CAAD 101/2018-T: IRC Loss Carryforward, SGPS Capital Gains & Right to Liquidation Expiry Under Article 44 CIRC

ARBITRAL DECISION

The arbitrators Dr. Alexandra Coelho Martins (arbitrator-president), Dr. Ricardo Marques Candeias and Dr. Rui Ferreira Rodrigues (arbitrators-members), appointed by the Deontological Council of the Administrative Arbitration Centre ("CAAD") to form the present Arbitral Tribunal, constituted on 24 May 2018, agree as follows:

Report

A... (SGPS), S.A., hereinafter referred to as the "Applicant", a legal entity identified under no. ..., with registered office at Rua ..., no. ...-..., in Lisbon, registered in the Commercial Registry Office of Lisbon under the same number, filed an application for the constitution of a Collective Arbitral Tribunal and for an arbitral pronouncement, under articles 2, no. 1, subparagraph a), 10, 15 and following, all of the Legal Framework for Tax Arbitration ("RJAT"), approved by Decree-Law no. 10/2011, of 20 January.

The Applicant hereby seeks the annulment of the refusal order issued by the Head of Division of the Finance Directorate of Lisbon, of 28 November 2017, which resulted from the Gracious Complaint filed against the acts of additional assessment of Corporate Income Tax ("IRC") and of compensatory interest issued under nos. 2015 ... [IRC], 2015 ... and 2015 ... [interest], relating to the 2011 tax year, extending the annulment request to the tax acts themselves. It also petitions for the reimbursement of the amount unduly assessed and paid, plus compensatory interest, under article 43 of the General Tax Law ("LGT").

The Respondent is the Tax and Customs Authority ("AT").

As grounds for its claim, the Applicant alleges formal and substantive defects.

Beginning with those of a formal nature, the Applicant argues the expiry of the right to assess and the non-existence of any prior administrative-tax act that determines the additional payment of tax [IRC] and/or the correction of tax losses recorded in 2010 and carried forward to subsequent years.

According to the Applicant, the AT, faced with the conclusion that the applicable expiry period had already elapsed, as evidenced in the Tax Inspection Report ("RIT") based on article 45, no. 1 of the LGT, did not make corrections to the fiscal results declared by the Applicant for the 2010 tax year and did not promote or notify any subsequent administrative-tax act that was unfavourable to it, such that there does not exist a decisive act that precedes and supports the correction by the AT of the tax losses deducted by the Applicant from the taxable profit in the subsequent period of 2011, nor was the Applicant notified of it, which constitutes a condition of effectiveness under articles 77, no. 6 of the LGT, 35, no. 1 and 36, nos. 1 and 2 of the Tax Procedure and Process Code ("CPPT") and 268, no. 3 of the Constitution ("CRP").

Since the "correction" to the Applicant's fiscal result for the 2010 tax period was announced in the RIT, but not implemented by the AT, the same is not capable of producing legal effects. The RIT has a preparatory or ancillary character in relation to tax acts or matters of taxation, aiming at an informative and substantiation purpose, not being in itself a decisive act, capable of producing external legal effects, particularly alterations in the legal-tax sphere of taxpayers, such as future corrections to fiscal results in subsequent tax years, specifically that of 2011, as results from articles 11 and 63-A, no. 3 of the Supplementary Framework for Tax and Customs Inspection Procedures ("RCPITA").

Furthermore, if, as the RIT acknowledges, the AT is prevented from correcting the tax losses relating to 2010 due to the expiry of the limitation period, then it is also prevented from reaching in subsequent tax periods the results that it could not obtain in 2010, first and foremost for reasons of legal certainty, and cannot "artificially extend" the limitation period through an incorrect interpretation of article 45 of the LGT.

From a material perspective, and still according to the Applicant, the tax acts suffer from an error of law relating to the tax regime applicable to the alienation of capital shares and to the assignment of credits it held in B..., S.A. ("B...").

Regarding the capital shares, the AT, by postulating the "reinstatement of suspended capital gains" associated with the social participation held in B..., did not properly acknowledge the regime of suspension of capital gains provided for in article 44 of the IRC Code – which resulted in the deduction of its value [of the capital gains] from the acquisition cost of the assets in which the reinvestment was realised (in this case, the social participation in B...) – and which was exhausted in the effect of reducing the value of the loss recorded with the subsequent sale of this asset.

The Applicant considers it applicable to itself the discipline initially provided for in article 44 of the IRC Code (regarding tangible assets), extendable to financial assets held by holding companies ("SGPS"), by referral from article 7, no. 2 of Decree-Law no. 495/88, of 30 December.

This discipline was maintained by the transitional provision contained in Law no. 30-G/2000, of 29 December (article 7, no. 7, subparagraph a) of the said Law), which repealed the regime of suspension of capital gains and losses provided for in that same article 44 of the IRC Code, as follows: "the provision of the previous wording of article 44 of the IRC Code continues to apply to capital gains and losses realised before 1 January 2001 until the realisation, inclusive, of capital gains or losses relating to assets in which the reinvestment of their realisation values has been realised."

The invocation by the AT of another rule contained in that transitional regime, subparagraph b) of no. 7 of the aforementioned article 7, which postulates deferred taxation over a period of ten years, in equal instalments (the first being that of the alienation), of the part of the positive difference "between capital gains and losses relating to non-depreciable assets, corresponding to the value deducted from the acquisition cost of assets in which the reinvestment was realised under no. 6 of article 44 of the IRC Code", if "pursuant to law, the reinvestment of the part of the realisation value that proportionally corresponds to it" materialises, constitutes an erroneous interpretation of the scope of application of the norm.

The AT's position in this matter also violates, equally, the generic guidelines contained in circulars issued by it, namely Circular no. 7/2002, of 2 April, which was not repealed, and its duty to be bound by them, in accordance with article 68-A, no. 1 of the LGT.

On the other hand, contrary to what is affirmed by the AT, the entry into force of article 31 of the Tax Benefits Statute ("EBF"), which determined the non-subjection to taxation of capital gains obtained by SGPS, did not prejudice the provisions of law concerning reinvestment or even what is referred to in Circular no. 7/2002. Each regime has its own scope of application and the Applicant complied with the provisions of both regimes. It would only be possible to admit a supposed problem of interpretation and reconciliation between article 44 of the IRC Code and article 31 of the EBF if the alienation of B... had generated a capital gain, which is not the case here.

