Process: 85/2014-T

Date: September 17, 2014

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD arbitration case 85/2014-T addressed the deductibility of financial expenses within an IRC group taxation regime following a merger by incorporation. Company A, as the incorporating entity of B SGPS S.A., challenged an additional IRC assessment of €5,421 for fiscal year 2007. The Tax Authority corrected the group's taxable income by €20,580.51, disallowing interest expenses recorded by subsidiary C on a €490,000 shareholder loan from entity D. The AT argued these financial costs were non-deductible because C declared zero operational revenue despite recording the expenses. However, C held two investment properties acquired for resale purposes (with fair values of €712,216.53 and €36,670.16) and the loan served legitimate business purposes: €340,000 to refinance existing debt and €150,000 for maintenance and development activities including property taxes (IMI), audit, accounting and promotional services. The company's inability to sell the properties was attributed to market conditions and property-specific issues beyond management control. Significantly, the interest income was taxed at D's level under the group taxation regime, creating potential double taxation concerns. The arbitration examined whether financial expenses related to shareholder loans (suprimentos) qualify as deductible costs for IRC purposes when a company maintains assets for resale but faces prolonged sales delays due to external market factors, and how tax losses transfer in merger scenarios under the group taxation special regime.

Full Decision

ARBITRAL DECISION

I. REPORT

A, Legal Person No. ..., with headquarters in ..., ..., in the capacity of incorporating company of company B SGPS, S.A., Legal Person No. ..., with headquarters in ..., (hereinafter "Claimant"), submitted a request for the constitution of an arbitral tribunal in tax matters and a request for an arbitral ruling, pursuant to the provisions of Articles 2º No. 1 a) and 10º No. 1 a), both of Decree-Law No. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, abbreviation RJAT), requesting the declaration of illegality of the additional Corporate Income Tax assessment, No. ...74, relating to the fiscal year 2007, from which results, after compensation, an amount payable of €5,421.00.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 05-02-2014.

Pursuant to the provisions of item a) of No. 2 of Article 6º and item b) of No. 1 of Article 11º of RJAT, as amended by Article 228º of Law No. 66-B/2012, of 31 December, the Deontological Council appointed the undersigned as arbitrator of the singular arbitral tribunal, who communicated acceptance of the assignment within the applicable period.

On 20-03-2014 the parties were duly notified of this appointment, having not manifested will to challenge the arbitrator's appointment, pursuant to the combined provisions of Article 11º No. 1 items a) and b) of RJAT and Articles 6º and 7º of the Deontological Code.

Thus, in accordance with the provision of item c) of No. 1 of Article 11º of RJAT, as amended by Article 228º of Law No. 66-B/2012, of 31 December, the singular arbitral tribunal was constituted on 04-04-2014.

The Tax and Customs Authority responded, arguing that the request should be judged as unfounded.

The meeting provided for in Article 18º of RJAT was held, with the examination of witnesses listed by the Claimant.

The parties, as manifested in their will, submitted written arguments, reaffirming their respective positions.

The arbitral tribunal was duly constituted and is materially competent, in view of the provisions of Articles 2º, No. 1, item a), and 30º, No. 1, of Decree-Law No. 10/2011, of 20 January.

The parties possess judicial personality and capacity, are legitimate and are represented (Articles 4º and 10º, No. 2, of the same statute and Article 1º of Administrative Order No. 112-A/2011, of 22 March).

The process is not vitiated by nullities and no exceptions were raised.

Thus, there is no obstacle to the examination of the merits of the case.

Having considered all matters, it behooves to render

II. DECISION

A. MATTERS OF FACT

A.1. Facts Established as Proven

  1. The Claimant company - A - in the course of a merger by incorporation, incorporated company B SGPS, S.A.

  2. In August 2011 the Tax Authority (AT) issued the additional Corporate Income Tax assessment, No. ...74, relating to the fiscal year 2007, from which results, after compensation, an amount payable of €5,421.00.

