Process: 95/2014-T

Date: November 12, 2014

Tax Type: IRC

Source: Original CAAD Decision

Summary

Process 95/2014-T addressed whether autonomous taxation charges (tributações autónomas) under Article 88 of the IRC Code are deductible expenses for corporate income tax purposes. Company 'A' S.A., as parent of a fiscal group under the special regime for taxation of groups (RETGS), self-assessed IRC for fiscal year 2010 including €729,884.84 in autonomous taxation on vehicle expenses, travel allowances, and representation expenses. The company initially treated these charges as non-deductible (similar to IRC itself) but later filed an administrative appeal arguing they should be recognized as deductible tax expenses in computing taxable profit. The Tax Authority denied the appeal, contending that Article 45(1)(a) of the IRC Code, which lists non-deductible costs, should not be interpreted restrictively to exclude autonomous taxation. The company then sought CAAD arbitration, claiming €209,933.24 in overpaid IRC, municipal surtax, and state surtax resulting from non-deduction of autonomous taxation expenses. The central legal issue was whether autonomous taxation, despite being calculated at specific rates under Article 88, constitutes a deductible expense or whether it falls under the prohibition of Article 45(1)(a) as an IRC-related charge. The case involved interpretation of the functional relationship between autonomous taxation and IRC, examining whether autonomous taxation's instrumental role in IRC determination makes it non-deductible or whether its specific nature as a separate levy allows deductibility.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration

Case no. 95/2014 – T

Subject: Corporate Income Tax – Autonomous Taxation; non-deductibility.

The arbitrators, Judge José Poças Falcão (arbitrator-president), Dr. Jorge Carita and Dr. Ana Teixeira de Sousa (arbitrators-vogais), designated by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 10-4-2014, agree as follows:

I REPORT

"A", S.A., with registered office at Rua …, no. …, …, legal entity no. …, registered in the Commercial Registry Office of … under the same number ("A" or applicant), parent company of a group (the "A" Group) subject to the special regime for taxation of groups of companies provided for, since 2010 to present, in articles 69 et seq. of the Corporate Income Tax Code, falling within the scope of the local peripheral services of the Tax Office of … …,

came, under articles 2, no. 1, paragraph a), and 10, nos. 1 and 2, of Decree-Law no. 10/2011 of 20 January and articles 1 and 2 of Ordinance no. 112-A/2011 of 22 March, to request the constitution of an Arbitral Tribunal, seeking to have declared the partial illegality of the self-assessment of Corporate Income Tax (and consequently annulled), in the part corresponding to the amount of € 209,933.24 and recognition of the right to reimbursement of this amount and, furthermore, the right to compensatory interest for payment of tax improperly levied, counted from 31 May 2011.

It alleged, in essence and in summary:

a) Having proceeded the applicant, in its capacity as parent company of the said Fiscal Group "A", to the self-assessment of Corporate Income Tax and consequent municipal surtax regarding the fiscal year 2010 by means of presentation of the Model 22 declaration (Doc. no. 1), it now raises the illegality of that self-assessment act.

b) On 29 May 2013, the applicant filed an administrative appeal against the said self-assessment of Corporate Income Tax and consequent municipal surtax relating to the fiscal year 2010 (cf. copy of the front page of the administrative appeal attached hereto as Doc. no. 2).

c) On 11 December 2013, the applicant was notified, by means of Official Letter no. …, of 9 December 2013, of the decision denying the administrative appeal, by order issued on 8 December 2013 by the Honourable Head of the Division of Tax Management and Assistance of the Large Taxpayers Unit (cf. copy of the decision denying the administrative appeal, attached hereto as Doc. no. 3).

d) The act subject to the request for the Arbitral Tribunal's pronouncement is the denial of the administrative appeal above identified and, consequently (and in final or ultimate terms), the act of self-assessment of Corporate Income Tax and consequent surtax relating to the fiscal year 2010, in the portion corresponding to the non-recognition for tax purposes of the expenses with autonomous taxation of that same fiscal year (cf. Doc. no. 1).

e) The applicant intends to submit to the appreciation of the Arbitral Tribunal (i) the legality of this denial of the administrative appeal, insofar as it disregards the recognition of the illegality of that part of the self-assessment of Corporate Income Tax and consequent surtax relating to the fiscal year 2010 of Fiscal Group "A" and, furthermore, (ii) the legality of that part of the self-assessment of Corporate Income Tax and consequent surtax relating to this fiscal year 2010, the amount of which (as will be demonstrated hereinafter) amounts to € 209,933.24.

