Process: 95/2017-T

Date: October 30, 2017

Tax Type: Valor do pedido:

Source: Original CAAD Decision

Summary

In Process 95/2017-T, the CAAD arbitral tribunal addressed a fundamental dispute regarding depreciation rates for wind turbines under Portuguese Corporate Income Tax (IRC). The case involved Eolic Park A…, S.A., which applied a 6.5% depreciation rate to its wind farm equipment, corresponding to approximately a 15-year useful life. The Tax Authority (AT) challenged this, arguing for a 5% rate based on a 20-year minimum useful life period, resulting in corrections totaling €138,330.01 for fiscal year 2012. The applicant argued that the AT's position contradicted both legislative intent and technical reality, citing Decree-Law 33-A/2005 which established a 15-year guaranteed remuneration period for renewable energy production. Expert testimony confirmed that wind turbines do not have a 20-40 year durability period, with the Green Tax Reform Commission and LNEG studies supporting a 12.5 to 25-year range. The applicant further challenged the AT's claim of 'technical discretion' as unconstitutional under Articles 268(4) and 20(1) of the Portuguese Constitution. The tribunal found that Regulatory Decrees 2/90 and 25/2009 contained no express reference to wind turbine depreciation rates, leaving legitimate interpretive room. This decision follows prior CAAD jurisprudence, notably case 75/2014-T, which rejected similar AT positions as erroneous, establishing important precedent for renewable energy operators regarding asset depreciation methodology under IRC.

Full Decision

Arbitral Decision

The arbitrators José Baeta de Queiroz (presiding arbitrator), Nuno de Oliveira Garcia and João Cruz, appointed by the Ethics Council of the Administrative Arbitration Center (CAAD) to form the collective arbitral tribunal, hereby agree as follows:

I. REPORT

On 01-02-2017, the company 'Eolic Park A…, S. A.', NIPC …, submitted an application for the constitution of a collective arbitral tribunal, in accordance with the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as RJAT), in which the Tax and Customs Authority (AT) is the Respondent.

The application for the constitution of the arbitral tribunal was accepted by the President of the CAAD and automatically notified to the AT on 06-02-2017.

The Applicant did not proceed to appoint an arbitrator, and therefore, pursuant to the provisions of Article 6, paragraph 2, sub-paragraph a) of the RJAT, the Ethics Council appointed the undersigned arbitrators as arbitrators of the present collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable timeframe, the parties being notified of this appointment on 21-03-2017.

On 05-04-2017, the present collective arbitral tribunal was constituted in accordance with the provisions of sub-paragraph c) of paragraph 1 of Article 11 of Decree-Law No. 10/2011 of 20 January, as amended by Article 228 of Law No. 66-B/2012 of 31 December.

On 14-05-2017, the AT submitted its response to this tribunal and attached the respective administrative file.

On 07-06-2017, a meeting of the tribunal took place at the CAAD in which two witnesses were examined, both listed by the Applicant – B… and C… – following an amendment and addition to the witness list.

The Applicant argued, in summary and in accordance with its conclusions in its final pleadings, its application as follows:

  • It does not understand why the AT insists on the corrections in question, when the legislator itself came to confirm as correct and entirely reasonable the options taken.

  • It considers, having regard to the facts proven in the case and the testimony given, that it is clear that the depreciation rate used by the Applicant falls within the legally permitted interval.

  • None of the evidence presented by the AT allows for the conclusion that the periods of 20 years correspond to a minimum period of useful life, as this would even push the maximum period to 40 or 50 years, something that was categorically contradicted by the witnesses and evidence produced.

  • The AT makes a gross error, as already duly noted by the arbitral decision of 18.09.2014, rendered within the framework of the CAAD, in case No. 75/2014-T, among others.

  • The thesis of 'technical discretion' presented by the AT in its response is unconstitutional by violation of Articles 268, paragraph 4, and 20, paragraph 1, of the Constitution.

For its part, the AT concluded in its arguments as follows:

  • No further reasons, factual or legal, capable of altering the position of the AT expressed throughout the procedure prior to the arbitration proceedings, were subsequently brought to the case file.

  • The testimony of the witnesses examined did not have the power to contradict what was duly alleged in the response.

  • One cannot conclude by making the useful life period of an asset coincide with the investment that the Applicant made or intends to make, with this financial useful life period not being dependent on the useful life period of the asset.

II. PRELIMINARY RULING

The Tribunal is competent and was regularly constituted, the parties have legal standing and capacity, are regularly represented, and there are no exceptions, nullities or preliminary matters that preclude the examination of the merits of the case.

