CAAD 88/2015-T: IRC Deductibility of Expenses and Article 55(2) EBF – Tax Arbitration

ARBITRATION DECISION

The arbitrators Maria Fernanda dos Santos Maçãs (arbitrator president), Carla Castelo Trindade and Jorge Júlio Landeiro de Vaz, appointed by the Ethics Council of the Center for Administrative Arbitration to form an Arbitral Tribunal, constituted on 21 April 2015, hereby decide as follows:

I. REPORT

1.

A..., with headquarters at ... Rua ..., in ...-... ..., legal entity no. ..., submitted, on 11-02-2012, to the Center for Administrative Arbitration (CAAD) a request for the constitution of a collective arbitral tribunal, in accordance with the combined provisions of articles 2, no. 1, paragraph a), and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as RJAT), in which the Tax and Customs Authority is the Respondent.

2.

The claim subject to the request for arbitration decision consists in the assessment of the legality of the additional tax assessment act for Corporate Income Tax (IRC) no. 2014 ..., in the total amount of €360,494.97, relating to the fiscal year 2010.

2.1.

The Claimant requests that the additional tax assessment act no. 2014 ... be partially annulled, pursuant to article 99 of the CPPT, and consequently, the reduction of the taxable income from €1,635,667.53 to €70,237.19 and that the value of the assessment be reduced from €346,447.53 to €14,047.44;

3.

On 11 February 2015, the request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority.

3.1.

The Claimant did not proceed to appoint an arbitrator, whereupon, in accordance with the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, the President of the Ethics Council appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the prescribed time.

3.2.

On 2 April 2015, the parties were notified of the appointment of the arbitrators, and neither raised any objection.

3.3.

In accordance with the provisions of paragraph c) of no. 11 of the RJAT, the collective arbitral tribunal was constituted on 21 April 2015.

3.4.

In these terms, the Arbitral Tribunal is properly constituted to hear and decide the subject matter of the proceedings.

4.

To substantiate the request for arbitration decision, the Claimant alleges, in summary, the following:

a) She accepts that unsubsidized training activities, namely seminars, conferences and similar events, constitute income equivalent to category B income and, accordingly, admits that the amount of €123,620.45 should be added to category B income;

b) She disagrees with the Tax Authority's position regarding the tax classification of subsidies obtained by A..., associated with training valued at €1,776,311.23;

c) The rule provided for in article 55 of the EBF, invoked by the Tax Authority, is not applicable to A..., not least because it is neither an employers' nor a trade union association, nor a legal entity created by law to ensure the discipline and representation of the exercise of liberal professions;

d) The non-subjection to IRC of the subsidies (received by A... within the scope of the training programs it carries out, in accordance with the provisions of paragraph e) of no. 1 of article 2 of the Association's Statutes), results from the application of no. 3 of article 54 of the IRC Code;

e) Therefore, the subsidies are income not subject to IRC, and the additional tax assessment act incurs an error in the qualification of income from subsidies, and should be annulled, on the grounds of paragraph a) of article 99 of the CPPT;

f) In the Claimant's view, the Tax Authority errs in the qualification of costs, since, according to article 54 of the IRC Code, expenses that are not specifically linked to a particular category of income are considered common;

g) This is what happens with the expenses related to projects B..., C... and D..., as they involve charges linked to both the obtaining of taxable income and the obtaining of income not subject to taxation, obtained within the scope of these three projects;

h) The costs considered by the Tax Authority as specific to income from project B..., C... and D... are unquestionably common costs to activities subject to tax and activities not subject to tax, as defined in article 54, no. 1, paragraph b), of the IRC Code;

i) Still in the Claimant's view, the Tax Authority also errs in the qualification of other costs it considered as specific to category B, namely the amount of €1,677,221.26 (relating to costs linked to training activity), since if subsidized training is income not subject to IRC, the specific costs of that activity cannot be considered, as the Tax Authority argues, "costs related to category B income (at most they would be costs specific to non-taxable income - subsidies related to training activities)" – article 88 of the Statement of Claim;

j) These are costs common to non-taxable activities (subsidies intended for training) and activities subject to IRC (income from non-subsidized training, namely seminars, conferences and similar events), and therefore, according to article 54 of the IRC Code, should be considered common to the income obtained within the scope of training activities;

l) Whereby the tax assessment is, according to the Claimant, illegal, for violation of article 54, no. 1, paragraph b), combined with no. 2 of the same provision;

m) The tax assessment is also illegal due to lack of substantiation of the arithmetic corrections made;

n) The tax assessment is further illegal for violation of the constitutional principles of certainty, legal protection and taxation according to real income.

