CAAD 104/2019-T: IRC Capital Losses Irrelevance, Double Economic Taxation & Autonomous Taxation on Directors' Remuneration

ARBITRAL DECISION

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president), Prof. Doctor Victor Calvete and Dr. Amândio Silva (arbitrator-members) appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 26-04-2019, agree as follows:

1. Report

A..., S.A., with the single registration and tax identification number ..., with registered office at ..., no. ..., ...-..., Lisbon, hereinafter referred to as "Applicant" or "A...", came, pursuant to Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), to request the constitution of an Arbitral Tribunal, with a view to the declaration of partial illegality of the corporate income tax assessment act no. 2018..., relating to the financial year 2015, with respect to the amount of €1,420,726.09, corresponding to the corrections contested herein, including compensatory interest, with its consequent annulment in this part, with all legal consequences, namely the reimbursement to the applicant of this amount, plus indemnificatory interest at the legal rate charged, until full reimbursement, from 16 April 2018 as to €952,179.39, and from 5 March 2018 as to the remaining €468,546.70.

The Applicant further requests the declaration of illegality of the dismissal of the administrative appeal that it presented.

The Respondent is the TAX AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 18-02-2019.

Pursuant to the provisions of subparagraph a) of no. 2 of article 6 and subparagraph b) of no. 1 of article 11 of the RJAT, the Deontological Council appointed as arbitrators the signatories, who communicated their acceptance of the appointment within the applicable period.

On 04-04-2019, the parties were duly notified of this appointment and did not manifest any intention to refuse the appointment of the arbitrators, in accordance with articles 11, no. 1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of subparagraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 26-04-2019.

The Tax and Customs Authority responded, arguing the lack of merit of the claim.

By order of 14-06-2019, the meeting provided for in article 18 of the RJAT and statements were dispensed with.

The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2, no. 1, subparagraph a), and 10, no. 1, of Decree-Law no. 10/2011, of 20 January, and is competent.

The Parties are duly represented, enjoy legal standing and capacity, are legitimately interested and are represented (articles 4 and 10, no. 2, of the same legal instrument and article 1 of Order no. 112-A/2011, of 22 March).

The proceeding is not vitiated by any nullities.

2. Factual Matters

2.1. Facts Established

An inspection action was carried out with respect to the Applicant relating to the financial year 2016, in which a Tax Inspection Report (RIT) was prepared, which is attached as document no. 3 with the request for arbitral pronouncement, the content of which is hereby reproduced and which states, among other things, the following:

III.1.3 - Tax Losses - Equity Interests (no. 2 of article 23-A of the Corporate Income Tax Code) -€2,713,954.64-

In the field "739 - Positive Difference between Capital Gains and Capital Losses without Intention to Reinvest (article 46)" of the Model 22 Income Tax Return, the Insurer increased the amount of €136,137,799.36, corresponding to the balance between the capital gains and capital losses realised with the transfer of equity interests.

In the course of the inspection procedure, an Excel file "MAPA FISCAL_122015_com ..._env_trab_vf.xlsb" was made available with the objective of demonstrating that, with respect to the alienations of equity interests, compliance was given to no. 2 of article 23-A of the Corporate Income Tax Code.

The aforementioned legal provision establishes that "[l]osses and other losses relating to instruments of own capital do not compete for the formation of taxable profit, to the extent of the value corresponding to distributed profits or reserves or capital gains realised through the onerous transfer of equity interests of the same entity that benefited, in the same tax period or in the four preceding periods, from the deduction provided for in article 51, the credit for double taxation prevention provided for in article 91-A or the deduction provided for in article 51-C."

In accordance with no. 1 of article 46 of the Corporate Income Tax Code, "[c]apital gains or losses realised are the profits obtained or losses suffered through onerous transfer, whatever the grounds thereof, and likewise those arising from accidents or resulting from permanent allocation for purposes other than the activity carried on, relating to:

a) (...);

b) Financial instruments, except those recognised at fair value in accordance with subparagraphs a) and b) of no. 9 of article 18."

And no. 2 of article 46 of the Corporate Income Tax Code establishes that "[c]apital gains and losses are given by the difference between the realisation value, net of inherent charges, and the acquisition value, less depreciation and amortisation accepted for tax purposes, impairment losses and other value adjustments provided for in articles 28-A and 31-B and also values recognised as tax expenses under article 45-A, without prejudice to the provisions of the final part of no. 3 of article 31-A".

Further, no. 11 of the same article provides that "[i]n the onerous transfer of equity interests of the same nature and conferring identical rights, it is considered that the equity interests transferred are those acquired earliest in time".

Adding to this, no. 1 of article 47 of the Corporate Income Tax Code states that the acquisition value adjusted under article 46 of the Corporate Income Tax Code is updated through the application of currency devaluation coefficients.

It is important to note that, in accordance with subparagraph l) of no. 1 of article 23 of the Corporate Income Tax Code, realised losses are considered expenses. Notwithstanding their acceptance as an expense, no. 2 of article 23-A establishes a limitation on their value, by requiring that, from the realised tax losses, the dividends that benefited from the elimination of double taxation be subtracted, under articles 51, 91-A or 51-C, all of the Corporate Income Tax Code, in the same year or in the four preceding tax periods.

For the purpose of validating the calculations evidenced in the map made available [Excel file "MAPA FISCAL_122015_com ..._env_trab_vf.xlsb"], the elements provided by the Insurer were analysed, as well as other information accessible to the inspection services, such as data from previous years resulting from inspection actions, and it was found that there were situations in which the Insurer had not considered, for equity interests alienated in the tax period of 2015 and which gave rise to realised losses, all the distributed profits that benefited from article 51 of the Corporate Income Tax Code, namely in the following cases (Annex 3):

• I...

1,090,515 shares were alienated on 2015-12-29, with realised tax losses being calculated in all the transactions totalling €12,477,126.83, the amount of dividends received on 2015-09-10 not being considered in their calculation, in relation to which the Taxpayer benefited from the regime established for the elimination of economic double taxation provided for in article 51 of the Corporate Income Tax Code, in the amount of €1,175,193.01";

• H...

