Tax Controversy 2024 Comparisons

Most tax controversies have their origin in a tax assessment, which may be made by the tax authorities (as is the case with personal income tax and with the tax on the acquisition of immovable property, based on information disclosed by taxpayers) or directly by taxpayers (as is generally the case with corporate income tax (CIT) and value-added tax (VAT)).

Tax controversies may arise for numerous reasons, although in most cases they arise because of an alleged illegality identified by the tax authorities during an administrative tax audit that leads to additional tax assessments.

Most tax controversies arise from CIT disputes, particularly regarding the non-recognition of certain costs for CIT purposes by the tax authorities. Nonetheless, there are some pending cases related to more cutting-edge topics, such as controlled foreign corporations (CFCs), transfer pricing and the general anti-avoidance rule (GAAR).

In addition, sectoral taxes (eg, on the banking, pharmaceuticals and energy industries) that generate very high assessments have been created in recent years, giving rise to a significant number of tax disputes.

Binding Rulings

Taxpayers may request binding rulings from the tax authorities regarding the application of law to certain facts. Through such binding rulings taxpayers may, for instance, request advance clearance of the tax and legal qualification of certain highly complex transactions.

At the request of the taxpayer, and where duly justified, the binding ruling may be provided urgently within 75 days, as long as the taxpayer presents a proposal for the tax treatment considered applicable. A fee ranging between EUR2,550 and EUR25,500 is payable by the taxpayer to the tax authorities in such cases. If the tax authorities recognise the urgency of the matter and the binding ruling is not issued within 75 days, it is deemed that they have agreed with the proposal of the tax treatment presented by the taxpayer.

Non-urgent binding rulings are free of charge and should be given within 150 days after the submission of the request. This deadline is considered merely indicative.

Advance Pricing Agreements

As the number of transfer pricing disputes has grown significantly in recent years, another way to mitigate tax controversies is to enter into an advance pricing agreement (APA) with the tax authorities. Such agreements may be unilateral, bilateral or multilateral.

APAs give legal certainty to taxpayers when conducting transactions with related entities (including parent companies, subsidiaries or associated companies, branches and other permanent establishments), provided that taxpayers comply with the terms and conditions of the APAs in question.

Portugal has put a number of measures to combat tax avoidance in place over the years, including:

• rules preventing the tax deductibility of payments to entities located in low-tax jurisdictions;
• interest barrier rules;
• CFC rules;
• exit tax rules; and
• a set of rules (the GAAR and its procedural provisions) that allow the tax authorities to recharacterise operations as purely fictional.

Anti-Tax Avoidance Directives

In May 2019 and July 2020, the Portuguese Parliament formally implemented the Anti-Tax Avoidance Directives I and II into Portuguese law.

Through this legislation, the Portuguese tax system adopts the common solutions defined in the context of the EU, in line with the conclusions of the final reports of the G20 and the OECD project on the erosion of the tax base and the artificial shifting of profits (BEPS) to ensure that co-ordinated measures are implemented to discourage tax avoidance practices more effectively; to ensure fair and effective taxation; and to protect tax systems, at a global level, against aggressive fiscal planning.

This legislation includes amendments to the CIT Code and to the GAAR and its procedural provisions, currently provided for in the General Tax Law and the Tax Procedure and Process Code.

In this context, however, Portugal has not yet transposed into domestic law Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union (commonly known as Pillar Two), an obligation that should have been fulfilled by the end of 2023. The non-transposition of the Directive has already led the European Commission to notify Portugal (along with eight other EU member states), within the scope of opening an offence procedure.

The taxpayer may challenge an additional tax assessment through an administrative, judicial or arbitration claim.

Tax disputes may involve both an administrative and a judicial or arbitration phase; they can start and finish as an administrative or a judicial or arbitration process, but they can also start as an administrative process that evolves into a judicial or arbitration one if the taxpayer is not satisfied with the final decision of the tax authorities.

None of these claims, by itself, suspends the foreclosure file. As a rule, the taxpayer must also pay the tax assessed or render a guarantee to suspend the foreclosure file while the claim is being heard. If the taxpayer is not successful with the administrative, judicial or arbitration award and it becomes res judicata, the foreclosure file is immediately activated and enforced.

In disputes related to additional tax assessments made by the tax authorities, the taxpayer will also be notified of an infraction procedure. Notwithstanding the possibility of immediately paying the administrative penalty or challenging the decision that determined the administrative penalty on its own merits, the law provides that this process may remain suspended until a final decision is reached in the tax dispute concerning the legality of the tax assessment. Usually, taxpayers opt for the latter alternative because the infraction file will be closed if they win the tax dispute.

Primarily, tax audits follow the general National Plan for tax and customs audits (PNAITA), which is approved every year by the government. The National Plan defines the programme of action, the criteria to be used and the taxpayers to be audited, and establishes the targets to be achieved by the different tax services.

However, other tax audits may also be initiated during the year, and the Plan should allocate specific human and material resources to tax audits not previously established. Although the National Plan is confidential, the tax and customs authorities must disclose the general criteria defined to select taxpayers and other entities that will be subject to a tax audit.

Tax audits may, therefore, be initiated following:

• the National Plan for tax and customs audits;
• European or international (eg, OECD) guidelines that tax authorities decide to enforce;
• the application of randomised methods for the selection of taxpayers;
• specific denunciations lodged before the tax authorities; or
• the verification of abnormal behaviour or parameters that do not follow from the ordinary patterns expected of a specific activity or wealth situation.

Heavily Audited Individuals and Companies

Specific taxpayers are permanently on the radar of the Portuguese tax authorities, particularly large companies and high net worth individuals (HNWI). Under the current regulations, these entities are accompanied by a special large taxpayers’ unit (LTU) that targets such entities if they meet the following criteria.

• HNWI – individuals with:
1. income above EUR750,000 in a specific year;
2. ownership, directly or indirectly, of wealth (including assets and rights) worth more than EUR5 million;
3. a lifestyle commensurate with the above-mentioned income or wealth and/or possession of the related accoutrements; or
4. a legal or economic relationship with HNWI or with companies or entities that are followed by the LTU.
• Large companies that:
1. are supervised by the Central Bank or the Insurance and Pensions Funds Authority (with the exception of those that carry out the activity of insurance distribution), or that are collective investment undertakings under the supervision of the Portuguese Securities Market Commission, or if they are entities with a turnover (or total income in the case of holding companies) exceeding EUR1.2 billion or EUR2.1 billion for entities belonging to a group of companies subject to the CbC report;
2. have an APA on transfer pricing matters in force;
3. have a total tax bill in excess of EUR20 million per year;
4. are considered relevant despite not meeting the above-mentioned criteria because of their relationship with entities that do meet the criteria; or
5. make up part of a tax group for CIT purposes and any of the companies in the group meet the above-mentioned criteria.

Strategic Plan to Combat Tax and Customs Fraud and Evasion

The government also prepares and releases a triennial Strategic Plan to Combat Tax and Customs Fraud and Evasion. The current plan concerns the period 2018–20, and was extended by an addendum for 2021–2022; it remained in force in 2023, despite not being formally extended for that year, and is still being applied in 2024, since the latest report states that approximately half of the foreseen measures are still to be adopted. An annual report is presented to Parliament, setting out the relevant actions that were put in place to achieve those goals and presenting statistics on different subjects under analysis.

As a rule, a tax audit may be initiated within the statute of limitations period, which in principle corresponds to a four-year period following the taxable event. If a criminal proceeding related to the tax audit is initiated within that period, the statute of limitations is extended and the tax authorities may make a tax assessment until the end of the year following the date on which that proceeding is closed, or a final decision becomes res judicata.