5.

The Tax Authority presented its response, defending itself by challenging both facts and law, invoking, in summary:

a) There is no error in the qualification of income from subsidies, inasmuch as they do not meet the requirements to benefit from the exemption provided for in no. 2 of article 55 of the EBF, either as to the nature of the taxpayer or as to the recipients of the training, who are not limited to the taxpayer's members;

b) There is also no error in the qualification of specific costs, since the income described (subsidies for training, non-subsidized training, seminars, conferences and similar events) is taxable income, and therefore all expenses associated with them are expenses specific to taxable income, falling within category B;

c) There is no violation of the alleged lack of substantiation, nor is there a violation of the principles of legal certainty and protection of confidence and taxation of real income.

5.1.

The Tax Authority therefore requests that the claim formulated by the taxpayer be judged unfounded, as not proven, maintaining the IRC assessment as valid, for being legal and adequate.

6.

Neither party requested testimonial evidence.

7.

Thus, on 1 July 2015, the arbitral tribunal issued an order inviting the submission of documentary evidence, notifying the parties to pronounce themselves on the procedure for submissions and dispensing (on the condition that the submissions were not made in oral form and by virtue of the arbitral process being governed by the principles of procedural economy and the prohibition of unnecessary acts) with the holding of the meeting provided for in article 18 of the RJAT, with 15 October being designated as the deadline for pronouncing the arbitration decision.

8.

Following notification of such order, both parties communicated that they waived the submission of submissions, whereby the dispensation with the first meeting of the Arbitral Tribunal was confirmed, in accordance with the provisions of article 18 of the RJAT.

9.

The Parties did not raise the preliminary objection of lack of jurisdiction, whereupon the Tribunal manifested, by order issued on 30/8/2015, its intention to know of it proprio motu, having, in accordance with the provisions of article 3, no. 3, of the CPC, applicable via article 29, no. 1, paragraph e), of the RJAT, invited, in the same order, the parties to exercise their right to be heard on such matter, as well as on the value of the claim.

Following such notification, the Taxpayer came to clarify the value of the claim, not exercising the right to be heard on the rest. It opted, on the other hand, to request the reduction of the claim to that (declaration of illegality of the additional tax assessment act) regarding which the problem of absolute lack of jurisdiction ratione materiae does not arise.

By contrast, the Tax Authority came to argue for the verification of absolute lack of jurisdiction ratione materiae.

The request for reduction of the claim was granted, by order issued on 24/9/2015.

II. SANATIO

9.1.

The arbitral tribunal was properly constituted.

9.2.

The parties have legal personality and capacity, show themselves to be legitimately interested and are properly represented (articles 4 and 10, no. 2, of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

9.3.

It is necessary to verify, in particular, the procedural requirement of the tribunal's jurisdiction.

a) The taxpayer formulates, in the arbitration request, three cumulative claims:

a.1- requests the annulment of the assessment act;

a.2- requests that the taxable income be reduced from €1,635,667.53 to €70,273.19; and

a.3- requests that the value of the tax assessment be fixed at €14,047.44.

9.3.1.

As explained above, in the Report, the parties did not raise the preliminary objection of lack of jurisdiction, whereupon the tribunal manifested its intention to know of it proprio motu regarding the claims for reduction of taxable income and reduction of the assessment.

In accordance with the provisions of article 3, no. 3, of the CPC, applicable via article 29, no. 1, paragraph e), of the RJAT, the tribunal invited the parties to exercise their right to be heard on such matter. Following such notification, the Taxpayer did not pronounce itself on the exception of lack of jurisdiction, but requested the reduction of the claims, maintaining only the claim in which it sought the annulment of the assessment. This request was granted.

