CAAD 94/2018-T: Taxation of Distributed Profits Under IRC Article 6(4) – Withholding Tax Correction on Shareholder Advances

ARBITRAL AWARD (consult full version in PDF)

The arbitrators Councilor Maria Fernanda dos Santos Maças (arbitrator-president), Prof. Dr. Maria do Rosário Anjos and Dr. Nuno Maldonado Sousa, appointed to form the Collective Arbitral Court, constituted on 24-05-2018, agree to render the following arbitral award:

I – REPORT

The company A... LDA, NIPC..., with registered office in ..., ...-... ..., hereinafter referred to as "Claimant", submitted a request for the constitution of a Collective Arbitral Court, pursuant to article 2, no. 1, paragraph a), of Decree-Law no. 10/2011, of 20 January (RJAT) and of Ordinance no. 112 – A/2011, of 22 March, to challenge and declare the illegality of the dismissal of the Gracious Complaint which proceeded under case number ...2017... .

The dismissal decision, rendered by the Head of Division of the Finance Directorate, in the exercise of competence subdelegated by the Deputy Finance Director of ..., where it requested, in the capacity of substitute taxpayer, that the acts relating to withholding tax on income for 2013, 2014 and 2015 in respect of Personal Income Tax (IRS) contained in the following returns, all dated 06.04.2017, be corrected, namely:

Withholding tax declaration no. ... (IRS) relating to 2013, in the amount of €78,102.68, relating to capital income;

Withholding tax declaration no. ... (IRS) relating to 2014, in the amount of €55,028.74, relating to capital income;

Withholding tax declaration no. ... (IRS) relating to 2015, in the amount of €7,353.34, relating to capital income.

According to the claimant, there were withdrawals of funds by its partners during the years 2013, 2014 and 2015. Not being documented that such withdrawals occurred under a loan agreement, despite being recorded as such, the Tax Authority (AT), during inspection, understood that they should take the form of advances on account of profits.

The claimant acquiesced to the position of the AT and proceeded to submit the withholding tax declarations in respect of Personal Income Tax. However, it was verified that, by oversight and in clear violation of commercial and tax law, the withholding tax declarations were improperly processed, resulting in the payment of an amount beyond what was legally due, as follows:

The request for constitution of the Arbitral Court was submitted by the Claimant on 12-03-2018, was accepted by His Excellency the President of CAAD and notified to the AT on 04-03-2018, in accordance with the legally provided terms and effects. The Claimant chose not to appoint an arbitrator, so, pursuant to paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council appointed the undersigned arbitrators, who communicated acceptance of the assignment within the applicable period. The court was constituted on 24-05-2018.

On 24-05-2018, an arbitral order was issued for the Tax and Customs Authority (AT) to present its response within the legal period, in accordance with and for the purposes of the provisions of nos. 1 and 2 of article 17 of the RJAT. The Respondent submitted its response and the respective Administrative File (PA) on 27-06-2018, the contents of which are hereby considered fully reproduced.

On 30-06-2018, in view of the position of the parties as evident in the file, an arbitral order was issued dispensing with the holding of the meeting provided for in article 18 of the RJAT, as unnecessary, given that no exceptions were raised nor testimony indicated to be heard. A period of 15 days (equal and successive) was set for the parties to submit arguments and a deadline was set for the issuance of the arbitral decision until 23-11-2018, which was subsequently extended, by arbitral order of 19-11-2018, to 22-01-2018, with the grounds which are hereby considered fully reproduced.

The claimant submitted its arguments on 04-09-2018 and the AT on 24-09-2018, alleging only that it reiterated everything already contained in the file, namely its response and respective PA.

B) THE REQUEST FORMULATED AND THE CLAIMANT'S POSITION:

In summary, the Claimant, in the arbitral request, sets out its claim and acknowledges that withdrawals of funds by its partners occurred during the years 2013, 2014 and 2015. Now, not being documented that such withdrawals occurred under a loan agreement, despite being recorded as such, the AT, during inspection, understood that they should take the form of advances on account of profits. The claimant acquiesced to the position of the AT and proceeded to submit the withholding tax declarations in respect of Personal Income Tax. However, the Claimant alleges that it subsequently verified that "by oversight and in clear violation of commercial and tax law, the withholding tax declarations were improperly processed, resulting in the payment of an amount beyond what was legally due."