A tax audit that takes place in the taxpayer’s premises should usually be concluded in a six-month period but, in specific circumstances, that period may be extended for two additional periods of three months each. The tax audit suspends the statute of limitations period during those six months.

When a mistake that may trigger an additional tax assessment was evidenced in the tax return, the statute of limitations period decreases to three years. On the other hand, the statute of limitations period increases to 12 years when the tax authorities encounter difficulties in making additional tax assessments in the following instances:

• when the tax event that is not reported to the tax authorities in due time is connected with low-tax jurisdictions, as foreseen in the blacklist approved by the Minister of Finance; or
• when the tax event is connected with bank accounts (cash or securities) opened with a non-EU financial institution or branches located outside the EU and those accounts are not mentioned in the tax returns presented by the taxpayer.

Audits may occur at the tax authorities’ headquarters or at the taxpayer’s premises. The latter inspection is the so-called external audit and usually occurs in the taxpayer’s head office or other location where the accounting ledgers are maintained; all this information (eg, inventory, assets, VAT registers, any other types of records) is currently kept on computers, but physical documents on paper still exist (eg, invoices). The minutes of board meetings and general shareholders’ meetings are provided in physical books. The tax authorities may also ask to see any specific elements or documents, and may make special visits to the taxpayers’ offices – namely to verify if the records are duly updated and/or to see inventory, etc.

The tax authorities can only make one external audit related to the same tax or the same tax year of a specific taxpayer, unless a specific grounded decision is adopted by the head of the tax services, invoking new facts.

Under their rights and powers, the tax authorities may:

• ask for all types of elements and documents that reveal the taxpayer’s situation;
• proceed with a physical inventory, including the identification and evaluation of assets;
• analyse and test all computer data and electronic archives, to check compliance matters (eg, tax return compliance or tax payments), tax accounts, tax reporting and specific operations (eg, mergers, divisions) or specific matters such as transfer pricing, the tax consolidation rules of a group or specific payments abroad, particularly to low-tax jurisdictions;
• send specific questionnaires to taxpayers or obtain specific oral statements from them;
• obtain information from other taxpayers that relates to the specific taxpayer subject to the tax audit;
• collect information from other tax authorities under EU directives, bilateral tax treaties or any other international treaties or “arrangements”; and
• in addition to all financial documentation (including invoices, receipts, credit or debit notes and banking information), also ask to see reports prepared by the taxpayer’s accountants, auditors or lawyers, although confidentiality rules may apply and prevent them from being revealed in specific cases.

As a rule, the tax authorities should make their requests in writing and, if not made under an audit within the taxpayer’s premises, through a registered letter, allowing the taxpayer to obtain and prepare its answers. Thus, the rule is that the authorities give advance notice that they are initiating a tax audit at the taxpayer’s premises (with a minimum period of five days), to give the taxpayer time to reply to a specific questionnaire.

Taxpayers are often accompanied by their legal and tax advisers during tax inspections, and companies undergoing inspection should also appoint a representative to accompany the tax auditor within the company’s premises.

Tax audits can be general or specific. The former generally cover all types of taxes, although the most common audits only cover income taxes, VAT, real estate taxes or stamp duty. They may also be very specific, covering just one of these taxes or any other.

General tax audits are usually designed to verify the global position of a specific taxpayer, whereas specific tax audits are commonly launched to verify a particular aspect within a sector or activity (eg, to verify whether and how financial institutions are dealing with a specific stamp duty or VAT issue).

Usually, the tax authorities review the company’s accounts and review its financial accounting compliance and tax obligations. Depending on the type of tax audit (a general or a specific one), the tax authorities may ask to examine:

• samples of sale and purchase invoices to verify if they comply with VAT and CIT regulations;
• the information contained in different types of documents, reports and statements to verify if results are consistent;
• the transfer pricing documentation and the intra-group transactions, including the relationships between the company and associated companies and/or permanent establishments;
• formalities observed in specific operations (eg, neutral mergers, divisions, transfers of assets or exchanges of shares, or the transfer of a head office);
• transactions concluded with entities located in low-tax jurisdictions and, in particular, payments made to them;
• the consolidated tax return and the different returns presented by all the companies belonging to a specific group as well as the formalities that those companies are, or are not, observing;
• payments abroad and all matters related to the proper application of withholding taxes;
• intra-community VAT operations or VAT deductions, or financial operations made by financial institutions often subject to stamp duties; and
• customs matters (often related to the qualification of items).

Both formal requirements and substantive issues constitute top priorities for the tax authorities, and litigation often arises because the tax authorities consider that taxpayers have failed to observe formal requirements in order to benefit from a specific tax regime (eg, a neutral merger operation, the consolidation tax regime or a waiver of a withholding tax), or reach the conclusion that a specific operation or a sequence of operations cannot produce the tax result intended by the taxpayer, either considering a specific violation of a substantive tax rule or invoking a specific or the general anti-avoidance rule.

Cross-border exchanges of information and mutual assistance between tax authorities have been increasing over the years, although the numbers are not yet very significant in some areas.

The Portuguese tax authorities’ Report of Activities that was released in 2022, referring to 2021, evidences the following requests for mutual assistance (MA) in the areas of customs/excise.

• Customs – six Portuguese requests for MA from other states, and 98 where Portugal was a recipient of requests from other states (104 in total).
• Excise – four Portuguese requests for MA from other states, and two where Portugal was a recipient of requests from other states (six in total).
• Naples Convention II – 12 Portuguese requests for MA from other states, and 26 where Portugal was a recipient of requests from other states (95 in total).

This adds up to a total of 15 Portuguese requests for MA from other states, and 190 where Portugal was a recipient of requests from other states (205 in total).

In relation to co-operation between the Portuguese tax authorities and the EC – mainly the Directorate-General for Taxation and Customs Union (DG TAXUD) and the European Anti-Fraud Office (OLAF) – in 2021, the same report states that Portugal received a total of 1,700 forms of information of significant risks that required specific analysis and treatment, and 52 specific indications of fraud and serious irregularities detected by OLAF.

Cross-border exchanges of information in relation to income taxes in 2021 may be summarised as follows:

• requests – 415 received, 282 sent;
• spontaneous – 61 received, 74 sent; and
• automatic – 1,617,250 received, 3,599,965 sent.

In 2021, under VAT EU Regulation No 904/2010 concerning administrative co-operation and the fight against VAT fraud 1,223 files were initiated concerning the exchange of information, at the request of member states, through the Central Liaison Office, participation in the Eurofisc network and participation in Multilateral Controls. Of these, 537 files originated in requests from other tax authorities and 686 in requests made by the Portuguese tax authorities.

The exchange of information between the tax authorities of different member states and their mutual assistance is obviously influencing the growth of tax audits as well as the sophistication and level of information that the Portuguese tax authorities currently have in relation to taxpayers that do business abroad and/or have cross-border connections.

In general, it is important to take the following steps before and during a tax audit:

• prepare the right documentation to release to the tax inspector and be able to explain it, including all the relevant facts related to that documentation;
• know beforehand the legal and formal requirements that the tax authorities and the taxpayer should observe during the tax audit in relation to all relevant aspects (scope, duration, timetables, obligation to provide documents, how to reply to questionnaires, how and when to require deadline extensions, etc);
• evaluate the tax contingencies at an early stage and verify whether it is better to regularise the situation immediately (without penalties or with lower penalties) or how it might be possible to mitigate and reduce adverse tax and other consequences (eg, infringement or even criminal penalties);
• be assisted by a tax lawyer before the tax inspection is initiated and during its course;
• provide documentation and clarifications to the tax audit accurately; and
• decide what to say (or not to say) after receiving the tax audit draft, considering that, as a rule, the tax authorities will have the possibility to review it before issuing their final report.

