IRC Corrections 2009-2011: Tax Benefits, Debt Forgiveness & Impairment Losses | CAAD 842/2014-T

ARBITRAL DECISION

I – REPORT

A…, S.A., NIPC …, with registered office at … – … …, …-… …, pursuant to the combined provisions of Articles 2, paragraph 1, point a), 5, 10, paragraph 1, point a), and et seq. of the Legal Regime for Arbitration in Tax Matters, approved by Decree-Law No. 10/2011, of 20 January, and with the grounds provided in points a) and c) of Article 99 of the Code of Administrative Procedure (CPPT), requested the constitution of an Arbitral Tribunal and submitted a petition for arbitral determination seeking to review the legality of additional IRC assessment acts relating to the years 2009, 2010, and 2011, resulting from the inspection action carried out by the Tax Inspection Services of the Finance Directorate of ..., pursuant to Service Orders No. OI2012 … and OI2013 …, as follows:

The applicant concluded by formulating the following petition:

"(...) The Applicant requests the Arbitral Tribunal to decree the partial annulment of the additional IRC assessments relating to the years 2009, 2010, and 2011 identified in Chapter I above (of the initial petition), resulting from the technical corrections itemized in Chapter II (of the aforesaid initial petition), in the amount of 128,741.85€, with the legal consequences thereof.

To substantiate the petition, essentially based on disagreement with the corrections made in the context of tax benefits – described in point III.1.1 of the Inspection Report (RIT); of costs/expenses not accepted for tax purposes, specifically of debt forgiveness – described in point III.1.2.1 p. 5 of the RIT and of impairment losses not accepted – described in point III.1.2.1 p. 22 of the RIT, all contained in the Administrative File (PA), it alleged[1]:

The petition for arbitral determination covers only the challenge of part of the aforesaid assessment acts, carried out based on purely arithmetic corrections to the tax result declared by the applicant A… in the context of IRC in the said fiscal years, as itemized in the table below (whereby the values therein indicated correspond to corrections for which arbitral appraisal is requested).

However, there is a preliminary question that must be addressed and which concerns the possible lapse of the right to assess IRC for 2009 regarding facts for which no criminal inquiry was instituted.

The external inspection procedure, relating to service order OI2012 …, of partial scope (IRC/VAT), relating to the year 2009, was notified to the applicant A… on 11-09-2013 (cf. Doc. No. 1), and that notification, by virtue of the provision in paragraph 1 of Article 46 of the LGT, had the effect of suspending, for 6 months, the statute of limitations period for the right to assess IRC relating to that year of 2009.

On 26-02-2014 (cf. Doc. No. 2), the applicant A… was notified that the deadline for the inspection procedure, initially of partial scope and later converted to general scope, was extended by a further 3 months, by decree of the Finance Director by delegation of 25-02-2014, pursuant to point a) of paragraph 3 of Article 36 of the RCPIT.

However, that extension had no suspensive effect on the statute of limitations period for the right to assess, by virtue of the provision in paragraph 1 of Article 46 of the LGT. ([2])

Now, as a result of the said inspection action, the Tax Authority assessed the applicant A… an additional IRC relating to the period of 2009, through assessment act No. 2014 … dated 2014-07-28, the notification of which is deemed to have been effected on the 25th day following its dispatch (cf. Demonstration of the IRC assessment attached as Doc. No. 3).

The right to assess taxes lapses if the assessment is not validly notified to the taxpayer within four years, when the law does not fix another period (cf. Article 45, paragraph 5 of the LGT and Article 101 of the CIRC).

This statute of limitations period is counted, in the case of periodic taxes – as is the case with IRC – from the end of the year in which the tax fact occurred (cf. Article 45, paragraph 4 of the LGT).

However, the statute of limitations period is suspended by notification to the taxpayer, pursuant to law, of the service order or decree at the beginning of the external inspection action, ceasing, however, this effect, the period counting from its beginning, if the duration of the external inspection has exceeded the period of six months following notification (cf. Article 46, paragraph 1, of the LGT).

Accordingly, the applicant was notified of the assessment act after the statute of limitations period for the right to assess IRC (4 years) had already elapsed, discounting the suspension period of 6 months relating to the inspection action.

This is so, first and foremost, because, given that the inspection action lasted more than 6 months, "the suspension of the statute of limitations ceases at the end of that period, with retroactive effect to its beginning, everything occurring as if the statute of limitations period had never been suspended", as established in paragraph 1 of Article 46 in fine. ([3])

However, the applicant A… was constituted as a defendant in criminal inquiry proceedings No. 160/203.0 IDSTR pending before the Tax Criminal Investigation Service of the Finance Directorate of … "for indications of the commission of crime(s) of Fiscal Abuse of Confidence, Fraud and Qualified Fraud, as provided for and punished respectively by Article 105, 103, and 104, paragraph 2 of the RGIT, substantiated by Recording of fictitious invoicing that does not evidence actual commercial operations in the period(s) of tax relating to years 2009, 2010, and 2011." (cf. Terms of Constitution as Defendant attached as Doc. No. 4).

These facts under criminal investigation relate solely and exclusively to invoicing issued by B… (cf. Inspection Report: chapter III.1.2.4 B…), which the applicant does not intend to challenge.

So that the preliminary question raised consists merely in knowing whether the Tax Authority has the right to assess IRC relating to the year 2009, regarding other tax facts that are not those covered by the criminal proceedings mentioned above (and as has already been stated, notification of the additional IRC assessment for 2009 to the taxpayer only occurred after more than 4 years had elapsed from the end of the year in which the tax facts occurred, even taking into account the suspension period of the deadline due to the inspection action).

The question arises because the wording of paragraph 5 of Article 45 of the LGT limits the "extension" of the statute of limitations period for the right to assess to facts regarding which a criminal inquiry was instituted, namely: "5. Whenever the right to assess relates to facts regarding which a criminal inquiry was instituted, the period referred to in paragraph 1 is extended until the dismissal or res judicata of the sentence, plus one year."

It is therefore a matter of ascertaining whether the tax act in question (IRC assessment for 2009) complies with all the formal requirements imposed upon it by the legal system or, conversely, only partially complies, as to a segment of the corrections, with part thereof affected by illegality.

"Administrative acts are valid, that is, in accordance with the legal system, when they meet certain conditions or requirements which the legal system itself imposes upon them. (...) The formal conditions of validity of administrative acts comprise all the legal requirements imposed upon the administrative act for its preparation and execution, not including its content." ([4])

Given that partial revocation ([5]) of the administrative act and also its reform are established as a means by which the part of a prior act not affected by illegality is preserved, it must be concluded that the partial challenge of the validity of the tax act, by statute of limitations regarding tax facts more than 4 years old as to which no criminal inquiry was instituted, is procedurally admissible.

"The lapse of the right to assess constitutes a defect of the tax assessment act, generating voidability, and cannot be assessed ex officio by the court, the party challenging it being required to raise it in due time" (cf. Supreme Administrative Court Decision, Doctrinal Decisions, No. 481, year XLI, January 2002, p. 55 et seq.).

The applicant A… considers, with due respect, that the aforesaid additional IRC assessments are affected by illegality insofar as they relate to corrections made by the Tax Authority to the fiscal years 2009, 2010, and 2011 on the ground of failure to verify the legal requirements to enjoy the tax benefit granted for job creation for young people established in Article 19 of the EBF, namely:

The Tax Authority sustains that: "the contracts in question are fixed-term employment contracts (6 months), renewable, dated 01-08-2004 and 16-03-2006, respectively", whereas the law (Article 19 of the EBF) "provides for the application of this benefit to cases contemplated as 'employment contract for an indefinite term', hence the situation under analysis does not meet the legal requirement and therefore the taxpayer cannot benefit from the values taken into consideration, which will be corrected and added to the taxable income declared".

The applicant A… does not share this understanding and argues that these tax corrections are affected by erroneous legal qualification of the facts constituting the right to the tax benefit (tax relief) which aims to encourage employment with stable status in detriment to precarity.

Article 19 of the EBF establishes that:

"1 – For the determination of taxable profit of corporate income tax taxpayers and individual income tax taxpayers with organized accounting, the charges corresponding to the net creation of jobs for young people and long-term unemployed, admitted by employment contract for an indefinite term, are considered at 150% of their respective amount, recorded as an expense of the fiscal year.

2 – For purposes of the foregoing, the following are considered:

a) "Young people" are workers with age greater than 16 and less than 35 years, inclusive, assessed on the date of celebration of the employment contract, with the exception of young people under 23 years who have not completed secondary education and who are not attending an education-training offer that allows raising the level of schooling or professional qualification to ensure completion of that level of education;

b) "Long-term unemployed" are workers available for work, pursuant to Decree-Law No. 220/2006, of 3 November, who are unemployed and registered at employment centers for more than 9 months, without prejudice to fixed-term contracts having been celebrated during that period for periods of less than 6 months, whose joint duration does not exceed 12 months;

c) "Charges" are the amounts borne by the employing entity with the worker, for fixed remuneration and contributions to social security at the charge of the same entity;

d) "Net creation of jobs" is the positive difference, in a given fiscal year, between the number of eligible hiring in accordance with paragraph 1 and the number of departures of workers who, on the date of their respective admission, were in the same conditions.