Thus, the error alleged by the Claimant stems from the fact that the company has two partners (and not just one), namely: Mr. B..., holder of three quota stakes with a nominal value of €49,879.79 each, representing in total 60% of the share capital, and the commercial company limited by shares "C..., (SGPS), LDA", (hereinafter C...) holder of two quota stakes, holding 40% of the share capital. For this reason, the Claimant invokes the provisions of article 217 of the Commercial Companies Code (CSC), which provides that partners have a right to the profits of the financial year, as well as article 297 of the same CSC (which applies by analogy to limited liability companies) regulates advances on account of profits during the financial year, combined with article 537, still, of the same CSC. It further alleges that, according to article 22 of the CSC, in the absence of special provision or contrary agreement, partners participate in the profits and losses of the company in proportion to the values of their respective interests in the capital, and any clause excluding a partner from sharing in profits is void, as is any clause by which the division of profits or losses is left to the discretion of a third party.

In this context, the Claimant seeks to have recognized the error it itself may have assumed regarding distributed profits and advances on account of profits, alleging that in acquiescing to the conclusions of the inspection, it proceeded to the declarations that served as the basis for Personal Income Tax assessments blindly, and did not take into account that part of the profits in question were exempt from taxation because they were due to partner C... and not to partner B.... In fact, the Claimant alleges, partner C... benefits from a Corporate Income Tax (IRC) exemption, since it meets the requirements of the participation exemption regime (article 51 of the Corporate Income Tax Code - CIRC).

It acknowledges that "there were indeed transfers to the partners which, in the absence of justifying documentation, fell (in the AT's understanding) within the category of advances on account of profits. The amounts involved were: €278,938.14 in 2013; €196,531.22 in 2014 and €26,261.93 in 2015. The claimant proceeded on 06.04.2017 to submit the withholding tax declarations for those years (2013, 2014 and 2015) blindly and indiscriminately. Thus it applied the standard rate of 28% to the above-mentioned amounts. However, while it is true that in the case of partner B..., withholding tax on Personal Income Tax is due at the standard rate of 28% (article 71, no. 1, paragraph c) of the Personal Income Tax Code - CIRS), the same does not apply in the case of partner C..., (SGPS), LDA, since, being the payment made considered as an advance on account of profits (capital income), this company is covered by the Corporate Income Tax exemption provided for in article 51 of the CIRC. Thus, the Claimant alleges that part of those amounts of advances, by force of commercial law, corresponded to profits due to company C... and, to that extent, were exempt from taxation in respect of Corporate Income Tax.

Thus, in summary, from the Claimant's point of view, excessive tax was paid in the amount of €74,632.53, requesting the annulment of the aforementioned assessments and the reimbursement of the amount of the excess, which it alleges was paid improperly.

C – THE RESPONDENT'S RESPONSE

In its response, submitted to the file on 27-06-2018, the Respondent came to argue for the legality of the impugned acts, in accordance with and on the grounds which are hereby considered fully reproduced. It considers there to be no error whatsoever and concludes that the arbitral request is unfounded.

II - PROCEDURAL REQUIREMENTS

The Arbitral Court is regularly constituted. The Parties have legal capacity and standing, are legitimate and are legally represented (cf. articles 4 and 10 no. 2 of the RJAT and article 1 of Ordinance no. 112/2011, of 22 March).

The proceedings do not suffer from defects that would invalidate it, so all procedural requirements are met for the arbitral court to hear the request.

Taking into account the documentary evidence attached to the file and the arguments of the parties, it is necessary to establish the facts relevant to the decision.