Various sales operations of this financial asset were carried out, with capital gains and losses being calculated, as they originated from different purchases and sales. The Taxpayer considered as a tax expense the entirety of the realised losses because these were less than the realised gains, and therefore did not apply no. 2 of article 23-A of the Corporate Income Tax Code;

However, in light of the various provisions of article 46 of the Corporate Income Tax Code, we are dealing with distinct sales operations, which gave rise to different realised gains. Thus, in the case of realised losses calculated, they were annulled to the extent corresponding to dividends that benefited from the elimination of double taxation, under article 51 of the Corporate Income Tax Code, in order to comply with what was established in no. 2 of article 23-A of the Corporate Income Tax Code.

• E...

2,365,199 shares were alienated on 2015-12-29, with realised tax losses being calculated in all the transactions totalling €18,846,054.42 (Annex 15), the amount of dividends received on 2015-09-29 not being considered in their calculation, in relation to which the Taxpayer benefited from the regime established for the elimination of economic double taxation provided for in article 51 of the Corporate Income Tax Code, in the amount of €1,435,982.23.

In this manner, the realised and tax-relevant gains were recalculated, evidenced in Annex 3, with the value of the dividends to be considered being changed as they had benefited from article 51 of the Corporate Income Tax Code.

The result of this calculation is an increase in taxable profit in the amount of €2,713,954.64, calculated as the difference between the amount considered by the Taxpayer of €136,137,799.36 and that determined by the Tax Administration of €138,851,754.00, effected in accordance with the aforementioned legislation.

It is important to note that this correction is directly related to and conditioned by the correction identified in point III.1.7 of this document.

Following the Taxpayer's pronouncement in the hearing exercise with respect to the correction proposed in point III.1.7 of the Draft Tax Inspection Report, the amount of this correction was adjusted and made the subject of an Addendum to the Draft Tax Inspection Report, as described in point IX of this document.

III.1.4. Withholding of Corporate Income Tax relating to the redemption of units of participation in real estate investment funds (no. 2 of article 68 of the Corporate Income Tax Code and no. 3 of article 22 of the Tax Benefits Statute)

-€286,644.00-

The Schedule of Capital Gains/Losses Model 31, which forms part of the tax documentation process referred to in article 130 of the Corporate Income Tax Code, shows that Units of Participation (UP) of the B... Fund - Real Estate Investment Fund were redeemed. Following that operation, A... informed, in the course of the inspection procedure, via email dated 2017-06-05, that:

"In the year 2015, A... redeemed all the UP's it held in the B... Fund.

During the period in which A... held participation in that fund, the latter was subject to tax (Corporate Income Tax), this being a tax on account in accordance with article 22 of the Tax Benefits Statute in the sphere of the holder of the UP's (A...).

When A... submitted the Model 22 return for the year 2015, it did not consider in the deduction from the tax the tax borne by the B... Fund that pertained to A... in accordance with the declaration attached hereto.

We therefore request that, in the context of the inspection currently being carried out on the accounts of A... for that year, the amount of €286,644 in tax in favour of the Company be considered."

For this purpose, it sent, attached to the email, an Income Tax Return issued by C..., S.A., which shows that, effective 15 July 2015, A... redeemed 120,000 units of participation that it held in fund B... for the amount of €5,339,184.00, subscribed on 15 July 2005 for the value of €6,000,000.00 and tax withheld in the amount of €286,644.00 (Annex 4).

Funds represent financial vehicles for financing certain critical areas, constitute autonomous assets, a unified and continuous form of action, pursue their own purposes, and the monetary contributions delivered by the entities that established them (e.g. associates and participants) are deposited with the respective management companies, which have the competence to represent them as entities holding those Funds.

Given these characteristics, Funds are considered, in the domestic legal order, as entities devoid of legal personality.

Notwithstanding the fact that they are of the nature of entities lacking legal personality, they possess tax personality given that they are generators of economic relations of a commercial character, an activity that is exercised as a principal activity and on a continuous basis, a fact manifestly determining for them to be conferred the status of passive tax subjects of tax relations.

In fact, the qualification of these entities as passive subjects of Corporate Income Tax is contained in subparagraph b) of no. 1 of article 2 of the Corporate Income Tax Code:

"The passive subjects of Corporate Income Tax are:

a) (...)

b) Entities devoid of legal personality, with registered office or effective management in Portuguese territory, whose income is not subject to taxation under personal income tax (IRS) or Corporate Income Tax directly in the ownership of natural or legal persons".

With respect to compliance with tax obligations inherent to Investment Funds, it is the management companies that administer the interests of the respective associates, participants or beneficiaries that are charged with this responsibility, through the exercise of legal representation of the Funds.

Considering that, in the specific case, the subscription of the Units of Participation took place in the year 2005 and their redemption on 15 July 2015, the analysis to be carried out will focus on the regime of taxation of collective investment bodies in force until 30 June 2015, as well as on the transitional regime established in article 7 of Decree-Law no. 7/2015.

The tax regime of Investment Funds in force prior to the entry into force of Decree-Law no. 7/2015, of 13 January, provided for in article 22 of the Tax Benefits Statute, was of the nature of a tax benefit, in which the legislator's choice was based on a system of tax neutrality through which participants are taxed in a manner similar to that to which they would be subject if the investment were made directly. A regime of quasi-transparency was thus obtained in which taxation is carried out "at entry". Therefore, and despite Investment Funds constituting legal entities, the income obtained was taxed by withholding at source and/or autonomously, with the subsequent income from units of participation (by distribution, redemption or liquidation or division) being incorporated with the remaining income, when obtained by passive subjects of Corporate Income Tax and Personal Income Tax within the context of a commercial, industrial or agricultural activity, or exempt, and with the option of incorporation, when obtained by passive subjects of Personal Income Tax outside the scope of these activities.

