Process: 84/2013-T

Date: October 31, 2013

Tax Type: IRC

Source: Original CAAD Decision

Summary

Process 84/2013-T addressed whether an Indian wind turbine component manufacturer had a permanent establishment in Portugal subject to IRC (Corporate Income Tax). The claimant, represented by B Portugal, challenged IRC assessments issued by the Portuguese Tax Authority. The company was registered for VAT purposes as a non-resident without a permanent establishment. However, tax authorities argued that installation activities of wind turbine components (nacelles and hubs) in a leased 4,800 m² warehouse in Portugal, combined with the presence of 20 Indian workers and up to 720 weekly working hours of Portuguese workers provided by the lessor F, constituted a taxable permanent establishment. The arbitral tribunal at CAAD (Administrative Arbitration Centre) was constituted under Decree-Law 10/2011 (RJAT - Legal Regime for Arbitration in Tax Matters) on June 21, 2013, comprising three arbitrators. The case involved complex analysis of permanent establishment criteria under Portuguese IRC law and applicable tax treaties, examining factors including physical presence, duration of activities, dependent agent status, and the substance of operations conducted in Portuguese territory. The claimant sought annulment of two IRC assessments and reimbursement of legal costs. Both parties waived the preliminary hearing and witness testimony, proceeding directly to written submissions. The case illustrates the critical importance of properly structuring cross-border operations to avoid unintended permanent establishment characterization, particularly in installation, assembly, and technical service contexts involving temporary physical presence and local support infrastructure.

Full Decision

ARBITRATION DECISION TRANSLATION

Case No. 84/2013-T

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Prof. Doctor João Sérgio Ribeiro and Prof. Doctor Diogo Leite de Campos, designated by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 21-6-2013, agree as follows:

1. Report

A, legal entity no. …, with registered office in …, fiscally represented in Portugal by B Portugal, legal entity no. …, with registered office in … (hereinafter designated as "Claimant"), presented a petition for constitution of the collective arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter designated only as LRATM), whereby the TAX AUTHORITY AND CUSTOMS SERVICE is the Respondent, with a view to:

(i) annulling the Corporate Income Tax assessments Nos. 2012 … and 2012 …;

(ii) reimbursing the costs borne and to be borne by the Claimant with attorney fees and expenses relating to the legal framework of the matter, monitoring of the administrative procedure, preparation of the present arbitration procedure and monitoring of the arbitration proceedings, as well as other expenses already incurred or to be incurred with the present arbitration, in an amount to be determined in the future.

The petition for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the Tax Authority and Customs Service on 18-04-2013.

Pursuant to the provision of paragraph a) of section 2 of article 6 and paragraph b) of section 1 of article 11 of Decree-Law No. 10/2011, of 20 January, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal Councillor Jorge Lopes de Sousa, Prof. Doctor João Sérgio Ribeiro and Prof. Doctor Diogo Leite de Campos, who communicated acceptance of the appointment within the applicable timeframe.

On 4-6-2013, the parties were notified of this designation, having manifested no wish to refuse the designation of the arbitrators, pursuant to the combined provisions of article 11, section 1, paragraphs a) and b), of the LRATM and articles 6 and 7 of the Code of Ethics.

Accordingly, in conformity with the provision of paragraph c) of section 1 of article 11 of Decree-Law No. 10/2011, of 20 January, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 21-06-2013.

The Tax Authority and Customs Service (TACS) replied, defending that it should be absolved of the claims.

Following a joint agreement of the parties, it was decided that there would be no need for the meeting provided for in article 18 of the LRATM, that no witness evidence would be produced and that no submissions would be made.

The arbitral tribunal was properly constituted, is competent to examine the questions raised and the parties enjoy legal personality and capacity and are legitimate (arts. 4 and 10, section 2, of the same decree and art. 1 of Ordinance No. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullities.

2. Statement of Facts

2.1. Facts Found to be Proven

a) The Claimant is a company governed by Indian law, resident, for tax purposes, in India (articles 19 and 20 of the petition for arbitral award);

b) The Claimant is one of the world's largest manufacturers of …, with manufacturing facilities located in India, China and the United States, serving a broad market of countries including Australia, Belgium, Brazil, Canada, China, Denmark, Germany, Greece, India, Italy, Portugal, Spain, Turkey, the Netherlands, Nicaragua and the United States (Inspection Report contained in document no. 2, attached with the petition for arbitral award, the content of which is reproduced herein);

c) In Portugal, the Claimant maintains a mere registration for Value Added Tax ("VAT") purposes, which dates to 25-1-2008, showing its registration as a non-resident entity in Portugal, without a permanent establishment in Portugal (registration statement, a copy of which constitutes Document No. 3, attached with the petition for arbitral award, the content of which is reproduced herein);

d) On 17-6-2006, the Claimant executed a supply contract for … and respective components to entities of A, namely the company C, resident in Denmark (hereinafter "C Denmark") (document no. 4 attached with the petition for arbitral award, the content of which is reproduced herein);

e) The contract referred to in the preceding paragraph gave rise, in 2007, to the issuance of purchase orders for … (document no. 5, attached with the petition for arbitral award, the content of which is reproduced herein);

f) C Denmark, D (hereinafter "D USA") and E (hereinafter "E Spain") executed, between 2006 and 2007, sales contracts for … with end customers in Portugal, Spain, and the United States of America (Documents nos. 6, 7 and 8, attached with the petition for arbitral award, the contents of which are reproduced herein);

g) The contractual position of C Denmark was subsequently assigned to B Portugal (hereinafter "B Portugal"), which is 100% owned by the Claimant (Document no. 9, attached with the petition for arbitral award, the content of which is reproduced herein);

h) The components of … ("nacelles" and "hubs") are supplied by the Claimant, which mostly acquires them from its parent company in India, except for … and … which are acquired in Germany and Belgium (article 33 of the petition for arbitral award and Inspection Report at page 14 of the administrative file document denominated "PA-1.pdf");

i) For reasons of greater geographical proximity to the end customers of group A, the Claimant decided to proceed with the installation, in Portugal, of certain components …, namely: … (article 33 of the petition for arbitral award);

j) B Portugal, on 4-12-2007, executed a mixed contract for provision of space and provision of services with company F (hereinafter "F"), through which the latter leased to the former a warehouse of 4,800 m² of which it is the owner located in …, as well as agreed to provide consulting services, technical advice and logistical support necessary for the installation, by the present Claimant, of components on …, (a copy of the contract is included in Annex III to the Inspection Report, at pages 11 et seq. of the administrative file document denominated "PA-2.pdf", the content of which is reproduced herein);

k) In the contract referred to the following is further established:

In clause 2, that the facilities are intended to "be used to make alterations in …";

In clause 6, the "Supply of food, accommodation and transport for a team of 20 Indian workers";