f) In the said self-assessment of Corporate Income Tax of fiscal year 2010, "A" also proceeded to the self-assessment of autonomous taxation provided for in article 88 of the Corporate Income Tax Code, in a total, in final terms of € 729,884.84 – cf. field 365, of table 10, of Doc. no. 1 – which correspond to (cf. table 11 of Doc. no. 1, and Doc. no. 4 attached hereto):

i) autonomous taxation on vehicle expenses, which generated the amount of € 594,004.70;

ii) autonomous taxation on travel allowances which generated the amount of € 95,125.35;

iii) autonomous taxation on representation expenses, which generated the amount of € 40,754.79.

g) Autonomous taxation of fiscal year 2010 which, like the Corporate Income Tax also self-assessed, are completely paid (cf. proof of payment attached hereto as Doc. no. 5).

h) However, "A" did not deduct, for purposes of determining the taxable profit of its fiscal group, the expense incurred with the said autonomous taxation, instead treating them as if they were Corporate Income Tax or municipal surtax (Doc. no. 6).

i) And should have deducted or, from another perspective, has legally the right to recognize the tax expenses with autonomous taxation in the computation of taxable profit for purposes of Corporate Income Tax (and the consequent surtax), hence this request for constitution of an Arbitral Tribunal which concerns the self-assessment of Corporate Income Tax (and consequent surtax) relating to fiscal year 2010.

j) In terms of quantification of the tax at issue here (tax impact resulting from the fact that the expense with autonomous taxation was not deducted in determining the Corporate Income Tax and the consequent Municipal Surtax) with respect to fiscal year 2010 of "A", we have the following values:

i. Corporate Income Tax resulting from the application of a base rate of 25%, in the amount of € 182,471.21 (€729,884.84 x 25%];

ii. consequent municipal surtax in the amount of € 9,793.64, according to calculations detailed in Doc. no. 7 attached hereto;

iii. consequent state surtax in the amount of € 17,668.39, according to calculations detailed in Doc. no. 7 attached above;

in a total of € 209,933.24.

After lengthy, learned and exhaustive legal and legislative framework, the applicant concludes:

k) From the foregoing, in summary, it follows that both the denial of the administrative appeal above better identified, and the self-assessment of Corporate Income Tax (including its surcharge "state surtax") and consequent municipal surtax relating to fiscal year 2010, suffer from a material vice of violation of law, and the partial illegality of this self-assessment must be declared (and consequently annulled), in the part corresponding to the amount of € 209,933.24 and be, consequently, recognized the right to reimbursement of this amount and, furthermore, the right to compensatory interest for payment of tax improperly levied, counted from 31 May 2011.

The applicant did not proceed with the nomination of an arbitrator, therefore, under article 6, no. 2, paragraph a), of the Arbitration Rules for Tax Proceedings, the signatories were designated by the President of the Deontological Council of the CAAD to integrate the present collective Arbitral Tribunal, having accepted in the terms legally provided for.

The parties were duly notified of such designation, and did not express the intention to refuse such designation, in the combined terms of article 11, no. 1, paragraphs a) and b) of the Arbitration Rules for Tax Proceedings and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provision in paragraph c) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20 January, in the version introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 10-4-2014, the process then following the remaining legal and regulatory procedures.

On 19-4-2014, the Tax and Customs Authority (AT) presented an answering brief to the request concluding that "(…) no interpretative aid supports a restrictive interpretation of article 45, no. 1, paragraph a) of the Corporate Income Tax Code, in the sense of excluding autonomous taxation therefrom; on the contrary, such would be contrary to the teleology of the rule since autonomous taxation has an instrumental role in determining Corporate Income Tax, does not have autonomy in functional terms (only in the form of calculation: tax base and rate), and contradicts the very systematic coherence, proving incompatible with the provision in article 88, no. 14 of the Corporate Income Tax Code (…)and therefore, the request for compensatory interest formulated by the Applicant also fails summarily (…)".

Written final arguments were presented by both parties concluding these, in essence, in the manner they had done in their pleadings.

Sanation/procedural grounds

The arbitral tribunal was duly constituted and is materially competent, in light of the provision in articles 2, no. 1, paragraph a), and 30, no. 1, of the Arbitration Rules for Tax Proceedings, with the requirement for prior recourse to the administrative route being satisfied (cf. article 2, paragraph a), of Ordinance no. 112-A/2011, of 22 March and Docs. nos. 3 to 6, attached with the request for pronouncement).

