A Swiss pharmaceutical company held marketing and distribution rights for certain medicines and operated in Portugal through a wholly owned Portuguese subsidiary. In 2009, the Portuguese company acted under a commission agreement for one product and as a limited risk distributor for another. The Swiss company was registered for VAT purposes in Portugal but had no fixed place of business. The Portuguese subsidiary sold the products in its own name to Portuguese hospitals, following pricing and commercial instructions set by the Swiss principal, with the principal bearing the main commercial and inventory risks.
Following a tax audit, the Portuguese Tax Authority concluded that the Swiss company had a permanent establishment in Portugal through a dependent agent. It argued that the Portuguese subsidiary acted under detailed instructions, lacked legal and economic independence, bore no significant business risks, and operated exclusively for the Swiss principal. On that basis, the Authority attributed to the alleged permanent establishment the profits arising from the sales made in Portugal, calculated mainly using data from VAT returns, and issued a corporate income tax assessment for 2009. The Tax Authority did not challenge the taxation of the Portuguese subsidiary itself and did not perform a transfer pricing analysis to determine arm’s length remuneration between the parties.
The taxpayer challenged the assessment, arguing that VAT registration cannot in itself create a permanent establishment, that the Portuguese subsidiary did not have the power to conclude contracts legally binding on the Swiss company, and that international case law supported a formalistic interpretation of dependent agent permanent establishment. It also argued that, even if a permanent establishment existed, the profit attribution was unlawful because the Tax Authority failed to apply transfer pricing principles, ignored deductible expenses, wrongly refused to use indirect methods, and created double taxation in breach of the Portugal–Switzerland tax treaty.
Judgment
The Central Administrative Court dismissed the taxpayer’s appeal and upheld the assessment. The Court adopted a substantive interpretation of the dependent agent concept, holding that a permanent establishment may exist even where the agent contracts in its own name, provided it acts on behalf of the principal, is subject to its instructions, bears no significant risks, and is economically dependent. The Court found that these conditions were met. On profit attribution, it held that indirect methods are only required where profits cannot be quantified using objective data, which was not the case, and that transfer pricing adjustments were not required because the Tax Authority had not identified elements undermining the credibility of the recorded values used to compute the taxable profit. The Court also rejected the arguments on double taxation and breach of the non discrimination principle, confirming the legality of the corporate income tax assessment in full.
Click here for English translation
Click here for other translation