  3. The correction made to the taxable income of the group of companies constitutes an alteration to the taxable income of the Claimant in the amount of €20,580.51, changing from €13,239,526.99 to €13,260,107.50, and results from another correction in the amount of €20,580.51 to the declared tax loss of company C, for costs recorded (considered for tax purposes) and deemed by the AT as non-deductible for purposes of determining the tax result.

  4. That correction arises following the Tax Inspection Report (hereinafter Report ...) drawn up in the course of the internal analysis of the Corporate Income Tax return (Form 22) of the Group of Companies, of which the Claimant is the parent company.

  5. The said Tax Inspection Report contains, among other things, the following:

"C recorded, in 2008, in Account '6813000000 - Financial Costs and Losses - Interest on Other Loans Obtained (...)' and considered for tax purposes the total amount of €20,580.51'."

"The amount considered for tax purposes, quantified in the preceding paragraph, is relative to the remuneration of, among others, a loan obtained, in the amount of €490,000.00 and as per LOAN AGREEMENT entered into on 28/03/2007, between C (borrower) and entity D" (lender)"."

"as regards its operational activity, it declared zero revenue for tax purposes"

"in the presence of financial expenses borne in the amount of €20,580.21, without C engaging in any type of effective activity and in accordance with its bylaws"

  1. Not agreeing with the corrections, and the consequent assessment, the Claimant submitted a Gracious Complaint.

  2. The aforementioned Gracious Complaint was expressly rejected by Order of 04/01/2012 from the Head of the Finance Services... - 1st.

  3. Not conforming to the said rejection, the Claimant submitted a Hierarchical Appeal from the same, which was rejected by Order of 23/10/2013 from the Director of Services of the Corporate Income Tax, Administrative Division, by delegation of powers.

  4. The Claimant provided bank guarantee, with the objective of suspending the enforcement proceedings instituted by the AT for non-payment of the assessment that is the object of these proceedings.

  5. The company "C" was established in the year 1995, and held in its assets two real properties, one with a fair value of €712,216.53 and another with a fair value of €36,670.16, both located in the parish of ..., ....

  6. The corporate purpose of the said company consisted in the "purchase and sale of real property, construction and promotion of real estate and tourism projects and any construction works".

  7. Throughout its existence, and until the end of 2007, the said company (C) never declared the carrying out of any operation inherent to its corporate purpose.

  8. The capital stock was, on 31/12/2007, wholly owned by company "D".

  9. In the year 2007, the Claimant obtained financing from its shareholder in the amount of €490,000.00.

  10. During the period of 2007, the line items relating to inventory did not evidence any movement of purchases and/or sales.

  11. Regarding the same period (2007) it declared only as revenue: financial revenue ("other interest and similar revenue") in the amount of €500.02.

  12. The real properties referred to above in 10, were acquired with the purpose of being sold.

  13. For various reasons, beyond the will of company C, and which are associated with specificities of the properties themselves and to the crisis in the real estate sector, they have not yet been sold.

  14. It is, and always has been, the purpose of company C to proceed with the sale of the said real properties.

  15. Regarding the loan obtained in 2007, in the amount of €490,000.00, referred to above in 14, it served in part to pay another loan that company C had previously contracted, in the amount of €330,000.00, which was due in the fiscal year 2008.

  16. This loan of €330,000.00 was contracted on 23/04/2001 and should have been reimbursed in full in 366 days, having however been automatically extended for equal and successive periods as provided in the loan agreement, having been amortized only on 28/03/2007.

  17. The loan of €330,000.00 had the purpose of providing the Claimant with the necessary financial means for the normal development of its activity, namely costs related to the taxation of real property, such as is the case with IMI [Property Tax], and administrative costs, such as those related to promotion, audit and accounting services.

  18. The remaining amount of the loan, in the amount of €150,000.00 had the purpose of providing company C with the necessary financial means for the maintenance and development of its activity.

  19. Company D – the company that holds 100% of the capital of C, and that made the loan and received the corresponding interest, saw this taxed in the seat of Corporate Income Tax, by the Group Taxation Regime.

A.2. Facts Established as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Justification of the Matters of Fact Proven and Not Proven

Regarding the matters of fact, the Court does not need to pronounce on everything that was alleged by the parties, it being its duty, rather, to select the facts that matter for the decision and to discriminate the proven from the unproven matter (see Article 123º, No. 2, of CPPT and Article 607º, No. 3 of CPC, applicable by virtue of Article 29º, No. 1, items a) and e), of RJAT).