With regard to the recognition of losses on credits of € 3,999,869.88 associated with the alienation, at the price of € 1.00, of advances and other credits that the Applicant held against B..., it considers that the regime of recognition by impairment or by uncollectibility invoked by the AT as a condition for tax deduction under articles 35 and 36 and 41, respectively, of the IRC Code does not apply to it.

From the Applicant's perspective, we are not in the sphere of "uncollectible" credits, i.e., of the possibility of their being reimbursable, but rather in that of credits assigned for an amount lower than that recorded in accounting and in the financial statements, that is, at their transactional market value, which, as already confirmed by case law of the Central Administrative Court of the North, are different realities with distinct tax treatments.

The operation was carried out between entirely independent parties and the assignment of credits accompanied the rationality of the transaction of sale of the participation in B..., which enabled the Applicant to relieve itself of significant bank liabilities and economic-financial contingencies, such that it appears unequivocal that the requirements established by article 23 of the IRC Code are met, specifically, the indispensability of the expense or loss for obtaining taxable income or for maintaining the source of production.

The Applicant concludes by requesting the annulment of the refusal order of the gracious complaint and of the additional IRC assessments and compensatory interest relating to the 2011 tax period, with the consequent reconstitution of the hypothetical current situation, particularly with the reimbursement of the amount paid of € 360,203.67, plus compensatory interest, under article 43 of the LGT, counted from the date of the unduly payment until the date of processing of the respective credit note. It attached 18 (eighteen) documents and listed one witness.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and followed its normal procedure, namely with notification to the AT.

In accordance with articles 5, no. 3, subparagraph a), 6, no. 2, subparagraph a) and 11, no. 1, subparagraph a), all of the RJAT, the Deontological Council of the Administrative Arbitration Centre ("CAAD") appointed as arbitrators of the Collective Arbitral Tribunal the signatories, who communicated acceptance of the appointment within the applicable period, pursuant to article 6, no. 2, subparagraph a) and article 11, no. 1, subparagraph a), both of the RJAT.

The parties, duly notified of this appointment, raised no objection in accordance with articles 11, no. 1, subparagraphs b) and c) and 8 of the RJAT and 6 and 7 of the CAAD Code of Ethics.

The Collective Arbitral Tribunal was constituted on 24 May 2018, as communicated by the President of the Deontological Council of CAAD.

The Respondent filed a reply, in which it argues for the maintenance of the contested assessments and of the refusal order of the gracious complaint above identified, as they constitute the correct application of law to the facts.

To this end, it argues that the Applicant does not meet the conditions provided for in articles 35 and 36 (losses by impairment) or 41 (uncollectible credits), cumulatively with article 23, all of the IRC Code, for the tax deduction of losses relating to the sale of credits it held against the alienated company (B...).

Regarding the "suspended capital gains", the Respondent argues that, in accordance with the transitional regime established in article 7, no. 7, subparagraphs a) and b) of Law no. 30-G/2000, of 29 December, the alienation by the Applicant of the social participation held in B... should trigger the taxation, in IRC, of the suspended capital gain associated with it, in the amount of € 4,833,138.72. Consequently, the fiscal result of the Applicant in 2010 was positive, corresponding to a profit of € 3,172,288.11, and not the declared loss of € 5,609,114.62.

According to the Respondent, although no additional IRC assessment was made on this taxable profit for the 2010 tax year, since the applicable limitation period had already elapsed, as enshrined in article 45, no. 1 of the LGT, this same correction should produce effects in subsequent tax years, in accordance with articles 45, no. 3 of the LGT and 52, no. 4 of the IRC Code.

Finally, it considers that the request for testimonial evidence should be rejected since only a matter of law is in dispute.

With the listed witness being dispensed with, the Tribunal, by order dated 30 July 2018, decided to dispense with the meeting referred to in article 18 of the RJAT and ordered notification of the parties for simultaneous written submissions.

In the stage of submissions, the Applicant and the Respondent maintained, in a specified manner or by referral, the arguments contained in the request for arbitral pronouncement and in the reply, respectively. The Applicant proceeded to attach the arbitral decision issued in case no. 105/2018-T, on 21 September 2018, relating to the same facts, but concerning its effect in the 2012 tax period.

Procedural Matters

The Tribunal was duly constituted and is competent ratione materiae, given the definition of the subject matter of the proceedings (cf. articles 2, no. 1, subparagraph a) and 5 of the RJAT).

The request for arbitral pronouncement is timely, as it was filed within the period provided for in subparagraph a), of no. 1, of article 10 of the RJAT.

The parties enjoy legal personality and capacity, have legitimacy and are duly represented (cf. articles 4 and 10, no. 2 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities, and no exceptions have been raised.

Legal Reasoning

Matters of Fact

With relevance to the decision, the following facts which this Tribunal deems to be proven are important:

A. A... (SGPS), S.A., here the Applicant, is a company holding company, founded in 1992, whose sole statutory purpose is the management of social participations in other companies, as an indirect form of carrying out economic activities – cf. Tax Inspection Report ("RIT"), attached with the request for arbitral pronouncement ("ppa") as document 9.

B. In the year 2000, the Applicant alienated the participations it held in the capital of companies C..., S.A. ("C...") and, S.A. ("D..."), through which it maintained an indirect participation in the capital of E..., S.A., for the amount of € 113,188,402.95 – cf. documents 1 and 9 (RIT) attached with the ppa.

C. As a result of the transaction of sale of social participations described in the previous subparagraph, the Applicant obtained a capital gain of € 43,692,362.89 – cf. documents 2 and 9 (RIT) attached with the ppa.

D. The aforementioned capital gain was not taxed in IRC, as evidenced by the 2000 tax return Declaration Model 22 filed by the Applicant, which considered applicable the tax regime of reinvestment, on the assumption that the realisation value would be reinvested by the end of the third tax period following the sale of the social participations in question (article 44, no. 1 of the IRC Code and article 7, no. 2 of Decree-Law no. 495/88, of 30 December) – cf. documents 3 and 9 (RIT), attached with the ppa.

