The Supreme Administrative Court (STA) of Portugal has admitted an exceptional appeal in the case of A… SGPS, S.A. vs Autoridade Tributária e Aduaneira (AT). This high-profile case challenges the Tax Administration’s power to determine a zero value for intra-group intangible asset transactions under the Transfer Pricing (TP) regime.
The STA’s final decision will set a crucial precedent on the limits of the arm’s length principle and tax discretion in the valuation of intangible assets.
Context of the Dispute
The dispute centers on a tax adjustment made by the AT in fiscal year 2005, which resulted in the rejection of €9.6 million in royalty deductions.
- Transaction: Royalty payments made by Portuguese subsidiaries (B… and C…) to a related entity resident in Switzerland, the legal owner of the group’s trademarks.
- Argument of the Tax Authority: The AT argued that the payments did not comply with the arm’s length principle. It pointed out that, despite the legal transfer of ownership to Switzerland, the Portuguese entities continued to bear the advertising and promotion costs, contributing directly to the value and maintenance of the trademarks.
- Method applied by the TA: The TA decided to apply the Profit Split Method (PSM), concluding that the market value of the royalty for the use of the trademarks was zero.
The Taxpayer’s Central Argument
The company A… SGPS, S.A. appealed the decision, focusing its defense on a violation of transfer pricing principles, pointing out that the AT:
- Violated the Arm’s Length Principle: A TP method cannot lead to a zero value result for the use of an asset essential to the business, as this negates the very existence of the transaction and does not represent a price that independent parties would agree upon.
- Misuse of the TP Regime: The AT used the Transfer Pricing regime (Article 58/63 of the CIRC) to completely cancel an expense whose deductibility is proven under other legislation (Article 23 of the CIRC). The TP regime seeks to adjust the price to market, not to cancel the expense entirely.
- Questionable Application of the PSM: The taxpayer argued that the choice of the PSM was unjustified, and the zero result “only stems from the lack of product sales in other territories,” demonstrating the inconsistency of the method in this case.
Decision of the Supreme Administrative Court
The STA did not issue a ruling on the merits of the case (i.e., it did not decide whether the royalty should be zero or not), but merely admitted the exceptional appeal.
The Court based its admission on the fundamental legal and social importance of the issue, which is summarized in the following legal question:
“Can the transfer pricing method imposed by the Tax Authority lead to a zero value of deductible expenses actually incurred for the use of trademarks, when this result is considered to nullify the very purpose of the Full Competition regime?”
The STA recognized that the debate requires a complex regulatory analysis linking the Transfer Pricing regime, the taxation of corporate groups (RETGS), and tax deductibility. The final ruling will be decisive in standardizing case law criteria in Portugal regarding the valuation of intangibles and the limits of the tax authority’s corrective powers.
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Source: TPCases