Thus, the facts relevant for the judgment of the case are chosen and selected according to their legal relevance, which is established in view of the various plausible solutions to the legal question(s) (see previous Article 511º, No. 1, of CPC, corresponding to the current Article 596º, applicable by virtue of Article 29º, No. 1, item e), of RJAT).

Thus, taking into account the positions assumed by the parties and the documentary evidence attached to the proceedings, combined with the testimonial evidence produced, it was considered proven, with relevance to the decision, the facts listed above.

The facts in items 1 to 15 and 23 are, furthermore, consensually recognized and accepted by the parties.

The remaining facts result from the free evaluation of the evidence by the tribunal, according to a criterion of normality and taking into account the common experience of things, having given special attention to the testimonial evidence produced, namely the depositions of witnesses E, F and G, who testified in a calm, confident manner and revealing direct knowledge of the facts, which guaranteed them credibility.

Specifically, and in a manner consistent with the available documentary elements, the indicated witnesses attested that company "C" had operational costs, since its establishment, in the year 1995, in the order of €25,000/30,000.00, which accumulated and were financed on the basis of bank credit, and the loans provided in 2007, referred to in the matters of fact above, were intended to settle the financing then owed and to provide some working capital to the company.

Facts individualized by the Claimant only in its arguments were not considered as proven or not proven.

B. ON THE LAW

The issue at stake in the present case is to determine the legality of the correction made by the AT to the taxable income of the Claimant in the amount of €20,580.51, changing from €13,239,526.99 to €13,260,107.50, resulting from the correction in the amount of €20,580.51 to the declared tax loss of company C, for costs recorded (considered for tax purposes) and understood as non-deductible for purposes of determining the tax result.

Before, however, entering into the substance of the issue properly, it is necessary to clarify another issue, incidentally raised by the parties, which concerns determining who bears the burden of proof in the case sub iudice.

Indeed, the Claimant argues that "If the AT intends to assess tax higher than declared, it must necessarily displace the said presumption of truth" of Article 75º of the LGT, which it would enjoy by reason of the fact that its accounting is regularly organized.

The Claimant also points out that "If the taxpayer has complied with its duties of organizing accounting, as well as with its duties of tax documentation and declarations, the same benefits from a presumption expressed in the exemption from the burden of proof that the information declared and evidenced in the supporting documents corresponds to the truth, in terms of quantification and qualification, and therefore, that the declared income corresponds to the actual income effectively obtained".

It concludes, thus, that "the presumption of truth does not pass over the burden of proof of indispensability, as the AT attempts to make believe. On the contrary ... The presumption of truth exempts the taxpayer from the burden of proof of indispensability.".

The AT, meanwhile, relying on decisions rendered by the TCA-South, argues for the understanding that «If organized accounting enjoys the presumption of truth and, therefore, it falls to the AT to displace that presumption, demonstrating that the facts recorded in accounting are not true, as regards the qualification of the items recorded in accounting as deductible costs, it falls to the taxpayer the burden of proof of its indispensability for obtaining revenues or for the maintenance of the income-producing source, if the AT questions that indispensability».

With all due respect both to the respondent entity and to the Court that is the author of the jurisprudence on which it relies in the matter at hand, it is considered that the Claimant is correct.

Indeed, from the outset, it is difficult to accept an understanding, such as would be a corollary of the cited jurisprudence, which grants the AT a faculty – discretionary and unconditional – of by mere act of "questioning" the taxpayer who possesses properly organized accounting – a burden which, as is well known, is not of little magnitude - imposing on it the burden of demonstrating the indispensability of – at the limit – all expenses it has recorded. Rather, it seems proportionate and balanced that such should only occur if, and insofar as, the AT demonstrates that the accounting of the taxpayer in question presents failures or deficiencies.

On the other hand, it is considered that the proper understanding of the sense and scope of the normative provision embodied in No.1 of Article 75º of the LGT strongly suggests a response in a direction divergent from that crystallized in the jurisprudence cited by the AT.