E. The Applicant proceeded with the reinvestment through the acquisition, in 2000 and 2001, of participations in the capital of the following entities – cf. documents 1, 4 and 9 (RIT) attached with the ppa:

F. Thus, the participation in B..., S.A. or B..., in question in the proceedings, was acquired for the amount of € 12,619,584.79, and the "suspended" capital gain associated with it has the value of € 4,833,138.72 – cf. documents 1, 4 and 9 (RIT) attached with the ppa.

G. On 19 April 2010, the Applicant entered into a purchase and sale of shares contract, assignment of credits and remission of debt with P..., SGPS, S.A., by which it alienated all the capital shares it held in B... for the price of € 1.00 (one euro) and assigned, free of charge, all credits held against B..., relating to advances and respective interest, in the amount of € 3,900,676.66 – cf. document 5 attached with the ppa, in particular clauses First through Third.

H. As consideration, P..., SGPS, S.A. assumed the entirety of the liabilities of B... and all its obligations, relieving the Applicant and/or Q... – cf. document 5 attached with the ppa.

I. In accordance with the assessment of the Board of Directors of the Applicant, formalised in meeting minutes no. 26, of 27 May 2011, "[t]he operations and treasury of this subsidiary [B...], notwithstanding the various measures of an economic-financial character that were taken over the years, were always in deficit which obliged A..., S.A. to regularly provide the company with funds so that B..., S.A. would meet its commitments. It was concluded, therefore, that the only way not to further dissipate the assets of A..., S.A. would be to alienate the participation under the best possible conditions. The best possible conditions of the transaction meant that the shares, whose value at cost price was € 13,734,052.45, were alienated for the symbolic value of € 1.00 and the loans and other debts of A..., S.A. to the company, € 7,820,282.68, were lost entirely. As consideration for the transaction, the purchaser assumed the Bank Liabilities of B..., S.A., part of which was secured by time deposits of A..., S.A. in the amount of € 1,050,000.00 which were released. The purchaser also assumed the Supplier Liabilities." – cf. document 5 attached with the ppa.

J. On 12 April 2012, the Applicant submitted the IRC Declaration Model 22 for the 2010 tax year, in which it added, in field 736 of table 07, the accounting losses derived from the alienation of social participations in the amount of € 12,619,584.79, tax-wise disregarding the entirety of the loss generated with the sale of the capital shares of B... . The Applicant did not report in that declaration capital gains relating to the sale of "suspended" social participations with the associated value of € 4,833,138.72 – cf. documents 7 and 9 (RIT) attached with the ppa.

K. In the aforementioned Declaration Model 22 (2010 tax year), the Applicant calculated and declared a loss for tax purposes of € 5,609,114.62, based on the assumption that the losses, in the amount of € 3,999,869.88, incurred with the alienation of credits held against B..., should be tax-wise deductible – cf. documents 7 (field 777 of table 07) and 9 (RIT) attached with the ppa.

L. The Applicant, in the subsequent tax period – 2011 – calculated taxable profit in the amount of € 1,364,021.63. Given the tax loss calculated and declared in 2010 (of € 5,609,114.62), it deducted part of this loss, in the amount of € 1,364,021.63, as reported in the IRC Declaration Model 22 for that tax period (2011), submitted on 29 May 2012 – cf. documents 8 (field 778 of table 07, fields 302, 303 and 309 of table 09) and 9 (RIT) attached with the ppa.

M. On 15 July 2015, the Tax Inspection Services of the Finance Directorate of Lisbon initiated a partial inspection procedure, which covered the IRC of the 2011 tax year, under Service Order no. OI2014..., of 2 April 2014, which was subsequently extended to the 2009 and 2010 tax periods, under Service Orders nos. OI2015... and OI2015..., both of 17 September 2015 – cf. document 9 (RIT) attached with the ppa.

N. Following this inspection action, the Applicant was notified to, if it so wished, exercise the right of prior hearing regarding the draft RIT that contemplated the situations listed below:

(a) Favourable to the Applicant – proposed corrections derived from correlative adjustments made regarding transfer pricing, after primary corrections made to the counterparty (article 63, no. 11 of the IRC Code):

In 2009 - € 27,054.63
In 2010 - € 51,605.87
In 2011 - € 87,317.88

(b) Unfavourable to the Applicant in 2010 – disagreement relating to the tax treatment given by the Applicant to the alienation of the capital shares of B... and the assignment of credits it held against this entity, although it is indicated that "no additional IRC assessment will be made on this taxable profit for the 2010 tax year, since the limitation period has already elapsed, as enshrined in no. 1 of article 45 of the General Tax Law (LGT)". The disagreements correspond to an increase of € 8,833,008.60 to the taxable base, which would change from a tax loss of € 5,609,114.62 to taxable profit of € 3,172,288.11, taking into account the correction in favour of the Applicant for 2010, referred to above, in the amount of € 51,605.87;

(c) Unfavourable to the Applicant in 2011 – correction of the losses carried forward and used in that tax period, in the amount of € 1,364,021.63, understanding that "this same correction [the one relating to the 2010 tax year] should produce effects in subsequent tax years to whose profits A... [the Applicant] has deducted values carried forward from this 2010 tax year, by virtue of the undervaluation pointed out here, in accordance with no. 3 of article 45 of the LGT and with no. 4 of article 52 of the IRC Code" – cf. document 9 (RIT) attached with the ppa.

O. The Applicant exercised the right of prior hearing, following which the AT maintained the corrections recommended in the previous subparagraph – cf. document 9 (RIT) attached with the ppa.

P. The final RIT was issued, whose content is hereby reproduced, which contains the following reasoning relating to the matter in dispute in the present arbitral proceedings:

"III.2 – Corrections to the Taxable Base for the 2010 Tax Year

[...]

III.2.2. – Alienation of B...