The parties have legal personality and capacity and are legitimate (articles 4 and 10, no. 2, of the same diploma and article 1 of Ordinance no. 112-A/2011, of 22 March).

The process does not suffer from nullities.

There are no exceptions or other preliminary matters to be considered and decided.

II GROUNDS

Essential proven facts:

a) The applicant, in its capacity as parent company of Fiscal Group "A", proceeded to the self-assessment of Corporate Income Tax and consequent surtax regarding fiscal year 2010, by means of presentation of the Model 22 declaration, on 30-5-2011 (Doc. no. 1);

b) On 29 May 2013, the applicant filed an administrative appeal against the said self-assessment of Corporate Income Tax and consequent municipal surtax relating to fiscal year 2010 (cf. copy of the front page of the administrative appeal - Doc. no. 2).

c) On 11 December 2013, the applicant was notified, by means of Official Letter no. …, of 9 December 2013, of the decision denying the administrative appeal, by order issued on 8 December 2013 by the Honourable Head of the Division of Tax Management and Assistance of the Large Taxpayers Unit (cf. Doc. no. 3).

d) In the said self-assessment of Corporate Income Tax of fiscal year 2010, "A" also proceeded to the self-assessment of autonomous taxation provided for in article 88 of the Corporate Income Tax Code, in a total, in final terms of € 729,884.84 – cf. field 365, of table 10, of Doc. no. 1 – which correspond to (cf. table 11 of Doc. no. 1, and Doc. no. 4):

i) autonomous taxation on vehicle expenses, which generated the amount of € 594,004.70;

ii) autonomous taxation on travel allowances which generated the amount of € 95,125.35;

iii) autonomous taxation on representation expenses, which generated the amount of € 40,754.79.

e) Such autonomous taxation of fiscal year 2010, like the Corporate Income Tax also self-assessed, was completely paid (cf. proof of payment - Doc. no. 5).

f) The applicant did not deduct, for purposes of determining the taxable profit of its fiscal group, the expense incurred with the said autonomous taxation, instead treating them as if they were Corporate Income Tax or municipal surtax (Doc. no. 6).

g) In terms of quantification of the tax at issue here (tax impact resulting from the fact that the expense with autonomous taxation was not deducted in determining the Corporate Income Tax and the consequent Municipal Surtax) with respect to fiscal year 2010 of "A", the amount of € 209,933.24 is determined:

i. Corporate Income Tax resulting from the application of a base rate of 25%, in the amount of € 182,471.21 (€729,884.84 x 25%];

ii. consequent municipal surtax in the amount of € 9,793.64, according to calculations detailed in Doc. no. 7;

iii. consequent state surtax in the amount of € 17,668.39, according to calculations detailed in Doc. no. 7.

Essential unproven facts

From the case file or from official knowledge, there is no evidence of essential unproven facts for the determination of the issues to be decided.

Grounds for fixing the factual matter

The proven facts, in addition to being documented [without challenge of the respective documents], also result from the non-challenge by the Tax and Customs Authority of any of the alleged facts and also, and essentially, from the administrative investigation process (PA).

II GROUNDS (continued)

THE LAW

Issues to be decided

The act subject to the request for the Arbitral Tribunal's pronouncement is the denial of the administrative appeal above identified and, consequently (and in final or ultimate terms), the act of self-assessment of Corporate Income Tax and consequent surtax relating to fiscal year 2010, in the portion corresponding to the non-recognition for tax purposes of the expenses with autonomous taxation of that same fiscal year

The applicant considers, in essence, that the self-assessment acts suffer partially from a "material vice of violation of law" and formulates - in addition to the request for declaration of illegality of the denial of the hierarchical appeal - a request aimed at the declaration of (partial) illegality of that same self-assessment and its consequent annulment ["(…)have declared the illegality and annulled the denial of the administrative appeal insofar as it refused the annulment of the illegal part, on the terms discussed herein, of the self-assessment of Corporate Income Tax and consequent municipal surtax of fiscal year 2010 (…)"].

It results from the case file that the said self-assessment was presented/submitted on 30.05.2011 and was the subject of an administrative appeal which culminated in a denial order issued by the Honourable Head of the Division of Tax Management and Assistance of the Large Taxpayers Unit.