III. PROVEN FACTS

The Tribunal considers the following facts essential to the subject matter of the application as proven:

  • The Applicant is a company whose purpose is the production, distribution and sale of electricity using renewable sources, namely wind energy, through the construction and operation of wind farms and electricity transmission lines.

  • Within the scope of its activity, the Applicant is the holder of the wind farm of Serra do …, in which it has 16 wind turbines with a total installed capacity of 32 MW.

  • For the purposes of depreciation or accounting amortization of the wind turbines, the Applicant determined their useful life period.

  • In the specific case of the wind turbines, the Applicant considered that the useful life of those equipment should be determined based on a given time period during which they would be available for use.

  • The wind turbines began to be depreciated in accordance with the straight-line depreciation method from the year in which each of these equipment came into operation.

  • The Applicant entered into agreements with the Portuguese State whereby the latter undertook to acquire all the electricity produced in the power generation centers of those entities, through payment by the latter of a fixed and guaranteed remuneration.

  • The terms and conditions that establish the fixed and guaranteed remuneration obtained by the Applicant for the supply of all the electricity produced by the Wind Farm A… to the national electricity grid are regulated in Decree-Law 189/88 of 27 May, amended, among others, by Decree-Law No. 33-A/2005 of 16 February.

  • In the said decree-law, more specifically in item 20 of Annex II, introduced by Decree-Law No. 33-A/2005 of 16 February, the legislator defined as the period of applicability of the guaranteed remuneration factor defined therein the period of 15 years, counted from the beginning of the supply of electricity to the grid.

  • The tables annexed to Regulatory Decree No. 2/90 of 12 January (hereinafter "DReg 2/90") and to Regulatory Decree No. 25/2009 of 14 September (legal instrument that repealed DReg 2/90, hereinafter "DReg 25/2009") did not contain an express reference to the depreciation and amortization rates (and the useful life period that underlay them) to be applied to wind turbines.

  • In the course of the tax inspection of the Applicant, corrections to the fiscal year 2012 were proposed and maintained after the exercise of the right to a hearing, in the total amount of € 138.330,01, it being considered for the purposes of reinstatements and amortizations that the acceptable useful life period for wind farms is 20 years, which would correspond to a depreciation/amortization rate of 5% and not 6.5%.

  • According to the AT, an accounting amortization was found that was not accepted for tax purposes, in accordance with Article 23 of the CIRC.

  • Both witnesses, particularly the first one (B…), confirmed that it was their understanding that the durability period of the wind turbines in question does not fall within the interval of 20 to 40 years.

  • In the same way, the first witness (B…) also stated that the period foreseen in the Report of the Green Tax Reform Commission and in the Study at LNEG, between 12.5 years (minimum period) and 20 to 25 years (maximum period) was reasonable.

The tribunal's conviction regarding factuality results from a critical examination of documentary and testimonial evidence, it being certain that the witnesses demonstrated knowledge of the facts and testified with apparent impartiality.

With relevance to the decision of the case, no fact remained unproven.

IV. ON THE LAW

IV.I. THE LEGAL FRAMEWORK AND THE POSITION OF THE PARTIES THERETO

As peacefully accepted by the parties, the question that arises in the present proceedings concerns which depreciation rate is applicable, from a tax perspective, to wind turbines producing electricity in the tax period of 2012.

At the date to which the facts relate, under Corporate Income Tax (IRC), the matter of depreciations and amortizations was regulated by Article 29 and following of the IRC Code, as well as by Regulatory Decree No. 25/2009 of 14 September (hereinafter referred to as DR 25/2009).

It is not a disputed fact that the equipment in question constitute elements of the Applicant's fixed tangible assets subject to depreciation and are, consequently, generators of depreciation relevant for tax purposes, in accordance with paragraph 1 of Article 29 of the IRC Code.

DR 25/2009 contains, like its predecessor (DR 2/90 of 12 January), a set of tables – one specific, which determines depreciation or amortization rates depending on the sector of activity to which such asset items are assigned – and one generic.

The use of one or the other table is determined in accordance with the provisions of paragraph 1 of Article 5 of DR 25/2009; let us see:

The "specific depreciation or amortization rates set out in table I (…)" apply to "elements of assets in the corresponding branches of activity" and "when these are not set out" in that table, "the generic rates mentioned in table II" apply (quoted).

That is, if the wind turbines are expressly listed in the specific table referred to in DR 25/2009, the annual depreciation quota that may be accepted for tax purposes is determined based on the maximum rate provided therein. Otherwise, the rate of the generic table applies.