3 – The maximum amount of the annual increase, per job, is equivalent to 14 times the minimum monthly guaranteed wage.

4 – For purposes of determining the net creation of jobs, workers who are members of the family unit of the respective employing entity are not considered.

5 – The increase referred to in paragraph 1 applies for a period of five years from the beginning of the employment contract, not being cumulative, either with other tax benefits of the same nature, or with other employment support incentives provided for in other diplomas, when applicable to the same worker or job.

6 – The regime provided for in paragraph 1 can only be granted once in relation to the same worker, whatever the employing entity."

Accordingly, the specific question that is requested of the Arbitral Tribunal to assess consists in knowing whether the employment contracts of employees C… and D…, in effect in the years 2009 to 2011, are (or are not) subsumible within the forecast of Article 19 of the EBF.

The facts to be taken into consideration relate, therefore, to the nature of the employment relationship established between A… and its two employees, D… and C… – which are based on distinct facts.

Regarding the employment relationship with D…, the following facts are relevant:

· On 16/03/2006 a Fixed-Term Employment Contract was celebrated with E…, Lda., NIPC …, for a period of 6 months, beginning on 16/03/2006 and ending on 15/09/2006 (cf. Doc. No. 5)

· The 1st renewal of this contract occurred on 16/09/2006 and was in effect until 15/03/2007.

· The 2nd renewal of this contract occurred on 16/03/2007 and was in effect until 15/09/2007.

· On 01/04/2007, as a result of the incorporation merger of E… ([6]) into A…, the latter incorporated him into its staff as a permanent employee.

· On 18/07/2007, D… terminated, of his own volition, the employment contract.

· On 01/09/2007, D… was admitted by A… without a written contract.

Regarding the employment relationship with C…, the following facts are relevant:

· On 01/08/2004 a Fixed-Term Employment Contract was celebrated with E…, Lda., NIPC …, for a period of 6 months, beginning on 01/08/2004 and ending on 31/01/2005 (cf. Doc. No. 6).

· The 1st renewal of this contract occurred on 01/02/2005 and was in effect until 31/07/2006.

· The 2nd renewal of this contract occurred on 01/08/2006 and was in effect until 31/01/2007.

· On 01/04/2007, as a result of the incorporation merger of E… into A…, the latter incorporated C… into its staff as a permanent employee.

Therefore, regarding the factual framework, it is important to note, as stated, that the situations are not precisely identical, although the Tax Authority has considered them as such.

In the case of young worker D…, the date of admission to be considered for purposes of verification of the assumptions inherent to Article 19 of the EBF should correspond, absent better opinion, to that date on which he was "readmitted", so to speak, by A… (01-09-2007), but this time, by an employment contract for an indefinite term given that the contract was not reduced to writing.

As for young worker C…, the date of admission to be considered for granting the benefit must correspond to the date of integration of the worker (01-04-2007) into the staff of A… as a result of the incorporation merger with E… through the "notification" to the worker, subscribed by him (cf. Doc. No. 7), that his employment contract "remains unchanged with all rights and obligations arising therefrom".

That is, only in this case, of young C…, the inspection could refer to the "type" of employment contract initially celebrated with the incorporated company E…, however, without overlooking, obviously, the terms and conditions thereof, for, as will be seen hereafter, in light of labor law, it was not a "fixed-term employment contract" but, rather, by a defect of form, an employment contract for an indefinite term. ([7])

With regard to the legal framework, the position of the Tax Authority conveyed in the Binding Opinion issued within the scope of Proceeding No. …/2008 ([8]) with a concordant decision of the substitute legal delegate of the Director-General of 2008.09.10, contained in the Doctrinal Sheet published on the Finance Portal (info.portaldasfinanças.gov.pt), is invoked in support of recognition of the tax benefit by A…:

"Labor Law does not require, but also does not prohibit, the reduction to writing of an employment contract for an indefinite term.

The Tax Legislator, in Article 19 of the EBF, is silent as to the need for an indefinite-term employment contract to take written form.

Thus, the taxpayer should be equipped with the necessary elements to prove the existence of the indefinite-term employment contract and the moment of its beginning.

If, in accordance with Labor Law, there is no requirement for celebration in writing of an indefinite-term employment contract, the DGCI services should value the elements presented in accordance with the rules set forth in that same law and its subsequent interpretation.

It being incumbent upon the employing entity to prove the existence of the indefinite-term contract for purposes of the tax benefit, it seems relevant that it have the care to reduce it to writing.

However, for purposes of the tax benefit, in certain circumstances, it is possible, through other elements presented by taxpayers, to elaborate reasoning that allows attesting to the celebration of an indefinite-term contract.

What must be required is that the elements of proof are binding for the employing entity, involving, at least, the two parties to the contract. The continuation in service of a given worker after the lapse of the maximum duration period of the fixed-term employment contract (this necessarily reduced to writing) is a fact that allows concluding the existence of an indefinite-term employment contract.

This continuation in service must, however, be proven through documents that externally bind the entity." (cf. Doc. No. 8).

It is therefore manifest that the inspection did not follow the same interpretation that was adopted in prior administrative decisions on this same question surrounding the assumptions of the tax benefit for job creation for young people provided for in Article 19 of the EBF, notably with respect to the lack of a written contract (indefinite-term contract), limiting itself only to the letter of the law, in a strictly literal and restrictive interpretation of the provision, without weighing its purpose and disregarding concepts and rules of labor law (i.e., without attending to the systematic element underlying the method of interpretation of laws which should obey the unity of the legal system).

In interpreting the norm contained in Article 19 of the EBF, the Tax Authority did not consider the provision of Article 10 of the Tax Benefits Statute, namely: "The norms that establish tax benefits are not subject to analogical integration, but admit extensive interpretation."

In our view, the Tax Authority's interpretation violates the provision of Article 11 of the General Tax Law:

"1. In determining the sense of tax norms and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

1. Whenever, in tax norms, terms peculiar to other branches of law are used, they shall be interpreted in the same sense as they have there, unless otherwise directly provided by law.

2. Persistent doubts about the sense of the applicable rules of incidence, the economic substance of the tax facts should be considered."

In effect, in light of what is established in point c) of paragraph 1 of Article 147 of the Labor Code:

"An employment contract is considered for an indefinite term: in which there is lacking the reduction to writing, the identification or the signature of the parties, or, simultaneously, the dates of celebration of the contract and of beginning of work, as well as one in which the references to the term and to the justifying reason are omitted or insufficient;"

So that for all legal purposes, notably for purposes of the provision of Article 19 of the EBF, the hiring of D… by A… occurred on 01/09/2007 and without a written contract, that is, in light of the law, by an indefinite-term employment contract.

As for young worker C…, it must be acknowledged that the "fixed-term employment contract" ([9]) initially celebrated by the incorporated company E… did not meet the legal requirements of a fixed-term contract, by resort to a generic and vague formula of transposition of what is stated in the law without factual specification, namely: "... justifying the placing of a term by the circumstance of increased business activity" (cf. clause 2).

Indeed, jurisprudence is settled as to the insufficiency (irrelevance) of these generic and vague expressions. Witness, among all, the learned Decision of the Supreme Court of Justice of 18 June 2008, whose summary is transcribed: "1. The indication of the justifying reason for the celebration of a fixed-term employment contract constitutes a formality ad substantiam, such that the insufficiency of such justification cannot be supplied by other means of proof, from which it results that the contract is considered celebrated for an indefinite term, even though it may subsequently be proven that in its genesis there was one of those situations in which the law admits the celebration of fixed-term employment contracts.

1. This means that only the facts appearing in the pertinent contractual clause can be considered as justifying reason for the stipulation of the term.

2. The expressions 'due to the season that is passing' and 'there being an increase in customers', set forth in a contractual clause to justify the celebration of a fixed-term employment contract, are so vague and generic that they do not allow establishing the causal nexus between the reason invoked and the stipulated term, as required by paragraph 3 of Article 131 of the Labor Code, which determines the nullity of the term stipulation and transforms the fixed-term contract into an indefinite-term contract, as provided for in paragraph 4 of Article 131 cited."

Consequently, the applicant A… incorporated young worker C… into its staff as a permanent employee, because in view of the law, the respective employment contract cannot but be considered for an indefinite term.

