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 administrative tax audits that lead to additional tax assessments.
Most tax controversies arise from corporate income tax disputes, in particular 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).
Additionally, considering that the recent years saw the creation of sectorial taxes (eg, on banking, pharmaceutical or energy activities) that generate very high assessments, such taxes have given rise to a significant number of tax disputes.
Taxpayers may use the possibility of requesting 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 on the tax and legal qualification of certain highly complex transactions.
At the request of the taxpayer, 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 considered that the tax authorities agree 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.
On the other hand, considering that in recent years the number of transfer pricing disputes has grown significantly, one of the ways to mitigate tax controversy 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 a taxpayer complies with the terms and conditions of APAs.
Over the years Portugal has already put in place a number of measures to combat tax avoidance; eg, (i) rules preventing the tax deductibility of payments to entities located in low-tax jurisdictions, (ii) interest barrier rules, (iii) CFC rules, (iv) exit tax rules and (v) the last set of rules (the GAAR and its procedural provisions) that allow the tax authorities to recharacterise operations in a purely fictional way.
Nonetheless, in May 2019 the Portuguese Parliament formally (partially) implemented the Anti-Tax Avoidance Directives I and II to 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 Organisation for Economic Co-operation and Development (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.
The taxpayer may challenge an additional tax assessment through an administrative, a judicial or an 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.
Neither 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 and if the taxpayer is not successful with the administrative, judicial or arbitration award and the latter becomes res judicata, the foreclosure file is immediately activated and enforced.
In the case of 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 a general National Plan for tax and customs audits (the so-called PNAITA) that 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 for tax and customs audits 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:
Moreover, specific taxpayers are permanently under the radar of the Portuguese tax authorities, in particular big 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 under the following criteria.
The government also prepares and releases a triennial Strategic Plan to Combat Tax and Customs Fraud and Evasion (the current one concerns the period of 2018-20), and presents an annual report 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 limitation period, which in principle corresponds to a four-year period following the taxable event. If a criminal proceeding related with the tax audit is initiated within that period, the statute of limitation is extended and the tax authorities may make a tax assessment until the end of the year following the date in which such proceeding is closed, or a final decision becomes res judicata.
Usually a tax audit that takes place in the taxpayer’s premises should be concluded in a six-month period, but in specific circumstances such period may be extended for two additional periods of three months each. The tax audit suspends the statute of limitation period during those six months.
When a mistake that may trigger an additional tax assessment was evidenced in the tax return, the statute of limitation period decreases to three years. On the contrary, the statute of limitation period increases to 12 years in two other situations; precisely when the tax authorities may encounter more difficulties in making additional tax assessments, as follows: (i) when the tax event, 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 (ii) 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 taxpayers.
The audits may occur in the tax authorities’ headquarters or 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 the existence of physical documents on paper still exists (eg, invoices). In addition, the board of directors minutes and general shareholders’ meeting minutes are also 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 tax external audit related with the same tax or year of a specific taxpayer, unless a specific grounded decision is adopted by the head of the tax services, namely invoking new facts.
Under their rights and powers, the tax authorities may:
As a rule, the tax authorities should make their request 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 to give advance notice that they are initiating a tax audit in the taxpayer’s premises (with a minimum period of five days) to provide time to reply and answer a specific questionnaire.
Taxpayers are often accompanied by their legal and tax advisers during the tax inspections and, in the case of companies, they also should appoint a representative that accompanies the tax auditor within the company’s premises.
Tax audits can be general or specific. The former generally covers 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 one of the taxes above-mentioned 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 of activity (eg, to verify whether and how the 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 verify (i) samples of sale and purchase invoices to verify if they comply with VAT and corporate income tax regulations; (ii) the information contained in different types of documents, reports and statements to verify if results are consistent; (iii) the transfer pricing documentation and the intra-group transactions, including the relationships between the company and associated companies and/or permanent establishments; (iv) formalities observed in specific operations (eg, neutral mergers, divisions, transfer of assets or exchange of shares, the transfer of head office); (v) transactions concluded with entities located in low-tax jurisdictions and, in particular, payments made to them; (vi) 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; (vii) payments abroad and all matters related with the proper application of withholding taxes; (viii) intra-community VAT operations or VAT deductions, or financial operations made by financial institutions often subject to stamp duties; and (ix) customs matters (often related with the qualification of items), to give just a few examples.