The Tax Authority came to respond to the Tribunal's invitation, sustaining the absolute lack of jurisdiction of the Tribunal to know of the claims identified under a.2 and a.3.

It is necessary to assess this.

By directly relating to the assessment of the legality of an unequivocal assessment act, the first claim formulated (requesting the annulment of the assessment act) proves to be entirely compatible with the scope of material jurisdiction provided for in the first part of article 2, no. 1, paragraph a), of the RJAT, pursuant to which arbitral tribunals have jurisdiction to "declare the illegality of acts assessing taxes, self-assessment, withholding and advance payments".

The present tribunal is, therefore, competent to know of the matter corresponding to the claim above identified under a.1.

The circumstance that there was a reduction of the claims originally formulated, with elimination of the other claims, leads to the problem of the present tribunal's lack of jurisdiction regarding the latter ceasing to have relevance. The exercise of such faculty eliminated, therefore, the relevance of the jurisdiction issue raised by the Tribunal, and the understanding and decision of the corresponding exception, whose initial relevance arose, ceased to have foundation.

In fact, the requirement of lack of jurisdiction ratione materiae is assessed according to the claims deduced, and therefore such assessment does not have to be undertaken regarding claims that have been subject to voluntary and admissible exclusion from the subject matter of the proceedings by the Claimant, as occurred in the present action.

That consideration is therefore circumscribed, in the case at hand, to the sole remaining claim.

In these terms, the tribunal declares itself competent to know the subject matter of the present proceedings.

9.4.

There are no other circumstances that prevent the knowledge of the remaining aspects relating to the merits of the case.

9.5.

The proceedings do not suffer from nullities.

III. MERITS

III.1. FACTUAL MATTERS

10. PROVEN FACTS

10.1.

With relevance to the assessment and decision of the substantive issues raised, the following facts are deemed established and proven:

a) The Claimant was subject to an external inspection procedure, for the fiscal years 2007 and 2008, and was notified, in October 2011, of the respective inspection report;

b) The Claimant was also subject to another external inspection procedure, as far as is relevant here, for the fiscal years 2009, 2010 and 2011, carried out by the Inspection Services of the Finance Directorate of Porto (SIT), under the service order identified as OI 2013...;

c) The opening of Service Order OI 2013... had its origin in a VAT refund request made by the Claimant;

d) The Claimant was notified, in November 2013, of the Inspection Report relating to fiscal year 2009, and in January 2014, of the Inspection Report relating to fiscal years 2010 and 2011;

e) In the 2010 report, the Tax Authority states that "A... is not an employers' association";

f) From article 2 of the statutes of the claimant it follows that:

"1. For the accomplishment of its purpose, it shall be the responsibility of A... to:

a) Promote the fostering of entrepreneurship in society, the economic fabric and young people in particular;

b) Promote instruments to facilitate access to and development of business activity, namely through mechanisms for business incubation and common support services;

c) Promote business awareness projects, sectoral and others, through product, service or region promotion events;

d) Defend the interests of young entrepreneurs and business people through their approach and support for private initiative;

e) Promote the professional training of its members and the general community and their integration and relationship with the business environment;

f) Foster the exchange of experiences and the exchange of information;

g) Promote new business projects and relationships and promote the action of young entrepreneurs and national companies in the international market, namely in Portuguese-speaking communities and countries;

h) Create a dialogue force with official, governmental, economic, social and cultural bodies;

i) Bring together around it groups or formal or informal organizations, with similar objectives, in order to increase and guide its activity."