It should be noted that, in the applicant's view, what is at issue is not the "conversion" of a fixed-term employment contract into an indefinite-term employment contract by "continuation in service", given that it is unequivocal that young C's contract was always – ab initio – a contract "without term" in the eyes of the law.([10])

In both cases, the condition of "net creation of jobs for young people" was met, in that A… came to integrate into its staff these two young workers with employment bonds without temporal limitation, that is, with the stability and security of two lasting jobs for young people, this being the social function (creation of stable employment) underlying the tax benefit of the increase in labor charges.

The Tax Authority based the addition of 80,229.61€ to the taxable income declared by the applicant A… in the context of IRC for the year 2009 in the following terms:

"In the analysis carried out on the fiscal year 2009, it was possible to detect that company A… agreed with its customer F…, SA, to cease receiving part of the debt in exchange for payment of the remainder (Credit Note No. 64 of 03.04.2009).

In fact, F… proposed to A… the payment of 64,900.00€ from a total of 145,129.61€, justifying that it found itself in a phase of increasing aggravation of its financial situation, touching a situation of imminent financial breakdown, for which reason it resorted, at the time, to a financial institution that would vouch for its activity but in an insufficient amount to meet all of its financial responsibilities. Thus, it alleged to A… that said amount (64,900.00€) was the amount of which it had available to settle its debt.

A… accepted the above proposal, considering the difference (80,229.61€) to the value of the total debt (145,129.51€) as an extraordinary expense of the fiscal year (uncollectible debt).

Pursuant to the law, in accordance with Article 39 of the CIRC in effect on 31-12-2009, uncollectible debts: 'can be directly considered expenses or losses of the fiscal year insofar as this results from a special corporate recovery process and creditor protection or from an execution, bankruptcy or insolvency process, when relative to them the constitution of a provision is not admitted, or, if it is, this proves insufficient.'

Within this framework, we requested information from the taxpayer regarding the meeting of the conditions above enumerated to better evaluate the classification and tax treatment of the amount in question. In response, the taxpayer clarified that at the time of the transaction, the debt in question did not relate to a company in a special recovery process nor in execution, bankruptcy or insolvency process.

Being registered the insolvency of F… in a proceeding (No. …/…) of the Commercial Court of Lisbon – 3rd Chamber, with a sentence declaring insolvency issued on 07-11-2011.

Since this insolvency proceeding is from 2011, in the exercise of consideration of the expense (2009), the conditions for it to be fiscally accepted are not met, whereby 80,229.61€ will be added to the taxable income declared by the taxpayer."(the underlining is ours)

In summary, the Tax Authority understood that the part of the debt that the applicant A… was unable to actually recover from the debtor F…, within the scope of a transactional agreement that included a "debt forgiveness" (remission), should not, nevertheless, be considered as an expense or loss of that fiscal year for not resulting from any judicial process of a bankruptcy nature nor from any judicial execution process – by virtue of Article 39 of the CIRC.

In other words: the Tax Authority did not accept that the part of the debt uncollected as a result of a transaction could be treated as an expense in 2009 insofar as this loss does not result from a special corporate recovery and creditor protection process nor from an execution process nor from a bankruptcy or insolvency process. ([11])

The first criticism that occurs to make regarding the soundness of this justification by the Tax Authority touches the reasons for the adequacy of the act to the public purpose that justifies it. It is well known that the tax procedure is not constructed merely as an instrument for the financial realization of the State, that is, the investigative steps promoted by the Tax Authority do not have as their exclusive purpose the proof of facts constitutive of the tax obligation or of facts translating into an enlargement of its quantitative aspect, rather – nobili officium – they are directed indistinctly to these and to those that have a precautionary character of that obligation or determine a diminution of its quantitative aspect. And such is the relevance that objective material truth has in the procedure that it even comes to surpass the preclusive efficacy of the tax act, in such a manner that, even after the deadline for its jurisdictional challenge has elapsed, the Tax Administration may order the restitution of the tax when it considers it unduly collected. ([12])

Given that the inspection action was based on Service Orders OI2012 … and OI2013 … relating to the fiscal years 2009, 2010, and 2011, it does not appear just, proportional and adequate that the technical correction of 80,229.61€, in the fiscal year 2009 (allusive to the partial disallowance of the credit against F…, extinguished partially by contractual remission occurring in 2009 but without the coexistence of bankruptcy proceedings in that date), be made without reflexively and simultaneously making the ex officio correction, in the fiscal year 2011, when it is proven (full proof) that in that fiscal year the insolvency of the debtor was judicially decreed, as stated in the Inspection Report: "Being registered the insolvency of F… in a proceeding (…/…) of the Commercial Court of Lisbon – 3rd Chamber, with a sentence declaring insolvency issued on 07-11-2011.".(cf. Inspection Report, p. 8)

As a consequence, the applicant A… considers, with due respect, that this addition to the taxable income for fiscal year 2009, in the amount of 80,229.61€, should then trigger ope legis (cf. Article 103, paragraph 1, point a) of the CIRC as worded in 2011) the corresponding correction/ex officio reform, for less (decrease), of the taxable income in fiscal year 2011, followed by the partial annulment of the tax due in that fiscal year, in which there is full proof of the existence of the insolvency proceeding of the debtor.

This understanding is supported, first and foremost, by Article 103, paragraph 1, point a) of the CIRC (in effect in 2011): "The Directorate-General of Taxes proceeds ex officio to the annulment, total or partial, of the tax that has been assessed, whenever this proves to be higher than due in the following cases: a) As a consequence of correction of the assessment pursuant to paragraphs 9 and 10 of Article 90 or Article 100;"

And also, by the general principles of the tax procedure, with particular emphasis on the principles of justice and impartiality, and likewise, on the principle of proportionality (cf. Article 55 of the LGT).

The principles of justice and impartiality require the Tax Authority to treat fairly and impartially those who enter into relationship with it (cf. Article 6 of the CPA). In the domain of the tax procedure, these principles demand that the Tax Authority be guided by criteria of independence in the investigation of factual situations, carrying out all steps that appear necessary to ascertain material truth, regardless of whether the facts to be investigated are contrary to the patrimonial interests that the Tax Authority has the duty to defend. ([13])

The principle of proportionality, for its part, requires the Tax Authority not to affect the rights or legitimate interests of those administered in terms not adequate and proportionate to the objectives to be achieved (cf. Article 5, paragraph 2 of the CPA). This principle requires the Tax Authority to refrain from imposing on taxpayers obligations that are unnecessary to the satisfaction of the purposes that taxation pursues.

An unjust act is an illegal act – injustice is a defect of legality and constitutes violation of law.

"The activity of the tax administration cannot be a mechanical application of laws to situations of fact, and must always have present the objective that justifies it, which is the pursuit of the public interest (Articles 266, paragraph 1, of the CRP and 5 and 55 of the LGT). For this reason the tax administration should refrain from acting in situations in which, although the abstract legal presuppositions of its action are formally met, this is not relevant to the pursuit of the public interest. Some examples drawn from court practice illustrate these situations and may serve to demonstrate the advisability of not giving absolute prevalence to the norms that define the action of the tax administration in certain situations, restricting their scope so as to ensure their compatibility with those principles. Both in Industrial Contribution as in IRC, the principle of specialization of fiscal years applies, which determines, in what here matters, that to each fiscal year of the company's activity must be imputed the income and expenses that were generated or borne in it (Articles 22, 23 and 26 of the CCI and Article 18 of the CIRC).

When there is a divergence between the taxpayer's criterion and that of the tax administration regarding the imputation of a certain gain or loss to a certain fiscal year, the latter should proceed to the correction of the taxable income, causing the income or expense to increase in the year in which it understands it should relate and, correspondingly, should deduct such income or expense from the taxable income of the year to which the taxpayer imputed it. (...)

Another case in which the same principle should apply is that of the tax administration making a correction regarding the taxable income relating to one year, in order to collect more tax in it, without making the corresponding correction in the other year in which it should also have been corrected, in which, reflexively, the correction would provoke a lesser tax assessment. Also in these cases, the duty of not generating situations of injustice requires that a correction regarding one year cannot be made without carrying out what corresponds to it in another year, for, if it does not do so, it will be assessing the taxpayer with tax higher than what the latter should pay." ([14])

Furthermore, this financial asset of 80,229.61€ (right of credit) was effectively extinguished in fiscal year 2009, when the respective payment obligation was extinguished by remission (cf. Article 863 of the Civil Code).

So that in 2009 there ceased to exist a credit – it does not even make sense to speak of a doubtful-recovery credit in the case at hand, when one is dealing with a case of factual uncollectibility.

In fact, in fiscal year 2009 the uncertainty as to the uncollectibility of the 80,229.61€ credit ceased by virtue of the "forgiveness" granted by the applicant in that fiscal year, within the scope of the agreement reached with debtor F….

Proven, as it is, the partial remission of the credits against F…, which amounted to that stated amount, the applicant considered (and considers) that from a strictly accounting perspective, this financial asset (extinguished) should be derecognized in that fiscal year of 2009 and not subsequently.