III – DECISION ON FACTUAL MATTERS

Proven Facts

1. As relevant factual matters, this court finds the following facts to be established:

• The Claimant is a commercial company limited by shares with the name A..., Lda. and has share capital of €249,398.95. [cf. RI 6th: doc. 5 and PA, pp. 21-27];

• The partners of the claimant are B..., holder of three shares with a nominal value of €49,879.79 each and the commercial company limited by shares "C..., (SGPS), Lda.", holder of two shares, one with a nominal value of €89,783.62 and another with a nominal value of €9,975.96. [cf. RI, 6th: doc. 5 and PA, pp. 21-27];

• Withdrawals of funds by its partner B... occurred during the years 2013, 2014 and 2015. [cf. RI, 1st and 3rd R-AT].

• Furthermore, there were transfers to partner B... and the amounts involved were €278,938.14 in 2013, €196,531.22 in 2014 and €26,261.93 in 2015 [cf. RI, 12th and 13th: PA, pp. 59].

• Under Service Orders (OI) nos. 2016.../.../... and 2017... the Tax Inspection Services detected that, in the accounting records of the Claimant, there had been revealed, through third-party accounts in the name of managing partner B..., various movements of inflows and outflows of financial resources. [cf. R-AT, 3rd: PA, pp. 56-60].

• The Claimant revealed in its accounting, through third-party accounts in the name of managing partner "B...", various movements of inflows and outflows of financial resources and during the year 2013, various financial movements were recorded in the account "278812011 –B...-Cash Management" and at the end of 2013 this account showed a balance of €278,938.14, which balance was transferred to the account "26822 -B...", with the latter recording a debit balance of €1,113,204.00 [cf. R-AT, 3rd: PA, p. 45]

• In 2014 the recordings in the account "278812011 –B...-Cash Management" resulted in a debit balance of €196,531.22 at the end of that year, which amount was transferred to account 26822 – "B..." and with this movement the debit balance of this account became €1,309,735.22 [CF. R-AT, 3rd: PA, p. 45].

• In 2015 the recordings in the account "278812011 –B...-Cash Management" resulted in a debit balance of €26,261.93 at the end of that year, which amount was transferred to account 26822 – "B..." and with this movement the debit balance of this account became €1,335,997.15 [Cf. R-AT, 3rd: PA, pp. 45-46].

• On 08-03-2107 B..., made a formal statement in the course of the inspection action, in the capacity of managing partner of the Claimant, which is filed in the administrative file, at page 48 (pdf file numbering) and then, among other things, stated that he had received such amounts in that capacity and as advances on account of profits, as shown in the following statement made by him: "Thus, I acknowledge that in the years 2013, 2014 and 2015, I made withdrawals of money from the company "A..., Lda."; the following amounts are involved: - 2013: €278,938.14; - 2014: €196,531.22; - 2015: €26,261.93;

• In the final report of Service Orders OI no. 2016.../.../... and 201700627 the AT concluded, in accordance with that document and in particular as follows: [R-AT, 3rd: PA, pp. 41-46]

"Thus, it is found that C... has been practicing what no. 4 of article 6 of the CIRS presumes as allocation to partners of advances on account of profits, through the recording in current account of sums not resulting from the provision of work or the holding of corporate offices, which will thus be considered as income of category E of Personal Income Tax subject, in the financial years 2013, 2014 and 2015, to the standard rate of 28%, as determined by paragraph a) of no. 1 of article 71 of the CIRS." -

C... should have withheld the tax, in accordance with paragraph a) of no. 2 of article 101 of the CIRS, and paid it into the State treasury, by the 20th day of the month following that in which they were or should have been deducted, as determined by no. 3 of article 98 of the CIRS.

(...)

Thus, Personal Income Tax is outstanding, in the amounts and periods as per the following table, corresponding to the application of the Standard Rate of 28% on the amounts that at the end of each year remain in the account of partner 26822 – "B...", as determined by the above-mentioned normative provisions.