In certain situations, an administrative claim is mandatory before initiating a judicial phase – namely, in situations of self-assessment, withholding taxes, payments on account of the final tax due or custom duties, when the claim is related to the origin, classification or customs value of the product.

However, in situations of additional tax assessment, the administrative claim phase is always optional.

The administrative claim should be presented in the local tax office of the area where the taxpayer is domiciled or where the tax assessment took place, or of the location of the assets; it can also be sent electronically through the tax authorities’ website. Although the administrative claim should be presented in the local tax office, it should be decided by the regional tax directorate (in Portugal, the tax authorities are made up of the central services, regional tax directorates and local tax offices). The deadline for the presentation of the claim is 120 days, counted from the first day following the termination of the deadline to pay the additional assessment, which should be around 30 days after the assessment is made. If the additional tax assessment does not give rise to an obligation to pay a certain amount of tax (for instance, the taxpayer had tax losses and the result of the additional tax assessment was a reduction of the available tax losses), the 120-day deadline to present the administrative claim should be counted from the notification of the assessment.

The procedure of the administrative claim, up to the final decision, is determined by law to be simple and without formalities. As a rule, no costs or fees are due to the administration in the administrative phase of tax litigation, but the proof is limited to the documentation made available, and the tax authorities will decide to hear witnesses in exceptional cases only. Moreover, this phase (as well as the eventual subsequent judicial phase) does not, by itself, suspend the enforcement and collection of the tax assessed, which means that to avoid the seizure of assets, the taxpayer should pay the assessment or present a guarantee to the tax authorities (the taxpayer can be released from this duty if they are able to demonstrate economic hardship or that the presentation of the guarantee will cause irreparable damage).

Finally, if the tax authorities intend to dismiss the administrative claim, they should notify the taxpayer, allowing them to react to the projected dismissal within a deadline of between 15 and 25 days. In their final decision, the tax authorities should take into consideration the reasons invoked by the taxpayer and the grounds on which they were rejected.

Notwithstanding specific deadlines that may apply to specific administrative procedures or claims, the main rule stipulates that any tax procedure (including, therefore, an administrative claim) shall be decided within four months.

If the tax authorities do not comply with this deadline, the taxpayer may presume that the claim was tacitly denied for the purposes of appealing against that tacit negative decision. The practical effect of this rule is to speed up litigation – ie, instead of waiting for a decision from the tax authorities, the taxpayer may presume that the appeal was dismissed at the end of the four-month period and appeal to the court against that tacit negative decision.

Taxpayers frequently use this rule in a strategic move because they try to convince tax authorities at the administrative level first, and because the deadlines to lodge administrative claims fall after the deadlines to go directly to court. Accordingly, it is relatively common to see taxpayers presenting an administrative claim and, at the end of the fourth month, appealing to a court assuming the tacit denial of the claim. Instead of going to court, taxpayers can also make a hierarchical appeal against the tacit negative decision and, on the express or tacit negative decision of the hierarchical appeal, subsequently go to court.

If the tax authorities manage to decide the appeal within said timeframe, taxpayers can also go to court against an express denial of the administrative appeal.

However, whilst the deadline to lodge a judicial claim is three months (90 days in the case of arbitration) after the notification of the denial of the administrative claim or after the tacit negative decision of such claim, the deadline to present the hierarchical appeal is 30 days from the same events. According to the law, hierarchical appeals should be decided within 60 days; however, this deadline is considered merely indicative and it is frequently not complied with. Taxpayers may consider that a tacit negative decision has occurred at the end of the 60-day term for the purpose of reacting against that negative decision.

Judicial tax litigation is initiated with the presentation of the claim in writing to the court of first instance. The claim may be sent by mail or by electronic means through the dedicated website of the tax (and administrative) courts. The claims can be presented directly by taxpayers, unless the value of the claim exceeds EUR10,000, in which case it is mandatory to appoint a lawyer registered with the Portuguese Bar Association.

The claim has to be presented in articles, identify the act contested, and expose the circumstances of fact and the law upon which the final request is based. The value of the claim shall also be indicated. Finally, the petitioners shall indicate their witnesses and other means of proof they wish to use and, in an annex to the claim, shall attach the documentary evidence at their disposal.

After the presentation of the claim, the court attributes a number to the case and the process is distributed to a judge, who notifies the tax authorities of the need to contest the claim within three months. The tax authorities are represented in court by a specific body called Representantes da Fazenda Pública, whose function is to represent the tax authorities in the thousands of files pending in the courts.

Although contestation is not mandatory, the tax authorities normally contest within the deadline, during which time they shall also gather the available information related to the process (the administrative file) and present it to the court.

If there is a partial revocation of the act, the tax authorities shall, within three days, notify the taxpayers to confirm, within ten days, if they want to continue with the judicial claim.

If the act is totally revoked, the tax authorities shall contact the person representing the tax authorities in court to promote the termination of the judicial claim.

After the tax authorities' response to the taxpayer’s petition, and if the litigation is related to a strictly legal matter, the judge may decide upon the claim immediately after it has passed through the Public Prosecutor in the court.

If witnesses shall be heard or other forms of proof shall be presented, such as inspections or expert hearings, the judge shall notify the parties of the relevant date to produce those forms. No more than three witnesses may be heard in relation to each fact, and the maximum number of witnesses allowed is ten. The hearing shall occur in court and the testimonials shall be duly recorded. If witnesses are resident in an area not covered by the territorial jurisdiction of the court, they may be present in the court of the area where they live and be heard and interrogated through videoconference. The claimant as well as the person representing the tax authorities may directly interrogate the witnesses.

Once the presentation of proof is terminated, the judge shall notify the parties to produce their final written allegations with a deadline of at least ten days, and no more than 30.

Finally, before the decision, the claim shall be presented to the Public Prosecutor in the court, who may pronounce on the matters under discussion. The Public Prosecutor’s opinion is not binding upon the judge.

In principle, the proof must be presented (in the case of documentation or witnesses) or requested (in the case of inspections or expert witness) immediately with the presentation of the claim in writing to the court of first instance. In exceptional cases it is possible to present or request such proof afterwards, mainly if it is demonstrable that it was not possible to present or request the proof earlier.

Although it is not stated as such in the law, there is a clear preference for documentary evidence in tax litigation as opposed to witness testimony or other types of proof. If there are no witnesses to be heard (and in a considerable number of cases there are not), the entire case from its beginning to its termination will occur without any personal contact between the parties and the judge, as all the contact is in writing.

If witnesses are to be heard and questioned by the judge and the parties, it is up to the judge to schedule a hearing after the tax authorities have presented their answer to the taxpayer’s petition. Both the taxpayer and the tax authorities can request the hearing of witnesses. Usually, in the tax authorities’ case, their witnesses will be their agents. Witnesses are questioned first by the judge and then by the party that has requested their hearing; they can subsequently be cross-examined by the other party.

The burden of proof rests with the party that invokes a certain fact to be proved. As a rule, the tax authorities invoke and should prove their claims in the audit report, therefore grounding the tax assessment, and it is for the taxpayer to challenge such views and refute those proofs in the administrative or judicial claim.

In criminal tax litigation, the burden of proof rests with the Public Prosecutor.