g) Between 1 January 2007 and 31 December 2010 there was no statutory amendment in A... nor was there any change in the level of activities developed by the Association, particularly there was no change in the "modus operandi" of the training carried out by A...;

h) In the inspection report for fiscal year 2010 (which underlies the disputed additional assessment act), the Tax Authority states that "A... is an IRC taxpayer in accordance with paragraph a) of no. 1 of article 2 of the CIRC, whose tax is levied on overall income, corresponding to the algebraic sum of income from the various categories considered for IRS purposes... given that it does not exercise, as its main activity, a commercial, industrial or agricultural activity...";

i) This same tax classification was expressed by the Tax Authority in the tax inspection reports relating to fiscal years 2007, 2008 and 2009;

j) In the said inspection action, and with relevance for the present proceedings, the SIT verified that, in fiscal year 2010, the now Claimant did not have its accounts organized according to the various IRS categories, with the recording of costs not being carried out in a way that distinguishes the specific charges of each category of income from other non-specific charges;

k) In the mentioned tax inspection report relating to fiscal year 2010, the Tax Authority noted that A... did not comply with the ancillary obligation provided for in article 116 of the IRC Code, stating therein that "Given the trial balances provided, it appears that the general accounts, considering the Chart of Accounts used, is not structured so that the different types of income obtained can be identified: exempt, not subject and subject (by IRS category). As regards income, it is noted that the provision of services is subdivided into VAT-exempt and subject to VAT, which in turn is subdivided into headquarters and regional centers - North, Center, Lisbon and Vale do Tejo (LVT), Alentejo (ATO) and Algarve (ALG). With regard to expenses, the different headings are subdivided into headquarters and regional centers";

l) In this way, the Tax Administration understood that the Chart of Accounts used is not structured or organized in a way to show:

• The various categories of income considered for IRS purposes;

• The records of charges, organized in such a way that the specific charges of each category of taxable income are distinguished;

• The other charges that, in whole or in part, are deductible from overall income.

m) As demonstrated by the following table contained in the Inspection Report:

[Table with financial data for 2010 and 2011, showing various account numbers, designations, values and percentages]

n) It also appears from the Inspection Report that:

"The facts described show that the taxpayer used the VAT framework, to which it subjected the income obtained, to proceed with its classification under IRC. Among the set of income considered non-taxable by the taxpayer are the income obtained from training, conferences, seminars and similar events, which are not referenced in no. 3 (non-taxable) and no. 4 (exempt) of article 54 of the CIRC."

o) For the year 2010, the Claimant carried out the determination by income categories as shown in the following table:

[Table showing income by category for 2010: Non-taxable income €6,659,420.40; Category B income €4,667,843.10; Category E income €457.92; Category F income €20,713.27; Category G income €9,000.00; Total income €11,357,434.69]

p) The accounts of A... not being structured according to the various categories of income (as defined in the IRS) and the recording of charges not being carried out in a way that distinguishes the specific charges of each category of income from other non-specific charges, the Tax Authority proceeded, within the scope of all inspection actions carried out on the five fiscal years, to requalify the income by categories (of IRS) and separated the charges it understood to be associated with a certain type of income from other general charges;

q) In the inspection action carried out on the fiscal years 2007 and 2008, the Tax Authority understood that the income earned by A... in the years 2007 and 2008 from subsidies to carry out training actions were income not subject to IRC (cf. doc. 2, e.g. pages 25 and 26) and for that reason the Tax Authority, in the inspection carried out on the fiscal years 2007 and 2008, did not carry out any correction (requalification) regarding this type of income;

r) The Tax Authority corrected the determination carried out by A... regarding income not subject to tax, having disregarded as income not subject to IRC the amount of €1,899,931.68, requalifying them as taxable income (category B), as shown in the following table:

[Table comparing income categories according to Claimant and Tax Authority for 2010]

s) In support of such requalification, the Tax Authority invoked that "these revenues result fundamentally from the following economic operations: holding of seminars, conferences and similar events, provision of training services (subsidies), cession of space and other service provisions";

t) The income requalified by the Tax Authority corresponds to those described in the following table:

[Detailed table listing various revenues related to non-subsidized training activities and fully subsidized training activities]

u) Between 1 January 2007 and 31 December 2010 there was no legislative amendment in the IRC Code or in separate legislation, liable to affect the tax classification of income earned by A... from subsidies intended to carry out training actions;

v) The Tax Administration also proceeded to a different allocation of expenses;

x) The difference in the determination of specific expenses of certain categories of income, carried out by the Claimant and by the Tax Authority is evidenced in the following table:

[Table showing costs comparison between Claimant and Tax Authority for 2010]

z) In support of the corrections carried out by the Tax Authority regarding costs, it invoked that: "given the information provided by A..., from the respective cost centers, it is considered that there is sufficient information to carry out a distribution of the total value of the costs incurred, by the income obtained (taxable and non-taxable or exempt). Thus, the specific costs of the taxable income obtained are determined, as shown in the following table:

a.) B... and C...:

[Tables showing cost allocation methodology for projects B... and C...]

aa) Thus, the Tax Authority established as a criterion for determining the specific costs relating to event B..., which results from the following table:

[Table showing calculation methodology for specific costs attribution]

bb) The data in the table of the preceding paragraph show that the Tax Authority calculated the percentage of non-taxable income in the total income obtained within the scope of project B... (47%) and calculated the percentage of taxable income in the total income obtained within the scope of project B... (53%);

cc) As well as that, subsequently, the Tax Authority multiplied the total costs related to project B... by the percentage that the taxable income represents in the total income of B... and determined the costs which, in the Tax Authority's view, are specific to taxable income. The same reasoning was used to determine the costs which, in the Tax Authority's view, are specific to non-taxable income;

dd) Thus, the Tax Authority used as a criterion for the allocation of the value of these costs a pro-rata of the value of the income;

ee) The same criterion of qualification of specific costs was followed for the projects designated by "C..." and "D...", as is evidenced, respectively, in tables 12 and 13 of the inspection report;

ff) The Tax Authority states in the inspection report for fiscal years 2007 and 2008 that "due to the specificity and lack of an accounting system for allocating costs by categories of income or auxiliary extra-accounting information, only costs specific to non-taxable income were considered. The specific costs considered for this type of income were those related to reductions and returns of the exploitation incentives received, as well as the proportional cost of depreciation of fixed assets that were subject to subsidies";

gg) And the said inspection report adds that "the proportional costs of depreciation of assets that received subsidies were considered as specific costs of non-taxable income, since the proportional amounts of subsidies received, recorded in account 79821, were considered, pursuant to article 49, no. 3 of the CIRC, as non-taxable income";

hh) In the inspection report of the inspection action for fiscal years 2007 and 2008, the Tax Authority concluded that the only costs specifically related to the non-taxable activity are those related to reductions and returns of subsidies received, as well as the proportional cost of depreciation of fixed assets that were acquired with funds from subsidies received by A.... It further concluded, in that same report, that there were no costs specific to activity subject to IRC;

ii) The management support information was organized in the same way in 2007, 2008 and 2010, that is, "the cost centers" in 2007, 2008 and 2010 are organized exactly with the same nomenclature and it is exactly the same purpose that underlies the allocation (imputation, distribution) of costs;

jj) Between 1 January 2007 and 31 December 2010 there was no legislative amendment in the IRC Code or in separate legislation, liable to affect the tax classification of the charges incurred by A... intended to carry out training actions;

kk) Between 1 January 2007 and 31 December 2010 there was no statutory amendment in A... nor was there any change in the level of activities developed by the Association, particularly there was no change in the "modus operandi" of the training carried out by A...;

ll) In the year 2010, A... did not benefit from any patrimonial increase obtained by title of grace and the income it obtained amounted to €11,357,434.69, with the total charges for that year being €11,122,074.78, whereby an accounting result of €235,359.91 was determined, which the Tax Authority did not challenge in the inspection activity and which is shown in the following table:

[Table showing total income, total charges, and result before taxes for 2010]

mm) The taxable income determined by the Tax Authority for the year 2010 was €1,635,667.53. The excess of the fiscal result (€1,635,667.53) compared with the accounting result before taxes (€235,359.91) in the amount of €1,400,307.62 (€1,635,667.53-€235,359.91) results from the requalification, carried out by the Tax Authority, of the income categories and the requalification of the charges (as specific or as general) incurred in the fiscal year;

nn) Following the corrections mentioned above, an additional IRC assessment no. 2014 ... was issued, in the total amount of €360,494.97, relating to the year 2010;

10.2.