The issues to be decided will therefore be to know whether the applicant has the right to recognize, as expenses of the taxation period, for purposes of calculating its taxable profit in Corporate Income Tax, the expenses it incurred by way of autonomous taxation and, in case such right is recognized, whether the request for reimbursement with payment of compensatory interest is justified.

Let us see then.

I. General Considerations

It should be noted that, despite the remarkable and wise effort of the applicant, reasons are not found to reverse the almost unanimous jurisprudence of the Arbitral Tribunals constituted within the scope of the CAAD on this matter of deductibility or non-deductibility of autonomous taxation for purposes of Corporate Income Tax.

In fact, as has already been defended by the president of this Collective Tribunal in previous cases, the doubt concerning the deductibility of autonomous taxation within the scope of the previous version of the Corporate Income Tax Code arises as a consequence of the interpretative margin created by the combination of two norms: on one hand, the general principle of deductibility of expenses proven to be indispensable for the realization of income subject to tax or for the maintenance of the income-producing source, namely, those of a fiscal and parafiscal nature, which resulted from article 23, no. 1, paragraph f), of the Corporate Income Tax Code and, on the other hand, the rule of non-deductibility provided for in paragraph a) of no. 1 of article 45 of the same Code, whereby there were not deductible for purposes of determining taxable profit the Corporate Income Tax and any other taxes which directly or indirectly fall upon profits.

Concretely, doubts arose because the norm provided for in paragraph a) of no. 1 of article 45 of the Corporate Income Tax Code (with the wording in force in 2010) does not expressly mention autonomous taxation and because the general principle under Corporate Income Tax was and is that of deductibility of expenses indispensable for the realization of income subject to tax or for the maintenance of the income-producing source. Thus, in light of a general principle of deductibility of expenses and the absence of express reference to autonomous taxation, doubt arises as to whether the legislator intended to include them or not in the exception of non-deductibility provided for in paragraph a) of no. 1 of article 45.

The doubts that arose regarding the deductibility of autonomous taxation under Corporate Income Tax are, therefore, perfectly justified in light of the uncertainty created by the literal element of the norms stated and the very technical nature of the type of tax that is autonomous taxation, which, this Tribunal admits, does not have the typical characteristics of a tax such as Corporate Income Tax.

Thus, it will be necessary to deepen the analysis beyond its literal element.

Autonomous taxation was introduced into the Portuguese legal order through article 4 of Decree-Law no. 192/90, of 9 June, which provided for autonomous taxation, at a rate of 10%, of confidential or undocumented expenses.

Subsequently, autonomous taxation was included in the Corporate Income Tax Code, through Law no. 30-G/2000, of 29 December, which came to integrate the provision of autonomous taxation in the diploma that regulates Corporate Income Tax.

Since then the regime of autonomous taxation has been undergoing a process of progressive expansion, in part dictated by the apparent continuous intention to increase tax revenue by means of this mechanism.

Currently, there are several types of autonomous taxation that we find in article 88 of the Corporate Income Tax Code:

i) Autonomous taxation on undocumented expenses;

ii) Autonomous taxation on vehicle expenses;

iii) Autonomous taxation on representation expenses;

iv) Autonomous taxation on amounts paid or due, in any capacity, to natural or legal persons resident outside Portuguese territory and there subject to a clearly more favorable tax regime;

v) Autonomous taxation on expenses with travel allowances and with compensation for the relocation of workers in their own vehicle on behalf of the employer;

vi) Autonomous taxation on profits distributed by entities subject to Corporate Income Tax to taxpayers who benefit from total or partial exemption;

vii) Autonomous taxation on expenses or charges relating to indemnities or any compensation due not related to the achievement of productivity objectives previously defined in the contractual relationship, when the cessation of functions of manager, administrator or partner occurs, as well as on expenses relating to the portion exceeding the value of the remuneration that would be received for the exercise of those positions until the end of the contract, when it is a matter of early termination of a contract;

viii) Autonomous taxation on expenses or charges relating to bonuses and other variable remuneration paid to managers, administrators or partners.

II. Thema Decidendum

From the analysis of the list of matters referred to above we can draw two general conclusions:

(i) The first is that autonomous taxation falls upon both deductible expenses and non-deductible expenses;

(ii) The second is that autonomous taxation aims to prevent the erosion of the tax base under Corporate Income Tax, by imposing taxation on expenses that may be deducted by taxpayers subject to Corporate Income Tax, but which, when deducted, become an increase in taxation, thus intended to serve as a disincentive to such expense.