Evidence

From a strategic perspective, and considering the limitations established by the law of the process as well as the fundamental audi alteram partem principle, it is generally advisable for all the evidence to be presented or requested at the beginning, as well as all the legal arguments.

Settlement

Settlement through an agreement whereby both the taxpayer and the tax authorities would retract part of what they are claiming is not possible. Among other motives, this is due to the fact that the law clearly states that the tax authorities’ credit (ie, the amount of tax) is not at their disposal.

Paying Upfront

The option to pay or not pay the tax while the dispute is pending is mainly a financial issue that the taxpayer has to weigh. The company’s financial accounts will benefit if the tax is paid, but if it wins the case the company will, in principle, be entitled to interest, currently at the rate of 4% per year. Taking into account the interest rate offered by banks operating in Portugal, it can be quite advantageous from a financial perspective to opt to pay the tax and then receive back the tax paid with interest. If the taxpayer opts not to pay the tax, it will have to constitute a guarantee to the benefit of the tax authorities.

In considering this option, the taxpayer has to weigh the fact that the guarantee has costs – firstly, a tax cost related to stamp duty due on guarantees and then variable costs, depending on the type of guarantee chosen (eg, bank commissions or notary costs). Moreover, the taxpayer should also consider that interest will continue to be computed while the case is pending, and will be due if the taxpayer loses the case. On the other hand, it is possible to recover this cost if the taxpayer wins the case.

Finally, the taxpayer can also opt to pay the tax in instalments; depending on the amount due, this may oblige the presentation of a guarantee.

Expert Reports

The presentation of expert reports or professors’ opinions is also something to consider. Their use will depend on the type of case. If the file includes complex non-legal matters, expert reports may be relevant to help the judge to understand the situation. In the case of complex legal matters, opinions from scholars may also be worth considering. Although these reports and opinions are not binding on the judge, they are usually taken into consideration.

In litigation related to international tax matters, it is common for the courts to take into account relevant jurisprudence (mainly from the ECJ) and international guidelines (mainly the different versions of the commentaries to the OECD Model Tax Convention or to the OECD Transfer Pricing Guidelines).

There are two appellate courts, the Administrative Central Court (ACC) North and the ACC South, and one Administrative Supreme Court (ASC).

The ACC South is situated in Lisbon and essentially covers the southern area of the country, while the ACC North is situated in Porto and covers the northern area of the country. The ASC is also located in Lisbon, and covers the entire country.

Whoever loses the case at first instance – the taxpayer or the tax authorities, or both in the event that both parties lose part of the case – may take the case to an ACC in the event of a disagreement over the facts and the law decided at first instance, or to the ASC in the event of a disagreement exclusively based on matters of law.

The appeal is only precluded if the value of the case (in cases challenging tax assessments, the amount of tax in litigation) is lower than EUR5,000.

In exceptional cases, the taxpayer or the tax authorities may still lodge a second appeal to the ASC, against the decision of an ACC or the ASC, based on a contradiction of a previous judgment, or may go to the Constitutional Court in cases where a constitutional issue is at stake.

If there are uncertainties as to whether a tax assessment violates EU law, the final instance court shall file a request for a preliminary ruling to the Court of Justice of the European Union. In contrast to the final instance court, the courts of first instance are not obliged to file such a request and the occasions on which such courts have opted to request a preliminary ruling voluntarily are scarce.

The appeal is launched in the court of first instance within 30 days of a final decision, and shall include the appellant’s statements. If the appeal is admitted by the court of first instance (it is only precluded if the value of the case is lower than EUR5,000), the other party will then have 30 days to submit its response. The appeal then goes to an ACC or the ASC, where it will await a decision. Where the purpose of the appeal is to review recorded evidence, the above-mentioned deadlines are increased by ten days each.

The ACCs and the ASC each have one chamber for tax law appeals and actions, and another chamber that deals only with administrative law appeals and actions.

The decisions of the appellate courts are rendered by the majority decision of a panel of three judges. The judges are appointed by the court randomly. If there is no unanimity, the dissenting judge may publish their reasons for the dissenting vote.

Portugal adopted an arbitration regime to settle tax disputes as an ADR mechanism in 2011. Tax arbitration courts (TACs) were created to solve domestic tax disputes regardless of whether they involve domestic, EU or international tax law.

TACs must decide cases based on the written law, being expressly prohibited from resorting to equity. In a nutshell, TACs should decide tax cases based on the same legal framework available to judicial tax courts. According to this regime, the tax authorities are bound by arbitration decisions for almost all types of tax disputes with a value of up to EUR10 million.

Mediation has not yet been established, although there are several proposals to create a specific regime in some areas.

Moreover, at the international level and where tax disputes involve relationships between states, tax arbitration becomes the ultimate resort to settle those disputes.

Under the arbitration regime, disputes are settled by TACs that can be constituted by a single arbitrator (usually for controversies of low value – up to EUR60,000) or a panel of three arbitrators (cases up to EUR10 million).

The linchpin of the tax arbitration project was deciding how the judges would be chosen/appointed by the parties involved or by a third party. If the disputed amount exceeds EUR60,000, or if the taxpayer chooses to appoint an arbitrator, the arbitration court is formed of a panel of three arbiters. Otherwise, the case will be settled by way of a decision of a single arbiter. The majority of cases are decided by a single arbitrator appointed by the Ethics Committee of the Centre for Administrative Arbitration (CAA).

Cases are initiated by a specific request being filed electronically with the CAA, indicating whether the taxpayer intends to appoint a specific arbitrator. Cases must be settled in a period of six months following the creation of the TAC, which may be extended for a further six months.

TACs receive the written arguments of both parties (first taxpayers, usually contesting a tax assessment grounded in an audit report, and then the tax authorities) and analyse the merits of the claim and hear witnesses and eventually the parties or experts, and they decide in writing.

Under the arbitration system, it is not possible to reach an agreement to reduce the tax assessment, the interest due or the penalties that may eventually be applied. However, in an earlier phase (usually during the tax audit), it is possible to regularise situations to reduce the interest due and/or the penalties that may potentially apply.

Advance rulings with binding effect may be requested from the tax authorities; see also 1.3 Avoidance of Tax Controversies.

TACs

According to the current arbitration regime, cases may be submitted to TACs as follows.

• As a rule, TACs have the jurisdiction to decide on the legality or illegality of the most common tax acts or decisions.
• All cases with a value up to EUR10 million may be submitted.
• The TAC has a period of six months, eventually renewable by another six months, to provide its final decision.
• Usually, there is no possibility to appeal against a TAC decision. The absence of an appeal in respect of TAC decisions is one of the principal characteristics of the model, but there are a few exceptions that contribute to ensuring the harmonisation of court decisions and guaranteeing taxpayers' rights at the highest level:
1. an appeal to the ASC whenever the TAC decision conflicts with a previous decision issued by another TAC, the ACC or the ASC, provided the same fundamental point of law is at issue; or
2. an appeal to the Constitutional Court whenever the TAC’s decision denies the application of a provision based on it being unconstitutional, or applies a provision whose unconstitutionality was raised during the proceedings.
• TACs are formed by one or three arbitrators.
• The panel of three arbitrators may be chosen by the CAA; otherwise, each party chooses an arbitrator, and both choose the president.
• Although precedence is not a binding rule, a previous decision on a specific matter of law may prove to be extremely important.
• Decisions must be based strictly on law.

MLI

The OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) was signed on 17 June 2017 and ratified in November 2019, and Portugal deposited its instrument of ratification before the OECD on 28 February 2020. The MLI entered into force in Portugal on 1 June 2020.