Both formal requirements and substantive issues are some of the top priorities analysed by the tax authorities and litigation often arises because the tax authorities consider that taxpayers 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 tendencies over the years, although the numbers are not yet very significant in some areas.
The Portuguese tax authorities' Report of Activities released in 2018, and referring to 2017, evidences the following number of requests of mutual assistance (MA) in the areas of customs/excises.
Moreover, in relation to the 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 2017 Portugal received a total of 1,481 forms of information of significant risks that required specific analysis and treatment, and 28 specific indications of fraud and serious irregularities detected by OLAF.
The cross-border exchanges of information in relation to income taxes in 2017 may be summarised as follows, for a total of 67 countries.
France, Spain, UK and Germany are clearly the countries with whom Portugal exchanged more information.
In 2017 under VAT EU Regulation No 904/2010, concerning the administrative co-operation and fight against VAT fraud – through the Central Liaison Office (CLO) – participation in the Eurofisc network and participation in Multilateral Controls, 1,452 files were initiated concerning the exchange of information, at the request of member states. From these, 500 files originated in requests from other tax authorities and 952 in requests made by the Portuguese tax authorities.
The exchange of information between the tax authorities of different MS and their mutual assistance is obviously influencing the growth of tax audits as well as the sophistication and the 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 be aware of the following aspects before and during a tax audit:
There are situations where 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 with the origin, classification or customs value of the product.
However, in situations of additional tax assessments, the administrative claim phase is always optional.
The administrative claim should be presented in the local tax office of the area of the taxpayer’s domicile, or of the tax assessment, or of the location of the assets and it also can be sent electronically through the tax authorities’ website. Albeit 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 formed by 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 inclusive 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. In this regard it is worth mentioning that, as a rule, in the administrative phase of tax litigation there are no costs or fees due to the administration, but the proof is limited to the documentation made available and only exceptionally will the tax authorities decide to hear witnesses. 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 (exceptionally it can be released from such duty, namely if the taxpayer is able to demonstrate economic hardship or that the presentation of the guarantee will cause an irreparable damage). Finally, if the tax authorities intend to dismiss the administrative claim, they should notify the taxpayer to react on the projected dismissal in 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 in four months.
The consequence of the tax authorities not complying with this deadline is that the taxpayer may presume that the claim was tacitly denied for the purposes of appealing against such tacit negative decision. The practical effect of this rule is to allow speeding up of litigation; ie, instead of waiting sine diem 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 court against that tacit negative decision.
Taxpayers frequently use this rule in a strategic move because (i) they try to convince tax authorities at the administrative level first and (ii) the deadlines to lodge administrative claims terminate after the deadlines to go directly to court. Accordingly, it is relatively frequent to see taxpayers presenting an administrative claim and at the end of the fourth month appeal going to 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 go subsequently to court.
Otherwise – ie, if the tax authorities manage to decide the appeal in the 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 90 days 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 counting 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 such 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, except if 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 that grounds the final request. Moreover, the value of the claim shall also be indicated. Finally, the petitioner shall indicate his or her witnesses, other means of proof he or she wants to use and in annex to the claim the petitioner shall attach the documentary evidence at his or her disposal.
After the presentation of the claim, the court attributes a number to the process and the process is distributed to one judge that notifies the tax authorities to contest within 90 days. The tax authorities are represented in court by a specific body of persons called Representantes da Fazenda Pública whose function is to represent the tax authorities in the thousands of files pending in the courts.
Although the contestation is not mandatory, the tax authorities normally contest within the said deadline. Within the deadline available to contest the claim, the tax authorities shall also gather the information available related with 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 taxpayer to confirm, within ten days, if he wants 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 response of the tax authorities 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 diligences of proof shall be made, such as inspections or expert hearings, the judge shall notify the parties of the relevant date to produce such diligences. The number of witnesses to be heard in relation to each fact shall not exceed three 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 video conference. The claimant as well as the person representing the tax authorities may directly interrogate the witnesses.
Once the diligences of proof are terminated, the judge shall notify the parties to produce their final written allegations in a deadline that shall not exceed 30 days.