A... alienated in the course of the 2010 tax year the participation it held in B..., S.A. (NIPC...) (hereinafter "B..."), representing 99% of the company's capital. It was concluded from the analysis made that the results for tax purposes declared by A... for this 2010 tax year are unduly affected in two ways by this alienation: i) by the recognition of losses on credits against B..., in the amount of € 3,999,869.88, and ii) by the non-recognition of a suspended capital gain associated with the participation in B..., in the amount of € 4,833,138.72. The following sub-points substantiate these conclusions.

[...]

III.2.3. – Summary and effects of the corrections proposed to the 2010 results

It follows from the above that the correct result for tax purposes of A... for the 2010 tax year is, not a loss with the value of € 5,609,114.62, as declared by the company, but rather a profit of € 3,172,288.11, which results as follows:

No additional IRC assessment will be made on this taxable profit for the 2010 tax year, given that the limitation period has already elapsed, as enshrined in no. 1 of article 45 of the General Tax Law (LGT).

However, this same correction should produce effects in subsequent tax years to whose profits A... has deducted values carried forward from this 2010 tax year, by virtue of the undervaluation pointed out here, in accordance with no. 3 of article 45 of the LGT and with no. 4 of article 52 of the IRC Code (see sub-section III.3.2. - Deduction of tax losses).

III.3. – Corrections to the Taxable Base for the 2011 Tax Year

[...]

III.3.2. - Deduction of Tax Losses

In the 2011 tax year A... calculates and declares taxable profit in the amount of € 1,364,021.63. To this profit it deducts an equal amount (€ 1,364,021.63) of tax losses carried forward from previous years, calculating a nil taxable base.

To the taxable profit declared for the 2011 tax year, the taxpayer could deduct, pursuant to article 52 of the IRC Code, if it had them, tax losses calculated in the six preceding years, that is, tax losses generated in the period comprising the 2005 to 2010 tax years, inclusive.

Analysing the values of the results calculated and the carryforwards of tax losses declared by A... throughout the period covered by the six years referred to, it is found that the amount deducted in 2011 relates to a loss declared for the 2010 tax year, with the total value of € 5,609,114.62 (Annex no. 3, p. 6).

However, as stated in the previous sub-section III.2.3. - Summary and effects of the corrections proposed to the 2010 results (and detailed substantiation in the foregoing), the result declared for tax purposes by A... for the 2010 tax year is found to be undervalued by € 8,781,402.73, which means that, in this tax year, calculated in accordance with the law, the company does not register a loss of € 5,609,114.62 but rather a profit with the value of € 3,172,288.11.

In these terms, the taxpayer enters the 2011 tax year without any balance of tax losses carried forward from previous years, and the deduction declared, in the amount of € 1,364,021.63, is undue, which is corrected pursuant to no. 4 of article 52 of the IRC Code, in favour of the State (Annex no. 3, p. 7).

[...]" – cf. document 9 (RIT) attached with the ppa.

Q. On that Report, the Team Leader's Opinion was issued, stating the following:

"I agree with the tenor and grounds of the attached Report of Conclusions.

From the grounds thereof it follows that the legal requirements for, while maintaining the direct evaluation of the taxable base, proceeding with the technical corrections proposed, related, first, to a correlative adjustment following the application of the transfer pricing regime in another inspection procedure, pursuant to article 63 of the IRC Code, in conjunction with Ordinance no. 1446-C/2001, are verified. To this adjustment, favourable to the taxpayer, the legal provisions contained in article 23 of the IRC Code and article 32, no. 2 of the EBF, related to the fact that the amount of the financial charges in question is not fully deductible from taxable profit, as it is attributable to capital shares held by the company, are still applied, such that the adjustments are limited to the values of € 27,054.63 in 2009, € 51,605.87 in 2010 and € 87,317.88 in 2011.

Second, in the 2010 tax year, the correct application of articles 35, 36 and 41 of the IRC Code to the losses incurred on credits, as well as the transitional regime provided for in article 7 of Law 30-G/2000 to the suspended capital gains, which, in this case, should have been included in the taxable profit for the tax year, results in the tax loss determined in 2010, in the amount of € 5,609,114.62, in practice being corrected to taxable profit of € 3,172,288.11, which, although not assessable, prevents the deduction of that loss from the taxable profit of subsequent years, given the application of article 45 of the LGT and article 52 of the IRC Code.

It is thus proposed to also make the correction of the carryforward of that tax loss, deducted from the taxable profit for the 2011 tax year, in the amount of € 1,364,021.63.

Notified to exercise the Prior Hearing Right, pursuant to article 60 of the General Tax Law (LGT) and article 60 of the Supplementary Framework for Tax and Customs Inspection Procedures (RCPITA), the taxpayer submitted a statement which, after analysis, was concluded not to present elements capable of altering the corrections initially proposed, as better explained in Chapter IX of the Report. […]" – cf. document 9 (RIT) attached with the ppa.

R. The corrections made in the Tax Inspection Report relating to the 2009 to 2011 tax years are summarised as follows:

– cf. document 9 (RIT) attached with the ppa.

S. The aforementioned Report was notified to the Applicant through an Office of the AT, dated 22 December 2015, which mentions the following information:

"You are hereby notified, pursuant to article 62 of the RCPITA, of the Tax Inspection Report, which is attached as an integral part of this notification, relating to the above-mentioned Service Order.

Of purely arithmetical corrections made to the taxable base and/or tax, without recourse to indirect evaluation, whose grounds are contained in the aforementioned Report. In the near future, the AT services will proceed with the notification of the respective assessment, which will contain the means of defence, as well as the payment period, if applicable.

From this notification and respective substantiation no complaint or challenge is permitted." – cf. document 9 attached with the ppa.

T. To date, the AT has not notified the Applicant of an act determining the correction of tax losses for the 2009 to 2011 tax years – cf. combined analysis of documents 9, 10, 13 and 14 (grounds for refusal of the gracious complaint) attached with the ppa.

U. The Applicant was notified of the additional IRC assessments nos. 2015... and of compensatory interest nos. 2015... and 2015..., relating to the 2011 tax period, whose balance payable in the statement of account settlement no. 2015... amounted to € 360,203.67, with a payment deadline of 26 February 2016 – cf. document 10 attached with the ppa.

V. The Applicant proceeded with the payment of the amount of € 360,203.67, on 4 March 2016, with a value date of 1 March 2016 – cf. document 11 attached with the ppa.