The decision regarding the factual matter contained in the preceding paragraphs results from the positions assumed by the parties and the documentary evidence submitted by them (namely from the administrative file attached to the proceedings).

10.3.

There are no other facts with relevance to the decision of the case.

III.2. MATTERS OF LAW

1.

With regard to the qualification of the type of income, the central issue to be decided concerns the assessment of the legality of the requalification made by the Tax Administration.

It is first necessary to establish what such requalification entailed and what the subject matter of the dispute is regarding this aspect.

Having the Claimant indicated, as non-taxable income, the amount of €6,659,420.40 and as category B income the amount of €4,667,843.10, the Tax Authority came to consider as non-taxable income the amount of €4,759,488.72 and as category B income the amount of €6,567,774.78. The Tax Authority thus carried out the requalification of income corresponding to the sum of €1,899,931.68, transferring them from the category of non-taxable income to category B.

The Claimant agrees with such requalification regarding the amount of €123,620.45, disagreeing, however, regarding the requalification of the remaining amount, corresponding to €1,776,311.23. It is thus only this amount regarding whose requalification there is a dispute and regarding which the parties request the tribunal's decision.

Once the subject matter of the conflict has been determined, it is necessary, secondly, to verify what type of income is at issue.

At this level, there is no divergence between the parties, both agreeing that this is income corresponding to subsidies associated with training (cf. article 29 of the petition, articles 30 and 31 of the response and 2nd paragraph of page 12 of the inspection report).

With importance for the resolution of the issue under analysis appears, thirdly, the qualification of the legal entity that A... represents. Also regarding this aspect the parties do not diverge, both agreeing that it is a matter of a legal entity under private law which, consequently, does not correspond to a public legal entity, nor to a trade union association. There is also no divergence regarding the fact that the training actions (subsidized) provided by A... do not have as exclusive recipients its respective members. It also appears – and also regarding this aspect the parties do not disagree – that the provision of the activity of "professional training of its members and the general community" proves to be compatible with the statutory purposes of the claimant, in particular with the competence provided for in paragraph e) of article 2 of the said statutes.

It is necessary, fourthly, to legally frame these factual elements, so as to be able to conclude regarding their appropriate qualification, from the tax point of view.

It appears, at this level, correct the qualification made by the Tax Authority when it excludes that the tax benefit provided for in no. 2 of article 55 of the Tax Benefits Statute can be considered applicable in the concrete case.

In fact, in accordance with such provision:

"Income from trade union associations and public legal entities, of an associative type, created by law to ensure the discipline and representation of the exercise of liberal professions, derived from training actions provided to their respective members within the scope of their statutory purposes, are exempt from IRC."

Now, in the present case, although the provision of training actions is carried out within the scope of the Claimant's statutory purposes, it does not correspond to the type of legal entity provided for in the law – it is neither a trade union association, nor a public legal entity, of an associative type, created by law to ensure the discipline and representation of the exercise of liberal professions. Neither is the second condition (for application of the tax benefit) provided for in the said article met, since the training actions were not provided only to the members of A....

These reasons eliminate, from the outset, without need for further considerations, the possibility of considering the tax benefit in question applicable to the Claimant.

The Tax Authority acted correctly thus when it considered that "the requirements are not met for the Claimant to benefit from the exemption provided for in no. 2 of article 55 of the EBF, either as to the nature of the taxpayer or as to the recipients of the training, who are not limited to the taxpayer's members" (cf. article 31 of the response – the expression in square brackets is ours).

The Tax Authority, however, stopped there, regarding the assessment of the possibility of there being special tax treatment of the income under analysis. Considering that the same were not exempt from IRC in accordance with article 55, no. 2 of the EBF, it classified them under the general taxation regime, as "positive components in the determination of income..." (article 31 of the response and 2nd paragraph of page 12 of the inspection report), stating that "pursuant to paragraph g) of no. 2 of article 3 of the IRS Code, such subsidies are considered business income" (2nd paragraph of page 12 of the inspection report).