Under one of the many optional clauses contained in the MLI, Portugal opted to apply the arbitration clause to settle international tax disputes; this option and the transposition of the EU Arbitration Directive (ie, Directive (EU) 2017/1852 of 10 October 2017) with the approval of Law 120/2019 of 19 September, which is even more relevant in practice, mean that arbitration is now allowed to settle this type of dispute as well.

In specific areas (eg, transfer pricing) or situations (eg, when the tax authorities calculate income through indirect methods), agreements between the parties (taxpayers and tax authorities) may be signed; see also 1.3 Avoidance of Tax Controversies.

Additional tax assessments typically result from internal or external tax audit procedures conducted by the Portuguese tax authorities. Within the context of such tax inspection procedures, the tax authorities not only evaluate whether the taxpayer has made a correct assessment of the tax paid and whether the taxpayer has paid the full amount of taxes due, but also ascertain if the mistakes eventually detected correspond to tax infringements/crimes.

Therefore, the tax inspection’s final report contains:

• an assessment regarding possible inaccuracies regarding the taxes paid and the taxes and interest due; and
• an assessment regarding any tax infringements that may derive from the mistakes/significant crimes committed by taxpayers.

In these circumstances and because both assessments are made at the same time, additional tax assessments and tax infringement processes typically begin “side by side”.

However, the tax authorities may initiate an administrative tax offence process independently of a tax inspection procedure whenever there is suspicion that an administrative tax offence has taken place, and regardless of the current status of the tax assessment. The same applies to the Public Prosecutor’s Office regarding tax crimes.

If an administrative tax offence is detected, the tax authorities are competent to initiate an administrative tax offence procedure on their own. In the event of a possible tax crime being detected, the tax authorities must inform the Public Prosecutor’s Office and pass on all the information gathered during the inspection procedure.

The administrative process in which the additional tax assessment is being challenged and the tax administrative offence or criminal process regarding the facts that gave rise to such additional tax assessment run in parallel. They are, therefore, independent from one another.

However, when an administrative process challenging the additional tax assessment is pending and the qualification of the facts under dispute as a tax infringement depends on the decision of that administrative process – which determines whether the additional tax assessment was legally issued and if the tax assessed is due – the tax infringement process (whether an administrative offence or a criminal one) must be suspended until a final decision on the administrative process is adopted and becomes res judicata.

As described in 7.1 Interaction of Tax Assessments With Tax Infringements, an administrative or criminal tax offence proceeding is initiated by the tax authorities if they become aware or suspect that an administrative tax offence or a tax crime may have taken place. This awareness commonly arises within the context of tax audit procedures.

The same facts may simultaneously support an indictment in an administrative tax offence proceeding and an indictment in a criminal proceeding. When this happens, the facts are prosecuted as a crime.

If, for some reason, the same facts have given rise to an administrative tax offence proceeding and a criminal one, the first one is extinguished as soon as the defendant is notified of the criminal indictment.

There are far more cases of administrative tax offences, considering that all types of mistakes originate in a file and usually the application of a fine (coima). However, tax criminal law has been aggravated in the last decade, and the tax and social security authorities are using criminal sanctions far more often than in the past.

Administrative Tax Offence Proceedings

These may be divided into two main stages: the administrative stage and the judicial stage. In the first stage, the tax authorities have broad powers to investigate and to issue a formal bill of indictment against the taxpayer, if it is concluded at the end of an investigation that there are sufficient grounds and evidence to indicate that a tax offence has been committed. The grounds that give rise to additional tax assessments are usually the ones used by the tax authorities to issue such a bill of indictment.

Subsequently, the defendant may present its defence before the tax authorities.

Thereafter, the tax authorities will issue their final decision. If a conviction is rendered at that moment, that decision may be judicially challenged by the defendant. Such judicial appeal marks the beginning of the judicial stage and has suspensive effect; therefore, the decision reached by the tax authorities at that point will neither become final nor be immediately enforceable.

The judicial decision rendered by the first instance court may still be appealed to the appellate courts if the first instance court confirms the conviction previously rendered by the tax authorities.

Only the decision rendered by that appellate court would, in principle, be final and fully enforceable, unless constitutional issues are involved and an extraordinary appeal (also with suspensive effect) is presented to the Constitutional Court.

The administrative and tax courts are competent to decide on tax administrative processes.

Criminal Tax Offence Proceedings

Criminal tax proceedings usually consist of four main stages:

• an investigation stage;
• a pre-trial stage (that may or may not occur);
• a trial stage; and
• an appeal (see 7.7 Appeals Against Criminal Tax Decisions).

Investigation stage

The investigation stage is conducted by the Public Prosecutor’s Office and has the purpose of gathering all the relevant information and evidence regarding the tax criminal offence allegedly committed. This stage typically ends with a decision of indictment or with a decision to close the investigation. Under certain circumstances, this stage may also give rise to a decision of provisional suspension of the tax criminal proceedings, where the defendants agree to comply with a number of injunctions for a period, after which time the investigation may be closed with no further action, or proceed, if the injunctions are not complied with.

Pre-trial stage

The pre-trial stage is not compulsory. It may take place if requested by the defendant, regarding facts based upon which the Public Prosecutor submitted a bill of indictment.

The pre-trial stage represents a number of preliminary judicial acts that the investigating judge intends to perform and must involve a preliminary hearing that is oral and adversarial in character, during which the Public Prosecutor, the defendant and their defence counsel may participate. It ends with a decision to arraign, with the case proceeding to the trial stage, or with a decision not to pursue the case, which brings an end to the proceedings.

Trial stage

At the trial stage, all evidence gathered by the Public Prosecutor’s Office and all evidence gathered by the defendants is brought to the first instance court to be discussed and analysed. This stage ends with the court issuing a decision, which is, in principle, appealable (see 7.7 Appeals Against Criminal Tax Decisions).

The criminal courts are competent to decide on criminal tax offences.

Portuguese law provides for some situations in which the taxpayers may benefit from fine waivers or reductions.

Taxpayers may benefit from a fine waiver if they have not been convicted by a final decision relating to an administrative tax offence or tax crime proceeding, nor benefited from exemption or payment of a reduced fine. The fine waiver automatically applies if it is not the non-payment of taxes that is being discussed, and if the taxpayer has, in the meantime, fulfilled the tax obligations that gave rise to the tax infraction.

If the fine is paid at the taxpayer’s request, they will benefit from a reduction of the fine, which can range from 12.5% to 50% of the minimum applicable fine, depending on the stage of the administrative tax offence proceedings.

If the defendant pays the fine before the administrative tax offence proceedings or tax inspection begins, the minimum applicable fine will always be imposed.

When the taxpayer pays the fine after one of those occurrences but before the deadline to be heard within a tax inspection, the penalty shall be reduced to 50% of the applicable fine.

The 50% reduced fine may also be applied at the request of the taxpayer before the deadline for presenting their defence within an administrative tax offence proceeding if they confess their responsibility for the infraction and regularise their tax situation.

Portuguese law does not allow a defendant to enter a plea bargain. Normally, plea bargains represent agreements between defendants and the Public Prosecutor’s Office whereby the defendant agrees to plead guilty and pays the tax assessed plus interest and penalties in exchange for a reduced sentence and avoiding trial.

There are no other procedures for the early resolution of criminal law offences before trial. However, if the criminal process refers to a crime for which criminal law allows no sentence, the Public Prosecutor’s Office may decide to close the case without further action (ie, no indictment and no trial) after consulting the tax authorities and with the agreement of the investigating judge.