• The claimant acquiesced to the position of the AT and proceeded to submit the withholding tax declarations in respect of Personal Income Tax [Cf. RI, 3rd and PA, p. 33]

• The Claimant proceeded on 06-04-2017 to submit withholding tax declarations for the years 2013, 2014 and 2015 and applied the standard rate of 28% to the aforementioned amounts, resulting in the following documents [RI, 14th and 15th: PA, pp. 15-19]:

  • document no. ... relating to December 2013, in the amount of €78,102.68, corresponding to "Personal Income Tax – Capital – Other Income";

  • document no. ... relating to December 2014, in the amount of €55,028.74, corresponding to "Personal Income Tax – Capital – Other Income";

  • document no. ... relating to December 2015, in the amount of €7,353.34, corresponding to "Personal Income Tax – Other Capital Income subject to the rate [text truncated]";

• On 20-07-2017 the Claimant filed the gracious complaint to which case number ...2017... corresponded, relating to "withholding tax on Personal Income Tax contained in the returns" referred to in L) [Cf. RI, introductory part and R-AT, 4th: PA, p. 1].

• The Claimant based its gracious complaint on (i) the existence of "error in determining withholding tax, because partner C..., (SGPS), Lda. is "exempt from Corporate Income Tax since it meets the requirements of the participation exemption regime (article 51 of the CIRC)", and because the calculation of withholding taxes did not take into account that the amounts received were "gross profit" and not "net profit", concluding that for these reasons "the withholding tax declarations will necessarily have to be corrected". [introductory part of R.I.: PA, pp. 3-11, articles 13, 14 and 22].

• The gracious complaint filed by the Claimant was dismissed in accordance with and on the grounds set out in the decision, which was notified to it by official letter of 11-12-2017, documents which are contained in the PA, and in particular for the following reasons: [cf. R-AT, 4th: PA, pp. 56-60, especially pp. 59-60]

• The dismissal of the gracious complaint was further based, with respect to the argument of the existence of a difference between "gross profit and net profit", in the following terms: [cf. R-AT, 4th: PA, pp. 56-60, especially pp. 59-60]

UNPROVEN FACTS

1. There are no other facts relevant to the decision that should be considered as unproven.

GROUNDS FOR THE PROVEN FACTS

1. The court does not have to pronounce on all details of the factual matters alleged by the parties, with its duty being to select the facts that are relevant to the decision and to distinguish the matters it deems proven and declare those it considers unproven (cf. article 123, no. 2 of the Code of Tax Procedure and Litigation (CPPT) and article 607, no. 3 of the Code of Civil Procedure (CPC), applicable ex vi article 29, no. 1, paragraphs a) and e) of the RJAT).

Thus, the facts pertinent to the trial of the case are selected and shaped according to their legal relevance, which is established in light of the various solutions for the object of the dispute in applicable law (article 596, no. 1 of the CPC, applicable ex vi article 29, no. 1, paragraph e) of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of article 110, no. 7 of the CPPT, and the documentary evidence contained in the administrative file itself, the facts listed above were deemed proven, with relevance to the decision. Account is also taken of the doctrine contained in the Judgment of the Tax and Administrative Court of the South (TCA-Sul) of 26-06-2014, rendered in case 07148/13, regarding the evidentiary value of the tax inspection report, admitting that "it may have evidentiary force if the assertions contained therein are not challenged."

No purely conclusive allegations made by the parties were deemed proven or unproven, even if presented as facts, as they are incapable of proof, and their correctness can only be assessed in comparison with the grounds for the decision on the legal matters contained in the following chapter.

IV – DECISION ON LEGAL MATTERS

1. At issue in these proceedings is the question of whether, having the claimant accepted the conclusions of the inspection, conforming to the facts evidenced therein, assuming to be faced with advances to partner B..., not supported by documentation as a loan and having regularized the situation spontaneously, it can now invoke an error, based on the formal principle of profit distribution under commercial law. In essence, this is the question, given that the claimant, as well as its managing partner B..., on his own behalf and in the name of his represented company stated that all amounts corresponded to advances to partners on account of profits.

It must be decided.