Finally, before the decision, the claim shall be presented to the public prosecutor in the court that 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. Exceptionally, mainly if it is demonstrable that it was not possible to present or request the proof earlier, it is possible to present or request such proof afterwards.
Although it is not stated as such in the law, there is a clear preference for documentary evidence in tax litigation in comparison with witness testimonials 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 the beginning to its termination will occur without any eye 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 such 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 first questioned by the judge, then by the party that has requested their hearing and they can be subsequently cross-examined by the other party.
The burden of proof is with the party that invokes a certain fact to be proved. As a rule, the tax authorities invoke and should prove its 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 the case of criminal tax litigation the burden of proof of the verification of the elements of the crime rests with the public prosecutor.
From a strategic perspective and taking into consideration the limitations established by the law of the process as well as the fundamental audi alteram partem principle, as a rule, it is advisable for all the evidence to be presented or requested at the beginning, as well as all the legal arguments.
The possibility of settlement, namely 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.
The option to pay or not to pay the tax while the dispute is pending is mainly a financial issue that the taxpayer has to weigh. In favour of paying the tax one can essentially invoke that, on the one hand, this is reflected on the company’s financial accounts and, on the other hand, if it wins the case, in principle it will 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 that the guarantee has costs, firstly a tax cost related with stamp duty due on guarantees and then variable costs depending on the type of guarantee chosen (eg, bank commissions or notary costs). Moreover, in connection with this option, the taxpayer shall also consider that while the case is pending, interest will continue to be computed and will be due if the taxpayer loses the case. On the other hand, if the taxpayer wins the case, as a rule, it is possible to recover this cost.
Finally, the taxpayer can also opt to pay the tax in instalments. Depending on the amount due, payment in instalments, to be accepted by the tax authorities, may oblige the presentation of a guarantee.
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, usually they are 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 second-instance 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, and the ACC North is situated in Oporto and covers the northern area of the country. The ASC is also located in Lisbon and covers the entire country.
Whoever loses the case in 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 the ACCs in the event of a disagreement with the facts and the law decided in 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.
From the decision of the ACCs or of the ASC, the taxpayer or the tax authorities may in exceptional cases still lodge a second appeal to the ASC based on a contradiction with a previous judgment, or go to the Constitutional Court in cases where there is a constitutional issue in the process.
If there are uncertainties as to whether a tax assessment violates EU law, the Court of Last Instance shall file a request for a preliminary ruling to the Court of Justice of the European Union. In contrast to the Court of Last Instance, the Courts of First Instance are not obliged to file such request and the instances in which such courts have opted to request a preliminary ruling voluntarily are scarce.
The appeal is launched in the Court of First Instance within ten days of a final decision. 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 parties will have 15 days each to submit their appeal statements. The appeal then goes to the ACCs or the ASC, where it will await a decision.
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 Courts of Appeal 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 the 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 the 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 several proposals already exist to create a specific regime in some areas.
Moreover, at the international level and on the relationships between states, tax arbitration becomes the ultimate resort to settle tax 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.
Provided the disputed amount exceeds EUR60,000, or the taxpayer chooses to appoint an arbitrator, the arbitration court is formed by 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 filed electronically to CAA, which also indicates 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 nevertheless may be extended for a further six-month period.
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, 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.
According to the current arbitration regime, cases may be submitted to TACs as follows:
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 already contains (i) an assessment regarding possible inaccuracies regarding the taxes paid and the taxes and interest due, and (ii) an assessment respecting 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, typically, additional tax assessments and tax infringement processes begin ‘side by side’.
However, the tax authorities may initiate an administrative tax offence process whenever there is suspicion that an administrative tax offence has taken place and independently from a tax inspection procedure, and whatever the situation is under the tax assessment perspective. 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 in which the additional tax assessment is being challenged is pending and the qualification of the facts under dispute as a tax infringement depends on the decision of such 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 of the administrative process is adopted and becomes res judicata.
As described above (see 7.1 Interaction of Tax Assessments with Tax Infringements), an administrative or a criminal tax offence proceeding is initiated by the tax authorities in any case in which they become aware or suspect that an administrative tax offence or that a tax crime may have taken place. Commonly this awareness 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.