It should be noted that with respect to real estate investment funds (RIF) the income obtained was taxed in accordance with no. 6 of article 22 of the Tax Benefits Statute, this normative establishing that the income from RIF had the following tax regime:

a) If it concerns real estate income, other than that relating to social housing subject to legal regimes of controlled costs, there is autonomous taxation at the rate of 25%, which applies to net income of conservation and maintenance charges actually borne, properly documented, as well as municipal real estate tax, with the tax being paid by the respective management entity by the end of April of the year following the year to which it relates, and any tax withheld being considered as payment on account of this tax;

b) If it concerns real estate capital gains, other than those relating to social housing subject to legal regimes of controlled costs, there is autonomous taxation at the rate of 25%, which applies to 50% of the positive difference between capital gains and losses realised, calculated in accordance with the Personal Income Tax Code, with the tax being paid by the respective management entity by the end of April of the year following the year to which it relates;

c) If it concerns other income, there is taxation in accordance with the provisions of subparagraphs a), b) and c) of no. 1.

It should be added that, in accordance with no. 7 of article 22 of the Tax Benefits Statute, income relating to units of participation in real estate investment funds was subject to a tax regime identical to that established in no.s 2 (tax framework applicable to Personal Income Tax subjects who are holders of units of participation outside the scope of a commercial, industrial or agricultural activity), 3 (tax framework applicable to Corporate Income Tax subjects or Personal Income Tax subjects who obtain them within the scope of a commercial, industrial or agricultural activity, resident in Portuguese territory or attributable to a permanent establishment of a non-resident entity located in this territory), 4 (tax framework applicable to Corporate Income Tax subjects resident in Portuguese territory exempt) and 5 (tax framework applicable to non-resident entities in Portuguese territory and not attributable to a permanent establishment located in this territory) of the same article, for income relating to units of participation in financial investment funds.

Thus, and despite Investment Funds constituting legal entities, the income obtained was taxed by withholding at source or autonomous payments, with subsequent income from units of participation being incorporated with the remaining income, when obtained by passive subjects of Corporate Income Tax and Personal Income Tax within the scope of a commercial, industrial or agricultural activity, being exempt when obtained by Personal Income Tax subjects outside the scope of these activities - with the possibility of incorporation by option of its holder - or by non-residents.

No. 3 of article 22 of the Tax Benefits Statute provided that income relating to units of participation in Funds obtained by Corporate Income Tax subjects, resident or non-resident with a permanent establishment in Portuguese territory, was not subject to withholding at source and was considered by its holders as income or gains, and the amount of tax borne by the Fund, in accordance with no. 1 of the same normative, had the nature of a tax on account, for the purposes of article 90 of the Corporate Income Tax Code.

Therefore, Corporate Income Tax subjects resident in Portuguese territory, such as A..., who obtained the income within the scope of a commercial activity in accordance with the application of what is contained in no. 3 of article 22 of the Tax Benefits Statute, would have to take into account no. 2 of article 68 of the Corporate Income Tax Code, "[w]henever there has been withholding of Corporate Income Tax with respect to income incorporated for taxation purposes, the amount to be considered in the determination of the taxable matter is the respective amount gross of the tax withheld at source."

Now, considering the system of neutrality and the regime of quasi-transparency on which the tax regime of Investment Funds was based, when income relating to units of participation in Funds was obtained by Corporate Income Tax subjects, the same should have been included at the gross value, that is, by the amount calculated in the redemption operation plus the tax borne, with the tax borne "at entry" being able to be deducted from the tax of the respective period. In this manner, the taxpayers holding units of participation were taxed in a manner similar to that to which they would have been subject if the investment had been made directly.

Indeed, in the sense that the tax regime of investment funds is based on a regime of tax neutrality, it has been stated that "[these legal norms [article 22 of the Tax Benefits Statute] reflect, clearly, an objective of tax transparency. The income generated by investment through funds is taxed as if the holder of the UP was the direct holder of the assets that make up the fund. For this reason, the purpose of the law is that, when such income is transferred to the sphere of the holders of the UP, it is already taxed and will not be taxed again.

(...)

All that is guaranteed is that taxation operates as if the investments were made directly by the holder of the UPs. The regime presented is a regime of tax neutrality between direct investment in equity interests and investment through non-personalised funds."

Decree-Law no. 7/2015, of 13 January, reformed the regime of taxation of collective investment bodies (CIB), amending article 22 and adding article 22-A, both of the Tax Benefits Statute. No.s 9 and 10 of article 7 of the aforementioned legal instrument established a transitional regime applicable to participants or shareholders of collective investment bodies, from which it is apparent that:

• The operation of redemption of units of participation in a Fund by a Company, in accordance with subparagraph e) of no. 1 of article 22-A of the Tax Benefits Statute, should be framed in accordance with the Corporate Income Tax Code, giving rise, in accordance with subparagraph b) of no. 1 of article 46 of the Code, to a capital gain or loss, which is considered realised in the tax period in which the redemption operation occurs, or to an adjustment at fair value, depending on whether the units of participation are valued, for tax purposes, at cost or at fair value;

• Thus, in the case of units of participation valued, for tax purposes, at cost:

(i) For the purpose of calculating the capital gain or loss relating to the units of participation subscribed before 2015-06-30, the gain or loss generated at the time of their respective redemption corresponds to the difference between the realisation value and the acquisition value, which, in accordance with no. 9, at the end, of article 7 of Decree-Law no. 7/2015, of 13 January, will equal the market value of the units of participation on 30 June 2015, or if higher, the acquisition value thereof;

(ii) The difference between the market value on 30 June 2015 and the acquisition value determined in accordance with no. 2 of article 46 of the Personal Income Tax Code should be included in the income or gains of the Company, and this difference should also be increased by the amount corresponding to the tax withheld or due in accordance with the previous wording of article 22 of the Tax Benefits Statute, which is considered as a tax on account of the Corporate Income Tax due finally, in accordance with the previous wording of no. 3 of article 22 of the Tax Benefits Statute.