1. First, from the considerations above, as a summary of the positions assumed by the parties in their respective pleadings, it is possible to determine that the essential legal issue to be decided requires an analysis of the legal regime governing the taxation of advances to partners of legal entities as distributed profits.

It should be noted that, in the initial request the taxpayer states that there was an error by the AT in calculating withholdings (see article 4 of the RI). However, on this point, it is hereby clarified that this is not the understanding this court draws from the content of the pleadings and the evidence collected in the file. In fact, it is found that, in this respect, the alleged "error" that led to the payment of excess tax is not attributable to the AT, but rather to the taxpayer itself, since there does not appear to have been any error in completing the data that originated the declarations, which are treated as "payment returns". What appears to exist is a disagreement in the application of the legal regime at hand, given that it is the AT's understanding that the withholding should apply to the amounts actually received by partner B... (in accordance with his own statement produced in the inspection proceedings and contained in the PA, as well as in accordance with the documents and records evidenced by the taxpayer's accounting), whereas from the taxpayer's point of view it understands that this is not the calculation that results from the law.

Given this, with relevance to the decision to be rendered by this arbitral court, it is important to note that it results from the factual matters established in these proceedings that, under Service Orders nos. 2016.../.../ and 2017..., the tax inspection services detected that, in the accounting records of the claimant, there had been revealed, "through third-party accounts in the name of managing partner B...", various movements of inflows and outflows of financial resources, recorded as: "VI.2.1. Advances on account of profits subject to standard rate. (emphasis added).

From what has been stated it results that the material truth evidenced by the very accounting records made by the taxpayer and by the statements made by the partner and manager B... shows us that all advances verified and mentioned by the tax inspection services (SIT) represent transfers in favor of partner B.... This partner, in turn, confirmed of his own free will that such amounts were received by him as advances on account of the profits made available to him. At no point does it appear that there were advances to another partner, in this case C..., as the claimant now alleges.

Given this, it is necessary to assess what results from the applicable legal regime regarding advances to partners, in the circumstances that result from the factual matters proven in the file. Paragraph h) of no. 2 of article 5 of the Personal Income Tax Code (CIRS) establishes that it is considered as capital income (category E of Personal Income Tax): profits of entities subject to Corporate Income Tax made available to their respective associates or holders, including advances on account of profits. As regards the qualification of the nature of these income there is no doubt, moreover, the parties acknowledge that these are capital income, that is, included in category E of income under the CIRS.

For its part, no. 4 of article 6 of the CIRS provides that: "entries in any current accounts of partners, recorded in commercial or civil companies in commercial form, when not resulting from loans, the provision of work or the holding of corporate offices, are presumed to be made as title to profits or advances on account of profits."

Now, C... over several years revealed in its accounting, through third-party accounts in the name of managing partner "B...", various movements of inflows and outflows of financial resources. As is well stated in the RIT, in the terms set out below:

"Until the end of 2012, the account "278812011 –B...-Cash Management" was used exclusively, which, at the end of that year, recorded a debit balance of €834,265.86. This amount was transferred in January 2013 to account "26822-B...". During the year 2013, the same procedure as in previous years was adopted, maintaining the recording of various financial movements in account "278812011 –B...-Cash Management". At the end of 2013 this account showed a balance of €278,938.14, which, in that period, was transferred from this account to account "26822 -B...", with the latter recording a debit balance of €1,113,204.00

In 2014 the various recordings in account "278812011 –B...-Cash Management" resulted in a debit balance of €196,531.22 at the end of that year, which amount was transferred, as per the practice of the previous year, to account 26822 – "B...". With this movement the debit balance of this account became €1,309,735.22.

In 2015 the various recordings in account "278812011 –B...-Cash Management" resulted in a debit balance of €26,261.93 at the end of that year, which amount was transferred, as per the practice of the previous year, to account 26822 – "B...". With this movement the debit balance of this account became €1,335,997.15.