The administrative tax offence proceedings 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 enough grounds and enough evidence indicate that a tax offence has been committed. Normally the grounds that give rise to additional tax assessments are the ones used by the tax authorities to issue such 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 immediately enforceable.
The judicial decision rendered by the first-instance court may still be appealed against to the Court of Appeals if the first-instance court confirms the conviction previously rendered by the tax authorities.
Only the decision rendered by such Court of Appeals would, in principle, be final and fully enforceable, except if constitutional issues are involved and an extraordinary appeal (also with suspensive effect) is presented to the Constitutional Court.
The Administrative and Tax Courts are the competent courts to decide on tax administrative processes.
On the other hand, 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).
The investigation stage, which is conducted by the Public Prosecutor’s Office, has the purpose of gathering all 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.
The pre-trial stage is not compulsory. It may take place if requested by the defendant, as regards 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, compulsorily, involve a preliminary hearing, oral and adversarial in character, during which the Public Prosecutor, the defendant and his or her 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.
In 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 the competent courts to decide on tax criminal offences.
Portuguese Law provides for some situations in which the taxpayers may benefit from fine reductions.
If the fine is paid at the taxpayer’s request, he or she will benefit from a reduction of the fine, which can go from 12.5% of the minimum applicable fine up to 75% of the minimum applicable fine, depending on the stage of the administrative tax offence proceedings.
If the defendant pays the fine during the course of the administrative tax offence proceedings, but before the deadline for presenting his or her defence, the minimum applicable fine will always be imposed.
When the taxpayer pays the fine within the voluntary payment deadline, after the conviction decision is issued by the tax authorities, the penalty shall be reduced to 75% of the value set in such decision.
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 appealable, as a rule, to the Court of Appeals 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 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 his intention to file an appeal, together with a written appeal statement. The written application must be submitted to the Court of First Instance, 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 gave rise to administrative tax cases in the same terms as all other tax facts (see 7.1 Interaction of Tax Assessments with Tax Infringements); this firm is not aware of criminal cases involving these type of operations, but one cannot exclude such possibility if the facts 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.
The biggest processes involving such matters (as in what concerns the amounts, the number of defendants or their public relevance) bring, however, a great amount of mediatic attention and public pressure to obtain convictions (which do not necessarily occur).
In the case of a situation of double taxation due to an additional tax assessment or tax adjustment in a cross-border situation, it is common to use domestic litigation, which does not mean that the mutual agreement procedure is not used as an alternative or together with judicial litigation. According to the OECD statistics, 23 cases related with Portugal started in 2017 and 34 were terminated in the same year, and the total number of cases pending at the end of 2017 was 49 (http://www.oecd.org/tax/dispute/mutual-agreement-procedure-statistics-2017-per-jurisdiction-all.htm).
With regard specifically to cases concerning transfer pricing, according to the same source, 11 cases started in 2017 and 24 were terminated in the same year, and the total number of cases pending at the end of 2017 was 28 (http://www.oecd.org/tax/dispute/mutual-agreement-procedure-statistics-2017-per-jurisdiction-transfer-pricing.htm).
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 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. Specifically, with regard to the application of the GAAR, taking into account that it may allow the tax authorities discretionarily to recharacterise the facts and operations occurred in facts or operations of an equivalent economic result, it is argued that it can be against the double tax treaty as it may alter the taxing powers of the contracting states. However, to the best of the authors’ knowledge, this has never been challenged successfully in court.
Portuguese tax law allows for correlative adjustments. Although these adjustments can be promoted by the tax authorities in the context of double tax treaties that foresee such possibility, they should be generally promoted by taxpayers since it is in their best interest to avoid the double taxation originated by the transfer pricing correction made to an associated company in another state. According to the law, the taxpayer shall present to the tax authorities a request to make the correlative adjustment. This request has to be presented within the deadline foreseen in the mutual agreement procedure (MAP) of the relevant double tax treaty. 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 11 transfer pricing cases under the MAP were initiated in 2017 and 24 were terminated in the same year, and the total number of cases pending at the end of 2017 was 28.