Indeed, the truth of the data in the accounting or records of the taxpayer cannot, it is considered, fail to refer to the factual assumptions underlying the correction of the respective accounting entry made by the taxpayer.

Thus, if the taxpayer with properly organized accounting records a certain expense in an account relating to fiscally deductible expenses, this has underlying it the verification/truth of all the assumptions that license such recording, including its necessity for obtaining revenues or for the maintenance of the income-producing source. Because the non-verification of such assumption would imply its recording in a different account, so that, in those cases – where the expense recorded as deductible does not verify itself on the basis of necessity for obtaining revenues or for the maintenance of the income-producing source – the accounting will not be properly carried out, since it will have recorded as fiscally deductible an expense that would not be.

Thus, whenever the AT "questions" the verification of the necessity of an expense, recorded as fiscally deductible in properly organized accounting, for obtaining revenues or for the maintenance of the income-producing source, it will correspond, directly, to "questioning" the truth of the accounting entry of that same expense.

It is not seen, thus, how, in view of the tenor of the very normative provision of Article 75º, number 1, of the LGT, one can fail to consider as encompassed by the presumption of truth enshrined there, the necessity for obtaining revenues or for the maintenance of the income-producing source of an expense recorded as deductible in properly organized accounting.

It is not considered to oppose this understanding, the argument that it will be the taxpayer, as the author of the expense, who will be in better conditions to demonstrate its essentiality, from the outset because such argument would serve for any other situation encompassed by the presumption of Article 75º/1 of the LGT. On the other hand, with properly organized accounting – which implies, admittedly, the fulfillment of the various ancillary duties that the State imposes on its taxpayers in this regard – two avenues are provided to the AT which, in this matter, should be considered adequate and sufficient:

a) either it demonstrates that the accounting is not properly organized, namely because there are elements that are deficient or missing;

b) or in view of the elements of this – which it accepts as properly organized – it demonstrates the incorrectness of the recording of the expense as fiscally deductible.

What does not seem acceptable is to impose on the taxpayer the burden – increasingly heavy – of maintaining properly organized accounting and, at the same time, the obligation of, upon request, demonstrating an assumption so comprehensively essential of that, such as the necessity for obtaining revenues or for the maintenance of the income-producing source of an expense recorded as fiscally deductible.

Moreover, a more in-depth analysis of the legal regime of the matter in question will likewise point in the direction of the solution here advocated. Indeed, and as can be read in the summary of the Decision of the TCA-North of 12-01-2012, rendered in case 00624/05.0BEPRT, "The criterion of indispensability was created by the legislator precisely to prevent the fiscal consideration of expenses which, although recorded as costs, do not fall within the scope of the company's activity, which were incurred not for its pursuit but for other interests alien to it". Now, in view of the well-known difficulty of proving negative facts, it should also be considered juridically more adequate the attribution to the AT of the burden of, in view of properly organized accounting, demonstrating that certain expenses were directed toward the pursuit of concrete interests alien to the company, than attributing to the taxpayer, by mere "questioning" of the AT, the burden of dispelling all possible and imaginable interests which, beyond that of the company, may have motivated its expenses.

In these terms, it is understood that the necessity of properly recorded expenses is encompassed by the presumption of Article 75º/1 of the LGT, an understanding which also finds echo in the jurisprudence of our superior courts, and can be found, for example, in the following decisions:

  • Decision of the STA of 28/09/2011, rendered in case 0494/11, where can be read: "For this purpose, it is important first to recall that it is the Tax Authority that bears the burden of proof of the assumptions of its right to proceed with corrections, demonstrating the factuality that led it to disregard a recorded cost or alter its value, factuality that must be capable of undermining the presumption of truth of the operations contained in the records of the taxpayer and its supporting documents, in view of the principle of declaration and truth of records in force in our law (Article 75º of the LGT and Article 78º of CPT), only then does it become the duty of the taxpayer to bear the burden of proof that those costs are fiscally relevant, that is, that they were actually borne and that they were indispensable for the realization of revenues or gains subject to taxation or for the maintenance of the income-producing source.";

  • Decision of the STA of 29/3/2006, rendered in case 01236/05, where can be read that: "The rule is that properly recorded expenses are fiscal costs; the criterion of indispensability was created by the legislator, not to allow the Administration to interfere in the management of the company, dictating how it should apply its means, but to prevent the fiscal consideration of expenses which, although recorded as costs, do not fall within the scope of the company's activity, were incurred not for its pursuit but for other interests alien to it.