• In the case of units of participation being valued, for tax purposes, at fair value, the Company should increase the taxable profit of the tax period in which the redemption occurs by the amount corresponding to the tax borne by the Fund (withheld or paid) in accordance with the previous wording of article 22 of the Tax Benefits Statute, which has the nature of a tax on account of the Corporate Income Tax due finally, in accordance with the previous wording of no. 3 of the same article.

The understanding described is explained in Circular no. 6/2015 of the Tax and Customs Authority which aimed to disseminate the essential characteristics of the new regime, as well as to clarify any interpretation doubts.

From the above, it is clear that, for the purpose of determining taxable profit, the income from units of participation in investment funds should be considered at its gross value, that is, to the amount of the gain or loss arising from the redemption of the units of participation should be added the amount corresponding to the tax withheld or due in accordance with the previous wording of article 22 of the Tax Benefits Statute, which is considered as a tax on account of the Corporate Income Tax due finally, in accordance with the previous wording of no. 3 of article 22 of the Tax Benefits Statute, thereby complying with what is established in no. 2 of article 68 of the Corporate Income Tax Code which provides, with respect to income incorporated for taxation purposes, that the amount to be considered in the determination of the taxable matter is the respective amount gross of the tax withheld at source.

Given A...'s claim to deduct from the Corporate Income Tax the value of €286,644.00, as withholding at source (coming to integrate the amount entered in field 359 - withholding at source - of table 10 - tax calculation), in accordance with subparagraph e) of no. 2 of article 90 of the Corporate Income Tax Code and in order to determine whether the income from the UP was accounted for at its gross values, proof was requested that the income was considered in the determination of the taxable matter by the respective amount gross of the tax withheld at source.

From the analysis of the elements presented, the trial balance of the accounts moved in the course of the redemption operation, it was verified that the accounting loss calculated in the amount of €660,813.60 (difference between the realisation value of €5,339,184.00 and the acquisition value of €6,000,000.00) was recorded in results accounts, confirming that the aforementioned income obtained was recorded accountingly at its "net value" (that is, did not include the tax borne - Annex 5). Indeed, when questioned, the Taxpayer informed that "(…) the amount of the tax withheld was not subject to accounting entry".

Furthermore, it was verified that with respect to a sample of other real estate investment fund income, A... proceeded to account for the tax withheld.

In this sense, and in accordance with the combined application of no. 2 of article 68 of the Corporate Income Tax Code and no. 3 of article 22 of the Tax Benefits Statute, there is an increase in the Corporate Income Tax taxable matter of the amount of €286,644.00, relating to the withholding of Corporate Income Tax carried out by the B... Fund that was not considered in the base taxable by the Insurer for tax purposes.

It should be noted that this correction is related to and conditions the one made as a deduction from the tax, reflected in point III.2.1.2 of this document.

(...)

III.1.7 - Elimination of economic double taxation of distributed profits (article 51 of the Corporate Income Tax Code) -(€1,039,126.56)-

The Company entered, in the field "771 - Elimination of Economic Double Taxation of Distributed Profits and Reserves" of Table 07 of the Model 22 Income Tax Return, the amount of €9,918,419.25, relating to the deduction provided for in article 51 of the Corporate Income Tax Code, with a view to the elimination of economic double taxation of distributed profits.

The regime established in article 51 of the Corporate Income Tax Code stipulates the conditions under which profits previously taxed can be deducted, and for insurance company activity, provides for the waiver of certain requirements with respect to the income of securities in which technical reserves have been applied.

Indeed, no. 1 of the cited article establishes that "profits and reserves distributed to Corporate Income Tax subjects with registered office or effective management in Portuguese territory do not compete for the determination of taxable profit, provided that the following requirements are simultaneously verified:

a) The Corporate Income Tax subject holds, directly or directly and indirectly, in accordance with no. 6 of article 69, a participation not less than 5% of the capital stock or voting rights of the entity distributing the profits or reserves:

b) The participation referred to in the preceding number has been held, uninterruptedly, for the 24 months prior to the distribution or, if held for a shorter time, is maintained for the time necessary to complete that period;

c) The Corporate Income Tax subject is not covered by the tax transparency regime provided for in article 6;

d) The entity distributing the profits or reserves is subject to and not exempt from Corporate Income Tax, the tax referred to in article 7, a tax referred to in article 2 of Directive no. 2011/96/EU, of the Council, of 30 November, or a tax of identical or similar nature to the Corporate Income Tax and the legal rate applicable to the entity is not less than 60% of the Corporate Income Tax rate provided for in no. 1 of article 87;

e) The entity distributing the profits or reserves does not reside or have its domicile in a country, territory or region subject to a clearly more favourable tax regime contained in a list approved by order of the Government member responsible for the area of finance."

However, and as referred to, in accordance with what is provided for in no. 6 of article 51 of the Corporate Income Tax Code, in the determination of taxable profit of insurance companies with registered office or effective management in Portuguese territory, there can be deducted, for the purpose of determining taxable profit, the income from equity interests in which technical reserves have been applied and which are not, directly or indirectly, attributable to the policyholders regardless of the percentage of participation and the period for which these have been in its ownership.

The wording of no. 6 of article 51 of the Corporate Income Tax Code, in the part "are not, directly or indirectly, attributable to the policyholders" was given by Law no. 7-A/2016, of 30 March (State Budget Law for 2016), with the tax legislator, in the exercise of its law-making discretion, through article 135 of the same normative establishing that "[t]he wording given by this law to no. 6 of article 51 (...) of the Corporate Income Tax Code is interpretative in nature."

