A S.A. is 51% owned by B SA and 49% by C Corp. A S.A is active in development of energy efficiency projects. In 2015 A S.A took out loans from B and C at an annual interest rate of 3.22xEuribor 12 months, plus a spread of 14%. A S.A had also paid for services to related party D.
The tax authorities issued an assessment related to the interest rate on the loan and the service purportedly received and paid for.
A complaint was filed by A S.A. with the Administrative Tribunal (CAAD).
Judgement of the CAAD
The complaint of A S.A was dismissed and the assessment upheld.
Excerpts regarding the interest rate
“Now, regarding the first argument, it falls immediately by the base, since the Applicant has not proved that it had made any effort to finance itself with the bank and that this effort was unsuccessful. On the contrary, it seems to result from the request for arbitration award that the Claimant and its shareholders have immediately assumed that, given the financial situation that the country was still experiencing in 2014, any request for financing made by a newly created entity and without business expectations would be rejected outright by all banks.
For that reason, the Claimant did not prove, nor could it, that the interest it contracted with its shareholders was more favourable to it than what the banks would demand from it. In short, it cannot but be stated that, in view of this, the Defendant could not assume any other position than to investigate whether the shareholders of the Claimant had taken advantage of the socio-financial context of the country to contract a fixed spread of 14%.
…
As the Respondent summarized very well in its allegations (no. 58) That is, if an independent bank agreed to provide financing to the Claimant, of similar amount and term to the shareholder loans, remunerated at an annual nominal interest rate (TAN) calculated according to the monthly average of the 6-month Euribor rate of the previous month, plus a spread of 3 percentage points, then nothing justifies that the partners require from the company a remuneration for the shareholder loans that includes a spread of 14 percentage points.”
Excerpts regarding the services
“But it was not only the formal issue that justified the position of the AT and that leads this Court to agree with it. The absence of material evidence that the work had been performed is further compounded by the fact that, during the inspection, the AT found invoices (which the Claimant has registered in its accounts under account “62213 – Specialized work”), issued by the accounting firm “H…, Lda, as well as other “Specialized work”, for services related to the execution and management of the contracts, issued by suppliers B… and I…, which indicates that entities other than D… were involved in the provision of services. The management services for the … and of …, which were ongoing in 2017, and whose invoicing started that year, were performed by B… and I… and not by D… .
Thus, the association of all the facts necessarily leads to the non-deductibility of D…’s invoice, since it was up to the Claimant to prove that the work was performed by D… and it failed to do so.
As recently decided by the South Administrative Central Court in its ruling of 27 May 2021 in case no. 744/11.1BELRA (available at www.dgsi.pt) I- Invoices are not only relevant documents for the purpose of exercising the right to deduct, but also relevant for the purpose of exercising the AT’s control powers. II- There is no hierarchy between the various requirements imposed on invoices. III- The CJEU has held that the right to deduct is admissible even if some formal requirements are not met by invoices, provided that the material situation is demonstrated. IV- The failure to scrupulously comply with the formalities required in terms of issuing invoices may not compromise the exercise of the right of deduction, provided that the substantive requirements have been complied with and that the AT has all the elements to substantively characterise the transaction, it being understood that the burden of proof will rest with the taxable person. V- As no documentary evidence has been submitted containing a content that enables the gaps in the invoices to be overcome, the right to deduct is not admissible.
Therefore, as the Claimant has not complied with the provisions of nos. 3 and 4 of article 23 of the CIRC, by virtue of paragraph c) of no. 1 of article 23-A, the invoice for the provision of services in the amount of €30,000.00, which determines the correction of the taxable income in that amount, cannot be deductible.”
“Based on these grounds, the Court decides to consider the request made by the Claimant as totally unfounded”
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CAAD - Jurisprudência 23 March 2022