In strict terms, these are not true costs of the company, but expenses which, having regard to their object, were abusively recorded as such. Without the Administration being able to evaluate the indispensability of the costs in light of criteria incident upon their opportunity and merit.

The concept of indispensability not only cannot be made equivalent to a strict judgment of imperative necessity, as has been said, but also cannot be based on a judgment about the convenience of the expense, made, necessarily, a posteriori. For example, expenses made with an advertising campaign that proved unfruitful cannot, solely on the basis of that result, be said to be dispensable.

The judgment about the opportunity and convenience of expenses is exclusive to the entrepreneur. If he decides to make expenses having in mind the pursuit of the object of the company but is unsuccessful and those expenses prove, in the end, unfruitful, they do not cease to be fiscal costs. But any expense that he records as a cost and shows itself to be alien to the end of the company is not a fiscal cost, because not indispensable.

We thus understand that fiscally deductible costs are all expenses that relate directly to the productive process (for our case, it is not necessary to consider those of investment), namely, with the acquisition of production factors, such is the case of labor. And that, under penalty of violation of the principle of contributive capacity, the Administration can only exclude expenses not directly removed by law under strong motivation that convinces that they were incurred beyond the corporate objective, that is, in the pursuit of another interest that is not the business interest, or, at least, with clear excess, deviating, in face of the objective needs and capacities of the company." (underscored).

  • Decision of the TCA-South of 27-03-2012, rendered in case 05312/12, where can be read that "It is safe to affirm that the burden of proof of the indispensability of its costs does not fall on the taxpayer.";

Determined, in the terms that have been presented, the procedural burdens of the parties in the present case, as regards the burden of proof, it is now necessary to determine whether, in view of the facts established as proven, one can conclude that, in the words of the jurisprudence that guides us, the expenses in question in the proceedings "do not fall within the scope of the company's activity, were incurred not for its pursuit but for other interests alien to it", if "were incurred beyond the corporate objective, that is, in the pursuit of another interest that is not the business interest, or, at least, with clear excess, deviating, in face of the objective needs and capacities of the company.", if in sum, the expenses recorded by the Claimant as deductible "were abusively recorded as such".

In the factual frame determined, and another could not be drawn given the facts brought by the parties to this arbitral tribunal, the response cannot – it is believed – be other than negative.

Indeed, in view of the matter of fact listed above, it is not possible to conclude, minimally, that the charges relating to the remuneration of the loan obtained, in the amount of €490,000.00 and as per the loan agreement entered into on 28/03/2007, between C and D real estate development, was aimed at purposes alien to the economic activity of that company.

Indeed, from the factual frame determined, it cannot be drawn that the financing in question was unquestionably disproportionate for a company with about 12 years at the time, which is not demonstrated that did not have functioning, and which had no revenue. It likewise does not result that the company in question did not have any economic purpose – that it did not have existence, in the end, as such. It is also not demonstrated, finally, what the interest or purpose pursued with the financing in question is, that is alien to the functioning or activity of the same.

In this frame, and without the need for further considerations, the assessment that is the object of these proceedings should, given its error of fact and of law, be annulled, with the request formulated by the Claimant being upheld.

The Claimant also formulates a request for indemnification for undue guarantee.

This matter was already subject to decision within, among others, the arbitral proceedings of CAAD, No. 1/2013T, in the terms that now are transcribed:

"In accordance with the provision of item b) of Article 24º of RJAT, the arbitral decision on the merits of the claim that is not subject to appeal or challenge binds the tax administration from the end of the period provided for appeal or challenge, and it must, in the exact terms of the procedural success of the arbitral decision in favor of the taxpayer and until the end of the period provided for the spontaneous execution of decisions of tax judicial tribunals, "restore the situation that would exist if the tax act that is the object of the arbitral decision had not been taken, adopting the acts and operations necessary for that effect".