When asked to justify the classification of these movements in the activity of C..., the managing partner Mr. B... immediately expressed his intention to clarify the situation, having for this purpose drawn up a "Formal Statement" on the eighth of March (see Annex 1), where he states that:

"I have been a managing partner of the company "A..., Lda" for more than thirty years and for some time, which I cannot specify, I have been making withdrawals of money from the company, as advances on account of profits, which had as their accounting counterpart a partner account. As a result of these withdrawals, the partner account reached, in 2015, the value of €1,335,997.15. However, such amount, as I mentioned above, results from an accumulation of withdrawals which, at the end of 2012, amounted to €834,265.86, as evidenced by the current accounts of that partner account, from the years 2011 and 2012, which I deliver at this time. Thus, I acknowledge that in the years 2013, 2014 and 2015, I made withdrawals of money from the company "A..., Lda." in the following amounts:

• 2013: €278,938.14; - 2014: €196,531.22 ; - 2015: €26,261.93

I further inform you that, given the legislation currently in force, which I was unaware of at the time of performing the acts and which I have now become aware of in the course of the inspection procedure underway, I will proceed to file the Personal Income Tax and the respective withholding tax declarations, to which such amounts are subject, by application of no. 4 of article 6 of the Personal Income Tax Code, corresponding to the withholding tax that should have been effected at the end of each of those years and which was not effected by us."

Thus, the content of the statements transcribed leaves no doubt as to the facts that occurred, the form and substance thereof, resulting from the content of the statements made by partner and manager B... a complete awareness of the tax implications arising from such a procedure. Therefore, the argument alleged by the claimant that the submission of the statements by the partner in question were made "blindly" does not hold. On the contrary, it stands out the full awareness of the facts practiced and their implications.

From the factual matters established in these proceedings it is found that C... has been practicing what no. 4 of article 6 of the CIRS presumes as allocation to partners of advances on account of profits, through recording in current account of sums not resulting from the provision of work or the holding of corporate offices, whereby such amounts are considered as income of category E of Personal Income Tax, subject to the standard rate of 28%, as determined by paragraph a) of no. 1 of article 71 of the CIRS, in the version in force in the financial years 2013, 2014 and 2015.

Accordingly, C..., in processing said advances in favor of partner B..., should have withheld the tax and paid that amount into the State treasury, by the 20th day of the month following that in which they were or should have been deducted, in accordance with the provisions of paragraph a) of no. 2 of article 101 and of no. 3 of article 98, both of the CIRS.

Now, for all that has been stated above, the claimant is not correct when it alleges that 40% of the value of the advances in question is income due to partner C..., a legal entity exempt from paying income tax by force of the provisions of article 51 of the CIRC. In fact, according to the rules in force in company law, as the claimant correctly alleges, all partners should benefit from the distribution of profits, however this matter is irrelevant to the decision of this case. This is a matter that the partners must resolve at the level of partnership relations existing between them, but with no relevance at the tax level of the issue being discussed here. At this level what is demonstrated is that the amounts in question were actually made available to partner B..., who confirms and has assumed this, as results from the factual matters proven.

As indeed results from the analysis of the current account statements attached to the "Formal Statement" filed in the PA, only the increases recorded in the partner's accounts in the years 2013, 2014 and 2015 were considered, insofar as the balance carried forward from 2012, in the amount of €834,265.86, relates to a period in which, under article 45 of the General Tax Law (LGT), the right to tax assessment had already been time-barred. Thus it is not apparent what error is attributable to the AT.

In this manner, the outstanding Personal Income Tax was regularized, in the amounts and periods covered by the inspection, corresponding to the application of the Standard Rate of 28% on the amounts that at the end of each year were confirmed to have been recorded in partner account 26822 – "B...", as determined by the above-mentioned normative provisions.