The judicial decision rendered by the first instance court is generally appealable to an appellate court and has suspensive effect in the case of conviction; therefore, the decision reached by the first instance court at that point will neither become final nor be immediately enforceable.

In some exceptional cases, first instance court decisions are appealable to the Supreme Court.

To appeal against a criminal court decision, the defendant must submit a written application declaring their intention to file an appeal, together with a written appeal statement. The written application must be submitted to the first instance court, but it will be considered by the second instance court. The appeal must be submitted within 30 days after the notification of the decision issued by the first instance court.

If constitutional issues are involved, an extraordinary appeal (also with suspensive effect) may still be presented to the Constitutional Court.

As a rule, transactions and operations that have been challenged in Portugal under the GAAR, specific anti-avoidance rules (SAAR), transfer pricing rules or anti-avoidance rules give rise to administrative tax cases in the same terms as all other tax facts (see 7.1 Interaction of Tax Assessments With Tax Infringements); as far as is known, there have been no criminal cases involving these types of operations, but the possibility cannot be excluded if the facts were to show the existence of dolus with the evident intent of not paying the due taxes.

Therefore, in principle there are no particular procedures to address these matters.

However, the largest disputes involving such matters (in terms of the amounts involved, the number of defendants or their public notoriety) attract a great deal of media attention and public pressure to obtain convictions (which do not necessarily occur).

In situations of double taxation due to additional tax assessments or tax adjustments in cross-border situations, it is common to use domestic litigation, which does not mean that the mutual agreement procedure (MAP) is not used – either as an alternative to, or together with, judicial litigation. According to the OECD statistics, 87 cases related to Portugal started in 2022 and 40 were terminated in the same year, and a total of 175 cases were pending at the end of 2022.

With regard to cases concerning transfer pricing specifically, according to the same source, 28 cases started in 2022 and five were terminated in the same year, and a total of 88 cases were pending at the end of 2022.

The Arbitration Directive and the MLI

In September 2019, Portugal published Law No 120/2019, which implemented the EU Arbitration Directive and “lays down rules on a mechanism to resolve disputes between member states when those disputes arise from the interpretation and application of agreements and conventions that provide for the elimination of double taxation of income and, where applicable, capital. It also lays down the rights and obligations of the affected persons when such disputes arise”.

According to the European Commission statistics, ten cases related to Portugal started in 2020 and five were terminated in the same year, and a total of 31 cases were pending at the end of 2020. Although the latest European Commission statistics refer to 2022 (and date from December 2023), Portugal does not seem to have submitted any data for such effect.

With the publication of the 2003 update to the OECD Model Convention, Portugal introduced an observation on the Commentaries to Article 1, stating that the application of GAAR or SAAR could not prevail if they were in conflict with treaty provisions due to the rules of the hierarchy of laws in the Portuguese legal system, according to which double tax treaties (DTTs) prevail over domestic law regardless of whether the latter rules were enacted before or after the former ones. This observation was later eliminated in the 2010 update of the OECD Model Convention.

After the elimination of this observation, Portugal started to negotiate treaties allowing the application of domestic anti-abuse provisions. Regarding the application of the GAAR specifically, and taking into account that it may allow the tax authorities to recharacterise, at their discretion, the facts and operations that occurred as facts or operations of an equivalent economic result, it is argued that it could be contrary to the DTT as it may alter the taxing powers of the contracting states. However, as far as is known, this has never been challenged successfully in court.

Times are changing, however. The MLI is introducing more anti-abuse rules and includes the principal purpose test (PPT) in all conventions signed by Portugal. Moreover, Portugal has accepted the principle that tax treaties generally do not limit a state’s right to tax the residents of the same state, unless this is expressly excluded by the treaty (“saving clause”), which is intended to clarify that SAARs such as CFC rules might be compatible with the convention.

This evolution and other international trends justify taxpayers being particularly cautious in cross-border transactions whenever benefiting from tax treaty measures, although they should not feel deterred by these new rules. In practice, it is likely that the PPT will not have a significantly different impact than the GAAR.

Portuguese tax law allows for correlative adjustments. Although these adjustments can be promoted by the tax authorities in the context of DTTs that foresee such a possibility, they should generally be promoted by taxpayers since it is in their best interest to avoid the double taxation originating in the transfer pricing correction made to an associated company in another state. According to the law, the taxpayer shall present a request to the tax authorities that they make the correlative adjustment. This request has to be presented within the deadline contained in the MAP of the relevant DTT. If the tax authorities agree with the adjustment made in the other state, the correlative adjustment shall be made within 120 days after the agreement obtained with the tax authorities of the other state.

There is no information available on the number of such adjustments that have been made by the tax authorities or challenged by taxpayers. The only information available is that 28 transfer pricing cases under the MAP were initiated in 2022 and five were terminated in the same year, and that a total of 88 cases were pending at the end of 2022.

See 8.2 Application of GAAR/SAAR to Cross-Border Situations regarding the effect of the MLI on cross-border tax disputes.

Whilst detailed rules on transfer pricing have been provided for in the law since 2001, APAs were only introduced in 2008. In the early years, taxpayers were reluctant to initiate APAs, but things have changed in recent years, with APAs becoming more widespread to mitigate controversies and litigation in transfer pricing matters. If the number of APAs does not grow, more tax controversies on transfer pricing matters are expected to arise. Although APAs take some time and involve a complex administrative procedure, more and more taxpayers intend to enter into this type of agreement.

The procedure to sign an APA starts with the taxpayer presenting a request to the tax authorities. If the taxpayer wants to include operations with associated enterprises that are resident in countries with which Portugal has entered into a double tax convention, they can request that the APA is bilateral or multilateral, in which case the request will be presented to the other(s) tax authorities under the MAP. The agreement reached between the tax authorities is notified to the taxpayer, to obtain its confirmation on the acceptance of such agreement. The request shall:

• contain a proposal of the methods chosen by the taxpayer;
• identify the period and operations covered;
• contain the signature of all the entities that are to be bound by the agreement;
• contain a declaration stating that the taxpayer will co-operate with the tax authorities and will not invoke any commercial or professional secrecy; and
• supply all the necessary elements so that the automatic exchange of information between the tax authorities can be put in place.

Taking into account the case law produced by the higher courts, the cases related to cross-border situations that generate the most litigation are those concerning withholding taxes. However, transfer pricing and residency matters are increasingly attracting the attention of the tax authorities, and several relevant court cases in this domain have recently been initiated and/or decided.

To mitigate this situation, taxpayers should have internal compliance rules in place that allow them to control these cases. Moreover, they should verify the different formalities and criteria that the implementation of EU rules and the DTT require. Particular attention should be paid to facts, documentation, compliance rules and procedures that might prevent or reduce tax contingencies.

Portugal has a sound relationship with the European Commission in state aid matters, and aims to comply with the applicable EU Treaty provisions and implementing regulations, soft law and the acquis communautaire of the European courts and of the European Commission addressed to Portugal.

The majority of cases concern atypical private enforcement matters, including legal actions against taxes, and parafiscal charges and actions by customers of the alleged aid beneficiary. State aid rules have been invoked to challenge parafiscal charges imposed on the claimants by the state, based on the argument that the proceeds from those charges were used to finance illegal state aid, or that an exemption from the charge constituted illegal state aid. For example, undertakings active in the wine sector have lodged numerous legal actions against their obligation to pay a parafiscal charge for the promotion of wine (a system that had been conditionally approved under state aid rules by European Commission Decision No 2011/6/EU).