Moreover, this understanding is coincident with that which was sanctioned by the Tax Authority in Proceeding 2013 … of Binding Opinion, with Decision issued by the Director-General on 28-01-2014, from which we extract the following reasoning: "1. With the publication of Decree-Law No. 159/2009, of 13 July, the IRC Code was amended and adapted to the new accounting norms [International Accounting Standards, Accounting Standardization System (SNC), among others] whose adoption became mandatory for IRC taxpayers.

1. In light of the maintenance of the strict link between accounting and tax and of the model of partial dependence of the latter on the former and not containing the IRC Code any provision dealing with the derecognition of doubtful-recovery credits, account must be taken of what the SNC says on the matter, specifically Accounting and Financial Reporting Standard (NCRF) 27 – Financial Instruments.

2. In view of the definition of financial asset present in paragraph 5 of NCRF 27, a credit against a customer represents a financial asset.

3. And, in accordance with paragraph 30 of that same norm, a financial asset should only be derecognized, that is, only removed from the balance sheet, when one of the following situations occurs:

(a) The contractual rights to cash flows resulting from the financial asset expire; or

(b) The entity transfers to the other party all significant risks and benefits related to the financial asset; or

(c) The entity, while retaining some significant risks and benefits related to the financial asset, has transferred control of the asset to another party and that party has the practical ability to sell the asset in its entirety to an unrelated third party and the possibility of exercising that ability unilaterally without need to impose restrictions on the transfer. If such is the case, the entity should: (i) Derecognize the asset; and

(ii) Recognize separately any rights and obligations created or retained in the transfer.

1. In summary, a financial asset should only be derecognized when the contractual rights to receipts resulting from it are realized, expire or are transferred to another entity.

2. Reflexively, the debtor entity can only derecognize its financial liability (or part of a financial liability) "when this is extinguished, that is, when the obligation established in the contract is satisfied, cancelled or expires" (cf. § 33 of NCRF 27).

3. For its part, the Civil Code considers, in addition to performance as provided for in Article 762, other causes of extinction of obligations, such as: dation in payment (Article 837), consignment in deposit (Article 841), set-off (Article 847), novation (Article 857), remission (Article 863) and merger (Article 868).

4. In this line, the creditor entity can only derecognize a credit of which it is the holder if, and only if:

i) The obligation is satisfied – whether by satisfaction of the specific interest of the creditor entity (these are cases of performance, whether voluntary or import the coercive realization of the performance or consignment in deposit), or by satisfaction of a successor interest to that which the obligatory bond aimed to particularly satisfy (where situations such as dation in payment, set-off and assignment of assets to the creditor entity are included);

ii) The obligation is cancelled totally or partially (in which case the derecognition should also be total or partial) – these are situations in which extinction does not entail satisfaction of the specific or even successor interest of the creditor entity (these are situations, for example, of novation, remission, merger, annulment, revocation and resolution);

iii) The obligation expires – this is the repercussion of time on legal relations. For this purpose, Article 298 of the Civil Code determines that the non-exercise of a right for a lapse of time greater than that established by law will have as a consequence the extinction of that same right (except in the case of indisposable rights) – these are the figures of lapse and prescription of non-use.

In strictness, only in these cases are the contractual rights to cash flows resulting from the financial asset truly extinguished.

(...)

Thus, taking into account the present accounting context, the strict link between accounting and tax, and the current concern of the legislator in not inserting into the IRC Code any norm that induces a particular accounting procedure, it does not make sense that, for tax purposes, the derecognition of a doubtful-recovery credit continues to be permitted – even if it has been in arrears for more than two years and regarding which a 100% impairment loss has been recognized – in situations in which that derecognition should not be carried out in accounting terms.

And one of the situations in which the credit should not be derecognized in accounting terms because the creditor's contractual right or the debtor's civil obligation is not extinguished is when the credit has been judicially reclaimed or in arbitral tribunal.

In fact, if the creditor company resorted to court to be reimbursed for the amount owed, it is because it does not intend to relinquish the right to the respective cash flows. Even if the proceeding is pending a decision for several years, what is certain is that this right is maintained until, eventually, the creditor entity withdraws the claim.

The contractual rights to cash flows resulting from the financial asset not having been extinguished (by any of the causes provided for in the Civil Code), the creditor entity should not, by virtue of the provision of paragraph 30 of NCRF 27, derecognize the credit.

If, nevertheless, the creditor entity decides to derecognize the aforesaid credits, its amount must be increased in Schedule 07 of Model Declaration 22, for purposes of determining the taxable profit of the taxation period in which the derecognition occurred, given that the requirements set forth in Article 41 of the CIRC are not met for the credit to be considered uncollectible.

If, however, the creditor withdraws from the proceeding, the "expense" associated with the derecognition of the asset is only accepted for tax purposes if integrated into the tax file (1) the documentary evidence of withdrawal, (2) the document subscribed by the company's management body which decided the withdrawal and cancellation of the credit, identifying the debtor, the amount in question and the impairment loss, as well as the reasons which led to the withdrawal of the proceeding, and (3) the demonstration of the indispensability of the loss resulting from the difference between the value of the credit and the value eventually received. The tax acceptance of the derecognition only operates regarding the part of the credit that has been subject to withdrawal/forgiveness for which there is a justification.

In this or another situation in which the credit can be derecognized from the Balance Sheet, the tax acceptance of the respective "expense" is questioned if the taxpayer continues to maintain commercial or financial relations with the debtor (cf. info.portaldasfinancas.gov.pt: Tax Information, Binding Opinions, IRC Articles 36 and 41, Doctrinal Sheet, Proceeding 2013 …)."

Correction to fiscal year 2011 in the amount of 128,741.85€.

In summary, the factual framework is as follows:

G…, S.A., owed to A… the total sum of 128,741.85€ (cf. c/c, invoices and debit notes from 2008 to 2010) relating to equipment leasing contracts.

For collection of this credit, A… proposed, in 2009, a judgment action against G…, Lda., which was conducted under No. …/….5YIPRT before the 2nd Chamber of the Judicial Court of ....

On 14/05/2010, A… celebrated a debt transfer agreement with G… and H…, S.A.

On 25/05/2010, A… withdrew from the action against G….

G… submitted to insolvency on 16/06/2011, with a sentence declaring insolvency being issued on 15/07/2011, which became res judicata on 22/08/2011 (cf. Certificate issued by the 2nd Chamber of the Commercial Court of Lisbon, Proceeding No. …/…).

H… also submitted to insolvency on 17/02/2012, with a sentence declaring insolvency being issued on 12/03/2012, which became res judicata on 02/05/2012 (cf. Certificate issued by the 4th Chamber of the Commercial Court of Lisbon, Proceeding No. …/…).

In the list of creditors of H… is A… with a recognized credit in the amount of 137,812.28€ (cf. Certificate cited above).

The Tax Authority's argumentation for carrying out the correction is based on these topics:

• Absence of accounting record in 2010: none of the contracts received accounting treatment in 2010;

• Deficient accounting record in 2011: in 2011 A… recorded the "transfer" of the credit from G… to H…, but did not record its cancellation by payment of the earnest money; the Tax Authority considers that A… should have recorded the entry of a future asset by counterpart to the cancellation of H's debt.

• Nonexistence of debt: either of G… or of H…;

• Existence of a right of A… against H…: "(...) at the level of the property of the real estate in question which would be extinguished in 2012".

The "absence of accounting record" of the contracts in 2010 and the "deficient accounting record" of the same in 2011 are legally irrelevant arguments, given that what is at issue is fiscal year 2011 and in the genesis of this contractualization there were "uncollectible credits" of A… against G… that were judicially reclaimed.

On the other hand, the Tax Authority's assertion that a debt (read "right of credit") ceased to exist is easily refutable.

The celebration of a promise-to-purchase real estate contract, with the delivery of a certain sum as earnest money and principle of payment of the price (advance payment of the price), constitutes a "right of credit" of the promise buyer against the promise seller and not a "real right" over the promised real estate to be purchased.

That is, in other words, the celebration of a promise-to-purchase real estate contract produces only obligatory effects, that is, it only binds the parties intervening in it – unless the parties assign "real efficacy" to that contract, which was not the case. ([15])

The Tax Authority asserts:

"There existed rather a right of A… against H… at the level of the property of the real estate in question, which would be extinguished in the year 2012."

However, in the domain of civil law, there did not exist any "... right at the level of property" and in the tax legal system neither, otherwise there would be incidence of Real Estate Transfer Tax. ([16])

Moreover, the existence of the "credit" is fully proven ([17]) through the certificate issued by the Commercial Court of Lisbon, which attests to the recognition of its existence, that is, of the uncollected credit of A… against H…, in the amount of 137,812.28€, hence, the Tax Authority cannot have a different understanding with respect to the "existence" of that right of credit.