In clause 7, it is established that "1. To carry out the services mentioned above, the First Party (F) shall provide up to a maximum of 720 weekly working hours to be performed by unskilled workers, at the facilities made available to the Second Party (B) ... the content of the activities to be performed by such persons shall be communicated by the Second Party to the First Party and their proper execution constitutes an obligation of the latter, being its obligation to ensure their proper performance by the persons it designates for that purpose";

l) The Indian workers referred to in the preceding paragraph were present in Portugal (documents contained in the Inspection Report, in Annex XV pages 1 to 6, pages 85 to 90 of the administrative file "PA-4");

m) For the contract between B and F the validity period of 10-12-2007 to 30-3-2008 was fixed (clause 14 of the contract, at page 20 of document "PA-2.pdf" of the administrative file);

n) In Annex III to the contract between B and F is contained the document reproduced at page 33 of the administrative file document denominated "PA-2.pdf", in which "individual 1" declares accepting the proposal of F;

o) For the installation/assembly work of the components on …, acquired by B from the present Claimant, on 25-1-2008, the latter subcontracted B itself for the provision of, among others, technical assistance services, supply of unskilled personnel, logistical services and provision of space for the installation of the components of … and storage of the tools necessary for the operations (see service provision contract executed between the present Claimant and B (document no. 11, attached with the petition for arbitral award, the content of which is reproduced herein);

p) The Claimant acquired the parts comprising the … and proceeded to couple them at the said facilities leased to F by B, so as to obtain equipment ready to be sold and used in parks … by its customers (Inspection Report, article 34 of the petition for arbitral award and document no. 10 attached thereto);

q) B and F executed subsequently, on 05.06.2008, an Addendum to the contract of 4-12-2007, which is contained in Annex III to the Inspection Report, at pages 34 et seq. of the administrative file document denominated "PA-2.pdf", the content of which is reproduced herein, in which, among other things, in recital B. that "In the practical execution of the Contract certain circumstances occurred that changed some of the agreed conditions, namely the planned commencement of execution and the number of working hours", establishing its commencement only on day 28-1-2008 and its validity until day 28-9-2008 (Clause 1);

r) The Claimant imported from India, on 25-1-2008, components of … of the types referred to (document no. 10 attached with the petition for arbitral award, the content of which is reproduced herein);

s) On 25-1-2008, the Claimant registered for VAT purposes in Portugal (articles 34 and 35 of the petition for arbitral award);

t) Upon completion of the installation/assembly of the components of …, the Claimant proceeded to dispatch such equipment to the United States, destined for D USA, to Spain, destined for E Spain, and to various locations in Portugal, for which the Claimant issued invoices to B Portugal, D USA and E Spain, using its VAT registration in Portugal and its respective tax identification number (articles 42 to 45 of the petition for arbitral award);

u) Among the Claimant's VAT documents are the following material purchases: (pages 15 and 16 of the administrative file document denominated "PA-1.pdf")

[table content]

v) The sales declared by the Claimant occurred in accordance with the following invoices, issued through its VAT registration in Portugal (page 17 of the administrative file document denominated "PA-1.pdf")

[table content]

w) The issue dates of the said invoices do not coincide with the dates on which the supply of wind turbines was negotiated and contracted between the Claimant and D USA, E Spain and C Denmark (following the assignment of contractual position to B Portugal) which occurred during 2006, but only with the physical flow of equipment under that … supply contract (article 49 of the petition for arbitral award, which is not disputed);

x) Within the scope of what was agreed in clause 5 of the contract of 25-1-2008 executed between the Claimant and B Portugal regarding assembly/installation of components of …, the latter debited to the former the expenses it paid to various suppliers involved in the project, the following debit notes having been issued: (page 18 of the administrative file document denominated "PA-1.pdf")

[table content]

y) In the computer system for exchanging information on VAT the existence of intra-community transactions was noted in addition to those declared by the Claimant, in accordance with the following schedules: (pages 19 and 20 of the administrative file document denominated "PA-1.pdf")

[table content]

z) The Claimant issued in its name the following invoices relating to transmission of materials and tools (page 16 of the Inspection Report, at page 21 of the administrative file document denominated "PA-1.pdf"):

[table content]

aa) The invoices in the table of the preceding paragraph were identified as a result of analysis of B PORTUGAL's accounts, where the costs relating to the exports to which they relate are recorded, namely, the invoices of the customs broker G (TIN …) and H (… – TIN …); although these costs were issued in the name of B PORTUGAL, the respective supporting customs documents show the Claimant as the exporter (TIN …), as demonstrated by all the documentation contained in Annex XIII to the Inspection Report, pages 1 to 64, contained in documents "PA3.pdf" and "PA4.pdf", attached with the reply, the contents of which are reproduced herein);

bb) B Portugal further recorded as revenue various debit notes issued to …, as follows: (page 22 of the administrative file document denominated "PA-1.pdf")

[table content]

cc) These debit notes issued to the Claimant refer to "… work at F", subsequent to October 2008, a period from which the Claimant does not record, declare or deduct VAT from these operations, with these notes relating to costs incurred by B Portugal that are the responsibility of the Claimant under clause 5 of the contract executed on 25-1-2008, relating to assembly/installation of … (page 22 of the administrative file document denominated "PA-1.pdf");

dd) Among the documents relating to the debit notes referred to in the preceding paragraph are included a document relating to the salary for the month of October of I, dated 31-10-2008; an invoice no. ….., of 18-11-2008 from supplier J relating to warehouse/facility rental and use of forklift(s), from February to October, for the project "…"; invoice no. … from K, relating to services rendered at K's facilities between 21.10.2008 and 23.10.2008; Debit Note no. …. of 31.10.2008, L, relating to export procedures for Invoices nos. 19 and 20/2008 of B, both dated 24.09.2008, but whose merchandise was only dispatched from K's facilities on 21/22.10.2008; invoice no. … from supplier M, relating to the air passage of Indian worker "individual 2", who travelled to Portugal on 08.12.2008, in the capacity of auditor ("audit purpose") (pages 22 and 23 of the administrative file document denominated "PA-1.pdf");

ee) In parallel with the installation of components in …, a process of repair and replacement of … already in operation in parks …, which had been acquired from the Claimant by B Portugal and by it marketed, because manufacturing faults and defects had been detected, with such repairs being performed under contractual warranty guarantees (articles 157 to 159 of the petition for arbitral award, which are not disputed);

ff) B Portugal opted to undertake itself the repair and/or replacement of the 21 … of parks … in … and …, incurring various expenses with materials and subcontracting of third-party services (articles 167, 170, 172, 173, 174, 175 and 176 of the petition for arbitral award, and Inspection Report, pages 24-25 of the administrative file document denominated "PA-1");