With respect to this issue, reference should be made to article 13 of the Civil Code which under the heading "Application of Laws over Time. Interpretative Laws", provides in the first part of its no. 1, "An interpretative law is integrated into the interpreted law", with its effects retroacting to the date of entry into force of the old law, as if it had been published on the date on which the interpreted law was published, subject to the effects already produced by performance of the obligation, by a final judgment, by a settlement even if not approved, or by acts of analogous nature. An interpretative law is considered to be one through which the legislator, in the words of Pires de Lima and Antunes Varela - citing the work of Baptista Machado, on the application over time of the new Civil Code (Coimbra, 1968) - in Civil Code Annotated, Vol. 1, 4th Edition, Coimbra Publishing House, pages 62 and 63 - "intervenes to decide a question of law whose solution is disputed or uncertain, establishing an understanding that jurisprudence by its own means could have reached" being "the declaration, made by the legislator, that a certain law has interpretative character" equivalent "to a retroactivity clause". In attributing an interpretative character to the tax incidence norm in question, an authentic interpretation of the interpreted norm was made, binding on all.

In this sense and for the purpose of ascertaining whether the income deducted under article 51 of the Corporate Income Tax Code, with a view to the elimination of economic double taxation of distributed profits, included income that was directly or indirectly attributable to policyholders, a breakdown of the investment portfolios by Life with Participation, Life without Participation and "Unit Linked" was requested, along with the detail of the income that benefited from article 51, with the breakdown, where applicable, of the values attributable to the insurer and the policyholders. In response, a file was presented with the identification of the portfolios, branches and designation of the associated products (Annex 8) and the breakdown of dividends received by branch and portfolio.

According to the information made available, it was verified that income from the life branch - "Life with Participation with Autonomous Investment" portfolio benefited from the regime provided for in article 51 of the Corporate Income Tax Code and income from the life branch - "N - ULCIA" portfolio - Unit Linked with Autonomous Investment did not benefit from the aforementioned regime. From the procedure adopted by the Taxpayer it can be concluded that it considers that the "Unit Linked with Autonomous Investment" portfolio cannot benefit from the elimination of economic double taxation since the dividends from the financial interests are entirely attributed to the policyholder.

Now, given that participation in profits consists of the policyholder's, insured person's or beneficiary's right to receive part of the profits generated by the insurance contract, it can be stated that part of the dividends received by the insurer is attributable to the policyholder.

Thus, since the "Life with Participation with Autonomous Investment" portfolio includes income that will be attributed to the policyholders, a renewed request was made with respect to the dividends received to identify the modalities in which these are attributable to the policyholder (no. 6 of article 51 of the Corporate Income Tax Code) and the indication of its amount. No response having been obtained, the request was reiterated. In response, the Insurer informed that: "(…)

• the dividends from securities allocated to the N portfolio in which the risk is borne by the policyholder are entirely attributed to the policyholder.

• In the life with participation in profits portfolios, the income is attributed to each product according to the return of the technical account. The technical account comprises Interest, dividends, gains/losses.

We do not, at present, have information about the portion of dividends that is attributed to the life insurance portfolios with participation in profits."

Thus, in the absence of a breakdown, with respect to the dividends received, of the amounts attributable to policyholders in the life insurance portfolios with participation in profits, without the information necessary to prove the correct application of what is provided for in no. 6 of article 51 of the Corporate Income Tax Code having been made available, the entirety of the income allocated to those portfolios, which amounted to €732,000.00 (Annex 9), cannot benefit from the elimination of economic double taxation provided for in the same article.

On the other hand, the enjoyment of the benefit provided for in article 51 of the Corporate Income Tax Code is subject to proof of the requirements described therein, to be provided by the beneficiary entity, which in the case of subparagraph d) of no. 1 of the aforementioned article, must be carried out, in accordance with article 51-B of the Corporate Income Tax Code, by means of declarations or documents confirmed and authenticated by the competent public authorities of the State, country or territory where the entity distributing the profits or reserves has its registered office or effective management.

Although the Taxpayer did not comply with what is legally established, by not integrating the declarations referenced in the tax documentation process referred to in article 130 of the Corporate Income Tax Code, in accordance with what is provided for in no. 5 of article 51-B of the same code, it made available, in the course of the external inspection procedure, documents with the purpose of providing the proof provided for in that article. It also made available the detail of the amount deducted, by security, type of allocation of the investment portfolio and country.

From the analysis of those elements, the following was concluded:

declarations of proof were not presented with respect to dividends included in the taxable base and deducted in field 771 in the amount of €20,595.76 (situation identified in Annex 10)

although the Taxpayer did not benefit from the benefit provided for in article 51 of the Corporate Income Tax Code for income included in the taxable base:

o in the amount of €355,740.09 with respect to entity D..., US, USD (situation identified in Annex 10);

o in the amount of €1,435,982.23 relating to E... USD (situation identified in Annex 10);

it proved that the invested-in entities met the conditions legally established for that purpose.

In this manner, it was found that A... considered, for the purpose of determining taxable profit, an amount lower by €1,771,126.56 (-€20,595.76 + €355,740.09 + €1,435,982.23) of income from equity interests in which technical reserves were applied, distributed by entities with registered office or effective management outside Portuguese territory, capable of benefiting from the deduction provided for in article 51 of the Corporate Income Tax Code (Annex 10).

In conclusion, the deduction from taxable matter made by the Taxpayer, relating to the elimination of economic double taxation, will be increased by (€1,039,126.56) (€732,000.00 - €1,771,126.56) in accordance with the aforementioned legal normative.

It is important to note that this correction is directly related to and conditions the corrections identified in points III.1.3 and III.2.1.1 of this document.

The Taxpayer pronounced itself, in the hearing exercise, with respect to the correction proposed in the Draft Tax Inspection Report, this having been altered (from €396,855.67 to €-1,039,126.56) and made the subject of an Addendum to the Draft Tax Inspection Report, as described in point IX of this document.

(...)

III.2.1.3 - Autonomous Taxation of Variable Remuneration (article 88 of the Corporate Income Tax Code) -€315,000.00-

In note 41. Related Parties of the Annex to the Individual Financial Statements, the remuneration received by the governing bodies of A... in 2015 is evidenced, these being comprised of fixed remuneration and variable remuneration.