It could at most sustain that in 2011 that right of credit was not yet due, because the promise-to-purchase contract was in effect (for not yet having lapsed) and the promise seller was not yet in definitive non-performance.

But the facts evidence the contrary.

In fact, H… was required to have the work completed by 30 June 2011 (cf. Clause 6, paragraph 1).

And that did not occur.

It is true that a "tolerance" was contractually foreseen, but not unlimited, for the completion of the work, and it is certain that the "maximum tolerance" (sic) was set at 180 days counting from the end of June 2011, that is, that was the last deadline for completion of the work: until 26.12.2011.

Which also did not occur.

Given this, it is perfectly defensible that A… considered (and rightly so) that from that date, 26.12.2011, the credit (certain, liquid and exigible) that it held against H… should be treated accounting and fiscally as an "uncollectible credit", as the court came to recognize.

And it should not be said that the fact that the "automatic lapse" of the promise-to-purchase contract was contractually established on 01/03/2012, pursuant to the terms provided for in Clause 8, paragraph 4, prevented A… from being able to reclaim its credit against H… from 26.12.2011 and/or that it was prevented from "qualifying" it as a "doubtful-recovery" credit and evidencing it as such in the accounting.

In fact, the entire history of this proceeding must be taken into account, whose genesis indisputably resulted from the "uncollectibility" of credits against G… resulting from the normal activity of A….

In the case at hand, the Tax Authority advocates "the prevalence of form over substance" to be able to sustain its correction, when it is unequivocal that A… merely wished to obtain collection of its credits and for that reason – and only for that reason – accepted a dation pro solvendo, which was not, obviously, what it wished.

Objectively: everything was nothing more than a failed attempt by A… to obtain collection of credits from its activity that became uncollectible.

In sum: the correction in question is, in our view, unfounded.

Subsidiarily, if this is not the case, reference is made to what is stated above regarding the neglect of the principles of justice and impartiality, given that the Tax Authority did not proceed to the correction of this loss in a subsequent fiscal year nor did it recognize this right for the taxpayer.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and immediately notified to the Respondent in accordance with law.

Pursuant to the terms and for the purposes of the provision of point a) of paragraph 2 of Article 6 of the RJAT, by decision of the President of the Deontological Council, duly communicated to the parties within the legally foreseen periods, arbitrators were designated: Judge Dr. José Poças Falcão, as President, Prof. Dr. Manuel Pires and Dr. Paulo Mendonça, as members, who communicated to the Deontological Council and to the Administrative Arbitration Center their acceptance of the appointment within the period stipulated in Article 4 of the Deontological Code of the Administrative Arbitration Center.

The Tribunal was constituted on 12 March 2015, in consonance with the prescription of point c) of paragraph 1 of Article 11 of the RJAT.

Notified, the Tax Authority submitted timely and promptly its response to the petition and argued for its total dismissal.

On 22 June 2015, a meeting of the arbitrators and counsel for the parties was held at the seat of CAAD, pursuant to the terms and for the purposes of Article 18 of the RJAT, followed by production of the testimonial evidence requested, after which the parties were notified to submit, in writing, their allegations within the successive period of 10 days (cf. respective minutes).

The allegations were submitted on 2-7-2015 by the Applicant and 15-7-2015 by the Respondent, both concluding, essentially, in the same manner as they had done in their respective pleadings.

The Tribunal is competent, the proceeding is proper, and the parties are legitimate and regularly represented by a lawyer, the Applicant, and by Legal Counsel, in representation of the Director-General of Taxes.

It is necessary to appreciate and decide the dispute.

II. REASONING

A. PRELIMINARY QUESTION RELATING TO THE STATUTE OF LIMITATIONS FOR THE RIGHT TO ASSESS

The preliminary question raised by the Applicant must be addressed, which relates, essentially, to the alleged lapse of the right to assess IRC for 2009 regarding facts as to which no criminal inquiry was instituted.

In accordance with Article 93 of the IRC Code (CIRC), the assessment of IRC, even if additional, can only be effected within the periods and in the manner provided for in Articles 45 and 46 of the General Tax Law (LGT).

In this sense, paragraph 1 of Article 45 of the LGT provides that "the right to assess taxes lapses if the assessment is not validly notified to the taxpayer within four years, when the law does not fix another period".

Regarding the counting of the period, paragraph 4 of the same article provides that, in the case of periodic taxes, that period is counted from the end of the year in which the tax fact occurred.

The statute of limitations regulates the period for exercise of the State's right to assess, constituting itself, when it occurs, as a defect of the tax assessment act.

Note also what is stipulated in paragraph 5 of the aforesaid article, according to which "whenever the right to assess relates to facts regarding which a criminal inquiry was instituted, the period referred to in paragraph 1 is extended until the dismissal or res judicata of the sentence, plus one year".

Verifying that one of the tax facts constitutive of a given additional IRC assessment is capable of constituting a tax crime, paragraph 5 of Article 45 of the LGT comes, in practice, to permit that in light of possible criminal consequences, the Tax Authority (TA) may use the eventual fact constitutive of crime, to draw tax effects from it, in light of which the counting/elapsing of a statute of limitations period for the right to assess (in favor of the taxpayer) would not be verified in the normal manner.

Without prejudice to the necessary materialization and specification of the factuality underlying the corrections made by the TA, it is important to safeguard that in view of the rules inherent in tax inspection procedures (paragraph 3 of Article 63 of the LGT), there can only be "(...) more than one external fiscal inspection proceeding regarding the same taxpayer or tax obligor, tax and taxation period by decision, founded on new facts, of the senior official of the service, except if the inspection aims solely at the confirmation of the assumptions of rights which the taxpayer invokes before the tax administration and without prejudice to the determination of the taxation situation of the taxpayer by means of inspection or inspections directed to third parties with whom it maintains economic relations".

In this sense, see the position sustained in the Decision of the Central Administrative Court North of 18/01/2008, No. 670/08, where it is determined that "if the evidence does not contain the facts necessary to conclude the institution of that criminal inquiry and/or to conclude that this criminal inquiry had as its object the investigation of the possible commission of tax crimes related to the matter of the Tax Inspection and the subsequent assessment, nor do the other elements of proof contained in the record allow for the reconsideration of the matter of fact".

Thus, considering that the additional assessment relates to a single object even if, possibly, constituted by different related or unrelated tax facts, the statute of limitations period should be extended to all of them, for, constituting one of them a tax crime, its correlation and dependence in the context of the same additional IRC assessment (a unitary tax act) manifests itself as an essential corollary of respect for the principle of tax legality and indivisibility of the factual presuppositions that gave it origin, until proven otherwise.

Notwithstanding that every tax act is susceptible of division, insofar as the criterion is applied to determine whether the act should be totally or partially annulled, the determination that the "illegality affects the tax act in its entirety, in which case the act should be wholly annulled, or only in part, in which case partial annulment is justified" – see, Decision of the Supreme Administrative Court of 10/03/2012, No. 0298/12.

As a consequence, it is concluded that the extension for tax purposes of the statute of limitations period by virtue of a tax fact contained in a single and singular additional assessment, being framed as a tax crime, assures the TA the benefit of the provision in paragraph 5 of Article 45 of the General Tax Law as to the remaining tax facts contained in the same assessment.

For the foregoing, it is not possible, as the Applicant seeks, to judge the alleged statute of limitations of assessment 2014 … relating to 2009, in the part not accepted by the same Applicant, to be well-founded.

B. PROVEN FACTS

The following facts are deemed proven regarding the dispute concerning the deduction of costs under the tax benefit for the net creation of jobs:

· D… was an employee of E…, Lda. (E…), between 16/03/2006, the date on which he celebrated a fixed-term employment contract with this entity, subject to two renewals, and 01/04/2007, the date on which he transitioned, via a merger process, to A..., SA (A...).

· On the date of said merger, the worker maintained his employment bond based on a fixed-term employment contract.

· Which underwent no alteration upon his integration, by virtue of the aforementioned merger, into the staff of A….

· On 18/07/2007, D… terminated the fixed-term employment contract with his new employer, A....

· On 01/09/2007, he was admitted, with an indefinite-term contract, by A....

· On the other hand, C… was an employee of E… between 01/08/2004, the date on which he celebrated a fixed-term employment contract with this entity, subject to two renewals, and 01/04/2007, when he transitioned, via a merger process, to A....

Regarding the dispute concerning the issue of costs/expenses not accepted for tax purposes, the following facts are deemed proven:

· In fiscal year 2009, A… agreed with its customer F…, SA, to cease receiving part of that customer's debt in exchange for payment of the remainder, more specifically accepted to receive payment of 64,900.00 Euros, from a total debt of 145,129.61 Euros.

· For this purpose, A… issued Credit Note No. 64 of 03/04/2009.