With respect to autonomous taxation on non-deductible expenses, if one admitted its deductibility, one would be admitting the deductibility of an expense not indispensable for the realization of income subject to tax or for the maintenance of the income-producing source.

Indeed, if the expense on which autonomous taxation falls is not, in itself, deductible, that is because (for the Corporate Income Tax system) it is not indispensable for the realization of income subject to tax or for the maintenance of the income-producing source.

Well, if that is the case, the autonomous taxation that falls upon it will also not be, and thus one would be admitting the deduction of an expense in flagrant disagreement with the general principle that expenses are only deductible under Corporate Income Tax if that indispensability for the realization of income subject to tax or for the maintenance of the income-producing source is inherent to them.

Thus, just as taxes falling upon facts unrelated to the realization of income subject to Corporate Income Tax are not deductible, so autonomous taxation that falls upon non-deductible expenses must, necessarily, be excluded from deduction under penalty of admitting an evident systematic contradiction in the Corporate Income Tax Code, which is unacceptable in light of the interpretative principles enshrined in article 9, no. 3, of the Civil Code (which the General Law of Taxation mandates be applied in accordance with no. 1 of its article 11), which determine that the interpreter must presume that the legislator "knew how to express his thinking in adequate terms" and "that he adopted the most correct solutions".

Therefore, with respect to this type of expenses, it is the Tribunal's understanding that, not being the same deductible, neither can the autonomous taxation that falls upon them be.

Having reached this point, it is now important to analyze the possible deductibility of autonomous taxation that falls upon deductible expenses. Will such taxation also be deductible?

Should one not immediately conclude that, being the expense deductible, the autonomous taxation should be deductible, it itself, as an expense incurred as a result of such expense, following the principle that the accessory follows the principal (accessorium principale sequitur)?

The Applicant argues that, given that autonomous taxation constitutes a tax that falls upon expense and not upon income, this taxation cannot be considered "Corporate Income Tax" for purposes of the exclusion of deductibility provided for in paragraph a) of no. 1 of article 45 of the Corporate Income Tax Code.

In assessing the matter at issue in the case, one must also take into account from the outset that the norm of article 45 of the Corporate Income Tax Code is situated in a context of broad legislative discretion.

That is, in defining what are deductible or non-deductible expenses for tax purposes, the tax legislator enjoys a wide discretionary power. Hence, one cannot say that it is forbidden to the legislator, by the "nature" of autonomous taxation (and, specifically, that which is characteristic of autonomous taxation arising from expenses deductible under Corporate Income Tax), whatever it may be, to exclude it from deductible expenses for purposes of the tax in question.

It is thus considered that it will be legitimate for the legislator to include or exclude autonomous taxation dealing with that category of deductible expenses for purposes of Corporate Income Tax, independently of the nature that doctrine or jurisprudence attribute to them.

The Tribunal understands that one thing is the type of taxable fact that underlies a particular imposition and another thing is the title on which such imposition is owed, ultimately, the cause of the tax obligation. And, in the case of autonomous taxation under Corporate Income Tax, that cause, the title on which the tax is exacted, will still be, and effectively, Corporate Income Tax.

One must consider, apart from everything else, that the legal regime of autonomous taxation in question in the case before us makes sense only in the context of taxation under Corporate Income Tax, or that is, detached from the legal regime of this tax, they would lack their principal referential meaning. Their existence, their purpose, their explanation, ultimately, their juridicity, is only properly understood and acceptable within the legal framework of Corporate Income Tax.

The autonomous taxation now under analysis, systematically belong to Corporate Income Tax, and not to VAT, to Personal Income Tax, or to any new tax.

For although it is accepted that the taxable impositive fact will be each of the singular legally typified expenses, the fact is that these are not, as such, the final object of taxation, the reality intended to be burdened by the tax.

That is, autonomous taxation of the type now at issue are strongly linked to the subjects of the income tax respectively, and, more specifically, to the economic and business activity conducted by them.

This aspect becomes even more evident, in that such autonomous taxation falls upon expenses deductible for purposes of Corporate Income Tax.

This circumstance, it is believed, is illustrative of the interconnection existing between them and Corporate Income Tax (in this case), and justifying not only their inclusion in the Corporate Income Tax Code, but, equally, their systematic integration in the legal regime of Corporate Income Tax.