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, when they have become more widespread to mitigate controversies and litigation in transfer-pricing matters. It is expected that if the number of APAs does not grow, more tax controversies on transfer-pricing matters will 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 request presented by the taxpayer to the tax authorities. In the event that taxpayers want to include operations with associated enterprises resident in countries with which Portugal has entered into double tax conventions, 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 (i) contain a proposal of the methods chosen by the taxpayer, (ii) identify the period and operations covered, (iii) contain the signature of all the entities that are to be bound by the agreement, (iv) contain a declaration stating that the taxpayer will co-operate with the tax authorities and will not invoke any commercial or professional secrecy, and (v) 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 with cross-border situations that generate the most litigation are related with withholding taxes.
To mitigate this situation, taxpayers should have internal compliance rules that allow them to control these cases. Moreover, they should verify with particular attention the different formalities and criteria that the implementation of EU rules and the double tax treaty requires.
As a rule, litigating at the administrative level (by filing an administrative claim to the Portuguese tax authorities) has no associated fees, but the latter may apply a 5% fee if such claim does not seem to be sufficiently grounded.
The tax litigation process involves the payment of fees that vary between EUR102.00 and EUR1,632.00 according to the value of the claim, between EUR51.00 and EUR816.00 in the case of appeals and according to the value of the appeal, and between EUR153.00 and EUR2,448.00 in cases classified by the court as particularly complex.
Where the value of the claim exceeds EUR275,000.00, an extra legal fee is due for each additional EUR25,000.00 or fraction thereof, equal to EUR306.00, EUR153.00 in the case of an appeal, or EUR459.00 in the case of files classified by the court as 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), with the exception of the extra legal fee due in claims with values exceeding EUR275,000.00, which is only paid at the end of the process.
The tax authorities are excused from the advance payment of legal fees, which means they will only be notified to pay fees at the end of the process.
Each party is responsible for the payment of the legal fees to the court: the court is always paid for its intervention. 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 an amount of indemnity interest of 4% per year calculated on the value of such 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 such 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 results from an error on the part of the tax authorities.
Tax litigation in the Arbitration Court involves the payment of fees that vary between EUR306,00 and EUR4,896.00 according to the value of the claim. Where the value of the claim exceeds EUR275,000.00, an extra legal fee is due, equal to EUR306.00 for each additional EUR25,000.00 or fraction thereof.
Half of the fees due is paid with the initial request for the constitution of the Arbitration Court and the other half is due up to the point that 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 EUR60,000.00 and a maximum of EUR120,000.00 for proceedings between EUR7,500,000.01 and EUR10,000,000.00.
In the latter case, arbitration fees are entirely borne by the taxpayer and must be totally paid before the filing of the initial request for the constitution of the Arbitration Court.
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 (2017 and 2018).
Source: based on information published by the Conselho Superior dos Tribunais Administrativos e Fiscais and the Direcção-Geral da Politica da Justiça in 2018 and 2019; available at www.cstaf.pt and www.siej.dgpj.mj.pt
The statistics show that tax judges are allocated a significant number of cases despite the level of litigation having decreased slightly in 2018.
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 (2016 and 2017).
Source: based on information published by the Conselho Superior dos Tribunais Administrativos e Fiscais and the Direcção-Geral da Politica da Justiça in 2018; available at www.cstaf.pt and www.siej.dgpj.mj.pt
Register of tax cases at the ASC (final instance) and their status (2016 and 2017).
Source: based on information published by the Conselho Superior dos Tribunais Administrativos e Fiscais, the Direcção-Geral da Politica da Justiça and the Administrative Supreme Court in 2018; available at www.cstaf.pt, www.siej.dgpj.mj.pt and www.stadministrativo.pt
As for tax arbitration, since 2011, 4,300 cases were initiated and, up to 31 December 2018, 3,809 cases were terminated, hence 491 were pending on 1 January 2019.
The following statistics show the number of tax court cases initiated and terminated in 2016 and 2017 in the first instance, although there is no information regarding their value or the taxes they relate to.
Register of tax court cases (first instance) and their status (2018, by first-instance tax courts area).
Source: based on information published by the Conselho Superior dos Tribunais Administrativos e Fiscais and the Direcção-Geral da Politica da Justiça in 2018; available at www.cstaf.pt and www.siej.dgpj.mj.pt
As for arbitration, the number of cases initiated every year augmented until 2014, peaking at 850 new cases, and has since decreased slightly. In 2015 there were 789 new cases, in 2016 there were 772 new cases, in 2017 there were 693 cases and in 2018 there were 709 new cases.