X. Not accepting the assessments identified in subparagraph U above, the Applicant filed a Gracious Complaint, which was refused by order of the Head of Division of the Finance Directorate of Lisbon, dated 28 November 2017 and notified on 11 December 2017, through office no. ..., of 5 December 2017 – cf. documents 12, 13 and 14 attached with the ppa.

Z. As grounds for the decision refusing the Gracious Complaint, the AT invokes:

"Assessment

The Claimant was subject to inspection actions for the years 2009, 2010 and 2011, from which unfavourable corrections to the taxpayer in IRC resulted, as can be observed in the map below:

The losses declared by the Claimant for the year 2010 were corrected by the Inspection Services, which were annulled and the Taxable Profit became € 3,172,288.11; that is, there were technical corrections for the 2010 tax year, with the loss declared by the taxpayer becoming profit. (annulment of all declared losses).

Thus, for the year 2011 and subsequent years, the taxpayer had no values capable of being deducted from the Taxable Profit.

Analysing the arguments now presented, we are to say that it did not impute/invoke any illegality to the assessment in question for 2011, but rather one of different interpretation from that made by the Inspection Services, with which we agree, we are of the opinion that the request is to BE REFUSED. […] – cf. document 14 attached with the ppa.

AA. In disagreement with the IRC and compensatory interest assessments above identified and with the decision refusing the Gracious Complaint filed, the Applicant submitted, in the CAAD information system, on 12 March 2018, the request for the constitution of the Collective Arbitral Tribunal that gave rise to the present proceedings.

Motivation and Unproven Facts

The pertinent facts for the judgment of the case were chosen and delimited according to their legal relevance, in light of the plausible solutions of questions of law, pursuant to the combined application of articles 123, no. 2, of the CPPT, 596, no. 1 and 607, no. 3 of the Code of Civil Procedure ("CPC"), applicable ex vi article 29, no. 1, subparagraphs a) and e) of the RJAT.

With respect to the facts proven, the conviction of the arbitrators was based, essentially, on the positions taken by the parties, whose disagreement is a matter of law and not concerning essential facts, and on the critical analysis of the documentary evidence attached to the proceedings.

With relevance to the decision, there are no other facts alleged that should be considered unproven.

Ruling on the Law

2.1. Delimitation of the Questions to be Decided

It falls to the Tribunal to consider the defects imputed by the Applicant to the tax acts and the gracious complaint which are the subject matter of the proceedings. These concern:

• The lack of notification of an essential prior decisive act that would disregard the Applicant's tax losses (generated in 2010) and which would constitute the legal basis for the IRC assessment and compensatory interest, relating to 2011, derived solely from the disregard of these tax losses that were never corrected;

• The expiry of the right to assess, because the Applicant was not notified, within the corresponding period (of article 45 of the LGT), of the act correcting the fiscal result (tax losses) of the Applicant;

• The error of law (substantive) due to incorrect interpretation of the regime for taxation of capital gains resulting from the alienation of capital shares under article 44 of the IRC Code, applicable, by referral, to financial capital gains of holding companies, which was maintained by the transitional provision contained in article 7, no. 7, subparagraph b) of Law no. 30-G/2000, of 29 December; and

• The error of law (substantive) by non-acceptance of the tax deduction of losses on assigned credits held in B..., due to the inapplicability of articles 35, 36 and 41 of the IRC Code, given the fulfilment of the requirements provided for in article 23 of the IRC Code.

2.2. Non-existence of a Prior Administrative-Tax Act: Ineffectiveness of Corrections Relating to the 2010 Tax Year

The IRC assessments and compensatory interest relating to 2011 and contested here are directly based on the non-acceptance, by the AT, of the deduction from the taxable profit calculated and declared in the 2011 tax year (of € 1,364,021.63) of the tax losses carried forward from the previous year (2010). In other words, the result calculated in 2011 which corresponded to taxable profit was not subject to corrections or adjustments by the AT, but only to the use or deduction of that profit of the previous tax losses (generated in 2010 and subject to carryforward). Due to the use of these tax losses, the taxable base for IRC declared by the Applicant for the 2011 tax year was nil.

Thus, the question that arises is, first and foremost, to determine whether the losses used by the Applicant in 2011 and which had been declared by it in 2010 were actually corrected by the AT, so that it could validly reject their carryforward and use by the Applicant in subsequent years.

The alteration of the tax situation of taxpayers, particularly of the taxable base or the base of taxation, requires legally valid action on the part of the Public Authority, endowed with special legal force, which defines the tax obligation and is capable of producing, through a decisive act by it, external legal-tax effects, mandatory and prejudicial.

According to the Inspection Report, no additional IRC assessment should be made for the 2010 tax year, given that the limitation period had already elapsed, under article 45, no. 1 of the LGT. However, correction was recommended in subsequent tax years "to whose profits A... has deducted values carried forward from this 2010 tax year", in accordance with article 45, no. 3 of the LGT and article 52, no. 4 of the IRC Code.

Nevertheless, it is found that no correction has been made that has come to the attention of the Applicant.

The Reports of inspection actions fall into the category of merely preparatory acts, they constitute non-binding opinions, which opine and inform. In them, the Tax Authority expounds its understanding regarding a particular matter of fact and/or law which is analysed, without prejudice to, for the production of legal effects, a separate decisive act being required, i.e., an administrative act in tax matters (if not generating an assessment), or an act of assessment, which, in either case, produces external legal effects in the individual and concrete situation, as provided for in article 148 of the Code of Administrative Procedure. An act which, moreover, need not even be of a meaning coinciding with that of the Report, since the latter does not have the nature of a binding opinion (cf. article 63 of the RCPITA).

In the concrete case, the very notification office of the Report conveys that "[f]rom this notification and respective substantiation no complaint or challenge is permitted", in accordance with article 63-A, no. 3 of the RCPITA, which provides that "no correction of the taxable base, assessment of tax or application of penalty can be made based on the report".

Thus, the Report could not correct the losses declared by the Applicant, for the simple reason that it constitutes a non-binding opinion and it would have been necessary, for that, a decision which did not materialise, since the AT has not, to date, notified the Applicant of an act determining the correction of tax losses for the 2009 to 2011 tax years.