In fact, not only the expenses incurred by taxpayers subject to Corporate Income Tax that are subject to autonomous taxation in such context, but such expenses will only be so if those taxpayers elect them as deductible expenses in determining the taxable subject matter of such tax.

The framework thus drawn is, it is considered, substantially different from what would be a tax that fell upon certain expenses, objectively considered, it appearing that the quality and the option of the taxpayer have here a relevance, if not greater, at least equal to the expense that triggers the tax imposition.

Furthermore, one could always say that if the taxpayer subject to Corporate Income Tax opts not to deduct from taxable profit for purposes of that tax the expenses corresponding to expenses subject to autonomous taxation, he will not have to bear it, which will be demonstrative of what was noted above, that is, that the cause of autonomous taxation will lie, still and ultimately, in the very regime of Corporate Income Tax.

In this framework - returning to the issue to be decided - determining what the legislator's intention is, expressed in the legislative text, understood in its entirety, that is, in the combination of the content of article 12 of the Corporate Income Tax Code with article 45, no. 1, paragraph a) of the same, will leave no great doubts as to the legislative understanding that autonomous taxation, if it does not constitute Corporate Income Tax strictly speaking, which the Tribunal admits, will always surely be integrated into that tax's regime, and will be owed on that basis.

It is thus considered that the legislative thinking, with a minimum of verbal correspondence in the letter of the law, although imperfectly expressed, was, at the date of the taxable fact in question in the case, in the sense that the amounts paid within the framework of autonomous taxation on expenses deductible by a taxpayer subject to Corporate Income Tax should not be considered a deductible expense for purposes of determining taxable profit subject to that tax.

The correspondence of such intention in the legislative text is quite apparent in the content of article 12 of the Corporate Income Tax Code, already in force at the date of the taxable fact, which comes to provide that:

"Entities and other entities to which, in accordance with article 6, the tax transparency regime is applicable are not taxed under Corporate Income Tax, except as to autonomous taxation." (underlining ours).

That is, in the perspective of the legal system, reflected in the respective text, autonomous taxation falls within the regime of, and is owed by virtue of, Corporate Income Tax, which is why in the aforesaid norm [article 12 of the Corporate Income Tax Code], the legislator expressly excepted its application. Hence, in parallel, if it were the legislator's intention to exclude autonomous taxation from the scope of paragraph a) of no. 1 of article 45 of the Corporate Income Tax Code, he would have said so expressly, since it would not make sense (it would not be reasonable) that in one norm of the Code (article 12) the legislator understood that taxation under Corporate Income Tax encompasses autonomous taxation and in another (article 45) understood the opposite.

On the other hand, and reinforcing these considerations, article 3 of Law no. 2/2014, of 16 January, approved in the context of the Corporate Income Tax Reform, came to add article 23-A of the Corporate Income Tax Code (which succeeded the former article 45) and to which, by what has been stated, should be given, in the matter at issue, an interpretative character, came to provide that:

"1 — The following expenses are not deductible for purposes of determining taxable profit, even when accounted as expenses of the taxation period:

a) Corporate Income Tax, including autonomous taxation, and any other taxes which directly or indirectly fall upon profits;"

(underlining ours).

This amendment came, as is understood, to clarify that, with respect to the periods to which the norm in question applies, expenses with autonomous taxation are not deductible for tax purposes, thus making express in the letter of the law something that this Tribunal understands already corresponded to one of the possible interpretations on this topic.

As Oliveira Ascensão states, in order for a law to be interpretative it is necessary that (1) there exists a doubt in doctrine and/or jurisprudence as to the meaning of the former law; (2) that the subsequent law comes to opt for one of the interpretations in dispute, and that (3) the subsequent law has as its purpose to interpret the old law, this purpose having to result unequivocally from its text (cf. Oliveira Ascensão, O Direito. Introdução e Teoria Geral, Almedina, 10th ed., 1999, 560-561).

Requirements which in the case sub iudice are met.

That is, the Tribunal understands that this clarification by the legislator has the nature of authentic interpretation, in that the legislator comes to adopt one of the possible interpretative meanings in light of the former norm (applicable to the case before us) by expressly excluding the deductibility of autonomous taxation and even equating the nature of this tax to Corporate Income Tax. And it opted for one of the possible meanings with the aim of clarifying a pre-existing doubtful situation.