In the past, there have been Commission investigations into Portuguese tax schemes for supposedly illegal state aid elements. In 2002, for instance, the Commission adopted a decision ruling that Portugal was using an illegal tax regime in the Azores (State Aid C 35/2002 (Ex NN 10/2010)). Portugal appealed to the ECJ (Case C-88/03) but was unsuccessful.

More recently, in a decision dated 4 December 2020, the Commission declared certain situations related to corporate and other tax exemptions for companies active in Madeira to be illegal and incompatible with state aid, ordering Portugal to recover the amounts from the beneficiaries (Case SA.21259 – Portugal, Zona Franca da Madeira, Regime III).

No particular legal regime is used in these matters. Depending on the particular situation, the Portuguese tax authorities request the recovery of specific state aid as they consider appropriate. The recovery is sometimes carried out by the Portuguese tax authorities according to the usual procedures used for the request of an additional tax assessment. This leads taxpayers to try to challenge such tax assessments.

As mentioned in 9.2 Procedures Used to Recover Unlawful/Incompatible Fiscal State Aid, there have been instances of taxpayers challenging requests or additional tax assessments. However, in the past, the tax authorities and the courts have maintained that taxpayers cannot challenge such requests as a typical additional tax assessment. This is on the grounds that such requests were mere executory decisions that stem from an EU decision, which is the only decision that can be challenged in court. In other words, the prevailing view is that taxpayers can challenge European Commission decisions, but have no standing to challenge the enforcement measures taken by the national authorities, either administratively or judicially, if they do not react against them (in the European instances).

It is obviously very important to ascertain what is really considered illegal or incompatible with European law – ie, was the legal regime put forward by the state not authorised or forbidden? Conversely, if the taxpayer applied the law but did not respect the European Commission terms and conditions for such aid, they might be obliged to refund the illegal state aid received. However, if the controversy is based on facts (ie, to determine whether the taxpayer fulfilled the criteria required), domestic courts would probably have a different view on their competence to settle the dispute.

There are cases pending on this subject, but no positive decisions have yet been made.

Portugal opted to apply part VI of the MLI. As a result, an arbitration clause was included in 18 DTTs: 12 with EU member states (Austria, Belgium, Denmark, Slovenia, Spain, France, Greece, the Netherlands, Ireland, Italy, Luxembourg and Malta) and six with states that do not belong to the EU (Andorra, Barbados, Canada, Singapore, the United Kingdom and Switzerland).

Before the signature of the MLI and the modifications introduced by these options, Portugal only had one DTT with an arbitration clause inserted in the MAP regime (the DTT signed with Japan – Article 24). Portugal opted not to apply part VI of the MLI in respect of this DTT.

Portugal reserved the right to apply arbitration only in matters related to Articles 5, 7 and 9 of the OECD Model Convention, declining to apply it in cases:

• where no effective double taxation occurs;
• of fraud or any other tax crime;
• that deal with the GAAR or SAAR, including tax treaty anti-abuse rules; or
• that should be dealt with by the EU Arbitration Directive or the Arbitration Convention.

Portugal reserved the right not to apply the default “final offer” arbitration procedure (“baseball arbitration”), opting instead to apply the “independent opinion” model. Although no official justification was made public, this option seems to be consistent with the position adopted by Portugal in the Arbitration Convention.

Apart from this, it should be stressed that the sole DTT with an arbitration clause (ie, the DTT signed with Japan) does not provide for a specific mode of arbitration.

The EU Arbitration Directive (Directive (EU) 2017/1852 of 10 October 2017) has been transposed into Portuguese law. Considering the countries covered by the arbitration clause (see 10.1 Application of Part VI of the Multilateral Instrument (MLI) to Covered Tax Agreements (CTAs)) and the fact that Portugal declined to apply the MLI arbitration procedure if the case might be dealt with by the EU Arbitration Directive or the Arbitration Convention, it seems that the latter instruments will be more relevant in practice than the MLI. Moreover, the matters that may be challenged under an arbitration procedure are much broader in the EU Arbitration Directive than in the MLI.

Despite the fact that the MLI and the EU Arbitration Directive are very recent, European Commission statistics indicate that ten cases related to Portugal started in 2020 and five were terminated in the same year, and a total of 31 cases were pending at the end of 2020, which means that these procedures were being used immediately after the Directive’s approval and the implementation by Portuguese legislation.

Portugal has supported the implementation of Pillars One and Two during the last years, so is expected to be one of the states involved under the rules that will be approved at international level (eg, through conventions or directives) if the projects go ahead.

For the time being, there are no Portuguese rules or drafts dealing with the envisaged rules to prevent and/or settle tax disputes as indicated in Pillar One or related to Pillar Two. However, Portugal has already ratified the MLI and adopted the domestic rules necessary to transpose the EU Arbitration Directive to settle tax disputes.

Decisions in international arbitration proceedings are generally not published. Portugal has opted to apply the confidentiality obligation contained in the MLI (Article 23.er Nos 4 and 5). However, EU Directive 2017/1852 and the Portuguese law that implemented it establish the possibility of publication of the final decision if all parties agree, or at least the publication of a summary according to an EU standard form.

International tax disputes are still generally settled under the MAPs or, more commonly, in accordance with domestic procedure rules in a litigation procedure between taxpayers and the state.

As a rule, taxpayers engage lawyers/barristers during the early stages of a dispute in order to proactively manage potential risks, often even prior to the emergence of a formal dispute. On the other hand, it is rare for the state to hire independent professionals in tax disputes. Given the complexity and significance of these issues, it is advisable for both parties to seek robust legal support and strategic guidance right from the outset.

As a rule, litigating at the administrative level (by filing an administrative claim to the Portuguese tax authorities) has no associated fees, but the tax authorities may impose a 5% fee if the claim does not seem to be sufficiently grounded.

The tax litigation process involves the payment of fees that vary as follows:

• between EUR102 and EUR3,060 depending on the value of the claim;
• between EUR51 and EUR1,530 in the case of appeals, depending on the value of the appeal; and
• between EUR204 and EUR6,120 in cases classified by the courts as being particularly complex.

Where the value of the claim exceeds EUR500,000, the legal fee is not fixed but is variable between:

• EUR2,040 and EUR3,060;
• EUR1,020 and EUR1,530 in the case of an appeal; and
• EUR4,080 and EUR6,120 in the case of files classified by the courts as being particularly complex.

The court may decide not to impose this extra fee.

In general terms, taxpayers must pay the above-mentioned fees in advance (it is the cost of their initiative to litigate), except for variable legal fees. In these cases, only the minimum fee is paid in advance, and the balance is paid at the end of the case.

The tax authorities are exempted from making advance payments for legal fees, which means they will only be required to pay fees at the end of the case.

Each party is responsible for the payment of the legal fees to the court, ensuring that the court is always compensated for its involvement. However, the winning party may request a refund of the amounts paid in all instances of litigation from the party that lost.

There are two possible situations to address regarding the possibility of requesting an indemnity if the disputed additional tax assessment is considered absolutely void and/or null.

Where the additional tax assessment has been paid, the taxpayer will be entitled to a full refund of the tax and interest unduly paid, plus indemnity interest of 4% per year calculated on the value of that tax and interest unduly paid.

If the additional tax assessment has not been paid and the taxpayer has prevented a tax enforcement procedure from seizing their assets by providing a bank guarantee or equivalent to suspend such procedure while the additional tax assessment is in dispute, the taxpayer may request an indemnity related to the costs borne to maintain that guarantee. The guarantee must have been maintained for at least three years for the taxpayer to be entitled to an indemnity, unless the additional tax assessment resulted from an error on the part of the tax authorities.