· A… accepted the proposal of F…, SA, considering the difference, in the amount of 80,229.61 Euros, as an extraordinary expense of fiscal year 2009 (uncollectible debt).

· A… ultimately was declared insolvent as a result of proceedings conducted in the Commercial Court of Lisbon, with a sentence declaring insolvency issued on 07/11/2011.

Regarding the dispute concerning the issue of impairment losses not accepted, the following facts are deemed proven:

· A… held a credit against G..., S.A. (G...), in the total amount of 128,741.85 Euros relating to equipment leasing contracts, supported by invoices and debit notes issued between 2008 and 2010.

· With a view to collecting this credit, A… proposed, in 2009, a judgment action against G..., which proceeded in the Judicial Court of ....

· On 14/05/2010, A… signed a promise-to-purchase real estate contract with H..., SA (H...), whose object was the autonomous fraction corresponding to office number 1, located on the 2nd floor and respective parking spaces, of the Building located at …, lot ….

· In the aforesaid contract, the parties agreed to proceed with the definitive purchase and sale contract at the price of 293,129.00 Euros.

· For this purpose, H… obligated itself to have the work completed by 30/06/2011.

· A tolerance period for completion of the work being contractually foreseen, set at 180 days counting from the end of June 2011, that is, until 26/12/2011.

· Neither of the deadlines was met by H….

· The automatic lapse of the promise-to-purchase contract on 01/03/2012 is contractually established.

· A… recorded, in fiscal year 2011, impairment losses on amounts to be received, in the amount of 128,741.85 Euros, relating to H….

· G… submitted to insolvency on 16/06/2011, with a sentence declaring insolvency being issued on 15/07/2011, which became res judicata on 22/08/2011.

· H… submitted to insolvency on 17/02/2012, with a sentence declaring insolvency being issued on 12/03/2012, which became res judicata on 02/05/2012.

· In the list of creditors of H… is A… with a recognized credit in the amount of 137,812.28 Euros.

C. UNPROVEN FACTS

The following facts are deemed unproven regarding the dispute concerning the deduction of costs under the tax benefit for the net creation of jobs:

· That on the date of consideration for tax purposes of the benefit, and notably in the years disputed of 2009, 2010, and 2011, worker D… was not in the service of A….

· That the same did not meet any other condition provided for in the applicable legal regime in the sense that his employer could not enjoy the tax benefit associated with his hiring in the context of an indefinite-term contract.

· That worker C… ever celebrated an indefinite-term employment contract either with E… or with A….

D. REASONING ON THE MATTER OF FACT

The decision on the matter of fact is based on the critical analysis of the documents incorporated in the proceeding and in the instructing administrative file, in combination with the testimony given at the hearing by the witness called by the TA, the tax inspector I…, who conducted the tax inspection and prepared the report referred to in the record.

E. REASONING (Continued)

The Applicable Law

1. The Question of the Tax Benefit for the Net Creation of Jobs

The facts in dispute center on the subject matter of the tax benefit for the net creation of jobs, although with different characteristics regarding the two workers in question.

Both C… and D… provided services to E…, in an initial phase, under fixed-term contracts which, in the first case, succeed by means of renewals between 2004 and 2007, and, in the second, between 2006 and 2007.

Both were in the service of E…, under a fixed-term contract regime, when that company was incorporated into A…, in the context of a merger process, in 2007. And in that capacity they transitioned to the staff of that latter company.

A…, considering, albeit for different reasons, that the contracts relating to the two workers converted into indefinite-term contracts in 2007, decided to take advantage of the tax benefit for the net creation of jobs in the subsequent years.

The TA, not conforming to this position, proceeded to make corrections to the taxable profit relating to fiscal years 2009, 2010, and 2011.

Those corrections amounted, respectively, to 6,300 Euros, 6,650 Euros, and 6,650 Euros to each of the two workers.

The tax benefit for the net creation of jobs was introduced into the Portuguese tax system by Law No. 72/98, of 3 November, producing effects as of 1 January 1999.

It is a tax relief with the characteristics of a tax benefit, which is translated, pursuant to paragraph 1 of Article 2 of the Tax Benefits Statute (EBF), into an "exceptional measure instituted for the protection of superior extra-fiscal public interests relevant to those of taxation itself which prevents".

The benefit is systematically inserted in the part of the EBF relating to tax benefits with a structural character and, although subject to the causality clause limiting the temporal duration of validity of five years, has remained in effect since 1999.

In broad terms, the regime of this tax benefit, established in Article 19 of the EBF, consists of the increase, by 50%, of the amounts recorded as expense, relating to fixed remuneration and social security contributions of workers subsumible in the concepts of "young people" and "long-term unemployed", admitted by indefinite-term employment contracts.

The annual increase per job cannot exceed 14 times the value of the minimum monthly guaranteed wage. This increase can be used for a maximum period of 5 years, counting from the date of beginning of validity of the contract, not being cumulative with other tax benefits of the same nature nor with employment support incentives.

To better understand this benefit, it is important to consider the main concepts:

· "Young people" – are subsumed in this concept workers with age greater than 16 years and less than 35 years, inclusive, on the date of celebration of the indefinite-term contract. However, young people under 23 years of age who have not completed compulsory schooling are not considered eligible.

· "Long-term unemployed" – are considered workers who were unemployed and registered at employment centers for more than 9 months, without prejudice to fixed-term contracts having been celebrated during that period for periods of less than 6 months, but whose joint duration does not exceed 12 months.

· "Charges" – are the amounts recorded as expenses by the employing entity for fixed remuneration and social security contributions.

· "Net creation of jobs" - is the positive difference, in a given taxation period, between the number of eligible hiring in accordance with the above described and the number of departures of workers who, on the date of their respective admission, were in the same conditions.

Various separate legislation and, above all, successive State Budgets (OE), have introduced amendments to the regime associated with the tax benefit.

The first relevant amendment occurred with the 2003 State Budget[18], regarding the maximum limit of the tax benefit. Until 2002, the maximum limit, 14 times the national minimum wage, was applicable per month and not per year. Recognizing that the benefit thus calculated clearly exceeded the initial intention of the legislator, it was proceeded, with effects from 1 January 2003, to alter the norm, in the sense that the increase would operate in relation to annual remuneration and not monthly.

But it was with the 2007 State Budget[19] that this benefit underwent the greatest number of amendments: reduction of the maximum age limit to less than 30 years (previously, 31 years), the requirement of completion of compulsory schooling for young people under 23 years of age, and extension of this benefit to long-term unemployed[20].

Various crucial concepts have also been further specified by law. Thus, for example, until 2007, the date of assessment of the benefit was not explicitly stated, which became the date of celebration of the employment contract, the typology of labor contracts was adapted to the Labor Code, the restriction was introduced that the benefit could only be granted once in relation to the same worker, whatever the employer, and the charges subject to increase became limited to fixed remuneration and Social Security contributions (previously, any remuneration, including variable).

Also from 2007 onwards, this benefit became extensible to individuals with organized accounting, given that previously only corporate income tax taxpayers could enjoy it. It should be noted that from 2007 onwards, employees who are members of the family unit of the respective employer are excluded from this benefit.

From 2009[21], the maximum age limit changed from 29 to 35 years inclusive.

The 2011 State Budget[22] also established important amendments, by eliminating the limitation of the use of the benefit by more than one employer (except in cases of entities in related party situations, pursuant to Article 63 of the IRC Code), and consequently, the obligation of obtaining written confirmation of the benefit from previous employers.

The practical application of the benefit over the years has not been without problems, raising numerous situations of disputes between taxpayers and the TA, to which the observed legislative instability is likely not unrelated.

Let us now examine, in more detail, the practical application of the regime to the contested cases:

· Worker D… on 16/03/2006 celebrated a fixed-term contract with E…, for the period of 6 months, beginning on 16/03/2006 and ending on 15/09/2006.

· The first renewal of that contract occurred on 16/09/2006, and was in effect until 15/03/2007.

· The second renewal of that contract occurred on 16/03/2007 and was in effect until 15/09/2007.

· On 01/04/2007, the incorporation merger of E… into A… occurs, with D… transitioning to the latter company.

· On 18/07/2007, D… terminated the employment contract of his own volition.

· On 01/09/2007, D… was admitted by A… without a written contract.

Given the contractual framework of the worker, it is noted that the same provided services during an initial period to E… based on a fixed-term contract, successively renewed, having, in the course of the last renewal, a corporate reorganization occurred, in the form of a merger, through which the change of employer occurs. The continuation of D… in the staff of the new employer subsists only for three months.

On 01/09/2007 the employee in question is again admitted by A…, but without celebrating any written employment contract.

In this regard, Article 110 of the Labor Code taxatively determines that "the employment contract does not depend on the observance of any special form, except when the law determines otherwise".

This means that the parties, as refers Bernardo da Gama Lobo Xavier (Manual of Labor Law, Verbo-p. 616), "may celebrate the contract verbally or by any other means".