The clarifying intent results from the very mandate conferred on the Commission for the Corporate Income Tax Reform to actively contribute to the reduction of areas susceptible to litigation, as this excerpt from the Report of the Commission for the Corporate Income Tax Reform shows us: "Although some improvement is noted, the recently available data on the state of the Judicial System in Portugal allows for the conclusion that the degree of conflict recorded remains unadjusted to the response capacity of the national judicial organization in tax matters. The Commission therefore deems it necessary to undertake an effort to reduce tax litigation through the introduction of legislative amendments on matters which, although they already merit a stable and solid jurisdictional framework, continue systematically to generate conflicts in the national tax courts.".

The Commission, supported by the legislator's will, thus came to clarify the very regime of deductibility of tax expenses, giving new wording to article 23-A of the Corporate Income Tax Code (which came to replace the former article 45 of the same Code).

It is true that the legislator chose not to inscribe in the diploma that he approved the regime currently in force an express declaration in the text or in the preamble of the diploma, saying that it was an interpretative norm.

But the fact that he did not do so does not directly lead to the understanding that the norm in question should not, for that reason, be given an interpretative character.

In fact, in the absence of an express declaration by the law itself, the interpretative character may still result "from the text, when it is flagrant the tacit reference of the new source to a pre-existing doubtful normative situation" (cf. Oliveira Ascensão, O Direito. Introdução e Teoria Geral, Almedina, 10th ed., 1999, p. 561).

Which manifestly is the case before us.

That is, in summary: from the consideration of the legislative text, statically and in its historical evolution, it results that the legislator understood, and continues to understand, that autonomous taxation falls within Corporate Income Tax, whether as strictly speaking a tax, or at least, in terms of being part of the same unitary tax regime, and should have the same treatment in terms of deductibility for purposes of calculating taxable profit.

In fact, the tax legislator has, in the recent past, altered the tax treatment related to autonomous taxation, without ever having altered the perspective of including it in income taxation.

In any case, as stated, from the perspective of the legislator, the autonomous taxation in question in the case before us will, effectively and unequivocally, fall within the regime of Corporate Income Tax, being owed on the basis of that tax.

And it is not the judge's role to alter on his own initiative the political and technical choice of the legislator in configuring this type of tax as Corporate Income Tax, even if he might not technically agree with the solution found by the legislator. This would constitute a corrective interpretation, knowingly forbidden by the imperative of obedience to the law.

All that has been said evidences that the evolution of the legal regime of Corporate Income Tax has transmuted it into a complex and multifaceted reality, at the most diverse levels.

By way of conclusion, and in favor of conceptual rigor, it will further be said that there is a leaning toward the understanding that autonomous taxation, as it currently exists, may be configured as a "hybrid" tax, falling more on certain types of expenses, and not on consumption or expense, generically considered, as it will not present the main characteristics of this form of taxation.

Considering, then, that autonomous taxation falling upon expenses deductible under Corporate Income Tax falls within the regime, and is owed by virtue of, that tax [and, as such, is covered by the provision of paragraph a) of no. 1 of article 45 of the Corporate Income Tax Code], the expenses with payment of that autonomous taxation will not constitute deductible expenses for purposes of determining taxable profit, and should, as a consequence of all that has been expended above, render the present arbitration action totally unfounded, with the request for compensatory interest being moot.

III DECISION

In accordance with what has been stated, the Arbitral Tribunal agrees to judge the request as totally unfounded and, as a consequence, to absolve the Tax and Customs Authority therefrom.

Value of the case

In accordance with the provision in article 306, nos. 1 and 2, of the Code of Civil Procedure, 97-A, no. 1, paragraph a), of the Code of Tax Procedure and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the case is valued at € 209,933.24.

Costs

In accordance with article 22, no. 4, of the Arbitration Rules for Tax Proceedings, the amount of costs is fixed at € 4,284.00 in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Let notice be given.

Lisbon, 12 November 2014

The Arbitrators

José Poças Falcão
(President)

Jorge Carita
(Vogal)

Ana Teixeira de Sousa
(Vogal)

Text prepared by computer, in accordance with no. 5 of article 131 of the Code of Civil Procedure, applicable by reference of paragraph e) of no. 1 of article 29 of Decree-Law no. 10/2011, of 20/01.

The writing of this decision is governed by the old orthography.

[1] All references to documents without other mention concern documents attached by the applicant with the presentation of its request for arbitral pronouncement.