Regarding the different taxes and according to the 2018 data, most cases were related to stamp duty (26%) and CIT (25.1%). Personal income tax was discussed in 15.9% of cases and VAT in 10.4%. Vehicle tax gave rise to 9.4% of the cases, property transfer tax to 7% of cases and property tax to 4.5% of cases.
Finally, also in accordance with the 2018 data, in arbitration most cases had a value of up to EUR60,000 (62%), 20.8% of cases had a value between EUR60,000 and EUR275,000, 5.8% had a value of EUR275,000 up to EUR500,000, 5.4% had a value between EUR500,000 and EUR1,000,000, and only 6% had a value higher than EUR1,000,000.
According to the OECD statistics (compiled with tax litigation data reported to 2015), around 40% of tax court cases are decided in favour of the Portuguese tax administration.
These results do not seem different in arbitration, according to the Administrative Arbitration Centre, using statistics from 2017.
Along the course of a tax controversy there are many strategic options and decisions to be taken. In spite of each case deserving its own strategic consideration, preparation and analysis, there are specific guidelines that should guide or be considered by taxpayers along the path. These are some of the most relevant issues.
Over the past decade Portugal has witnessed great changes in the relationship between taxpayers and the tax authorities as a result of the digitalisation of routines and procedures. Accordingly, most interactions with the tax authorities are now performed electronically. The most recent development was the introduction of the possibility of electronic invoicing on a broad scale in 2019. Nevertheless, despite this shift, according to the report "Paying Taxes 2018" prepared by The World Bank and PwC, Portugal still ranks in the first ten of the 33 countries ranked in which taxpayers have to spend more time annually to comply with tax obligations.
According to the tax authorities’ data, there are around 25 million tax assessments made annually related to the various taxes that compose the Portuguese tax system. Of those 25 million tax assessments, around 48,000 assessments give rise to litigation (representing a percentage of approximately 0.20%). Regarding administrative litigation (reclamações graciosas), cases related to personal income tax represent the larger piece of the pie (8,685 cases initiated in 2018), but it is also worth noting the sharp increase in cases related to stamp duty (6,612 cases initiated in 2018 in comparison with 3,537 cases initiated in 2017). Another interesting statistic is that in 2018 57% of administrative claims were decided in favour of taxpayers.
14,895 new judicial litigation files were initiated in 2018 in tax courts of first instance. Of these, 3,569 files related to disputes against tax assessments. The same courts produced 16,828 sentences in the same year, with more than 50% being totally or partially ruled in favour of taxpayers (including cases where the tax authorities revoked the assessments during the dispute). Unfortunately, no information is available on the cases pending in the courts of appeal, nor on the number of appeals ruled in favour of taxpayers.
In contrast, tax arbitration is more limited than litigation in tax courts since it does not rule on disputes related to tax enforcement processes, the value of the cases is capped at EUR10 million, and the grounds to present appeals from the decisions are more limited; there were 709 new cases initiated in 2018 and almost the same number of final decisions were reached. Of those final decisions, around 60% were totally or partially ruled in favour of taxpayers. Since its inception in 2011, most arbitration has related to taxes on immovable property, followed by cases on income taxes.
Experience shows that arbitration has proved to be a good option in test cases, because it is possible to obtain a final decision in less than one year. This swiftness in obtaining a final decision has the consequence of creating an imitation effect when the first decision is in favour of the taxpayers, because others will rapidly follow the same path. However, contrary decisions may occur due to the divergent opinions of the different arbitrators that judge the cases, especially considering that the rule of precedence does not exist in Portugal. In these situations, taxpayers have no grounds to appeal from the decisions rendered against them. To avoid this, an amendment to the law is expected in the short term, to allow an appeal to the Supreme Court in the case of two opposing arbitration decisions. Due to the subtleties of Portuguese procedural law, arbitration has also proved to be a valid option in cases related to Constitutional and EU law matters that are intended to go up to the Constitutional Court and the European Court of Justice, since it allows taxpayers to reach these courts much more rapidly than through the alternative route of the tax courts.
The following sections describe some of the latest trends and developments in tax litigation in Portugal.