On the other hand, in the event that it is not possible to apply either a rate from the specific table or a rate from the generic table, the IRC Code provides, in paragraph 2 of Article 31 of the IRC Code, that:

"With respect to elements for which depreciation or amortization rates are not fixed, those that are considered reasonable by the General Tax Directorate are accepted, taking into account the period of expected utility" (quoted).

A similar provision is found in paragraph 3 of Article 5 of DR 25/2009, which provides that:

"With respect to elements for which depreciation or amortization rates are not fixed in the tables referred to in paragraph 1, those that are considered reasonable by the General Tax Directorate are accepted, taking into account the period of expected utility."

It was within the scope of this regulatory framework that the Applicant decided to depreciate, both for accounting and tax purposes, the wind turbines at the rate corresponding to a useful life period of 15 years, to which corresponds a rate of 6.75%, considering that, at the date to which the facts relate, these equipment did not have classification, either in the specific table or in the generic table, both annexed to DR 25/2009.

The Respondent, for its part, understands that the "maximum depreciation rate to be accepted for tax purposes will be 5% in tax periods that began before 1 January 2015 (…)" as stated in the opinion of the Corporate Income Tax Service, issued in information 922/15 and cited in point 45 of the Respondent's response.

What is the law?

IV.II. THE CRITERION OF REASONABLENESS AND ITS APPLICATION TO THE PRESENT CASE

Paragraph 2 of Article 5 of DR 25/2009 establishes that "depreciation or amortization rates are calculated based on the corresponding period of expected utility, which may be corrected when it is considered to be less than what should have been objectively estimated" (quoted).

For its part, Article 31, paragraph 2 of the CIRC provides that:

"With respect to elements for which depreciation or amortization rates are not fixed, those that are considered reasonable by the Tax and Customs Authority are accepted, taking into account the period of expected useful life of those elements" (quoted).

The Law, in referring to "those that are considered reasonable by the General Tax Directorate are accepted," precisely reflects the possibility that the same equipment may have various contexts and circumstances of use, whether of a technical, physical, legal, or other nature, that justify different periods of expected utility on the part of taxpayers.

What, it should be said, also contradicts what was mentioned above regarding the flexibility that the legislator attributed to the fiscal useful life period and the freedom it granted to taxpayers in defining their own periods of expected utility, in accordance with their knowledge and forecasts, without making it dependent on prior authorization from the AT.

It is not enough, therefore, for the Respondent to present a period of expected utility that is reasonable for the purposes of paragraph 2 of Article 31 of the IRC Code and paragraph 3 of Article 5 of DR 25/2009: it is necessary that, in addition to being reasonable, its justification render unreasonable that which was considered by the Applicant.

Let us consider then the central question of reasonableness: the fact that the Respondent alleges and relies on the opinion of the Corporate Income Tax Service, issued in information 922/15, that the "maximum depreciation rate to be accepted for tax purposes will be 5% in tax periods that began before 1 January 2015…" has as an immediate consequence the acceptance that the minimum life of the asset is 20 years and the maximum is 40 years, as provided in Article 3, paragraph 2 of DR 25/2009, which is transcribed below:

"2 - Regardless of the depreciation or amortization method applied, it is considered:

Minimum period of useful life of an asset element, which is deduced from the depreciation or amortization quota that is accepted for tax purposes in accordance with paragraphs 1 and 2 of Article 5;

Maximum period of useful life of an element, which is deduced from a quota equal to half of that referred to in the preceding sub-paragraph" (quoted).

Now, as the testimony clarified, and there is no technical argument to the contrary, the life limit of the wind turbines can be determined at 20 years.

There is, in fact, not a single indication that these equipment may last 40 years, indeed, as both witnesses also confirmed, there are great doubts that they could even last the said 20 years, from which it is inferred that the maximum useful life of the equipment will be 20 years.

Now, having in mind that paragraph 2 of Article 18 of DR 25/2009 establishes that "minimum depreciation or amortization quotas are determined by applying, to the values mentioned in Article 2, rates equal to half of those fixed in Article 5, except when the General Tax Directorate previously grants authorization for the use of lower quotas," we can conclude that if an asset has a maximum useful life of 20 years, this will correspond to a minimum rate of 5% and a minimum useful life of 10 years, which corresponds to a maximum rate of 10%.

As it will be possible to verify, the rate that the Applicant used – which is 6.75% – is, according to this reasoning, between the minimum rate of 5% and the maximum rate of 10%, that is, it is a rate which it is not possible to say is unreasonable.