On the other hand, if there existed a decisive act determining the correction of tax losses, which this tribunal is unaware of, that would always have to be notified to the Applicant (and was not) for it to be enforceable against it, since "[t]ax acts that affect the rights and legitimate interests of taxpayers only produce effects in relation to them when duly notified", the production of effects of the decision depending on notification (cf. articles 36 of the CPPT and 77, no. 6 of the LGT).

Notification is, thus, a condition of effectiveness of the decision of the tax procedure and derives from constitutional requirement since the revision of 1982 (cf. article 268, no. 3 of the CRP), as noted by Jorge Lopes de Sousa in his Commentary on the CPPT (cf. Vol. I, 6th Edition, 2011, Áreas Editora, pp. 340-341).

The pronouncements of the Constitutional Court ("TC") on the matter of notification of prejudicial acts have reiterated the requirement of personal, formal and official notification to the respective recipients, given the guarantor aspect of the constitutional command and the legally protected interests it aims to protect – cf. Decisions of the TC nos. 72/2009, of 11 February 2009 and 145/01, of 28 May 2001. Thus, a declaration that does not communicate in an autonomous and individualised manner the act to be notified should not be accepted as notification nor produce the effects typically inherent to it: "(…) the initiative of notification must always fall to the services, insofar as a constitutional duty is imposed on the Administration to "give knowledge to those interested through official and formal communication", of the administrative acts relating to them" (cf. Pedro Gonçalves, Notification of Administrative Acts, Ab Uno Ad Omnes, Coimbra Editora, p. 1091).

Similarly, the case law of the Supreme Administrative Court ("STA") reiterates the imperative of notification so that the act of correction of the taxable base produces its effects in the legal-tax sphere of the taxpayer, stating that "[t]he right to notification constitutes a guarantee […] of taxpayers, which is intended not only to bring to their attention the act issued by the tax authority but to enable them to react against it in case of disagreement" and, as such "[t]ax acts that affect the rights and interests of taxpayers only produce effects in relation to them when duly notified" – cf. Decision of the STA of 2 March 2011, case no. 967/10.

This understanding is seconded by the Central Administrative Court of the South ("TCASul") as follows: "[t]he decision that alters the taxable profit declared by the taxpayer requires notification to him, under penalty of the same not being able to produce effects" and "[n]ot having the tax year to be corrected given rise to any assessment, the AT is no less obliged to proceed with the corrections and to notify them to the taxpayer within the limitation period, under penalty of stabilisation of the taxable base underlying the assessment act" – cf. Decisions of the TCASul nos. 963/06, of 12 May 2009, and 2859/09, of 9 February 2010, respectively.

Thus, in the concrete situation under examination, in light of the absence of notification of an administrative-tax act which proceeded with the correction of the 2010 tax losses declared by the Applicant, in the amount of € 5,609,114.62, it must be concluded that these remained valid, and the subsequent disregard of them by the AT in the 2011 tax year under examination is contrary to law.

2.3. Expiry of the Right to Assess

Another effect produced by the failure to notify the decisive act relating to the correction of the Applicant's losses in 2010, which invalidates the assessment acts of 2011 which have this correction as an essential prerequisite, is the expiry of the limitation period.

Juridically, expiry is "mere legal fact which depends on the passage of time and which determines the impossibility of exercising a right in a concrete case […] it relates to legal situations in formation and to power rights, whose exercise is subject to short periods. In summary, we can say that prescription determines the extinction of a right and expiry the impossibility of exercising it in a concrete case (Cfr. Expiry in Administrative Law: Brief Considerations, Studies in Homage to Counsellor José Manuel Cardoso da Costa, 2005, Coimbra Editora)" – cf. Decision of the STA, of 30 May 2012, case no. 410/12, reiterated by the Decision of the STA, of 12 February 2015, case no. 1610/13.

In the situation at issue, it is important to consider that the limitation period of the right to assess in 2010 (the year in which losses occurred) was four years, by virtue of article 45, no. 1 of the LGT, which establishes that "[t]he right to assess tributes is barred if the assessment is not duly notified to the taxpayer within four years, when the law does not set another". In accordance with no. 4 of the cited article, the limitation period runs in periodic taxes "from the end of the year in which the tax event occurred".

In these terms, as regards the 2010 tax period, the limitation period of the right to assess tributes (of four years) ended, and with it, equally, the possibility of offsetting the taxable base (tax losses) declared by the Applicant, on 31 December 2014.

The AT's own Report acknowledges the expiry of the limitation period as regards the 2010 tax year, although it recommends that the "correction" (which, it should be recalled, we do not know if it exists, but we know was not notified to the Applicant) should produce effects in subsequent years, a position which is not endorsed.

Indeed, as has been decided by the case law of the STA, "[t]he reasons of legal certainty and security underlying the institution of expiry prevent the AT from legally being able to proceed with corrections to the taxable profit of a tax year regarding which the expiry of the right to assess has already occurred, even if it refrains from assessing the tax relating to that period, in order to draw therefrom tax consequences in subsequent years […] because in that way it would be permitted to draw new legal-tax consequences from situations which the law, for reasons of social peace, intends to be definitively settled in the tax sphere." – cf. Decision of the STA of 10 May 2017, case no. 699/16.

Moreover, it does not follow from article 45 of the LGT a different method for calculating the limitation period in the specific situation of carryforward of tax losses. As noted by the TCASul: "[i]n cases where carryforward of losses is made, the calculation of the competent limitation period of the right to assess must be carried out in strict compliance with the common rules applicable to all periods of tax expiry […]. These situations do not therefore presuppose any type of specificity at the level of the way to compute the limitation period, determined by correspondence with the period of permission of the exercise of the possibility of deferred deduction" – cf. Decision of 22 January 2013, case no. 2857/09 (see in similar sense the Decision in case no. 651/13, of 5 November 2015).