gg) Regarding this repair and/or replacement of 21 … of parks …, a contract was executed on 25-1-2008 between the Claimant and B Portugal, which is contained in Annex VIII to the Inspection Report, the content of which is reproduced herein, at pages 1 to 16 of document "PA-3.pdf", attached to the reply, pages 131 to 145 of the administrative file);

hh) The repair and/or replacement operations of … of … were scheduled for February to April 2008 (under clause 2 of the contract referred to in the preceding paragraph), but on 2-10-2008 an Amendment to the Agreement on Compensation for defects in … was signed, in which it is stated that on that date no repair/replacement operation had yet been initiated (annex IX to the Inspection Report, at pages 18 to 24 of the administrative file document denominated "PA-3.pdf", the content of which is reproduced herein);

ii) The charging of costs incurred by B Portugal with the repair/replacement operation occurred between late October and March 2009 (debit note no. 44/2008, issued on 31-3-2009 by B Portugal to the Claimant, a copy of which is contained at page 26 of the administrative file document denominated "PA-3.pdf" and extracts, trial balance and documents contained in the aforementioned Annex IX to the Inspection Report, which are reproduced herein);

jj) There was involvement of Indian technicians common to both the component installation projects in … and repairs (article 178 of the petition for arbitral award, which is not disputed);

kk) The Tax Authority and Customs Service carried out partial scope inspection actions on the Claimant, following Service Orders nos. … and .., in the Corporate Income Tax sphere, covering the years 2008 and 2009, respectively (Inspection Report contained in document no. 2, attached with the petition for arbitral award, the content of which is reproduced herein);

ll) As a result of the actions referred to the Tax Authority and Customs Service understood that technical rules of the CIRC had been disrespected in conjunction with the Convention to Avoid Double Taxation between Portugal and India, by the existence of a permanent establishment of the Claimant in actual terms under article 5, section 3 of the Corporate Income Tax Code in conjunction with article 5 of the Convention to Avoid Double Taxation between Portugal and India, for a period of time exceeding 9 months, considering its commencement on 25-1-2008 and its conclusion on 21-6-2009.

mm) The following is further noted in the conclusions of the Inspection Report:

In view of the foregoing, it is concluded that there is a permanent establishment in actual terms under article 5, section 3 of the Corporate Income Tax Code in conjunction with article 5 of the Convention to Avoid Double Taxation between Portugal and India, for a period of time exceeding 9 months, considering its commencement on 25 January 2008 and its conclusion on 21 June 2009.

Being evident the existence of the PE in Portugal from 04.12.2007, for purposes of classification under Corporate Income Tax we opted to consider its commencement on 25.01.2008, as it corresponds to the first registration of taxable operations, and its end on 21.06.2009, coinciding with the date of customs exit confirmation (...) of the last goods/materials exported in the name of A (corresponding to invoice no. … of 08.06.2009 identified in point II.3.2.1.2 of this Report).

The profit attributable to this permanent establishment in Portugal shall be maintained under the terms of paragraph c) of section 1 and section 3 of article 3 of the Corporate Income Tax Code, in conjunction with article 7 of the Convention to Avoid Double Taxation between Portugal and India, its value being calculated in point 111.3 of this Report. [1]

nn) To determine the taxable profit the Tax Authority and Customs Service considered the following costs and revenues:

[table content]

oo) Based on these values the Tax Authority and Customs Service attributed to the permanent establishment of the Claimant, which it understood to exist, the taxable profit of € 3,250,389.33, in 2008, and € 24,902.07, in 2009, in accordance with the following schedule:

[table content]

pp) Following the determination of the taxable profit referred to in the preceding paragraph, a Corporate Income Tax assessment, surtax and compensatory interest relating to the year 2008 was drawn up, with number 2012 …, dated 5-12-2012, in which the amount of € total of € 982,461.78 is assessed, being € 812,597.33 of Corporate Income Tax, € 48,755.84 of surtax and € 121,108.61 of compensatory interest, with payment deadline of 16-1-2013 (document no. 1, attached with the petition for arbitral award, the content of which is reproduced herein);

qq) Further following the said determination of the taxable profit made in the inspection report, assessment no. 2012 …, relating to Corporate Income Tax for 2009, was subsequently drawn up in the amount of 5,543.22, being € 4,663.01 of Corporate Income Tax, € 373.53 of surtax and € 506.68 of compensatory interest, with payment deadline of 16-1-2013 (document no. 1, attached with the petition for arbitral award, the content of which is reproduced herein);

rr) On 16-4-2013, the Claimant presented the petition for constitution of the arbitral tribunal that gave rise to the present proceedings (CAAD computer system).

2.2. Facts Found Not to be Proven

There are no material facts for decision that have not been proven.

2.3. Basis for the Statement of Proven Facts

The proven facts are based on the documents indicated for each of the points and on the statements of the Claimant which are not disputed by the Tax Authority and Customs Service.

3. Statement of Law

3.1. The Question of the Existence of a Permanent Establishment of the Claimant in Portugal

3.1.1. Framework

The principal question to be decided in the present arbitration proceedings is whether the activity carried out in Portugal by the Claimant can be considered as giving rise to a permanent establishment that permits the Portuguese State to tax its profits.

In the case at hand, a Convention to Avoid Double Taxation between Portugal and India (hereinafter "CDT") was executed, approved by Resolution of the Assembly of the Republic No. 20/2000, of 6 March, and ratified by Decree of the President of the Republic No. 8/2000, of the same date.

By virtue of the provision of article 8, section 2, of the Constitution of the Portuguese Republic, "the norms contained in regularly ratified or approved international conventions are in force in the domestic order following their official publication and whilst they bind internationally the Portuguese State".

Irrespective of the solution to be given, in general, to the question of the primacy or otherwise of international conventional law over Portuguese domestic law, [2] regarding the concept of "permanent establishment" the referred CDT created a special regime that was not derogated by the later introduction into our domestic law of a concept with the same denomination, in article 4-A of CIRC, added by Law No. 30-G/2000, of 29 December (current article 5), since there is no indication that it was intended unilaterally to revoke the regimes contained in previous conventions of that kind and the general law only revokes special laws when an unequivocal legislative intention in that sense is demonstrated (article 7, section 3, of the Civil Code).

The special concept of "permanent establishment" provided by the referred CDT is as follows:

Article 5

Permanent Establishment

1 – For the purposes of this Convention, the expression "permanent establishment" means a fixed place of business, through which the enterprise carries on all or part of its activity.

2 – The expression "permanent establishment" comprises, in particular:

a) A place of management;

b) A branch;

c) An office;

d) A factory;

e) A workshop;

f) A sales outlet; and

g) A mine, an oil or gas well, a quarry or any place of extraction of natural resources, including an installation or structure used for the prospecting, searching and exploring of natural resources, but only for a period exceeding 120 days in a fiscal year.