In validating the value entered in Field 365 of Table 10 - "Tax Calculation" of the Model 22 Income Tax Return, it was verified that the Taxpayer calculated autonomous taxation in the total amount of €763,802.56, having entered no amount in Field 424 of Table 13, relating to expenses or charges relating to bonuses and other variable remuneration paid to managers, administrators or directors [subparagraph b) of no. 13 of article 88 of the Corporate Income Tax Code].

In this context, a map supporting the calculation of autonomous taxation was requested from the Insurer, with the indication of the accounting entry and the trial balances before and after profit calculations for 2015, and it was verified that the balance of the expense account PCES 6800920001 "OS-Out.rem-Award Company Performance-Const Prov", in the amount of €692,833.33, had not been subject to autonomous taxation.

As bonuses and other variable remuneration relating to governing bodies were involved, a request was made for the presentation of an extract of the aforementioned account, the identification of the beneficiaries of the remuneration recorded, with indication of their annual remuneration and payment schedule.

In accordance with the clarifications/elements presented, the balance of the aforementioned account relates to the following components:

• "Estimated Profit Sharing 2015" - €384,999.99

• "Provision Performance Stock Units (PSU)" - €307,833.34

It identified the five members of the Executive Committee benefiting from remuneration in the tax period 2015, indicating their payment schedule and their annual remuneration:

[Table omitted in translation]

The nature of the various remuneration types not having been clarified, a request was made for:

"- Statement on the remuneration policy of the members of the governing bodies, presented by the Remuneration Committee, approved at the General Meeting of 31 March 2015;

• Minutes and respective annexes of the meeting of the Remuneration Committee, held on 1 April 2015, where it deliberated, among other matters, on the allocation of profit sharing and on the revision of the fixed annual remuneration applicable to members of the Executive Committee;

• Minutes and respective annexes of the meeting of the Remuneration Committee, held on 20 October 2015, where it deliberated, among other matters, to conclude the review and approve the policy and remuneration conditions applicable to the members of the governing bodies of A... for the mandate corresponding to the three-year period 2014-2016;

• Description of the nature of the remuneration identified as "Remuneration in Kind", namely the legal and tax framework, the conditions of allocation and payment and presentation of any contracts or other documents associated therewith;

• Description of the nature of the remuneration presented as "Performance Stock Units", namely the legal and tax framework, the conditions of allocation and payment and presentation of any contracts or other documents associated therewith;

• Justification for the non-subjection of expenses with variable remuneration to taxation".

From the analysis of the elements and clarifications provided, the following was found:

• With respect to remuneration policy

a) Fixed Annual Remuneration (includes Holidays and Christmas)

"[T]he Remuneration Committee, (...), deliberated, (...), to conclude the review and approve the Policy and remuneration conditions applicable to the members of the governing bodies of A... for the mandate corresponding to the three-year period 2014-2016, in accordance with the Annex to this Minutes which forms an integral part thereof".

"The fixed component of remuneration, approved by deliberation of the Remuneration Committee of 4 August 2014, is paid in cash, in 14 monthly instalments, including those corresponding to holiday and Christmas allowances [...]".

b) Remuneration in Kind

"[T]he Remuneration Committee deliberated, (...) to approve the revision of the gross fixed annual remuneration to be applied, in 2015, to the members of the Executive Committee in the following terms: To the President, (...), an additional fixed annual gross amount is allocated (...), with respect to the gross fixed annual remuneration in effect in 2014. This additional amount will be spent, by the Company, within thirty days following the date of this deliberation, in a deferred receipt individual capitalisation insurance of which the insured person and beneficiary is the insured party".

Similar description with respect to the remaining beneficiaries, which totals:

[Table omitted in translation]

With respect to the nature of the "Remuneration in Kind" of the members of the Executive Committee, it informed that "(…) this was realised through a supplementary retirement insurance constituted by A... by means of "Poupança Activa" insurance policies. Given that the amounts delivered for the "Poupança Activa" policy represented an acquired and individualized right of the administrators, the value of the Premiums paid by A... were properly taxed as dependent labour income of the respective administrator".

c) Short-Term Variable Remuneration (RVCP)

"For the purpose of allocating the RVCP, (...), a set of indicators is defined annually, namely financial, operational and strategic ones, as well as the respective targets to be achieved. (...) The RCVP includes a portion of immediate cash payment, to take place in April of the year following the year of reference, and a portion of deferred payment for a period of 3 years, (...), which should, generally, represent 50% of the RVCP and contemplate two forms of allocation: one in cash (generally representing 25% of the RVCP) and another in remuneration units (Restricted Stock Units or "RSU") (generally representing 25% of the RVCP)".

d) Long-Term Variable Remuneration (PSU - Performance Stock Units)

"[T]he Remuneration Committee further deliberated to approve the allocation to the members of the Executive Committee of the Company, with reference to the year 2014, of long-term variable remuneration represented through remuneration units ("Performance Stock Units" or "PSU"), with the unit value calculated in accordance with what is referred to in Point 7 of the Annex and vesting in April 2018, unit value which by reference to 31.12.2014 is €10,520, in the following terms":

[Table omitted in translation]

"The RVLP (...) allocated through remuneration units, (...), being, however, its payment subject to future verification of additional medium-to-long-term performance conditions (Performance Stock Units or "PSU")"".

"The PSUs will be automatically converted and paid in cash after 3 years from the date of allocation (vesting period)".

"[T]he "Performance Stock Units (PSU)" are long-term variable remuneration units - allocated after the elapse of a minimum period of 3 years - with their actual payment being dependent on the future verification, during the deferment period, of additional company performance conditions, compared to the sector of activity in which A... operates".

• With respect to the justification presented for the non-subjection of variable remuneration expenses to taxation.

"As to the possible application of autonomous taxation with respect to the amounts paid as variable remuneration of the administrators, we inform that the same is not due, since the criteria provided for in subparagraph b) of number 13 of article 88 of the Corporate Income Tax Code are strictly observed. Notwithstanding the fact that the amounts allocated as variable remuneration represent a portion greater than 25% of the annual remuneration and exceed the amount of €27,500.00, the payment of the RSU and PSU are subordinated to the deferment of a portion greater than 50% for a minimum period of three years, also being dependent on positive performance of A... during the deferment period.

