereby they were not deductible for purposes of determination of taxable profit IRC and any other taxes that directly or indirectly affect profits, in its provision, does not entail the deductibility of autonomous taxation.

  1. Does the amendment introduced by Law No. 2/2014, of January 16, which repealed Article 45 of the IRC Code and added Article 23A of the IRC Code, whose paragraph a) of no. 1 now has the following wording: "IRC, including autonomous taxation, (...)", in contrast with the intervention it made to the precept through the State Budget Law for the year 1996, when it added to its wording, to include surcharges, "(...) and any other taxes that directly or indirectly affect profits" have an interpretative nature?

It appears to us that what has just been said above does not collide with the interpretation regarding the nature of autonomous taxation and, in particular, regarding the question of its (non-)deductibility in the field of IRC, the recent amendment made to the IRC Code by Law No. 2/2014, of January 16, which came to repeal the former Article 45, now establishing in Article 23-A of the CIRC that "The following charges are not deductible for purposes of determining taxable profit, even when recorded as expenses of the taxation period: a) IRC, including autonomous taxation, and any other taxes that directly or indirectly affect profits."

This amendment came, as is understood, to clarify that, with respect to the periods to which the norm in question applies, charges with autonomous taxation are not deductible for tax purposes, thus making express in the letter of the law something that already resulted from its terms, albeit indirectly.

That is, what the legislator intended to do would be only to clarify more evidently the content of the norm aiming to avoid potential conflict as that resulting from this case.

In this line of thinking, it does not appear, therefore, that the legislative amendment in question has an interpretative nature, nor that it has or could have retroactive effects or application.

  1. Was the norm contained in paragraph a) of no. 1 of Article 23-A of the IRC Code as redrafted by Law 2/2014, of January 16 applied here by the AT and consequently does the violation of Article 103, no. 3, of the Constitution (prohibition of retroactivity of tax law) and the violation of the principle of protection of confidence inherent in the principle of the rule of law (in accordance with Article 2 of the Constitution) occur?

It does not appear that the AT made application of a norm that only takes effect from 2014 to the situation of the present case.

In fact, the applicant was notified in November and December 2013 of the dismissals of administrative objections as is proven in subsections 9) and 10) of the proven facts, whereby it would be impossible for it to apply a norm that only came to be published in January 2014.

In any case, based on what was referred to above, the legislative amendment aims only a clarification of something that was already comprised in the provision of the repealed norm, more specifically in the acronym "IRC".

There is, nor could there be, therefore, any retroactive application of a norm that did not exist at the time of the practice of the acts that the Applicant seeks to have annulled.

There does not occur, therefore, any non-conformity with the constitutional principles questioned.

As a consequence of the above, the requests for arbitral pronouncement shall be judged as lacking in merit.

V. DECISION

In the terms and with the justifications set forth above, the requests for arbitral pronouncement are judged to be lacking in merit, with costs to be borne by the Applicant.

Value of the case: in accordance with the provisions of Article 3, no. 2, of the Regulations of Costs in Tax Arbitration Proceedings (and paragraph a) of no. 1 of Article 97-A of the CPPT), the case is valued at 513,501.78 euros.

Costs: in accordance with the provisions of Article 22, no. 4, of the RJAT, the amount of costs is fixed at € 7,956.00, in accordance with Table I attached to the Regulations of Costs in Tax Arbitration Proceedings, to be borne by the Applicant.

Notify.

Lisbon, June 30, 2014

Collective Arbitral Tribunal,

Jorge Lino Ribeiro Alves de Sousa (President)

António Alberto Franca

Augusto Vieira

Text prepared by computer in accordance with the provisions of Article 138, no. 5, of the CPC, applicable by reference to Article 29 of the RJAT.

The wording of this decision is governed by the spelling prior to the Orthographic Agreement of 1990.