3 – A place or a construction site, a construction project, of installation or of assembly, as well as supervisory activities in connection with the same only constitute a permanent establishment if their duration exceeds nine months.

4 – Notwithstanding the preceding provisions of this article, the expression "permanent establishment" does not comprise:

a) Installations used solely for the purpose of storing, displaying or delivering goods or merchandise belonging to the enterprise;

b) A depot of goods or merchandise belonging to the enterprise, maintained solely for the purpose of storing, displaying or delivering them;

c) A depot of goods or merchandise belonging to the enterprise, maintained solely for the purpose of processing them by another enterprise;

d) A fixed installation, maintained solely for the purpose of purchasing goods or merchandise, or of gathering information, for the enterprise;

e) A fixed installation, maintained solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character;

f) A fixed installation, maintained solely for the purpose of carrying on any combination of activities referred to in subparagraphs a) to e), provided that the overall activity of the fixed installation resulting from this combination is of a preparatory or auxiliary character.

5 – Notwithstanding the provisions of sections 1 and 2, when a person – who is not an independent agent, to which section 6 applies – acts in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise is deemed to have a permanent establishment in the first-mentioned State, if:

a) He has and habitually exercises in that State authority to conclude contracts in the name of the enterprise, unless the activities of such person are devoted exclusively to the activities listed in section 4; or

b) He does not have such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and additional activities carried on in that State on behalf of the enterprise have contributed to the sale of goods or merchandise.

6 – An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other independent agent, provided that such persons are acting within the ordinary scope of their business.

7 – Notwithstanding the preceding provisions of this article, an insurance company of a Contracting State shall, except with respect to reinsurance, be deemed to have a permanent establishment in the other Contracting State if it collects premiums in the territory of the other State or insures risks situated therein by means of a person who is not an independent agent to which section 6 applies.

8 – The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State or which carries on business in that other State (whether through a permanent establishment or otherwise) is not of itself sufficient to make of either such company a permanent establishment of the other.

The Protocol agreed at the time of signature of the said CDT, which is an integral part thereof, clarifies that, in the "Ad article 5", that "for purposes of section 2, a warehouse used by a person furnishing warehousing services to others is deemed to be a permanent establishment".

The concept of permanent establishment does not relate, regardless of what its formulation seems to suggest, to something physical, tangible, with a separate existence from the taxpayer to which it pertains. This concept aims solely to determine whether the activity of a non-resident in a given tax system is sufficiently significant so as to justify that such non-resident be taxed there in terms similar to those in which residents are taxed. It will be, therefore, the non-resident who holds the permanent establishment and not the permanent establishment itself to be taxed, as it has no autonomous existence, being solely a specially relevant presence of the non-resident.

This concept is developed by article 5 of the OECD Model Convention (OECD MC) which, given its influence, ends up corresponding to article 5 of the majority of conventions on double taxation, including that executed between the Portuguese Republic and the Republic of India.

From it stem three alternative tests for determining the existence of a permanent establishment, one resting on the existence of a physical installation, another on that of a project and another on an agency relationship.

3.1.1.1. Physical Installation

Traditionally the concept of establishment concerned a physical installation, an idea that often conditions the approach taken to the concept. There exist, as has just been noted, other admissible tests that do not presuppose the existence of a physical installation, being applicable precisely because this does not exist or its existence is questionable.

The permanent establishment resting on the existence of a physical installation is commonly designated by the general definition of permanent establishment, partly because it appears immediately in section 1 of article 5 of the OECD MC (and of the convention executed between Portugal and India) and presupposes the cumulative verification of several requirements.

It is necessary not only a fixed installation, that is, with permanence from the geographical and temporal point of view, but also that it is through that space that the activity is carried out, which necessarily implies that such installation is at the disposal of the enterprise.

Moreover, as results from article 5, section 4, of the OECD MC (and of the convention executed by Portugal and India) there are activities that do not constitute, in themselves, permanent establishments, even if they are carried out through a physical installation. The essential characteristic of these activities is their preparatory or auxiliary character and the fact that they are provided solely to the enterprise to which that installation belongs, and not to third parties.

Article 5, section 2, of the convention under analysis, in line with the OECD MC, enumerates a series of installations that can be included in the notion of permanent establishment resting on a physical installation. However these examples are only situations in which there is prima facie correspondence with the existence of permanent establishments, as, as results from the provision itself, it is necessary that the requirements of section 1 of the same article are met.

3.1.1.2. Project

It is further considered that we are in the presence of a permanent establishment when there exists "a place or a construction site, of installation or of assembly, as well as supervisory activities in connection with the same".

However, they only constitute a permanent establishment if their duration exceeds nine months (article 5, section 3 of the CDT). The time spent with preparatory work is also relevant for the counting of this period.

3.1.1.3. Agency

The permanent establishment deriving from agency presupposes the verification of several elements for its existence to be sustained, which are extracted from section 5 of the transcribed article 5.

First, it is necessary a person (who will be the agent), individual or legal, who acts on behalf of a non-resident enterprise. The agent, however, does not necessarily have to be a resident or have a fixed installation in the country where it develops its activities as an agent, provided that it is not, obviously, an independent agent.

Secondly, it is necessary that the agent have and habitually exercise in that State authority to conclude contracts in the name of the enterprise.

3.1.2. Analysis of the Concrete Case

Having made this brief review of the possible tests for determining whether or not there is a permanent establishment, it is now necessary to apply each of them to the concrete case.

3.1.2.1. Delimitation of the Object of the Proceedings

Although there are several possibilities for framing factual situations within the concept of permanent establishment, in the case at hand only the possibility of this concept being satisfied in the face of section 3 of article 5 of the CDT is at issue.

In fact, in a contentious proceeding of mere legality, as is provided for in the LRATM for the arbitral tribunals that function in CAAD, in which one seeks only the declaration of illegality of acts of the types provided for in paragraphs a) and b) of section 1 of its article 2, one must assess the legality of the impugned act as it occurred, with the reasoning used therein, other possible reasoning that could serve as support for other acts, of a decisional content totally or partially coinciding with the act practiced, being irrelevant. Accordingly, reasoning invoked a posteriori, after the end of the tax procedure in which the act whose illegality declaration is requested was performed, are irrelevant, including those put forward in the judicial proceeding.