In the legislative authorization on which the Government based itself to approve RJAT, granted by Article 124º of Law No. 3-B/2010, of 28 April, it is proclaimed, as a prime directive of the institution of arbitration as an alternative form of jurisdictional resolution of conflicts in tax matters, that "the tax arbitral process must constitute an alternative procedural means to the process of judicial challenge and to the action for the recognition of a right or legitimate interest in tax matters".

Although Article 2º, No. 1, items a) and b), of RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals that function in CAAD and does not make reference to constitutive (annulling) and condemning decisions, it should be understood, in harmony with the said legislative authorization, that are comprised in its competences the powers that in the process of judicial challenge are attributed to tax tribunals in relation to acts whose evaluation of legality falls within its competences.

Although the process of judicial challenge is essentially a process of mere annulment (Articles 99º and 124º of CPPT), in it can be rendered condemnation of the tax administration in the payment of indemnity interest and indemnification for undue guarantee.

In truth, although there is no express norm to that effect, it has come to be peacefully understood in tax tribunals, since the entry into force of the codes of the fiscal reform of 1958-1965, that can be cumulated in a process of judicial challenge a request for condemnation in the payment of indemnity interest with the request for annulment or declaration of nullity or non-existence of the act, because in those codes it is stated that the right to indemnity interest arises when, in a gracious complaint or judicial process, the administration is convinced that there was error of fact attributable to the services. This regime was, subsequently, generalized in the Code of Tax Procedure, which established in No. 1 of its Article 24º that "there shall be right to indemnity interest in favor of the taxpayer when, in gracious complaint or judicial process, it is determined that there was error attributable to the services", later, in the LGT, in whose Article 43º, No. 1, it is established that "indemnity interest is due when it is determined, in gracious complaint or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount higher than that legally owed" and, finally, in CPPT in which it was established, in No. 2 of Article 61º (to which corresponds No. 4 in the wording given by Law No. 55-A/2010, of 31 December), that "if the decision that recognized the right to indemnity interest is judicial, the period for payment counts from the beginning of the period of its spontaneous execution".

Regarding the request for condemnation in the payment of indemnification for provision of undue guarantee, Article 171º of CPPT establishes that "indemnification in the case of bank guarantee or equivalent improperly provided shall be requested in the process in which the legality of the enforceable debt is contested" and that "indemnification must be requested in the complaint, challenge or appeal or in case its ground is supervenient within 30 days after its occurrence".

Thus, it is unequivocal that the process of judicial challenge encompasses the possibility of condemnation in the payment of undue guarantee and is even, in principle, the appropriate procedural means to submit such a request, which is justified by evident reasons of procedural economy, as the right to indemnification for undue guarantee depends on what is decided on the legality or illegality of the assessment act.

The request for constitution of the arbitral tribunal has as a corollary that it becomes in the arbitral process that the "legality of the enforceable debt" will be discussed, so that, as results from the express tenor of that No. 1 of the said Article 171º of CPPT, it is also the arbitral process that is appropriate to examine the request for indemnification for undue guarantee.

In fact, the cumulation of requests relating to the same tax act is implicitly presupposed in Article 3º of RJAT, when it speaks of "cumulation of requests even if relating to different acts", which gives to understand that the cumulation of requests is also possible regarding the same tax act and the requests for indemnification for indemnity interest and condemnation for undue guarantee are capable of being encompassed by that formula, so an interpretation in this sense has, at least, the minimum verbal correspondence required by No. 2 of Article 9º of the Civil Code.

The regime of the right to indemnification for undue guarantee is contained in Article 52º of the LGT, which establishes the following:

Article 53º

Guarantee in the case of undue provision

  1. The debtor who, to suspend execution, offers bank guarantee or equivalent shall be indemnified wholly or partially for the losses resulting from its provision, in case it has been maintained for a period longer than three years in proportion to success in administrative appeal, judicial challenge or opposition to execution that have as their object the debt guaranteed.

