Tax Authority Rules Forfeited Deposits on Failed Deals are Deductible from Corporate Tax
Portugal’s Tax Authority (Autoridade Tributária - AT) has issued a binding ruling clarifying that a deposit forfeited by a company in a business deal that was not completed can be considered a tax-deductible expense for Corporate Income Tax (IRC) purposes. The ruling, published this Tuesday on the official Finance Portal, states that such a loss is acceptable as a deductible cost as long as the transaction was part of the company’s “normal activity” and was intended to generate or secure taxable income.
The clarification came in response to a query from a company primarily active in “civil construction and restoration of buildings in public and private works.” The company had entered into a promissory purchase and sale agreement for a plot of urban land and paid the corresponding deposit (sinal). Subsequently, the company decided not to proceed with the acquisition, citing that the deal was “not viable from a financial and economic point of view.” This led to the termination of the contract and the loss of the deposit, prompting the company to question whether this amount could be deducted as a fiscal expense.
In its analysis, the Tax Authority referenced Article 23 of the Corporate Income Tax Code (CIRC), which establishes the general principle that expenses are deductible if they are incurred by the taxpayer to “obtain or guarantee income subject to IRC.” The AT elaborated that the modern interpretation of this rule does not require a strict causal link between an expense and a specific income. Instead, the crucial factor is whether the cost was incurred “in the interest of the company” and in the course of its regular business operations.
The AT’s document explains that for a company whose business is construction, the act of signing promissory contracts and paying deposits is an “objectively normal act of the activity.” Consequently, the loss of a deposit is considered “a vicissitude inherent to the type of activity exercised.” The authority reasoned that since the company’s decision to withdraw was based on a sound business assessment of the deal’s viability, the resulting loss was directly connected to its operational strategy.
The ruling distinguishes such legitimate business losses from expenses that could be attributed to the “personal interests of partners or third parties,” which are explicitly not deductible. The AT stressed that for an expense to be accepted, it must be properly documented and its connection to the company’s pursuit of taxable income must be clear. The authority also noted the importance of the context, stating that at the time the promissory contract was signed, it was not foreseeable that the purchase would ultimately fail.
This decision provides significant legal certainty for companies in the real estate and construction sectors, where preliminary agreements are a fundamental part of the investment process. It confirms that financial losses resulting from strategic decisions to abandon unviable projects can be fiscally mitigated. The ruling is based on the premise that such decisions, while not generating immediate income, are part of the broader effort to guarantee the company’s overall profitability and sustainability by avoiding larger potential losses.
The Tax Authority concluded that, assuming the facts presented by the company are accurate, “the loss of the deposit can be considered as arising from the normal activity carried out by the applicant, and that it contributes to obtain or guarantee income subject to IRC, and, in this way, its deductibility can be accepted for tax purposes.” This clarification reinforces a business-centric approach to tax administration, acknowledging the complex realities of investment and development cycles.
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