Thus, the Tribunal cannot, faced with the finding of the invocation of an illegal basis as support for the administrative decision, examine whether its action could be based on other grounds and fail to declare the illegality of the concrete act performed because, possibly, there would exist the abstract possibility a hypothetical act with totally or partially identical decisional content, with other reasoning, that would be legal, but was not performed. [3]

Having examined the inspection report, underlying the determination of the Claimant's taxable profit, on which the acts of assessment whose illegality declaration is requested were based, it is found that the Tax Authority and Customs Service understood that "that under section 3 of article 5 of the Corporate Income Tax Code in conjunction with article 5 of the Convention to Avoid Double Taxation between Portugal and India, the fact of A having developed an assembly, marketing and repair project of … and its components, as well as supervisory activities connected with it, for a period of time exceeding 9 months, constitutes for this company the existence of a permanent establishment" (page 20 of the Inspection Report, digitalized at page 23 of "Document 1 and 2.pdf" attached with the petition for arbitral award).

This understanding is confirmed in the conclusions, which state:

In view of the foregoing, it is concluded that there is a permanent establishment in actual terms under article 5, section 3 of the Corporate Income Tax Code in conjunction with article 5 of the Convention to Avoid Double Taxation between Portugal and India, for a period of time exceeding 9 months, considering its commencement on 25 January 2008 and its conclusion on 21 June 2009.

Being evident the existence of the PE in Portugal from 04.12.2007, for purposes of classification under Corporate Income Tax we opted to consider its commencement on 25.01.2008, as it corresponds to the first registration of taxable operations, and its end on 21.06.2009, coinciding with the date of customs exit confirmation – document which now becomes Annex XIX, pages 1 and 2 to the present Report — of the last goods/materials exported in the name of A (corresponding to invoice no. … of 08.06.2009 identified in point 11.3.2.1.2 of this Report) (pages 34-35 of the Inspection Report, digitalized at pages 37 and 38 of "Document 1 and 2.pdf" attached with the petition for arbitral award).

Although a generic reference is made to article 5 of the CDT, which provides several possibilities for framing situations within the concept of permanent establishment, the reference to article 5, section 3, of CIRC, which establishes that "a place or a construction site of installation or of assembly, coordination, supervisory and inspection activities in connection with the same or the installations, platforms or drilling ships used for the prospecting or exploitation of natural resources only constitute a permanent establishment if their duration and the duration of the work or activity exceeds six months" reveals that only the possibility of framing the Claimant's situation in section 3 of article 5 of the CDT was considered, which establishes that "a place or a construction site, a construction project, of installation or of assembly, as well as supervisory activities in connection with the same only constitute a permanent establishment if their duration exceeds nine months", being, thus, the provision corresponding to that section 3 of article 5 of CIRC.

In view of the foregoing, the question of the legality of the impugned act is reduced to ascertaining whether the situation described in the statement of facts is susceptible to being framed in article 5, section 3, of the CDT, as it is a special norm regarding the concept of permanent establishment for situations of double taxation between Portugal and India.

3.1.2.2. Activities of the Claimant and Unity or Plurality of Permanent Establishments

According to the proven facts, two distinct activities developed by the Claimant in Portugal are identified: one concerning the installation of components in wind turbines (assembly) and another concerning projects for repair of …, under contractual warranty guarantees.

The distinction between the two activities is manifest, as while the activity of installing components in … is an activity potentially generating profits, that relating to repairs motivated by manufacturing faults and defects is only generating expenses.

And it is necessary to make a distinction between the two types of activities for purposes of application of the tests to determine the existence of a permanent establishment, as, to begin with, being this a concept created to tax the profits of a non-resident in the State in which it exercises its activity (as results from article 7 of the CDT), it is not understood how activities that are clearly autonomous in relation to the profitable activities which, by their nature, do not provide profits, but rather expenses, such as the performance of repairs in performance of duties resulting from contractual warranties, are relevant to this assessment.

Thus, the possibility of aggregating the repair activity to the assembly activity by reconducting them to the same permanent establishment is not to be accepted.

Moreover, as is found to be proven in paragraphs o) and gg), the two activities were pursued under contracts that, despite being executed on the same date, are absolutely distinct and without any relationship to each other, in terms of object.

There is lacking, therefore, between the two activities of the Claimant, not only commercial coherence, but also, as they are equally developed in distinct spaces, geographical coherence. [4] Now, without the verification of these two components can, if the respective requirements are met, there arise two permanent establishments, one relating to each of these activities, but not only one encompassing both.

Thus, there is an error underlying the act that determined the Claimant's taxable profit but it does not necessarily result therefrom the illegality of the impugned acts of assessment, as this will only succeed if it affected the determination of the taxable profit.

3.1.2.3. Permanent Establishment Arising from the Activity of Installation and Assembly

As referred to, in view of the reasoning of the act determining the Claimant's taxable profit, there is only to consider the possibility of the activity of installation and assembly of … constituting a permanent establishment in light of section 3 of article 5 of the CDT.

In the case at hand, there exists a physical installation corresponding to the warehouse of 4800 m² located in the Industrial Zone of …, in …, which, being used to carry out the commercial activity constitutes a place of activity. Being noted that this space, given its characteristics, enjoys permanence from the geographical and temporal point of view and there is a link between it and a concrete geographical space (which is moreover confirmed by the claimant in article 77 of the petition).

Despite this fact, the application of the test of section 5, section 3, dispenses in rigor with the existence of physical installation, as in the majority of situations the project is not truly carried out through the physical installation, the physical space being more the object of the activity than the physical installations through which this activity is pursued.

However, it is established in section 3 of article 5 that "a place or a construction site, a construction project, of installation or of assembly, as well as supervisory activities in connection with the same only constitute a permanent establishment if their duration exceeds nine months".

This period of 9 months begins at the moment when the enterprise begins to carry out its activities, including the preparatory work performed in the country where the project is to be developed and ceases at the moment when the work is completed or is permanently abandoned. [5]

The physical installation constituted by the said warehouse and the period during which steps were taken to occupy it through a rental contract – it is referred to in the Inspection Report underlying the determination of the Claimant's taxable profit, that it was evident the existence of this in Portugal from 4-12-2007, through the signature of a representative of it in Annex III to the contract executed between B Portugal and F (which is at page 33 of the administrative file document denominated "PA-2.pdf") – are relevant for fixing the commencement of the project permanent establishment, as they clearly concern preparatory work directly linked to it. [6] This, regardless of (i) not even being demonstrated that the said representative ever was in Portugal, as the said document is dated 3-12-2007, the day before the execution of the contract, and is a message sent to the representative of F, manifesting agreement with his proposal; (ii) no proof being found that, before 25-1-2008, the date on which the first registration of taxable operations is made and on which the components from India were imported, there had been any occupation of the fixed installation that F made available, nor that any preparation was effected on site before the commencement of activity.

However, although in the abstract the commencement of the relevant period for purposes of ascertaining the existence of a permanent establishment can be fixed at a date prior to 25-1-2008, in the concrete case this period is not relevant. For, in the conclusions of the Inspection Report underlying the determination of the Claimant's taxable profit, which gave rise to the assessments whose illegality declaration is the object of the present proceedings, despite saying that it is evident the existence of the Claimant in Portugal from 4-12-2007, for purposes of classification under Corporate Income Tax, it opted "to consider its commencement on 25-1-2008" (page 40 of the administrative file document denominated "PA-1.pdf").