The general anti-avoidance rule (GAAR) was introduced into Portuguese law in 1999, and was amended in May 2019 to bring it more into line with the GAAR foreseen in the ATAD (Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market). The GAAR allows the Portuguese tax authorities to disregard any transaction that has been undertaken through artificial, fraudulent or abusive forms with the prime purpose of avoiding tax (including its mitigation or deferral), taxing instead the transaction according to its substance, rather than its form. However, the tax authorities have to prove that the transaction has been implemented or concluded with the primary intention of avoiding taxes.
To apply the GAAR, the tax authorities must follow a strict procedure and meet extra requirements. These exigencies, combined with the absence of experience and tradition in Portuguese tax law in dealing with these types of clauses, contributed to the fact that the first decision from the courts where the applicability of the GAAR was considered was only issued at the beginning of 2011.
In recent years, the Portuguese tax authorities have resorted increasingly to the application of the GAAR, which has meant that the number of cases decided in the tax courts and mainly in the arbitration courts has increased significantly.
In general, the GAAR has been applied to three main groups of cases: (i) distribution of dividends in the form of debt repayment; (ii) capital gains from the sale of shares after the transformation of a sociedade por quotas (Lda) into a sociedade anónima (SA); and (iii) sale of own shares. Other more specific cases were also targeted by the GAAR.
The use of the GAAR is likely to become more and more relevant in 2019, with the implementation of the ATAD. A significant change will be introduced in the GAAR to facilitate its application and ensure a higher level of protection against abusive planning and tax avoidance schemes.
For instance, under this amendment it will no longer be necessary to prove that the obtainment of a tax advantage was the main purpose of the transaction, as it will be sufficient to prove that it was one of the main purposes. Additionally, a new paragraph will be added to introduce the concept of "valid economic reasons", which has been clarified by the Court of Justice on several occasions, hence the Portuguese tax courts and arbitration courts will now have abundant case law to which they may refer.
In Portugal, large companies are addressed by a dedicated team within the tax authorities, called the Large Taxpayers’ Unit (LTU), which came into existence in January 2012. Companies are defined as large companies if:
The list of large companies is public and published in the Portuguese official gazette.
The LTU's aim is to be in direct contact with large companies and gain a clear comprehension of their particular needs in order to better support them and develop open and transparent working relationships. The final purpose is to improve tax compliance.
It is the LTU that performs tax audits on large companies, conducts the tax enforcement processes and decides the administrative claims against tax assessments.
Large companies are frequently subject to annual tax audits, which lead to additional tax assessments by the Portuguese tax authorities. Such assessments are more often than not contested through either an administrative claim, a judicial challenge or a request for arbitration, creating new litigation trends.
Following the most recent economic and financial crisis, the Portuguese Government created a number of Sectorial Extraordinary Contributions, intended to operate as financing mechanisms and new sources of income from specific economic areas.
For instance, in 2011 the Banking Sector Contribution was levied for the first time, and in 2014 the Energy Sector Extraordinary Contribution was imposed, amounting to millions of euros of additional tax revenue. The pharmaceutical industry and large retailers were also targeted with new contributions.
Despite being expressly "extraordinary" or perceived as such (at the time Portugal was under the Troika supervision), which would imply that these Contributions should only be levied in the years they were created or for a short period of time, this has not been the case and they are still in force in 2019.
Assessments of these Contributions have been challenged by the various market operators, creating a body of relevant litigation in tax courts and arbitration courts that is still under discussion.
High Net Worth Individuals
In 2016, the Portuguese government defined the term "high net worth individual" (HNWI) for the purposes of such individuals also being monitored by the Large Taxpayers’ Unit (LTU). As a result, for these purposes, HNWIs are defined as those that earn income above EUR750,000 per annum; own, directly or indirectly, wealth (including assets and rights) worth more than EUR5 million; have a lifestyle commensurate with the above-mentioned income or wealth and/or possession of the related paraphernalia; or have a legal or economic relationship with HNWIs or with companies or entities that are followed by the LTU.
The Tax Authorities first started monitoring 758 individuals under this definition, 539 of whom were included under the 'income above EUR750,000' criteria and 215 under the 'ownership of wealth worth more than EUR5 million' criteria and four individuals under the oath two criteria. The list of HNWI is not published, and is unknown.