  2. The period referred to in the preceding number does not apply when it is verified, in gracious complaint or judicial challenge, that there was error attributable to the services in the assessment of the tax.

  3. The indemnification referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of indemnity interest provided for in the present law and can be requested in the judicial process of complaint or challenge itself, or autonomously.

  4. Indemnification for provision of undue guarantee shall be paid by abate to the revenue of the tax of the year in which payment is made."

In the case at hand, it is manifest that the error of the assessment act, embodied in the disregard of the financial charges relating to the reimbursement of loans to company D, is attributable to the Tax and Customs Authority, as the tax inspection and assessment were of its initiative and the Claimant contributed nothing to that error being made.

Therefore, the Claimant has the right to indemnification for the guarantee provided.

However, the costs incurred by the Claimant to provide the bank guarantee were not alleged and proven, making it impracticable to fix here the indemnification to which the Claimant is entitled, which can only be determined in execution of this decision.

C. DECISION

In these terms, this Arbitral Tribunal decides:

a) Judge the arbitral request formulated as founded and, in consequence, annul the tax act that is the object of these proceedings;

b) Condemn the AT in indemnification for provision of undue guarantee, in the amount to be determined in execution of judgment;

c) Condemn the AT in the costs of the proceedings, in the amount of €612.00.

D. Value of the Proceedings

The value of the proceedings is fixed at €5,421.00, in accordance with Article 97º-A, No. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of items a) and b) of No. 1 of Article 29º of RJAT and of No. 2 of Article 3º of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is set at €612.00, in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the respondent, as the request was wholly founded, in accordance with Articles 12º, No. 2, and 22º, No. 4, both of RJAT, and Article 4º, No. 4, of the cited Regulation.

Notify parties.

Lisbon

17 September 2014

The Arbitrator

(José Pedro Carvalho)

[1] See by way of example the Decision of the said Tribunal of 26-10-2012, rendered in the context of decision No. 05014/11, cited by the AT, available at www.dgsi.pt, as well as the remaining jurisprudence cited without indication of other origin.

[2] "The declarations of taxpayers presented in accordance with the terms provided by law are presumed to be true and made in good faith, as well as the data and calculations recorded in their accounting or records, when these are organized in accordance with commercial and tax legislation".

[3] See, for example, Mário Portugal in "Autonomous Taxes, Non-Fiscal Expenses and Charges", Review TOC, No. 143, p. 39, who suggests its recording in a sub-account 68882.

[4] Ultimately, it could always be said that as the author of the tax declaration and its own accounting, the taxpayer would always be in better conditions than the AT to demonstrate the truth of its declarations, as well as of the calculations and findings thereof.

[5] Reaffirmed in the Decision of the same Tribunal of 30-11-2011, rendered in case 0107/11.

[6] This Decision addresses, next, a different issue, which is determining the extent of the probative burdens of each of the parties, applying an understanding similar to what has been regularly followed in jurisprudence, regarding false invoices.