[2] Follows closely and in part the arbitral decisions of the Tribunals constituted within the scope of the CAAD, delivered in cases nos. 210/2013-T and 187/2013-T, published in https://caad.org.pt/tributario/decisoes/

[3] Admitting in its arguments the possibility of qualification as Personal Income Tax, should it not be qualified as an expense.

Frequently Asked Questions

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Are autonomous taxation charges deductible as costs for IRC (corporate income tax) purposes?
No, autonomous taxation charges are generally not deductible as costs for IRC purposes. According to Article 45(1)(a) of the IRC Code, IRC itself and related charges are non-deductible expenses. The Tax Authority's position in Process 95/2014-T argues that autonomous taxation, despite being calculated separately under Article 88, has an instrumental role in determining IRC and lacks functional autonomy. Therefore, it falls within the scope of non-deductible expenses under Article 45(1)(a). The restrictive interpretation sought by taxpayers—that would exclude autonomous taxation from this prohibition—is not supported by the teleology of the legal provision, as autonomous taxation is functionally integrated into the IRC system.
What was the CAAD ruling in Process 95/2014-T on the non-deductibility of tributações autónomas?
In Process 95/2014-T, CAAD examined whether Company 'A' S.A. could deduct €729,884.84 in autonomous taxation expenses when computing its fiscal group's IRC for 2010. The company argued these should be recognized as deductible tax expenses, claiming €209,933.24 in overpaid IRC and surtaxes. The Tax Authority defended that Article 45(1)(a) of the IRC Code prohibits deduction of IRC and related charges, including autonomous taxation due to its instrumental role in IRC determination. While the excerpt does not show the final ruling, the case centered on whether autonomous taxation's specific calculation method under Article 88 grants it sufficient independence to escape the non-deductibility rule, or whether its functional connection to IRC makes it non-deductible.
Can a company file a gracious complaint (reclamação graciosa) against IRC self-assessment involving autonomous taxation?
Yes, a company can file a gracious complaint (reclamação graciosa) against IRC self-assessment involving autonomous taxation issues. In Process 95/2014-T, Company 'A' S.A. filed an administrative appeal on May 29, 2013, challenging its IRC self-assessment for fiscal year 2010 regarding the treatment of autonomous taxation expenses. The appeal was denied by the Head of the Division of Tax Management and Assistance of the Large Taxpayers Unit on December 8, 2013. After exhausting this administrative remedy, the company proceeded to request tax arbitration at CAAD under Articles 2(1)(a) and 10 of Decree-Law 10/2011. This demonstrates the procedural path available: first gracious complaint, then optional tax arbitration as an alternative to judicial courts.
How does the special taxation regime for groups of companies (RETGS) interact with autonomous taxation deductibility?
Under the special taxation regime for groups of companies (RETGS), governed by Articles 69 et seq. of the IRC Code, the parent company files consolidated IRC returns for the entire fiscal group. In Process 95/2014-T, Company 'A' S.A. operated as parent of a fiscal group subject to RETGS since 2010. The interaction with autonomous taxation deductibility is significant because the parent company must determine consolidated taxable profit for the group. The question arose whether autonomous taxation paid by the group (€729,884.84 for 2010) should reduce this consolidated taxable profit. The company argued for deductibility, which would lower the group's IRC base. However, the Tax Authority maintained that Article 45(1)(a)'s non-deductibility applies equally under RETGS, as autonomous taxation remains functionally linked to IRC regardless of individual or group taxation regime.
What are the legal grounds for requesting tax arbitration at CAAD to challenge IRC self-assessment?
The legal grounds for requesting tax arbitration at CAAD to challenge IRC self-assessment are established in Articles 2(1)(a) and 10 of Decree-Law 10/2011 of January 20, and Articles 1-2 of Ordinance 112-A/2011 of March 22. In Process 95/2014-T, Company 'A' invoked these provisions after its administrative appeal was denied. The arbitration request must specify: (1) the challenged act (here, the IRC self-assessment for 2010 and the denial of administrative appeal); (2) the legal violation alleged (violation of law regarding interpretation of Article 45(1)(a) IRC Code); (3) the requested relief (annulment of €209,933.24 in tax plus compensatory interest); and (4) prior exhaustion of administrative remedies when required. Tax arbitration provides an alternative to judicial courts for resolving tax disputes, with specialized arbitrators designated by CAAD's Deontological Council.