Tax litigation in the TAC involves the payment of fees that vary between EUR306 and EUR4,896, depending on the value of the claim. Where the value of the claim exceeds EUR275,000, an extra legal fee is due, equal to EUR306 for each additional EUR25,000 or fraction thereof.

Half of the fees due are paid with the initial request for the constitution of the TAC, and the other half are due before the arbitration decision is issued (no decisions are issued without the correspondent fees being entirely paid for).

Where the arbitrators are appointed by the parties, the fees payable by the taxpayer vary between EUR6,000 for arbitration proceedings with a value up to EUR60,000 and a maximum of EUR120,000 for proceedings between EUR7.5 million and EUR10 million. In such cases, arbitration fees are entirely borne by the taxpayer and must be paid in full before the filing of the initial request for the constitution of the TAC.

First Instance

The following statistics show the number of tax court cases pending in the first instance, indicating the average number of cases attributed to a judge of first instance.

Register of tax court cases (first instance) and their status (2021)

• Pending cases as of 31 December 2021: 38,413.
• Total number of first-instance judges as of 31 December 2021: 97.
• Average number of cases per judge (2021): 396.

Source: based on information published by the Conselho Superior dos Tribunais Administrativos e Fiscais in December 2022.

The statistics show that tax judges are still being allocated a significant number of cases despite efforts being made to reduce the number of pending cases with the recruitment of special teams for this purpose.

Appeal

The following two sets of statistics reflect the number of cases pending in the second instance courts and the ASC. There was also a decrease in the level of appeal litigation.

Register of tax cases at the ACC (second instance) and their status (2021 and 2022)

• Pending cases as of 31 December 2021 – north area/Porto: 2,793; south area/Lisbon: 3,446; total: 6,239.
• Pending cases as of 31 December 2022 – north area/Porto: 2,679; south area/Lisbon: 4,272; total: 6,951.

Source: based on information published online by the Conselho Superior dos Tribunais Administrativos e Fiscais and the Direção-Geral da Política da Justiça in October 2023.

Register of tax cases at the ASC (final instance) and their status (2021 and 2022)

• Pending cases as of 31 December 2021 – tax plenary: 0; tax section: 636; customs section: 215; total: 851.
• Pending cases as of 31 December 2022 – tax plenary: 0; tax section: 633; customs section: 252; total: 885.

Source: based on information published by the Conselho Superior dos Tribunais Administrativos e Fiscais, the Direção-Geral da Política da Justiça and the Administrative Supreme Court in October 2023.

Arbitration

As for tax arbitration, 7,719 cases were initiated between July 2011 and December 2022, with an average time of conclusion of four and a half months. In 2022, 810 were initiated while 815 cases were terminated, according to the annual Tax Arbitration Report for 2022.

Tax Litigation by Region

The following statistics show the number of tax court cases in the different regions of Portugal initiated and terminated in 2022 in the first instance, although there is no information regarding their value or the taxes to which they relate.

• Almada: 567 cases initiated; 916 cases finalised; 1,381 pending cases.
• Aveiro: 627 cases initiated; 930 cases finalised; 2,280 pending cases.
• Beja: 267 cases initiated; 328 cases finalised; 418 pending cases.
• Braga: 1,861 cases initiated; 2,092 cases finalised; 3,920 pending cases.
• Castelo Branco: 192 cases initiated; 231 cases finalised; 1,033 pending cases.
• Coimbra: 251 cases initiated; 442 cases finalised; 928 pending cases.
• Funchal: 196 cases initiated; 227 cases finalised; 452 pending cases.
• Leiria: 919 cases initiated; 1,283 cases finalised; 2,521 pending cases.
• Lisbon: 2,548 cases initiated; 3,365 cases finalised; 11,216 pending cases.
• Loulé: 408 cases initiated; 586 cases finalised; 721 pending cases.
• Mirandela: 227 cases initiated; 295 cases finalised; 300 pending cases.
• Penafiel: 536 cases initiated; 485 cases finalised; 1,185 pending cases.
• Ponta Delgada: 71 cases initiated; 34 cases finalised; 106 pending cases.
• Porto: 1,837 cases initiated; 2,102 cases finalised; 4,785 pending cases.
• Sintra: 707 cases initiated; 1,216 cases finalised; 2,655 pending cases.
• Viseu: 369 cases initiated; 353 cases finalised; 887 pending cases.
• Total cases: 11,583 cases initiated; 14,885 cases finalised; 34,788 pending cases.                            

Source: based on information published by the Direcção-Geral da Política da Justiça in October 2023.

Tax Litigation Subjects

Based on the data from 2019, the majority of tax-related disputes pertained to CIT, accounting for 34% of all cases. Personal income tax disputes constituted 18.1% of the cases, while disputes over VAT made up 16.2% of the total. Property tax issues were the subject of 12.8% of the cases. Disputes related to stamp duty and property transfer tax were less frequent, representing 6.4% of the cases. Vehicle tax disputes were the least common, accounting for just 3.6% of the total cases.

Arbitration

The number of arbitration cases initiated every year increased until 2014, peaking at 850 new cases, and then decreased slightly until 2017, when it started increasing again. In 2015 there were 789 new cases, in 2016 there were 772 new cases, in 2017 there were 693 cases, in 2018 there were 709 new cases, in 2019 there were 718 new cases, in 2021 there were 862 new cases, and in 2022 there were 810 new cases.

Finally, based on the 2022 data, in arbitration most cases (51.2%) had a value of up to EUR60,000, 28.3% of cases had a value between EUR60,000 and EUR275,000, 7.2% had a value between EUR275,000 and EUR500,000, 6.4% had a value between EUR500,000 and EUR1 million, and only 6.9% had a value higher than EUR1 million.

According to the OECD statistics (compiled with tax litigation data reported to 2022), around 37% of tax court cases are decided in favour of the Portuguese tax administration.

These results do not seem different to those achieved in arbitration, according to the Administrative Arbitration Centre, based on statistics from 2022, according to which the tax authorities succeeded in 33.3% of cases (40.8% when considering the amounts in dispute) for the previous five years (2018–2022).

Throughout the course of a tax controversy there are many strategic options and decisions to be taken. Although each case requires its own strategic considerations, preparation and analysis, there are general guidelines that taxpayers should bear in mind. The most relevant issues include the following.

• Understanding the factual landscape of the case is crucial. It is vital to thoroughly comprehend all facts pertaining to the case, meticulously examining all relevant documents and related business affairs. This includes the business rationale behind specific transactions or conduct. Such comprehensive knowledge can be instrumental in reframing an initial perspective that might otherwise lead to a misleading conclusion.
• Legal aspects often play a decisive role, including:
1. the formalities to be observed throughout the course of the process (as at an earlier stage, during the tax audit);
2. the analysis of the burden of proof;
3. different possible interpretations of legal provisions; and
4. the proper use of all possible forms of evidence to prove alleged facts (documents, witnesses, experts, etc) or better illustrate a question of law (an option).

• Engaging a tax lawyer early on can be a game changer. A competent lawyer can help shed light on the dispute, highlight the strengths and weaknesses of a case, and chart a strategic path forward while assessing all the facts and potential legal outcomes.
• Another crucial decision for taxpayers is the selection of the appropriate avenue for resolving the tax dispute. This could be through administrative channels, judicial processes or arbitration (including potentially referring matters to the ECJ). It is critical to evaluate these options at an early stage, considering potential combinations of these routes (choosing one option initially and switching to an alternative or combination thereof, if necessary). Clearly, the “one size fits all” strategy does not apply here.