Indeed, in the conclusions of the Inspection Report underlying the determination of the Claimant's taxable profit, which gave rise to the assessments whose illegality declaration is the object of the present proceedings, despite saying that it is evident the existence of the Claimant in Portugal from 4-12-2007, for purposes of classification under Corporate Income Tax, it opted "to consider its commencement on 25-1-2008" (page 40 of the administrative file document denominated "PA-1.pdf").

Therefore, having the act determining the Claimant's taxable profit considered as a factual basis this date of 25-1-2008, it is on the basis of it that there must be assessed the existence of permanent establishment regarding the activity of assembly and installation of components of wind turbines.

As regards the end of the activity relating to the assembly and installation of components of … the last invoice found in the Claimant's accounts is no. …, of 29-9-2008.

However, as is seen from paragraph z) of the statement of facts fixed, several other invoices were found following analysis of B PORTUGAL's accounts, issued by the Claimant between 12-1-2009 and 8-6-2009, which demonstrate that its activity extended until this date. Even if these are materials and tools that remained in the warehouse rented from F and were returned, it cannot be considered that the project ceased before this return and vacating of the premises, as these are acts related to the activities and inherent to the assembly project. [7] That is, the activity of the Claimant, of a temporary nature, required the occupation of the installations, including with the tools necessary for the exercise of the activity and the subsequent vacating with the removal of the same tools, so that both the former and the latter are to be understood as necessary for the exercise of the activity which only ceases, it bears emphasizing, when the work in its entirety is abandoned. [8]

Therefore, June 2009 will be the month relevant for the purpose of the final deadline counting as required by section 3 of article 5 of the CDT for the existence of a permanent establishment of the types provided for therein.

This means that more than 9 months elapsed between the initial and final dates relevant for the purpose of the existence of a permanent establishment, in light of this provision.

3.1.2.4. Permanent Establishment Arising from the Activity of Repair/Replacement of … of …

As regards the repair of …, it is found that the physical installation considered, that is, the warehouse, is essentially used for the assembly project, performing in relation to the activity of repairing the generators a merely auxiliary role as described in article 5, section 4, of the CDT. The warehouse will not therefore constitute a "permanent establishment physical installation" through which the repair activity is developed.

It is however found that there exists no other fixed installation that can serve as the basis for the first test ("permanent establishment physical installation") as regards this activity of repair of …, as the "field hospitals", in addition to not fitting fully with the concept of a fixed installation, did not enjoy the temporal permanence required (something that is admitted by the Tax Authority and Customs Service itself in article 45 of the reply).

Thus, the repair activity of … could only give rise to a permanent establishment within the scope of article 5, section 3 of the convention executed between Portugal and India.

A test which, according to the dominant thesis and subscribed by this Tribunal, does not depend on the verification of the requirements of article 5, sections 1, and therefore of the verification of a physical installation, sufficing itself with the existence of a project that has a duration exceeding 9 months.

Let us see whether, in accordance with that second test, the repair activity gives rise to a permanent establishment.

Assuming that maintenance and repair can be reconducted within the scope of article 5, section 3, as appears to be common ground, [9] and taking into account that the fact that this project was not carried out in its entirety directly by the Claimant, but essentially by a subcontracted company (B Portugal), will not a priori put in question the possible compliance with this test, [10]

Decisive, however, for a permanent establishment to arise within the scope of article 5, section 3, of the CDT will be that the project has a duration exceeding 9 months.

This requirement was not met, which can be inferred from the following facts: the project, initially planned to be executed in February to April 2008, ended up not commencing before 2-10-2008, revealing the debit note for the respective costs, issued by B Portugal to the Claimant on 31-3-2009, that the repair/replacement activity of … of … will have lasted at most 6 months (pages 18 to 24 and 26 of the administrative file document denominated "PA-3.pdf").

Aggregating this project to the assembly project of … for, within the scope of the test "permanent establishment project" to count the deadline, does not appear possible.

This is because the criterion of 9 months applies to each site individually, time spent on other projects not being taken into consideration. Unless such projects constitute a coherent whole both at the commercial level and at the geographical level. Now, taking into account that the assembly of … was done in a specific physical installation distant from the place where the repairs were carried out, this immediately implies the lack of geographical coherence. The distinct nature of the contract and the diverse nature of the projects involved (the repaired generators have nothing to do with the … assembled in Portugal) equally puts in question the commercial coherence, which translates into the impossibility of the two projects being considered as a unit.

In all truth, even if the unity were conceivable, presupposing obviously that assembly would also constitute a permanent establishment project, the effects of the repair project would translate, at most, at the level of the expenses of the permanent establishment, as the repairs were effected under warranty, which means that they involved expenses and not profits.

However, understanding, as is understood, this permanent establishment as independent of that relating to the assembly and installation operations of components, no profit attributable to it can be determined on the basis thereof, nor do the impugned assessments find justification.

Therefore, these will be illegal, by error as to the factual and legal bases, to the extent that they have considered profits relating to the activity of repair/replacement of wind turbine blades.

3.2. Attribution of Profits to the Permanent Establishment

The Tax Authority and Customs Service determined the value of the costs and revenues of the permanent establishment in the terms referred to in paragraphs nn) and oo) of the statement of facts fixed.

The Claimant censures this determination for having been effectuated solely on the basis of the elements provided by the Claimant's VAT registration and that it does not reflect the costs of a permanent establishment as there are expenses not subject to VAT, namely with salaries, depreciations and other costs with personnel and financial charges.

The Tax Authority and Customs Service states that this did not occur, having considered the costs that derive from the documents contained in Annex XIV to the Inspection Report.

Article 7 of the CDT establishes the following:

Article 7

Profits of Enterprises

1 - The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so far as they are attributable:

a) To that permanent establishment;

b) To sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or

c) To other business activities carried on in that other State of the same or similar kind as those carried on through that permanent establishment.

2 - Subject to the provisions of section 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.

3 - In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether incurred in the State in which the permanent establishment is situated or elsewhere, subject to the law of the Contracting State in which the permanent establishment is situated.

4 - Insofar as it has been customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in the preceding provisions of this article shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as it in its practice; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this article.

5 - No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.

6 - For the purposes of the foregoing provisions, the profits to be attributed to a permanent establishment shall be determined by the same method each year unless there is good and sufficient reason to determine them otherwise.

7 - Where the profits comprise elements of income dealt with separately in other articles of this Convention, the provisions of those articles shall not be affected by those of this article.