Frequently Asked Questions

Automatically Created

Are autonomous taxation charges deductible as expenses under Article 45(1)(a) of the Portuguese IRC Code?
Under the legislation in force until 2013, the deductibility of autonomous taxation charges under Article 45(1)(a) of the IRC Code was disputed. The applicant argued that autonomous taxation charges should be tax-deductible expenses under the general rule of Article 23(1)(f), contending that Article 45(1)(a)'s prohibition on deducting tax charges applied only to IRC itself and surcharges, not autonomous taxation. The company's position was that autonomous taxation, since its creation by Decree-Law 192/90, never constituted a tax on corporate income but served different fiscal purposes, applying regardless of IRC exemptions and targeting different taxable events. Therefore, these charges should not fall within the non-deductible category. The 2014 amendment introducing Article 23-A explicitly addressed this issue prospectively, suggesting the prior law's interpretation was uncertain.
Can the 2014 amendment to IRC Article 23-A be applied retroactively to tax years before 2014?
The applicant firmly argued against retroactive application of the 2014 amendment (Law 2/2014 introducing Article 23-A of the IRC Code) to tax years before 2014. The company contended that this legislative change had unequivocally innovative character, establishing a new rule rather than merely interpreting existing law. Applying it retroactively would violate Article 103(3) of the Portuguese Constitution, which prohibits retroactivity of tax laws, and would breach the principle of protection of legitimate expectations inherent in the rule of law under Article 2 of the Constitution. The company argued that if the legislature intended Article 23-A to merely interpret the former Article 45(1)(a), such retroactive interpretation would be unconstitutional. The fact that the legislature felt compelled to amend the law in 2014 demonstrates that the previous regime did not clearly prohibit deduction of autonomous taxation charges.
What is the special taxation regime for groups of companies under Articles 69 and following of the IRC Code?
The special taxation regime for groups of companies (RETGS) is regulated under Articles 69 et seq. of the IRC Code (previously Article 63 before 2010 reforms). This regime allows affiliated companies within a corporate group to be taxed as a single entity for IRC purposes. Group B, led by A, SGPS, SA as the dominant company, has been subject to this regime since 2010. Under this system, the dominant company consolidates the taxable income of all group members, filing a unified tax return (Form 22 declaration). The regime provides for offsetting profits and losses among group members, potentially resulting in tax efficiencies. Self-assessments under this regime are made by the dominant company for the entire group, and any disputes or corrections affect the group's consolidated tax position, as occurred in this case for the 2010-2012 tax years.
How does the CAAD arbitral tribunal handle claims for refund and compensatory interest on unlawful self-assessments?
The CAAD (Centro de Arbitragem Administrativa) arbitral tribunal handles refund claims and compensatory interest through a structured arbitration process under the Legal Regime of Arbitration in Tax Matters (RJAT). When taxpayers challenge self-assessments or administrative objection dismissals, they can request the constitution of an arbitral tribunal within the statutory deadline (Article 10(1)(a) RJAT). If the tribunal finds the tax assessment illegal or excessive, it declares the partial or total illegality of the self-assessment and orders its annulment. Consequently, the tribunal recognizes the taxpayer's right to reimbursement of overpaid amounts plus compensatory interest. Interest is calculated from the official refund deadline dates (typically May 31 following the tax year for IRC). In this case, the applicant claimed compensatory interest from May 31, 2011, 2012, and 2013 for the respective tax years 2010, 2011, and 2012.
Does retroactive application of fiscal legislation violate Article 103(3) of the Portuguese Constitution?
Retroactive application of fiscal legislation generally violates Article 103(3) of the Portuguese Constitution, which establishes the principle of non-retroactivity of tax laws. This constitutional provision protects taxpayers from having tax obligations created or increased for past periods where they had legitimate expectations based on existing law. The prohibition applies to substantive tax rules that worsen the taxpayer's position. However, there is an exception for genuinely interpretative legislation that merely clarifies—rather than innovates—existing law. In this case, the applicant argued that Law 2/2014 introducing Article 23-A was innovative, not interpretative, because it established a new rule explicitly equating autonomous taxation to IRC for deductibility purposes. Any attempt to apply this rule retroactively to 2010-2012 would violate both Article 103(3) and the principle of protection of legitimate expectations derived from the rule of law principle enshrined in Article 2 of the Constitution.