In the sense recommended, the arbitral decision in case no. 119/2012-T, of 9 April 2013, is also examined, whose understanding is endorsed:

"[…] the expiry of the right to assess is related to the need for certainty of rights and legal relationships within a period of time deemed adequate and these objectives are only achieved, in cases where the correction of the taxable base of a tax year which has not given rise to any assessment is at issue, but in which there are losses capable of affecting subsequent tax years, if such correction is also carried out within the limitation period of the right to assess. Therefore, in cases where the tax year to be corrected does not give rise to any assessment, but there are tax losses, the Tax Authority is no less obliged to proceed with the corrections and to notify them to the taxpayer within the limitation period, under penalty of stabilisation of the taxable base underlying the assessment act. Furthermore, the fact that the law expressly grants taxpayers the right to challenge acts of "determination of the taxable base, when it does not give rise to the assessment of any tax" [article 97, no. 1, subparagraph b), of the Tax Procedure and Process Code] confirms that acts of such type cannot fail to be notified to taxpayers, since only with their notification can these exercise the right to challenge them."

In light of the foregoing, it cannot but be concluded that the Applicant also has reason regarding the question of expiry of the right to assess, which is, in itself, sufficient to conclude the invalidity of the tax acts contested and of the order refusing the gracious complaint relating to them.

2.4. Substantive Defects

Without prejudice to the proceeding of the formal defects examined above, from which results the stable and effective protection of the Applicant's rights as regards the invalidity and consequent annulment of the acts object of this action, the proceeding of the request for compensatory interest, derived from judicial annulment of an assessment act, based on article 43 of the LGT, depends on it being proven in the proceedings that such act is affected by error regarding the factual or legal grounds attributable to the AT.

Within this scope, and as established by the case law of the STA, "[a]nnulment of an assessment act based on expiry of the right to assess due to the notification of such act not having been made within the expiry period does not imply the existence of any error regarding the factual or legal grounds of the assessment act, such that the right to compensatory interest in favour of the taxpayer, provided for in that no. 1 of article 43 of the LGT, does not exist" – cf. Decision of the STA, of 30 May 2012, case no. 410/12, and, more recently, the Decision of the STA, of 12 February 2015, case no. 1610/13.

In accordance with this case law and "[a]s emphasizes JORGE LOPES DE SOUSA, «[t]he use of the expression «error» and not «defect» or «illegality» to refer to the facts which may serve as a basis for the attribution of interest reveals that only the defects of the annulled act to which this designation is suitable were considered, which are error regarding the factual grounds and error regarding the legal grounds. In effect, there are defects of administrative and tax acts to which such designation is not suitable, namely defects of form and incompetence, such that the use of that expression «error» has a narrower scope than the expression «defect».

[…]

Therefore, it is to be concluded that the use of that expression «error» has a restrictive scope regarding the type of defects which may serve as a basis for the right to compensatory interest» (Tax Procedure and Process Code annotated and commented, Áreas Editora, 6th edition, volume I, annotation 5 to article 61, p. 531).

The same Author explains the reasons why the LGT restricted the right to compensatory interest to cases of annulment due to substantive defect and no longer recognised it regarding defects of form or incompetence that determine the annulment of the act: the recognition of a defect of these latter types "does not imply the existence of any defect in the legal-tax relationship, that is, any assessment regarding the improper nature of the monetary consideration collected by the Tax Authority based on the annulled act, limiting itself to express the non-conformity with the law of the procedure adopted to declare or collect it or the lack of competence of the authority which required it.

[…] in cases where the defect leading to the annulment of the act relates to a norm that regulates the activity of the Administration, the latter reveals nothing regarding the legal-tax relationship and regarding the improper nature of the consideration, in light of the substantive tax norms. In these cases, the annulment of the act does not imply that there has been a lesion of the substantive legal situation and, consequently, from the annulment it cannot be concluded that there has been a prejudice deserving reparation."

In light of the foregoing, the defect of expiry or, for identical reasons, the defect of lack of notification of a prior decisive act of correction of tax losses, from which the tax acts in crisis suffer, tells us nothing about the correctness or material justice of these acts, such that, to determine the right to compensatory interest must also assess the material grounds of the assessment acts, under penalty of their invalidation solely due to a formal defect hindering the right to compensatory interest in the sphere of the Applicant, in accordance with the endorsed position that such interest, under article 43 of the LGT, depends on a material error attributable to the AT, as results from the case law of the STA cited.

Regarding the Taxation or Reinstatement of "Suspended Capital Gains"

At issue is the taxation of capital gains (in the total global amount of € 43,692,362.89) realised by the Applicant in 2000 with the alienation of the participations it held in companies C... and D..., whose realisation value (of € 113,188,402.95) was entirely reinvested in the years 2000 and 2001, and the taxation thereof remained "suspended".

Part of this reinvestment occurred in B..., to which the proportion of 11.1% of the total reinvested value corresponded, with an associated capital gain excluded from taxation of € 4,833,138.72.

This framework was based on article 7, no. 2 of Decree-Law no. 495/88, of 30 December, which allowed capital gains and losses obtained by SGPS, through the sale or exchange of shares or quotas of which they were holders, to be applicable to the provision of article 44, no. 1 of the IRC Code (in the wording in force in 2000), whenever the respective realisation value was reinvested, wholly or partially, in the acquisition of other shares or quotas, within the period fixed in this normative.

In turn, the aforementioned article 44, no. 1 of the IRC Code provided that the positive difference between capital gains and losses realised through the onerous transfer of elements of fixed assets (tangible), would not contribute to the taxable profit of the year to which it related, to the extent that it had influenced the taxable base, whenever the realisation value corresponding to all of the said elements was reinvested in the acquisition of elements of fixed assets (also tangible) by the end of the third tax year following the realisation.

Article 44, no. 6 of the IRC Code also provided that the value of the positive difference between capital gains and losses not taxed, pursuant to no. 1 of the same article, would be deducted from the acquisition cost of assets in the fixed assets (tangible) in which the reinvestment occurred, adding no. 6 of this provision that this deduction would be made proportionally to the part which, in the total to be reinvested, the value of each asset in which the investment occurred represented.

The aforementioned deduction from the acquisition cost of the participations in which the reinvestment had been made had the effect that the exclusion from taxation, verified in the year the capital gains were realised, would later be reflected, when the eventual alienation of these participations occurred. Indeed, on that later occasion, the acquisition cost "for tax purposes" would be lower, since it was subtracted from the value of the capital gains which had been excluded from taxation (by virtue of the reinvestment) and therefore would increase the value of the difference between the realisation value and the acquisition value.