In accordance with article 7 of the convention executed between Portugal and India, in line with the OECD MC, when an Indian enterprise has a permanent establishment in Portugal, as has been verified, the profits obtained by that enterprise in our country can only be taxed here if they are attributable to the permanent establishment. That is, those profits that the permanent establishment would obtain "if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment". What would be done according to market conditions and prices in accordance with the arm's length principle. Taking into account that only the profits resulting from assembly and supervision can be attributed to the permanent establishment (after application of the arm's length principle provided for in article 9 of the CDT), only these can be considered for taxation purposes. Moreover, as was demonstrated, only a part of the Claimant's activity was developed in Portugal through the physical installation considered.

It is true that in the convention executed between Portugal and India the arm's length principle of the permanent establishment is provided for, which implies that it is attributed profits both (a) from sales effected in the State where the permanent establishment exists of goods or merchandise identical or similar to goods or merchandise sold through that permanent establishment; as (b) from other commercial activities carried on in the State where the permanent establishment exists identical or similar to the activities carried on through that permanent establishment. It is found, however, that the manner in which the arm's length principle was implemented, especially as regards paragraph a), the only one relevant for the case under decision, does not put in question the conclusion that only the profits relating to the assembly operations and respective supervision can be attributed to the permanent establishment. For the sales, namely of …, made by the Claimant in Portugal have no parallel in the activity of the permanent establishment, to the extent that through it no operations of that type are made. They are made solely and exclusively, as has been emphasized, the assembly of elements in the wind turbines and supervision of these works.

As regards costs, section 3 of article 7 of the CDT establishes that it is permitted to deduct "the expenses which are incurred for the purposes of the permanent establishment".

In the case at hand, as regards remuneration, some are included (of I, at page 46 of the administrative file document denominated "PA-4.pdf"; of … and …, at page 57 of the administrative file document denominated "PA-4.pdf"), but there are many other workers, namely those of presumed Portuguese nationality (as is inferred from their names) indicated in the list contained in page 58 of the same document, for whom the remuneration is not indicated, in addition to the "elements of the Indian team", whose stay is referred to at page 39 of the same document, without any indication of the respective remuneration.

Moreover, in section 3 of article 7 of the CDT Portugal India it is permitted to deduct, for purposes of determining the taxable profit of the permanent establishment, the "executive and general administrative expenses incurred for those purposes, whether incurred in the State in which the permanent establishment is situated or elsewhere" and it is not envisaged that these expenses have been considered.

It is true that there will not be in the Claimant's accounts elements that permit exactly calculating such costs, but, the alternative, when there is certainty that there are more necessary expenses to obtain the revenues that are not documented, is to determine the taxable profit through indirect methods, as established by article 87, section 1, paragraph b), of the General Tax Law, and not to make its calculation on the basis of existing elements, as if those other costs did not exist.

It is to be noted that, at the end of section 3 of article 7 of the CDT a reservation is made, regarding determination of taxable profit, as to the law of the Contracting State in which the permanent establishment is situated, which makes viable the application of that rule of the General Tax Law.

Therefore, it must be concluded that the adjustments effected are vicious with violation of law, by error as to the legal bases, deriving from the non-application of indirect methods, pursuant to article 87, section 1, paragraph b), of the General Tax Law and article 7, section 3, of the CDT Portugal India, a vice which repercuted on the impugned assessments and justifies their annulment [article 135 of the Administrative Procedure Code, applicable by virtue of the provision of article 2, paragraph c), of the General Tax Law].

4. Question of Reimbursement of Costs Borne and to be Borne by the Claimant Related to the Present Proceedings

The Claimant seeks that it be reimbursed the costs borne and to be borne by the Claimant with attorney fees and expenses relating to the legal framework of the matter, monitoring of the administrative procedure, preparation of the present arbitration proceedings and monitoring of the arbitration proceedings, as well as other expenses already incurred or to be incurred with the present arbitration, in an amount to be determined in the future.

It is not among the competencies of the arbitral tribunals functioning in CAAD to examine requests of this type.

In fact, article 2 of the LRATM only attributes to these Arbitral Tribunals competencies to declare the illegality of acts of the types indicated therein and the annulment or declaration of nullity which are corollary to the recognition of illegalities.

Beyond these questions, it has been understood, in harmony with the consistent jurisprudence of the Supreme Administrative Court, that requests that can be formulated in judicial impugnation proceedings can be examined (of which tax arbitration proceedings are an alternative, as is referred to in article 124, section 2, of Law No. 3-B/2012, of 28 April).

In those conditions are requests for condemnation to payment of indemnificatory interest (which has explicit legal support in article 61, section 4, of the Code of Tax Procedure and Process) and condemnation to payment of indemnification for the provision of undue guarantee (which also has express legal support in article 171, section 1, of the same Code).

As regards reimbursement of expenses deriving from the proceedings, no competency is provided for the arbitral tribunals functioning in CAAD, nor is any provision found that attributes such competency to tax tribunals in judicial impugnation proceedings and, therefore, also cannot be examined in the present arbitration proceedings.

It is accordingly declared that this Arbitral Tribunal is incompetent, ratione materiae, to know of this request.

5. Decision

In accordance with the foregoing, the parties to this Arbitral Tribunal agree:

a) To judge as well-founded the requests for annulment of the Corporate Income Tax assessments relating to the years 2008 and 2009 nos. 2012 … and 2012 … and to annul these assessments;

b) To judge this Arbitral Tribunal incompetent, ratione materiae, to examine the request for reimbursement of expenses deriving from the present proceedings, absolving the Tax Authority and Customs Service from the instance as to this request.

6. Value of the Proceedings

In accordance with the provision of art. 315, section 2, of the Civil Procedure Code and 97-A, section 1, paragraph a), of the Tax Procedure and Process Code and 3, section 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 988,005.00.

7. Costs

Pursuant to art. 22, section 4, of the LRATM, the amount of costs is fixed at € 13,770.00, pursuant to Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax Authority and Customs Service.

Lisbon, 31 October 2013

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(João Sérgio Ribeiro)

(Diogo Leite de Campos)

[1] A copy of invoice no. 29/2009 is contained at page 22 of document "PA4.pdf", attached with the reply.

[2] On the doubts that arise as to the solution of this question, see J. J. GOMES CANOTILHO and VITAL MOREIRA, Annotated Constitution of the Portuguese Republic, 4th edition, pages 260-261.

[3] In this sense essentially, the following judgments of the Supreme Administrative Court can be seen, regarding a parallel situation that arises in contentious appeal proceedings:

– of 10-11-98, of the Plenary, delivered in appeal no. 32702, published in Appendix to the Official Journal of 12-4-2001, page 1207;

– of 19/06/2002, case no. 47787, published in Appendix to the Official Journal of 10-2-2004, page 4289;

– of 09/10/2002, case no. 600/02;

– of 12/03/2003, case no. 1661/02.