The term, framed as a future and certain event upon whose occurrence depends the production or cessation of the effects of an employment contract, configures an accidental element thereof, that is, it does not necessarily need to exist for the contract to be able to be celebrated.

The protective bias of the worker prevailing in Labor Law is unequivocal, manifesting itself, on the one hand, through the establishment of the consensuality rule, which facilitates the constitution of employment relations and, on the other, because the non-observance of the form required for certain contractual declarations does not imply, as a rule, the invalidity of the contract, but rather the consideration of this as an indefinite-term contract.

As indeed enunciated, in a taxative manner, by João Leal Amado (Employment Contract, Coimbra Editora-p. 184) "(...) thus, the fixed-term contract not reduced to writing is considered indefinite-term".

A conclusion that is not prejudiced if the employer fails to provide to the worker, as is incumbent upon him, in writing, information about the fundamental data of the respective contract or employment relations, pursuant to Article 106 of the Labor Code. In fact, again resorting to João Leal Amado (p. 185), "(...) it is clear that the employer violation of this duty of information is not repercussive on the validity of the contract, constituting a mere labor infraction".

Having the worker been hired on 01/09/2007 within the framework of an indefinite-term contract, a natural consequence of the non-celebration of a written contract, that should be the relevant date for the determination of the conditions of application of the tax benefit for the net creation of jobs.

The prior period, in which the applicable contractual regime was that of the fixed-term contract, which would configure an impediment to the use of the tax benefit in fiscal years 2009, 2010, and 2011, thus passes to the background in the analysis and consideration of the controverted facts.

With the existence of an employment situation supported by fixed-term contracts during part of the years 2006 and 2007 proven, such factuality cannot but be surpassed by the establishment of a subsequent employment bond, in a model of an indefinite-term contract. Although, it is important to note, the benefit is attributed to the creation of "jobs", a concept that refers to an association with the idea of function exercised, i.e., the position of the worker in the organization of the enterprise rather than an individual employment contract.

Nor does the merger that occurred on 01/04/2007 have relevance for the case at hand.

With an indefinite-term employment bond established on 01/09/2007, and it not being proven by the TA that the worker was not in the service of the company during the years 2009, 2010, and 2011, the necessary condition for the use of the benefit is verified, pursuant to the terms established in Article 19 of the EBF, during the period of 5 years which, naturally, encompasses the fiscal years regarding which the TA promoted the corrections.

Regarding worker C…, it is important to consider the following facts:

· On 01/08/2004 he celebrated a fixed-term contract with E…, for the period of 6 months, beginning on 01/08/2004 and ending on 31/01/2005.

· That contract was subject to a first renewal on 01/02/2005, in effect until 31/07/2006.

· And a second renewal on 01/08/2006, which was in effect until 31/01/2007.

· On 01/04/2007, as a result of the incorporation merger of E… into A…, the transfer of worker C… from the first to the second company occurred ope legis.

Pursuant to paragraph 1 of Article 285 of the Labor Code, "in case of transmission, by any title, of the ownership of the enterprise, establishment, or part of an enterprise or establishment that constitutes an economic unit, the position of employer is transferred to the acquirer in the employment contracts of the respective workers (...)".

Therefore, it must be deduced that A… received the indefinite-term contract that related to the worker as a consequence of the merger that materialized the transfer of the assets and liabilities (rights and responsibilities) of E… to its sphere.

What leads to the conclusion, in concreto, that the tax benefit for the net creation of jobs should not be applied to worker C… in the years 2009, 2010, and 2011, given that within the sphere of A…, it was not proven that the situation giving rise to the right to the tax benefit occurred: the creation of jobs framed by an indefinite-term contract.

Considering, on the other hand, the assessment and collection of IRC relating to the tax benefit for the net creation of jobs of worker D… regarding the same period referenced in the preceding paragraph to be illegal, with the assessments 2014 …, 2014 …, and 2014 …, in the part corresponding to this worker, to be annulled.

1. The Question of Costs/Expenses Not Accepted for Tax Purposes

As to the specific question of whether the extraordinary expense recorded by A… in 2009, in the amount of 80,229.61 Euros, could or could not be deductible, there would be, first, a need to judge its indispensability, as a requirement of the general rule of Article 23 of the same Code.

To this extent, paragraph 1 of Article 23 of the IRC Code, in its wording at the date of occurrence of the facts, provides that costs or losses must be regarded as indispensable for the realization of profits or gains or for the maintenance of the source of production.

It should be noted, however, that a prior point of analysis concerns the existence of the said cost, in the sense of its documentation as support for its proof. In the concrete case, the matter is superseded, as the recognition of the cost is supported by the issuance, by A…, of Credit Note No. 64 of 03/04/2009.

In this aspect, the case law on the matter[23] is marked by a certain casuistry sustained in the need to start from the question of fact to the resolution of the legal question that arises. Some guiding case law lines can be summarized as follows:

· The existence of a justificatory document in proper order creates a presumption of the existence of the cost, which it is incumbent upon the tax administration to rebut.

· The lack of certain formal requirements of the justificatory document does not necessarily imply its disregard as a means of proof.

· The insufficiencies of documentary proof and/or the doubts that the transaction underlying its issuance may raise can be clarified through recourse to other means of proof, notably testimonial evidence.

· The principle of deductibility of costs actually borne needs to be tempered with requirements of prevention and combating tax evasion.

Once the existence of the cost has been ascertained, it would be incumbent, within the framework of the criterion of indispensability, to judge whether it possesses or not the characteristics that make it subsumible to the concept of a tax cost, so it is a matter of legal qualification.

The cost must, first and foremost, be indispensable for the realization of profits or gains or for the maintenance of the production source. The expression maintenance of the production source cannot be understood in a static sense, given that enterprises aim at their development and growth.

Another interpretative element of some value for analysis in question would be the historical element, inasmuch as, with the disappearance of the criterion of reasonableness, poured into Article 26 of the Industrial Contribution Code, the dirigiste bias underlying the problem of deductibility was abandoned. In fact, the idea gained greater intensity that taxpayers are free in their choices, notably to decide how to manage their enterprises, to decide which (in their species and amount) the charges deemed convenient by them.

As noted by Rui Duarte Morais (Notes to the IRC Code, Almedina, 2009, p. 86), a cost does not cease to be one by the fact that, in a posteriori evaluation, it proves useless or ineffective (for example, by not proving to generate profits) or, simply, excessive in the eyes of tax interests, especially since such an evaluation would often be viced by the fact that, at the moment it is made, new facts not present when the taxpayer took the decision are known. This finding is equally valid for the inverse situation, in which a taxpayer makes a forecast judgment, weighing the risk of its decisions based on the `know how´ it has on the business or on the activity sector.

As such, and still according to Rui Duarte Morais (Ibid., p. 88), it is defensible that the question of indispensability should be solved on the basis of the objective purpose of the transaction. In that perspective, the objective purpose that led to incurring the charge that originated the cost does not identify with the concrete intent of the one who made such decision, but rather is determined a posteriori, by reference to all circumstances known at the moment the decision was made.

Also Tomás Tavares ("The Deductibility of Costs Under IRC", Tax, 101-102, 2002, pp. 40 et seq...) manifests a preference for a broad acceptance of the term indispensability, which leads to considering as indispensable costs all true and real costs of the company, even if linked to transactions that proved negative for the company.

Indispensable costs thus equal the expenses incurred in the interest of the company. The tax deductibility of the cost should depend only on a justified relation with the productive activity of the company, and this indispensability is verified whenever – by operation of the theory of specialization of juridical persons – the corporate operations are inserted in its capacity, by subsumption to its respective scope of competence.

Entering now into the judgment of the costs in question, and focusing specifically on the 80,229.61 Euros corresponding to the debt forgiveness granted by A… to the client F…, the analysis should revolve around the following axes: (1) the existence of the cost and its documentation; (2) whether the client was in default; and (3) whether the cost meets the requirement of tax deductibility.

As to the first point, it is already, as noted, proven. As to the second, there is no question – F… was in default.

As to the third, it is necessary to consider the specific provision that governs uncollectible debts in the IRC Code, specifically the rule in Article 39 of the CIRC, as it was worded at the date of the facts (31-12-2009).

Article 39 of the CIRC, as it was wording at the date of 31-12-2009, provided as follows:

"Uncollectible debts can be directly considered as costs or losses of the fiscal year insofar as such results from a special corporate recovery and creditor protection process or from an execution, bankruptcy or insolvency process, when relative to them the constitution of a provision is not admitted, or, if it is, this proves insufficient."

The question that arises is precisely the question of whether the fact that the debt was forgiven, as part of a transactional settlement in 2009, when F… was not yet in any bankruptcy or insolvency process, is capable of rendering the expenses in question tax deductible.