It is, however, necessary to verify whether, despite, in the case sub judice, the cause of exemption from IRC provided for in the said article 55, no. 2, of the EBF not being applicable, the cause of non-subjection to IRC provided for in article 54, no. 3, of the CIRC applies or does not apply to this income. This is indeed an operation that should be prior to the one undertaken, since, as is known, exemption presupposes subjection to tax. Thus, if it is concluded that there is non-subjection, there will therefore be no need to know whether or not there is an exemption.

According to this provision, applicable to "legal entities and other entities resident that do not exercise, as their main activity, a commercial, industrial or agricultural activity" (heading of the Section, where the article in question is included):

"Income not subject to IRC shall be considered the quotas paid by members in accordance with the statutes, as well as subsidies intended to finance the accomplishment of the statutory purposes."

Comparing the elements of the case with the provision in question, it is apparent that both the legal requirement relating to the taxpayer is met (A... is a resident legal entity that does not exercise, as its main activity, a commercial, industrial or agricultural activity), and the requirement relating to the type of income (subsidies are at issue).

Meeting the requirements for the application of article 54, no. 3, of the IRC, this rule should be applied to the case of the Claimant, and therefore the income on which we now decide is not qualified as income of category B but rather as income not subject to IRC.

It is thus deemed that the invocation, by the Claimant, of the illegality of the assessment, based on erroneous qualification of the income in question, is well-founded.

2.

The requalification of expenses made by the Tax Administration equally lacks legal foundation.

The requalification carried out by the Respondent, of the specific expenses of the activity, taxable and non-taxable, loses meaning, since, in accordance with article 54, no. 1, paragraph b), of the CIRC, in conjunction with no. 2 of the same provision, expenses that are not linked to those categories of income should be considered as common expenses or costs.

Now, the Tax and Customs Administration merely, through the application of a percentage that reflects the relative weight of taxable income, converts costs considered common into alleged specific costs, when no proof is made that these are expenses exclusively related to the obtaining of category B income, as would be required.

In the case of common expenses, for the determination of taxable income, their deduction from taxable income should be made in accordance with paragraph b) of no. 1 of article 54 of the CIRC, as the Claimant argues.

In these terms, the allegation by the Claimant regarding the illegality of the requalification of costs made by the Tax and Customs Administration is well-founded.

III.3. PREJUDICED MATTERS

Proceeding with the request for arbitration decision on the basis of the defect of illegality resulting from error in the qualification of both income and costs, which ensures effective and stable protection of the Claimant's rights, the knowledge of the other defects that are attributed to the tax assessment in question is prejudiced.

In fact, it follows from the establishment of an order of knowledge of defects, in article 124 of the CPPT, that when a defect is judged well-founded which prevents the renewal of the disputed assessment, there is no need to assess the others attributed to it. If it were always necessary to know of all defects, it would be indifferent the order in which their knowledge was undertaken.

IV. DECISION

In these terms, this Tribunal agrees to:

Judge well-founded the request for declaration of illegality of the additional IRC assessment no. 2014 ..., relating to fiscal year 2010, as delimited by the Claimant, with the consequent (partial) annulment of the said assessment.

V. VALUE OF THE PROCEEDINGS

In accordance with the provisions of articles 306, no. 2, and 297, no. 2, of the CPC, article 97-A, no. 1, paragraph a), of the CPPT and article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at €360,494.97.

VI. COSTS

In accordance with the provisions of articles 22, no. 4, and 12, no. 2 of the Legal Regime of Arbitration, article 2, no. 1, article 3 and nos. 1 to 4 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings, as well as in Table I attached to this regulation, the value of the arbitration fee is fixed at €6,120.00 to be paid by the Tax and Customs Authority.

Notification is ordered.

Lisbon, 13 October 2015.

The Arbitrator-President,

(Fernanda Maçãs)

The Arbitrator Member,

(Carla Castelo Trindade)

The Arbitrator Member,

(Jorge Júlio Landeiro de Vaz)

Text prepared by computer, in accordance with article 138, no. 5 of the Code of Civil Procedure (CPC), applicable by remission of article 29, no. 1, paragraph e) of the Legal Regime of Tax Arbitration.

The drafting of this decision follows the old spelling rules.