In the same sense, see:

– MARCELLO CAETANO, Manual of Administrative Law, volume I, 10th edition, page 479 in which he states that it is "irrelevant that the Administration comes, already during the judicial appeal, to invoke as determining reasons other reasons, not stated in the act", and volume II, 9th edition, page 1329, in which he writes that "the answering authority cannot (...) justify the practice of the appealed act for reasons different from those contained in its express motivation";

– MÁRIO ESTEVES DE OLIVEIRA, Administrative Law, Volume I, page 472, where he writes that "the reasons objectively existing but not expressly adduced as bases of the act, cannot be taken into account in the assessment of its legality".

[4] See Commentary to art. 5 of the Model Convention, §5.1.

[5] See Commentary to art. 5 of the Model Convention, § 19.

[6] Klaus VOGEL, Klaus Vogel on Double Taxation Conventions, third edition, Kluwer, The Hague, 1997, p. 307, § 77.

[7] See Commentary to art. 5 of the Model Convention, § 19.

[8] See Commentary to art. 5 of the Model Convention, § 19.

[9] Cf. Klaus VOGEL, op. cit., p. 288 and p.306, § 73a.

[10] See Commentary to art. 5 of the Model Convention, §24 in fine. Cf. Klaus VOGEL, op. cit., p. 309.

Frequently Asked Questions

Automatically Created

What is the concept of permanent establishment (estabelecimento estável) under Portuguese IRC tax law?
Under Portuguese IRC law (Corporate Income Tax Code), a permanent establishment (estabelecimento estável) is defined in Article 5 as any fixed place of business through which a non-resident entity wholly or partly carries on its business. This includes management offices, branches, offices, factories, workshops, and construction sites lasting more than six months. The concept also extends to dependent agents who habitually exercise authority to conclude contracts on behalf of the foreign entity. Tax treaties may provide different definitions that take precedence. The determination considers factors such as: physical presence in Portuguese territory, duration and continuity of activities, availability of premises and equipment, authority to bind the company, and whether activities are preparatory or auxiliary versus core business functions. Installation and assembly projects exceeding 6-12 months (depending on treaty provisions) typically constitute permanent establishments, triggering Portuguese IRC obligations on profits attributable to that establishment.
How did CAAD Arbitration Tribunal rule on the IRC tax liquidations in Process 84/2013-T?
While the complete decision text is not provided in the excerpt, Process 84/2013-T involved the CAAD Arbitral Tribunal examining whether IRC tax assessments against an Indian wind turbine manufacturer were valid. The tribunal had to determine if installation activities of wind turbine components in Portugal, conducted through a leased warehouse with Indian workers present and local Portuguese workers provided by the lessor, constituted a permanent establishment under Portuguese tax law and applicable tax treaties. The claimant sought annulment of two IRC assessments (Nos. 2012…), arguing it maintained only VAT registration as a non-resident without permanent establishment. The Tax Authority defended the assessments, claiming the activities and physical presence created taxable nexus. The three-arbitrator panel was constituted on June 21, 2013, and proceeded without oral hearings based on written submissions. The tribunal's analysis would have addressed the duration of activities (December 2007 to March 2008), the nature of installation services, and whether preparatory/auxiliary activity exceptions applied.
Can a foreign company challenge IRC tax assessments through arbitration in Portugal?
Yes, foreign companies can challenge IRC tax assessments through arbitration in Portugal under the RJAT (Legal Regime for Arbitration in Tax Matters), established by Decree-Law No. 10/2011 of January 20. Non-resident entities, even those without permanent establishment in Portugal, have standing to request constitution of arbitral tribunals at CAAD (Centro de Arbitragem Administrativa) to contest tax assessments, including IRC liquidations. The foreign company must be properly represented, typically through a fiscal representative in Portugal as required for non-residents. Process 84/2013-T exemplifies this: an Indian company, fiscally represented by B Portugal, successfully initiated arbitration proceedings against the Portuguese Tax Authority. The procedure requires filing a petition for constitution of the arbitral tribunal within 90 days of the final administrative decision (or tacit deferral deadline). Foreign entities enjoy the same arbitration rights as Portuguese residents, including the ability to challenge assessments, request reimbursement of taxes paid, and recover legal costs if successful. This mechanism provides an alternative to judicial courts, offering faster resolution and specialized tax expertise.
What legal framework governs tax arbitration (RJAT) proceedings at CAAD in Portugal?
Tax arbitration proceedings at CAAD are governed by the RJAT (Regime Jurídico da Arbitragem em Matéria Tributária), enacted through Decree-Law No. 10/2011 of January 20, as amended by Law No. 66-B/2012. The framework establishes CAAD as the administrative arbitration center for tax disputes, offering an alternative to traditional judicial appeals. Key provisions include: voluntary nature requiring taxpayer initiative; jurisdiction over challenges to tax assessments, self-assessment acts, and tax authority decisions exceeding €10,000; three-arbitrator panels (or single arbitrator for amounts under €10,000) designated by the Deontological Council; 90-day deadline to file arbitration petitions; decisions with same effect as court judgments; and expedited proceedings typically concluded within 6-12 months. Articles 2 and 10 define scope and admissibility requirements. Article 11 governs arbitrator designation and tribunal constitution. Article 18 addresses procedural hearings. The regime incorporates subsidiary application of the Voluntary Arbitration Law and Civil Procedure Code. Parties may agree to waive hearings and proceed on written submissions, as occurred in Process 84/2013-T. Decisions are final but subject to limited judicial review for procedural irregularities.
What are the grounds for annulment of IRC tax liquidations related to permanent establishment?
Grounds for annulment of IRC tax liquidations related to permanent establishment include: (1) Incorrect factual determination that activities conducted in Portugal constitute a permanent establishment under Portuguese IRC Code Article 5 and applicable tax treaty definitions; (2) Misapplication of preparatory or auxiliary activity exceptions, where activities are merely supportive rather than core business functions; (3) Incorrect duration calculation for construction, installation, or assembly projects that fall below treaty thresholds (typically 6-12 months); (4) Improper attribution of profits to the alleged permanent establishment, violating arm's length principles under OECD Transfer Pricing Guidelines and Article 4 of the IRC Code; (5) Violation of tax treaty provisions that provide more favorable permanent establishment definitions than domestic law, which take precedence under Article 98 of the IRC Code; (6) Procedural defects in the assessment process, including inadequate notification, failure to provide opportunity to be heard, or lack of proper justification in the tax assessment notice; (7) Erroneous characterization of dependent agent relationships where the local entity acts independently; and (8) Failure to consider that activities were performed through an independent subsidiary rather than creating direct permanent establishment presence. Successful challenges require demonstrating these legal or factual errors with supporting documentation.