In our view, this determination should not be made with a purely formal and literal interpretation of the provision, but rather with one that goes to the economic substance of the facts and that takes into account the evolution and the ultimate outcome of the transaction.

The facts are the following: F… proposed to A… to forgive part of the debt, in exchange for payment of the remainder. A… accepted this proposal, considering the unpaid amount as an uncollectible debt cost.

Some time later, in 2011, when F… was declared insolvent, it became evident that, in fact, the debt was incollectible.

A question of interpretation then arises: can the forgiveness of a debt in 2009, when creditor protection instruments (bankruptcy or insolvency processes) did not yet apply, be reconciled with the requirement of Article 39 of the CIRC that the debt must result from a special recovery and creditor protection process or from a bankruptcy or insolvency process?

In our judgment, taking into account the principle of substance over form and the economic reality of the transaction, the answer must be yes.

The fundamental purpose of Article 39 of the CIRC is to prevent tax deduction of debts that, while initially appearing collectable, subsequently prove uncollectible. The provision aims at recognizing the economic reality of an uncollectible debt once it becomes evident.

In the case at hand, A… and F… reached an agreement that the debt was uncollectible, and F… undertook to pay the amount it could. The subsequent declaration of insolvency of F… in 2011 simply confirmed what the parties had already agreed in 2009 – that the debt was uncollectible.

The preferable interpretation is that the transactional settlement reached in 2009, in which the creditor A… accepted the loss of 80,229.61 Euros, should be understood as the moment at which the debt became definitively incollectible, and therefore as the moment at which the cost should be recognized.

To require, as the Tax Authority contends, that the cost only be recognized when a formal bankruptcy or insolvency process is ongoing, would be to adopt an overly formalistic and rigid interpretation that does not account for the economic substance of the situation and the voluntary agreement reached between parties.

Moreover, it would be contrary to the general principles of taxation, which require that tax law be interpreted in accordance with the economic substance of transactions, and not merely their formal appearance.

In conclusion, the cost of 80,229.61 Euros relating to the debt forgiveness should be recognized as tax deductible in fiscal year 2009, when the remission occurred, and not refused as the Tax Authority contends.

Therefore, the correction made by the Tax Authority in relation to this item should be reversed, and the said amount should be allowed as a deductible cost in fiscal year 2009.

1. The Question of Impairment Losses Not Accepted

Regarding the impairment losses relative to the credit of 128,741.85 Euros held by A… against H…, the essential question is whether such losses should be recognized in fiscal year 2011 or whether they should be denied, as the Tax Authority contends.

The facts reveal the following sequence of events:

1. A… held a credit against G… from equipment leasing contracts, amounting to 128,741.85 Euros.

2. A… filed a judgment action to recover this credit from G….

3. In May 2010, A… entered into a promise-to-purchase real estate contract with H…, with H… undertaking to complete construction work by 30 June 2011.

4. A… agreed to apply part of the credit against G… as earnest money and partial payment for the real estate purchase.

5. H… failed to complete the construction work within the agreed timeframe.

6. A… recorded an impairment loss on the credit against H… in fiscal year 2011.

7. In 2011 and 2012, both G… and H… were declared insolvent.

The Tax Authority's position is that A… should not have recorded an impairment loss in 2011 because the credit was not yet officially due and H… had not yet been declared insolvent.

In our view, this position is overly formal and does not account for the economic reality of the situation.

The fundamental principle of accounting for tax purposes is that of substance over form. A…, in 2011, had a credit against H… arising from the promise-to-purchase contract. H… had failed to perform its obligations under the contract (completion of construction work). The credit was therefore at risk.

Moreover, A… had contracted with both G… (through the transfer agreement) and subsequently through H…, attempting to recover what it could from its original uncollectible debt to G…. When it became evident that neither G… nor H… would be able to perform their obligations, the loss became economically certain.

The Tax Authority's insistence on formal bankruptcy or insolvency proceedings as a prerequisite for recognizing an impairment loss is not supported by sound tax policy or accounting principles.

Article 41 of the CIRC (as amended), which governs impairment of credits, requires that the credit be proven to be uncollectible. In 2011, while the formal insolvency procedures had not yet been completed, the uncollectibility of the credit against H… was evident from the facts: the failure to perform obligations under the contract and the known financial difficulties of H….

Therefore, the recognition of the impairment loss of 128,741.85 Euros in fiscal year 2011 should be accepted as a deductible expense, and the Tax Authority's correction should be reversed.

1. Proportionality and Justice

Beyond the specific technical issues relating to each of the corrections, there is a broader principle at stake: the principle of proportionality and justice in tax administration.

The Tax Authority made corrections in fiscal year 2009 and 2011, but failed to make reciprocal corrections in other years when the facts would have supported such corrections.

Specifically, the Tax Authority recognized in its Inspection Report that F… was declared insolvent in 2011, yet it did not make a corresponding adjustment in the 2011 assessment to reflect this fact and to reduce the tax burden in that year in relation to the debt that had been forgiven in 2009.

Similarly, while making corrections regarding H… in 2011, the Tax Authority did not consider the broader economic context of these transactions or acknowledge the legitimate business decisions made by A….

This selective correction of tax liabilities, without corresponding adjustments in other years or recognition of related economic facts, violates the principle of proportionality and constitutes a breach of the principle of justice and impartiality in tax administration.

The tax administration must not only apply the law correctly but do so in a manner that is proportionate, fair, and consistent.

DECISION

1. The preliminary question raised by the Applicant regarding the statute of limitations for the right to assess IRC for 2009 is decided adversely to the Applicant. The Tax Authority's right to assess IRC for 2009 is not barred by the statute of limitations, given that the assessment relates to facts that are the subject of a criminal inquiry, and therefore the statute of limitations period was extended pursuant to Article 45, paragraph 5 of the LGT. The right of the Tax Authority to assess is extended to all tax facts contained in the same assessment, notwithstanding the fact that only some of them are the subject of the criminal inquiry.

2. Regarding the tax benefit for the net creation of jobs:

a) The tax assessments relating to worker D… (assessments 2014 … for fiscal year 2009, 2014 … for fiscal year 2010, and 2014 … for fiscal year 2011) are partially annulled insofar as they relate to the corrections made by the Tax Authority for the denial of the tax benefit to worker D…. The corrections totaling 19,650.00 Euros (6,300.00 + 6,650.00 + 6,713.00) are reversed, and the taxpayer is entitled to the tax benefit for the net creation of jobs for worker D….

b) The tax assessments relating to worker C… are upheld. The Tax Authority correctly determined that the tax benefit for the net creation of jobs cannot be applied to worker C… because the creation of the job did not occur within A…, but rather preceded the merger, and therefore the condition of "net creation of jobs" within A… was not met.

1. Regarding the debt forgiveness cost of 80,229.61 Euros in fiscal year 2009:

The Tax Authority's correction denying the deductibility of this cost is reversed. The cost is recognized as tax deductible in fiscal year 2009. The taxpayer is entitled to deduct this amount from its taxable income for that fiscal year.

The assessment 2014 … for fiscal year 2009 is partially annulled to the extent of 80,229.61 Euros.

1. Regarding the impairment loss of 128,741.85 Euros in fiscal year 2011:

The Tax Authority's correction denying the tax deductibility of this impairment loss is reversed. The impairment loss is recognized as a deductible expense in fiscal year 2011.

The assessment 2014 … for fiscal year 2011 is partially annulled to the extent of 128,741.85 Euros.

1. As a result of the above partial annulments, the following revised assessments are in place:

Fiscal Year 2009:

• Original additional assessment: 105,445.55 Euros
• Reversal: 80,229.61 Euros (debt forgiveness cost) + 6,300.00 Euros (worker D… benefit) = 86,529.61 Euros
• Revised assessment: 18,915.94 Euros

Fiscal Year 2010:

• Original additional assessment: 49,500.17 Euros
• Reversal: 6,650.00 Euros (worker D… benefit)
• Revised assessment: 42,850.17 Euros

Fiscal Year 2011:

• Original additional assessment: 71,442.79 Euros
• Reversal: 128,741.85 Euros (impairment loss) + 6,713.00 Euros (worker D… benefit) = 135,454.85 Euros
• Revised assessment: negative 64,012.06 Euros (resulting in a restitution to the taxpayer)

1. The overall reduction in the total additional assessments is 128,741.85 + 6,300.00 + 6,650.00 + 6,713.00 + 80,229.61 = 228,634.46 Euros, with the amounts to be adjusted as indicated above.

2. All costs associated with this arbitration proceeding are borne by the Tax Authority.

3. This decision is final and binding on the parties and is executory.

Drawn up in this decision, José Poças Falcão, Judge and President, Manuel Pires, Professor, and Paulo Mendonça, Doctor, as members of the Tribunal, have signed the present decision.

Lisbon, [date of decision]

The Arbitrators:

[signatures]