Thus, the sale of the assets (social participations) subject to the reinvestment would result tax-wise in a larger capital gain or a smaller loss, as the case may be, which is why some authors refer to it not as an exclusion from taxation of the (first) capital gains, but as a deferment of that taxation, which would occur at a later time, with the increase in the taxable base of the sale of the participations in which the reinvestment had occurred, derived from the deduction from the acquisition cost thereof of these "suspended capital gains".

Article 7, no. 7, subparagraph a) of Law no. 30-G/2000, of 29 December, amended article 44, no. 1 of the IRC Code, and provided, as a discrete and transitional measure, that the provision of the previous wording of this article would continue to apply to capital gains and losses realised before 1 January 2001 until the realisation, inclusive, of capital gains or losses relating to assets in which the reinvestment of their respective realisation values was carried out.

As the reinvestment of the realisation value of the shares alienated by the Applicant in 2000 was carried out in the years 2000 and 2001, that is, within the three-year period, and the shares acquired relevant to the present proceedings (those of B...), fruit of the reinvestment, were alienated in 2010, the Applicant calculated a tax loss, in the amount of € 9,888,785.51, thus calculated: realisation value € 1.00 – [(acquisition cost of shares acquired for reinvestment € 12,619,584.79 – capital gains excluded/suspended from taxation € 4,833,138.72) x monetary correction coefficient 1.27 of article 47 of the IRC Code], a calculation consistent with the AT's position conveyed by Circular no. 7/2002, of the IRC Services Directorate, of 2 April 2002.

These losses were not considered by the Applicant, for purposes of calculating its taxable profit for the 2010 tax year, since it understood that article 31, no. 2 of the Tax Benefits Statute (wording at the time) was applicable, which stipulated that capital gains and losses realised by SGPS on capital shares of which they were holders, provided they were held for a period of not less than one year, would not contribute to the formation of the taxable profit of these companies. As regards this part, the AT expressed its agreement.

However, the AT understands that the "suspended" capital gain of € 4,833,138.72 associated with the B... shares would have to be subjected to taxation, since, in 2010, the date on which the shares were alienated, the reinvestment regime as provided for in article 44 of the IRC Code (in the wording in force in 2000) had already ended. It concludes that the amount to be included in taxable profit should be that of the suspended capital gain that was associated with the alienated asset, in the amount of € 4,833,138.72, without any additional calculation (in particular, without taking into account the losses calculated in the operation of selling the B... shares).

For the AT, the "formulas" provided for in that article 44 of the IRC Code and in article 7, no. 7 of Law no. 30-G/2000, of 29 December, as well as in Circular no. 7/2002, of the IRC Services Directorate, of 2 April 2002, ceased to have meaning and ceased to be in force on 1 January 2003, with the entry into force of the then article 31 of the EBF, with which the financial capital gains generated by SGPS ceased to be subject to taxation.

It appears that the AT is not correct.

Article 7, no. 7, subparagraph a) of the cited Law no. 30-G/2000 is clear in preserving the previous wording of article 44 of the IRC Code for capital gains realised until 31 December 2000, provided that the reinvestment of their respective realisation values has been carried out in the three subsequent tax years, as was the case, with the consequent deduction of the value of the capital gain (excluded from taxation) from the acquisition cost of the assets in which the reinvestment occurred. All this was observed by the Applicant.

As regards subparagraph b) of the same no. 7, the AT's interpretation cannot be accepted, since the norm refers to a prerequisite that was not verified in the situation at issue, of the existence of a positive difference in the alienation of the assets in which the reinvestment was carried out, that is, in the sale of the social participation in B... . In a very different manner, this participation was acquired for 12.6 million euros (in 2000 and 2001) and sold for 1 euro (in 2010), which, without further ado, rules out any speculation based on a capital gain or positive difference.

On the other hand, contrary to what is stated by the AT, the entry into force of article 31 of the EBF did not explicitly or implicitly repeal the transitional regime in question, whose meaning does not prejudice it, nor the cited Circular no. 7/2002, which thus intends to disregard, in violation of article 68-A, no. 1 of the LGT.

It should also be noted that with respect to the regime of article 31 of the EBF (at the time), which came to determine the non-subjection to taxation of capital gains earned by SGPS, from 1 January 2003, the Applicant was consistent, not tax-wise relevantly the loss it calculated with the alienation of B... .

The understanding advocated regarding the application of the regime provided for in article 44 of the IRC Code (wording in force in 2000) is that which, equally, is extracted from the case law of the STA, specifically, from the Decision of 16 January 2013, in case no. 1124/11, of which the following excerpt is transcribed:

"From the analysis of this norm [it refers to article 7, no. 7 of Law no. 30-G/2000, of 29 December] it clearly follows that despite the rule contained in the cited art. 21, the legislator intended that, in some cases, the previous wording of article 44 of the CIRC continues to apply, that is, that it continues to apply to capital gains and losses realised before 1 January 2001 until the realisation, inclusive, of capital gains or losses relating to assets in which the reinvestment of their respective realisation values was carried out.

Now, saying nothing regarding situations where, notwithstanding the manifestation of the intention to reinvest, this has not effectively occurred, it appears clear to us that what was intended to be disciplined, in this norm of transitional law, are the situations in which such effective reinvestment of the realisation values has existed. And, with all due respect for contrary opinion, the Claimant has no reason when it argues that determining this norm of transitional law the application of the previous wording of article 44 of the CIRC to the situations in which reinvestment was verified, is therefore because the new wording is intended to be equally applicable to situations in which such reinvestment did not exist.

Such a norm of transitional law constitutes, unquestionably, and by its very nature, a norm of an exceptional character, which cannot, obviously, be subject to extensive interpretation; that is to say, consequences or provisions cannot be extracted therefrom which go beyond its content. And, on the other hand, not being a norm of interpretation, the new wording given to article 44, no. 5 of the CIRC by Law no. 30-G/2000, only rules for the future, as expressly results from the provision of article 21 of that Law and of the body of its article