Accordingly, the arguments raised by the Claimant do not hold, namely the allegation that: "The partners of the claimant are B..., holder of 3 partner shares with a nominal value of €49,879.79 each (which correspond to 60% of the share capital) and the commercial company limited by shares C... (SGPS), SA, holder of 2 partner shares, one with a nominal value of €89,783.62 and another of €9,975.96 (holding 40% of the share capital)." because one cannot from this extract that in the years 2013, 2014 and 2015 withdrawals of funds by its partners occurred in the form of advances on account of profits, constituting capital income. For, as we have seen, all amounts in question were actually advanced only and solely to partner B...; From the evidence produced in the file it does not result that any amounts were advanced to the legal entity, partner C....

The Claimant's allegation seeks to prevail the idea that the taxation of said advances should have been effected, not in accordance with the distribution of profits actually operated in favor of partner B..., but rather in accordance with what should have occurred, had the rules set forth in the CSC for profit distribution been complied with. Now, such an argument is totally inconsistent with reality and would constitute a violation of the principle of material truth. In fact, partner C... (SGPS), LDA, is covered by the Corporate Income Tax exemption, since it meets the requirements of the participation exemption regime (article 51 of the CIRC), however this circumstance cannot be used for the purpose sought by the Claimant, because, as results from the evidence collected in these proceedings, all amounts were, likewise, advanced only to one of the partners of C..., namely B...; To adopt any other understanding would allow this partner not to be taxed on said advances it received (or part thereof) by benefiting from the exception provided in the law for the legal entity, without fulfilling a prior requirement: the actual advance of those amounts to partner C... SA. We would thus be condoning a violation of law.

Accordingly, the claimant's argument that "withholding tax is only due on amounts made available to partner B..., in proportion to its share, with partner C... being exempt" does not hold.

In other words, what is being discussed in these proceedings is only the taxation of amounts made available to managing partner B... and not the taxation of company C.... Considering the transfers as advances on account of profits, as the Claimant alleges in articles 12 and 15 of the arbitral request, it follows that the same are subject to withholding tax on the amounts made available to this partner, whose accounts were admittedly and provably moved, in contrast to what occurred with partner C... SGPS.

And it cannot be said, as the Claimant now argues that, despite the statements of partner B... to the effect that he "made withdrawals of money from the company "A..., Lda", in the amounts already indicated, this simply means that "he did so in his own name (partner holding 60% of the share capital of the claimant) and also in the name and on behalf of partner C... (partner holding 40% of the share capital of the claimant), as would have to be under the terms of the law"

Now, such an argument falls before the complete absence of evidence as to the existence of any movement of amounts on behalf of both partners, and in face of the evidence of advances made in favor of one sole partner: B.... Therefore, for the decision of the case at hand, the Corporate Income Tax exemption regime, under article 51 of the CIRC, in which company C... SGPS was situated is totally irrelevant. The amounts in question in these proceedings relate solely to partner B..., with no place for any recalculation in proportion to the 60% share held by this partner.

Thus, as can be assessed from the aforementioned table, the account relating to "C...SGPS" has an unchanged balance since 2012. As for the account of partner "B...", this has initial movement in 2013, but part of that movement derives from account "278812011-B... -Cash Management" from which was transferred, in January 2013, the balance of €834,265.86 shown in the 2012 balance sheet, integrating that account 278812011. It was precisely the amounts contained in this line item of the partner accounts that were at the origin of the present inspection procedure, which result from an accumulation of withdrawals which, at the end of 2012, amounted to €834,265.86, as evidenced by the current accounts of that partner account, from the years 2011 and 2012. The managing partner himself conformed and acknowledged having received those advances, therefore the argument raised regarding the formal participation of each partner in the company's share capital and their respective right to share in profits does not hold, when the partner himself stated in the first person that, in the years 2013, 2014 and 2015, he made "withdrawals of money from the company "A..., Lda." in the following amounts: - 2013: €278,938.14 ; - 2014: €196,531.22 ; - 2015: €26,261.93»

Finally, the Claimant further alleges that, for the purposes of applying the standard rate of 28% "account must be taken of the "net" profit advanced and not the "gross" profit advanced, since the "(...) partner received in excess (the tax) in the absence of withholding tax (on the tax), a situation that will have to be restored to the company, via the right of recourse that assists him."