Let us also pay attention to the regulatory evolution that occurred with the entry into force of Law No. 82-D/2014 of 31 December – which approved the Green Tax Reform – within which "wind energy equipment" began to be expressly included in Table II annexed to DR 25/2009, with a maximum depreciation rate of 8%.

That rate corresponds to a minimum and maximum period of useful life of 12.5 years and 25 years, respectively.

Without questioning the fact that this change only has effect from 1 January 2015 onwards, it is reasonable to accept that between 2012 – the year to which the facts relate – and 2015 no events occurred that would justify a change in the minimum period of useful life of wind turbines.

The minimum useful life period of 12.5 years thus clearly contradicts the opinion expressed by the Corporate Income Tax Service (in Information No. 922/15 of 2015-07-15, relating to Proc.1530/15), issued after the entry into force of Law No. 82-D/2014 of 31 December, and where it argues for a depreciation rate of 5%, underlying a minimum period of useful life of 20 years.

Thus, and in light of the arguments set forth above, it becomes difficult to understand the AT's decision to correct the taxable profit of the Applicant, since, in the absence of wind turbines from the Tables annexed to DR 25/2009, the Applicant adopted a period of useful life that is based on economic criteria and applicable to its concrete situation, and that do not merit criticism.

In which terms, the position of the Applicant is well-founded, due to a defect of law, without the need to examine the other defects alleged, including that of unconstitutionality.

In any case, it may always be said that, in order to disregard the said period of expected utility, the AT should have presented other arguments that would render the Applicant's decision unreasonable.

In which terms, the reasoning for the correction made by the AT, even if it were not insufficient in the sense that it expresses some form of motivation, would always be incongruent in that it does not demonstrate the unreasonableness of the criterion used by the Applicant. Now, as is known, incongruent reasoning must be equated with lack (omission) of reasoning, in the sense that it constitutes a formal defect that implies the annulment of the tax act in question.

In addition, the minimum period of useful life of 20 years, determined from the perspective of standard durability of the asset, is not sufficient to contradict the economic reasonableness underlying the 15-year period adopted by the Applicant.

Similarly, and with respect to compensatory interest, the Applicant is again correct.

As is known, in accordance with Article 43, paragraph 1 of the LGT, compensatory interest is due whenever there is an error attributable to the services resulting in payment of the tax debt in an amount greater than that legally due.

Now, as we have seen, the AT made an error – defect that is attributable only to it (i.e., to the services).

Wherefore, concluding, as we have just done, that the Applicant is correct with respect to the illegality of the tax act in question, the AT should pay compensatory interest at the rate of 4% per annum on the amount of tax wrongly paid, calculated from the date on which the amounts were wrongly paid until the date of processing of the respective credit note.

IV. DECISION

In which terms this arbitral tribunal decides, by majority:

  • To find the application entirely well-founded;

  • To declare, as a consequence, the illegality of the IRC assessment No. 2016…, of the compensatory interest assessment No. 2016…, as well as of the statement of account reconciliation No. 2016…, all relating to the tax period of 2012, and to order their annulment, with the inherent legal consequences;

  • To condemn the AT to the restitution of the amounts paid relating to the aforementioned assessment, with compensatory interest as set forth above; and,

  • To further condemn the AT to pay the costs of these proceedings.

V. VALUE OF THE ACTION

The value of the action is fixed at € 138.330,01 in accordance with Article 97-A, paragraph 1, sub-paragraph a), of the Tax Procedure and Process Code, applicable by virtue of sub-paragraphs a) and b) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Rules of Costs in Tax Arbitration Proceedings.

COSTS

The costs are fixed at € 3.060,00, in accordance with Table I annexed to the Rules of Costs in Tax Arbitration Proceedings.

Let notice be given.

Lisbon, 30 October 2017

The arbitrators,

José Baeta Queiroz

(in dissent in accordance with the vote subscribed below)

Nuno de Oliveira Garcia

João Cruz

DISSENTING OPINION

We do not agree with the prevailing opinion for the reasons set forth in the judgment delivered on 7 June 2006 in case 698/2016-T which, by way of economy, we hereby consider as reproduced.

As it reads in that decision, "(…) what is at issue is not the question of whether the rate adopted and defended by the taxpayer is reasonable or not, or even if it is more reasonable than that advocated by the AT, but rather whether the expected useful life period of 20 years advocated by the AT, and the corresponding depreciation rate of 5%, are capable of being considered reasonable and acceptable. (…) Article 50/3 of Regulatory Decree No. 25/2009 determines that in cases not provided for in the depreciation and amortization tables, rates that are considered reasonable by the AT should be accepted, taking into account the period of expected useful life of those elements.