Indeed, only a small portion of variable remuneration can be paid in the same year, with the remaining variable remuneration being deferred for a period of 3 years, always greater than 50%. To this fact contributes the long-term variable remuneration (PSU) which, of significant amount, can only be paid after the 3rd year and provided that the performance of A... is positive.

Thus, with the deferment of more than 50% of the variable remuneration deferred for a period exceeding 3 years, the condition provided for in subparagraph b) of no. 13 of article 88 of the Corporate Income Tax Code is verified and, as such, the conditions for non-application of autonomous taxation are met".

However, the Tax and Customs Authority (AT) cannot agree with the framing carried out by A... with respect to autonomous taxation of bonuses and other variable remuneration of administrators:

a) Remuneration in Kind

With respect to the remuneration in kind allocated, which was considered an additional to fixed annual remuneration and which was realised through a supplementary retirement insurance constituted by A... by means of "Poupança Activa" insurance policies, the following considerations should be made:

• The Remuneration Policy of the Governing Bodies of A..., S.A., for the three-year period 2014-2016 considers that remuneration comprises a fixed component adjusted to the functions and responsibilities of the administrators and a variable component, the latter being comprised of a portion that aims to remunerate short-term performance and another, with the same purpose, applied to medium-term performance;

• The remuneration in kind in question is not considered fixed remuneration, as defined in the Remuneration Policy of the Governing Bodies of A..., S.A. - Annex to Minutes no. 5 of the meeting of the Remuneration Committee held on 2015-10-20, which as transcribed above states that the "fixed component of remuneration, (...), is paid in cash, in 14 monthly instalments, including those corresponding to holiday and Christmas allowances in accordance with applicable legislation";

• It was a one-off allocation, there is no identical remuneration in the following year, as can be seen from the 2016 Annual Report and Accounts;

• The expense relating to the aforementioned remuneration is recorded in the expense account PCES 6800000001 "Governing bodies - fixed annual remuneration", by the overall amount of €515,000.00,

In this sense, the concept of remuneration/salary, fixed remuneration and variable remuneration should be clarified in light of applicable legislation.

For this purpose, attention should be paid to article 11 of the General Tax Law (LGT), under which, in determining tax norms and qualifying the facts to which they apply, general rules and principles of law interpretation are observed. Moreover, it is determined there that whenever, in tax norms, terms peculiar to other branches of law are used, they should be interpreted in the same sense as they have therein, unless otherwise derived directly from the Law.

In accordance with the Labour Code (CT), only what, under the contract, the norms governing it or customary practice, the worker is entitled to as consideration for his/her work is considered remuneration, comprising the base remuneration and all other regular and periodic benefits made, directly or indirectly, in cash or in kind, and remuneration can be fixed, variable or mixed (as per articles 249 and 251). Article 261 of the Labour Code adds that remuneration is considered fixed when calculated on the basis of work time (no. 2), while variable remuneration can be calculated according to the reasonable discretion of the judge (no. 4).

On the other hand, in tax legislation itself, namely in article 2 of the Personal Income Tax Code, we can find the concept of remuneration. Since the concept does not vary between Personal Income Tax and Corporate Income Tax, in this case attention should be paid to the concept of "remuneration" provided for in that article.

No. 1 of the aforementioned article establishes a list of remuneration from various sources as "dependent labour income", additionally, article 2, no. 3, subparagraph a) of the Personal Income Tax Code refers to "remuneration of the members of the statutory bodies of legal persons and equivalent entities, with the exception of those participating as official auditors", are also considered dependent labour income.

No. 2 of article 2 of the Personal Income Tax Code provides that "the remuneration referred to in the preceding number comprises, in particular, salaries, wages, emoluments, bonuses, percentages, commissions, participations, allowances or prizes, attendance fees, honoraria, participations in earnings and other accessory remuneration, whether periodic, fixed or variable, of a contractual or other nature".

From this it follows that within the concept of "remuneration" there is the concept of "accessory remuneration" and that, within this, there is the concept of "(accessory) variable remuneration".

In turn, subparagraph b) of no. 3 of article 2 of the Personal Income Tax Code establishes a definition of "accessory remuneration", in it "comprising all rights, benefits or perquisites not included in the main remuneration that are received due to the provision of work or in connection with it and constitute for the respective beneficiary an economic advantage", followed by an exemplary list of remuneration considered accessory, which includes, among others, amounts spent, mandatory or discretionally, by the employer with insurance and operations in the "Life" class, contributions to pension funds, savings-retirement funds or any other supplementary social security regimes, provided that they constitute acquired and individualized rights of the respective beneficiaries [Article 2, no. 3, subparagraph b), point 3), sub-paragraph i) of the Personal Income Tax Code],

From the above it follows that the remuneration in kind under analysis is an accessory remuneration that cannot be considered as regular or fixed, given its one-off nature, recall that it was allocated only once and only in the tax period 2015, which is why it will be considered as variable remuneration in the assessment of subjection to autonomous taxation.

b) Tax Framework applicable to autonomous taxation that applies to bonuses and variable remuneration

In accordance with the provisions of subparagraph b) of no. 13 of article 88 of the Corporate Income Tax Code, there is autonomous taxation, at the rate of 35%, of expenses or charges relating to bonuses and other variable remuneration paid to managers, administrators or directors when these represent a portion greater than 25% of annual remuneration and have a value greater than €27,500.00 unless their payment is subject to the deferment of a portion not less than 50% for a minimum period of three years and conditioned by the positive performance of the company over that period.

As follows from the cited norm, the subjection to autonomous taxation of expenses or charges relating to bonuses and other variable remuneration paid to managers, administrators or directors depends on the simultaneous verification of a set of presuppositions related to: (a) the value of the expenses themselves ("greater than €27,500.00") together with (b) their relative weight in the calculation of annual remuneration ("a portion greater than 25% of annual remuneration").