Now, this argument is also not correct. First, because, as results from the provisions of no. 4 of article 6 of the CIRS, it is presumed as allocation to partners of advances on account of profits: "Entries in their favor, in any current accounts of partners, recorded in commercial or civil companies in commercial form, when not resulting from loans, the provision of work or the holding of corporate offices (...)" which will thus be considered as capital income (category E) and subject to withholding tax at the standard rate in effect as of the date of the facts, namely 28% as determined by paragraph a) of article 71 of the CIRS."

Now, the amounts entered in the current accounts of partners are those designated by the Claimant as gross profit advanced, namely the amounts of €278,938.14, €196,531.22 and €26,261.93, as results from the law, therefore on this point also it is not apparent that the Claimant is correct.

The jurisprudence of our superior courts has recognized that "article 6, no. 4, of the CIRS, enshrines a presumption regarding capital income, that sums recorded in any accounts of partners of commercial or civil companies in commercial form, sums which do not result from loans, the provision of work or the holding of corporate offices, are presumed to be made as profits or advances on account of profits. With this presumption the legislator wished to resolve the qualification of sums recorded in partner current accounts, whose "legal basis" has not been expressly declared, thus leading to such amounts having the treatment of distributed profits. We are therefore faced with a legal presumption (established expressly and directly in the law), being incident on the tax event." – Cf. in this sense the Judgment TCA-S – Case no. 08760/15, of 18-02-2016.

1. Being at issue the "lifting of a legal relative presumption (iuris tantum), the burden of proof to the contrary fell on the Claimant (cf. article 350, no. 2 of the Civil Code), that is, to develop evidentiary action aimed against the casually presumed fact, with the objective and so as to convince the court that, notwithstanding the occurrence of the fact (entries in current accounts of partners, recorded in commercial companies) which serves as the basis for the operation of the presumption invoked, the presumed fact did not occur and/or the presumed right does not exist. Furthermore, where it is the presumption provided for in article 6, no. 4, of the CIRS, it is by force of the provisions expressly stated in no. 5 of that same provision, the unavoidable necessity that it can only be lifted by the four means of proof explicitly provided for therein, court decision, administrative act, statement of the Bank of Portugal or recognition by the Tax Authority, enshrining the law specific procedural method for this purpose in article 64 of the Code of Tax Procedure and Litigation (CPPT)." – Cf. the judgment cited above.

Now, the Claimant did not demonstrate any facts capable of lifting the presumption resulting from article 6, no. 4 of the CIRS. Therefore, in view of the foregoing, it must be concluded that the request is unfounded, because the conduct of the respondent AT, expressed, in particular in the order dismissing the gracious complaint impugned in this arbitral request, was guided by the application of the law to the facts ascertained in the inspection and acknowledged as true by the managing partner B... himself, beneficiary of the advances that gave rise to the regularization of outstanding tax.

Thus, no illegality is apparent in the impugned tax assessment acts. Accordingly, the arbitral request must be dismissed and, as a result, knowledge of the request for default interest is barred, equally unfounded.

IV - DECISION

Accordingly, this collective arbitral court decides:

To dismiss entirely the arbitral request filed and, as a result, to uphold the dismissed order and the underlying tax assessments.

To condemn the Claimant to pay the costs of the proceedings.

VALUE OF THE PROCEEDINGS

The value of the proceedings is fixed at €74,632.53 in accordance with article 97-A, no. 1, a), of the CPPT, applicable by force of paragraphs a) and b) of no. 1 of article 29 of the RJAT and of no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

COSTS

The value of the arbitration fee is fixed at €2,448.00, in accordance with Table II of the Regulation of Costs in Tax Arbitration Proceedings, in accordance with articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 5 of the aforementioned Regulation, to be paid by the losing party.

Notify.

Lisbon, 21 December 2018

The Collective Arbitral Court,

(Maria Fernanda dos Santos Maças - President)

Arbitrator Member

(Maria do Rosário Anjos)

Arbitrator Member

(Nuno Maldonado Sousa)