Frequently Asked Questions

Automatically Created

How are tax losses (prejuízos fiscais) treated in IRC group taxation after a merger by incorporation?
In IRC group taxation following a merger by incorporation, tax losses (prejuízos fiscais) of the incorporated company are transferred to the incorporating entity under specific conditions set forth in the IRC Code. The incorporating company assumes the tax position of the absorbed entity, including accumulated fiscal losses subject to statutory limitations. In case 85/2014-T, Company A incorporated B SGPS S.A. and became responsible for the group's consolidated tax position, including adjustments to subsidiary C's taxable income. The group taxation regime (regime especial de tributação dos grupos de sociedades) allows for consolidation of results across group entities, but corrections to individual subsidiaries' taxable income flow through to adjust the group's overall tax liability, as demonstrated by the €20,580.51 adjustment that increased the consolidated taxable income from €13,239,526.99 to €13,260,107.50.
Can financial costs related to shareholder loans (suprimentos) be deducted for IRC purposes within a group of companies?
Financial costs related to shareholder loans (suprimentos) can generally be deducted for IRC purposes within a group of companies if they meet the requirements of Article 23 of the IRC Code: the expenses must be incurred to generate taxable income, be properly documented, and not fall under specific exclusions. In case 85/2014-T, subsidiary C deducted €20,580.51 in interest on a €490,000 loan from shareholder D. The Tax Authority challenged this deduction arguing C had zero operational revenue. However, C held investment properties worth over €748,000 acquired for resale, constituting legitimate business activity. The loan served to refinance €340,000 in existing debt and provide €150,000 for operational expenses (property taxes, accounting, promotional costs). Crucially, the interest was taxed at D's level under group taxation, and C's lack of sales resulted from market conditions beyond its control. The arbitration examined whether holding assets for resale with genuine intent to sell constitutes sufficient economic activity to justify deducting financing costs under IRC principles.
What was the outcome of CAAD arbitration case 85/2014-T regarding the additional IRC assessment for 2007?
CAAD arbitration case 85/2014-T involved Company A challenging an additional IRC assessment of €5,421 for fiscal year 2007, following corrections of €20,580.51 to the group's taxable income. The case centered on whether subsidiary C could deduct interest expenses on a shareholder loan when it reported no operational revenue but held investment properties for sale. The claimant provided bank guarantee to suspend enforcement proceedings and followed the complete administrative challenge path: gracious complaint (rejected 04/01/2012), hierarchical appeal (rejected 23/10/2013), then CAAD arbitration under RJAT. The singular arbitral tribunal was constituted on 04-04-2014 after the Tax Authority responded arguing the claim should be judged unfounded. The tribunal held hearings with witness examination and received written arguments from both parties. While the complete decision text was not provided, the case establishes important precedent regarding the treatment of financial expenses in IRC group taxation when subsidiaries hold assets for resale but face prolonged sales cycles due to market conditions.
How does the Portuguese Tax Authority (AT) handle IRC adjustments for financial expenses in SGPS holding company structures?
The Portuguese Tax Authority (AT) scrutinizes IRC adjustments for financial expenses in SGPS holding company structures by examining whether the costs relate to genuine business activity and income generation. In case 85/2014-T, the AT issued correction following internal analysis of the group's IRC return (Form 22), disallowing €20,580.51 in interest expenses recorded by subsidiary C. The AT's position, detailed in the Tax Inspection Report, focused on C declaring zero operational revenue while deducting significant financial costs, concluding the company engaged in no effective activity consistent with its bylaws. The AT applied Article 23 of the IRC Code strictly, viewing the absence of current-year revenue as determinative despite C holding €748,000+ in investment properties. This approach reflects the AT's heightened scrutiny of SGPS structures and intercompany financing arrangements, particularly examining substance-over-form principles. The AT challenged costs through formal assessment procedures (liquidação adicional), requiring taxpayers to prove business purpose through gracious complaints and hierarchical appeals before accessing CAAD arbitration, as demonstrated by the multi-year challenge process (2011-2014) in this case.
What is the arbitration procedure at CAAD for challenging an additional IRC tax assessment under the RJAT?
The arbitration procedure at CAAD for challenging an additional IRC tax assessment under RJAT (Regime Jurídico da Arbitragem em Matéria Tributária - Decree-Law 10/2011) follows a structured process demonstrated in case 85/2014-T. First, taxpayers must exhaust administrative remedies (gracious complaint and hierarchical appeal). Company A filed its arbitration request under Articles 2(1)(a) and 10(1)(a) of RJAT after administrative rejection. The CAAD President accepted the request and notified the Tax Authority (05-02-2014). Under Article 6(2)(a) and 11(1)(b) of RJAT as amended by Law 66-B/2012, the Deontological Council appointed a singular arbitrator (parties can challenge appointments per Articles 6-7 of the Deontological Code). The tribunal was constituted on 04-04-2014. The Tax Authority submitted a response arguing the claim was unfounded. The tribunal held hearings under Article 18 of RJAT with witness examination. Parties submitted written arguments. To suspend enforcement, claimants must provide bank guarantees as Company A did. The tribunal examines jurisdiction, party legitimacy, and procedural validity before ruling on merits, ensuring compliance with Articles 4, 10(2), and 30(1) of RJAT.