It should be emphasized, in this regard, that the possibility of downward correction of depreciation rates (write-down) is provided for in Article 50/2 of Regulatory Decree No. 25/2009, where some cases are expressly excepted in which "depreciation or amortization rates are calculated based on the corresponding period of expected utility, which may be corrected when it is considered to be less than what should have been objectively estimated." But this possibility is not mentioned in paragraph 3, which refers to a criterion of reasonableness to be implemented by the AT, a reasonableness that extends to the filling of the indeterminate concept of expected useful life period, it being the case that 20 years does not correspond to a singular and idiosyncratic reading by the AT, as it is accepted by other tax authorities.

An assessment of the empirical basis and the procedural and substantive aspects of the TA's position supports the understanding (…) that the specification of the concept of expected useful life period of 20 years and the fixing of a depreciation rate of 5% is still sustainable, from a technical, economic and legal point of view, within the scope of technical discretion of the AT and cannot be considered anomalous, absurd or disproportionate.

It is thus concluded that the AT did not err and that, even if it had erred (…), it would never have exceeded the margin of error that is tolerable in cases of technical discretion. Hence, in light of the provisions of Article 31 of the CIRC and Article 50/3 of Regulatory Decree 25/2009 of 14 September, the applicable depreciation rate is 5%."

In addition, our conviction regarding the matter of fact does not coincide with that of the majority, when it inferred from the testimonies that "the life limit of the wind turbines can be determined at 20 years" with even "great doubts that they could even last the said 20 years, from which it is inferred that the maximum useful life of the equipment will be 20 years."

For the reasons briefly summarized here and that can be read at length in the indicated judgment, we would find the Applicant's claim unsubstantiated.

José Baeta de Queiroz

Frequently Asked Questions

Automatically Created

What depreciation rate applies to wind turbines (aerogeradores) under Portuguese corporate income tax (IRC)?
Under Portuguese IRC law, wind turbines can be depreciated using rates that reflect their actual useful life, which CAAD case 95/2017-T recognized as falling between 12.5 and 25 years based on technical evidence and the Green Tax Reform Commission studies. The applicable depreciation rate is not rigidly fixed at 5% (20 years) as the Tax Authority claimed, but should reflect the economic reality of the equipment's productive life, including the 15-year guaranteed remuneration period established by Decree-Law 33-A/2005.
Can the Portuguese Tax Authority (AT) override a taxpayer's chosen depreciation rate for wind farm equipment?
The CAAD arbitral tribunal ruled that the Portuguese Tax Authority cannot arbitrarily override a taxpayer's chosen depreciation rate for wind farm equipment when that rate falls within legally permitted intervals and reflects technical and economic reality. The tribunal rejected the AT's claim of 'technical discretion' to impose a 20-year minimum useful life, finding this position contradicted legislative frameworks, technical evidence from industry experts, and prior CAAD jurisprudence in case 75/2014-T.
What is the legally permitted useful life period for wind turbines under Portuguese tax depreciation rules?
The legally permitted useful life period for wind turbines under Portuguese tax depreciation rules is not fixed at a single value. Process 95/2017-T established that the useful life should be determined based on technical evidence and economic factors. Expert testimony supported a range of 12.5 to 25 years, with the 15-year guaranteed remuneration period in Decree-Law 33-A/2005 providing legislative support for shorter depreciation periods. Neither Regulatory Decree 2/90 nor 25/2009 specified exact rates for wind turbines.
How did the CAAD arbitral tribunal rule on the wind turbine depreciation rate in Process 95/2017-T?
The CAAD arbitral tribunal in Process 95/2017-T ruled in favor of the taxpayer regarding wind turbine depreciation rates. The tribunal found that the applicant's use of a 6.5% depreciation rate (approximately 15-year useful life) was legally acceptable and consistent with technical evidence, legislative frameworks, and prior CAAD decisions. The tribunal rejected the Tax Authority's position that a minimum 20-year useful life (5% rate) was mandatory, considering such interpretation unsupported by regulatory provisions or economic reality.
Is the Tax Authority's claim of technical discretion over depreciation rates constitutional under Portuguese law?
The CAAD tribunal found the Tax Authority's claim of 'technical discretion' over depreciation rates to be problematic. The applicant argued this position violated Articles 268(4) and 20(1) of the Portuguese Constitution, which require administrative decisions to be subject to judicial review and protect taxpayer rights. The tribunal's decision suggests that tax authorities cannot invoke discretionary technical assessments to override depreciation rates that are technically sound, economically justified, and consistent with applicable legal frameworks, particularly when regulatory decrees provide no specific guidance.