Corporate Financing, Interest Deduction and Tax Controversies

Abstract

This article focuses on a general tax principle: the usual corporate income tenet that, for being deductible, costs have to be necessary or indispensable to generate revenue or to maintain the corporation as a going concern. After exposing its possible meaning, we analyze its impact on court decisions and legal controversies regarding some intra-group financing operations. These controversies have, in our view, been a major reason for the recent introduction of quantitative limitations to interest deduction in the Portuguese corporate income tax code. The Portuguese tax law already had several ways of restricting interest expenses without recurring to the new clause of quantitative automatic limitation. In the light of such a set of legal avenues for restricting interest deduction, the new clause inserted in the tax code is a move in the direction of abandoning principles in favour of rules.