The Tax Authorities recently announced that they have identified 868 other individuals that may shortly be added to the monitoring list. However, it seems that the majority of these are the spouses of the individuals that were already considered HNWIs, as well as the spouses of those now identified as meeting the criteria described above.
Within this monitoring regime, the Tax Authorities have carried out 450 tax audits on the already certified HNWIs, which resulted in 146 different situations, and in additional tax assessments amounting to approximately EUR3.4 million.
Considering the amount of new information that the tax authorities are gathering from banks, beneficial owners’ registers, other taxpayers and other tax authorities, alongside the political pressure put on taxing this category of taxpayers, these numbers will probably increase significantly. Therefore, this is definitely one Portuguese tax trend to keep an eye on.
Over the last few years, Portugal has witnessed an increase in the number of tax-related criminal cases, in terms of both number and importance.
Typically, such cases involve large amounts of non-declared income, which give rise to indictments for tax fraud and qualified tax fraud. The most common suspicions fall on the existence of corruption, money laundering, the use of offshore structures to avoid taxation and the rendering of false services between companies to abusively shift profits/losses to where they benefit from the most favourable tax regime.
These indictments may or may not give rise to additional tax assessments, depending on the particularities of the case and eventual options selected by the Public Prosecutor’s Office – which may opt to file an indemnity request with the civil courts in order for the Portuguese State to be reimbursed the damages caused by the taxpayers involved or to follow the general rules to investigate and calculate the exact amount of tax that may have been avoided by the indicted taxpayers, additionally assessing it with interest.
The most mediatic tax crime-related cases that have occurred in Portugal in recent years include the 'Operação Furacão' and the 'Operação Marquês'.
The first case involves an estimated EUR45 million loss of tax revenue to the Portuguese State and an alleged 'tax optimisation scheme' set up with the main purpose of avoiding corporate and individual income taxes in Portugal. The 'scheme' involved the mass issuance of false invoices for services that were never rendered by offshore companies to companies resident in Portugal, shifting the profits offshore. Some of the tax fraud crimes investigated were covered by criminal law dispositions that allow no sentence. Therefore, the Public Prosecutor's Office decided to close the case without further action (ie, no indictment and no trial) in relation to many of the more than 40 defendants after consulting the Tax Authorities, and with the agreement of the judge. Such action imposed some obligations upon the defendants, such as payments to the Portuguese State and not engaging in certain activities for a period of time. This is still an ongoing process.
The second case is more recent, and is still at an earlier stage. At the centre of the investigation are the more than EUR23 million gathered by the childhood friend of a former Portuguese prime minister, in Switzerland. Part of the amount was transferred to Portugal in 2004 and the overwhelming majority was transferred in 2010 and 2011. At that time, such amounts were self-declared by a third intervenient under an amnesty tax regime. The prosecution alleges that the amounts in question were in fact obtained by the above-mentioned former Portuguese prime minister. The process is still ongoing and currently involves 28 defendants, accused of 188 different crimes, including corruption, money laundering, tax fraud and qualified tax fraud.
We are witnessing the dawn of a new era in tax matters. The increase in world trade, e-commerce and the digital economy, alongside the mobility of HNWIs and MNEs, is being accompanied by an increase in exchanges of information between tax authorities, which allows for the unprecedented gathering of information that is relevant for tax purposes and mutual assistance among tax authorities. With new tools and information, the tax authorities are becoming more thoughtful in their analysis and the cases that will come up in the courts will definitely become more complex. Moreover, the BEPS initiative is making an important contribution to closing loopholes in the law and in the interaction of the different tax systems in cross-border situations, and will also contribute to an increase in transfer pricing-related tax disputes. On the other hand, taxpayers’ rights and their privacy are increasingly in danger, with all sorts of leaks and fake news, and it is expected that the judiciary will play an important part in combating these abuses.
On an EU scale, state aid cases are gaining prominence. Portugal is awaiting the final results of the pending EU Commission’s in-depth investigation to examine whether Portugal has applied the Madeira Free Zone regional aid scheme in conformity with the 2007 and 2013 Commission decisions approving it. Depending on the outcome of the investigation, a new flow of litigation may be on the horizon.