Such simultaneous verification, together with the non-application of the requirements of the negative delimitation of incidence provided for in the final part of subparagraph b) of no. 13 of article 88 of the Corporate Income Tax Code ("unless their payment is subject to the deferment of a portion not less than 50% for a minimum period of three years and conditioned by the positive performance of the company over that period"), permits the fixing of the subjection to taxation of the aforementioned expenses.

As to the amount of annual remuneration to be considered for the purpose of assessing the first requirement of subjection, reference should be made to the fixed and variable remuneration received/allocated to each of the administrators during the period to which the bonuses and other variable remuneration relate and in which the respective expenses were duly recognised accountingly.

Thus, in the concept of "annual remuneration" provided for in subparagraph b) of no. 13 of article 88 of the Corporate Income Tax Code all returns (remuneration) fixed, variable or mixed should be included, which, under the contract, the norms governing it or customary practice, the worker is entitled to in the tax period as consideration for his/her work, being excluded from this concept, among others, the amounts referred to in no. 1 of article 260 of the Labour Code when the conditioning factors provided for therein are verified.

In order to validate the annual amount of remuneration received individually by the members of the governing bodies of the Insurer, a request was made, as already referred, for the indication of fixed remuneration and variable remuneration, recorded as an expense in the tax period 2015, as well as a breakdown of short-term variable remuneration recorded as an expense in 2015 and paid in the tax period 2016.

With respect to the tax fact "bonuses or other variable remuneration", this encompasses a set of reward instruments that complements fixed remuneration and is normally associated with the professional performance of the governing body member.

It is important, in this context, to note that the wording of subparagraph b) of no. 13 of article 88 of the Corporate Income Tax Code refers, firstly to expenses or charges relating to bonuses and other variable remuneration, which thus suggests the option of considering and qualifying as the tax generator of autonomous taxation the moment of recognition of expenses relating to the aforementioned remuneration.

The principle underlying this norm is that the expense inherent to variable remuneration allocated to managers, administrators or directors should be recognised in the period in which an entity benefits from the work of the aforementioned managers, administrators or directors, and in which it assumes and recognises the obligation to allocate the remuneration in question, these being recorded for the purpose of formation/determination of the economic and tax profit calculated in that period (and not when paid).

This follows, moreover, from the wording of no. 1 of article 18 of the Corporate Income Tax Code, which provides that "Income and expenses, as well as other positive or negative components of taxable profit, are attributable to the tax period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the system of economic periodisation", establishing its no. 2 that "Positive or negative components considered as relating to earlier periods are only attributable to the tax period when on the date of closure of accounts of the one to which they should have been attributed they were unforeseeable or manifestly unknown".

Thus, transposing to the matter in question, we have that, for purposes of Corporate Income Tax, with the obligation to proceed with payment of bonuses or other variable remuneration constituted, the company will have to recognise the respective amount in accounting, regardless of whether payment is made in the same year or in the following year.

Thus sustaining that, as autonomous taxation operates on expenses or charges and not on payments, the same should be applied in the period to which the charge relates and not in that in which payment occurs.

In these terms, it is important to carry out a survey of variable remuneration whose expenses or charges are recorded in the tax period 2015, even if they are only paid in the course of later years.

In accordance with the elements made available, in the tax period 2015, the Insurer recognised expenses relating to bonuses, bonuses and other variable remuneration to be allocated to administrators, recorded accountingly in the aforementioned account PCES 6800920001 "OS-Out.rem-Award Company Performance-Const Prov", in the total amount of €385,000.00, having paid in the following tax period (2016) the amount of €721,600.00 [€385,000.00 + €336,600.00 (expense recognised in earlier periods)].

Recall that the remuneration in kind, recorded accountingly in the expense account PCES 6800000001 "Governing bodies - fixed annual remuneration", by the overall amount of €515,000.00, is an accessory remuneration that cannot be considered as regular or fixed, given its one-off nature, it was allocated only once and only in the tax period 2015, which is why it is also considered as variable remuneration in the assessment of subjection to autonomous taxation.

Now, as demonstrated in Annex no. 14, the variable remuneration paid to the administrators reaches, individually amounts greater than €27,500.00 and corresponds to more than 25% of annual remuneration (fixed plus variable), thus verifying the conditions necessary for these to be subject to autonomous taxation, in accordance with the aforementioned normative.

In light of the above, and in accordance with what is evidenced in the annex referred to above, from the verification of the cumulative conditions of subjection provided for in subparagraph b) of no. 13 of article 88 of the Corporate Income Tax Code, assessed on an individual basis, the amount of €900,000.00 resulted in eligibility for purposes of autonomous taxation in the tax period 2015.

From the above it follows that the value of €900,000.00 should be subject to autonomous taxation, in accordance with the terms established in the aforementioned article, and therefore the rate of 35% provided for therein will be applied, resulting in a tax shortfall of €315,000.00.

The Taxpayer pronounced itself, in the hearing exercise, with respect to the correction proposed in the Draft Tax Inspection Report, this having been maintained by the Tax and Customs Authority, as described in point IX.2 of this document.

(...)

POINT III.2.1.3 - Autonomous Taxation of Variable Remuneration (article 88 of the Corporate Income Tax Code) -€315,000.00-

In the exercise of the hearing exercise, A..., among points 18 and 29 of its submission, requests the alteration of the amount of correction proposed as autonomous taxation, with the following grounds:

• "on numerous occasions, in response to Requests for Binding Information (RBI) submitted by companies it was made explicit the concept of variable remuneration for the purposes of autonomous taxation provided for in subparagraph b) of no. 13 of article 88 of the Corporate Income Tax Code":

• «[i]n one of those responses by AT to the aforementioned RBI can be read that,

• [e]xcluded from the concept of remuneration, namely, "bonuses or extraordinary benefits granted by the employer as a reward or prize for the good results obtained by the company" and "participation in the profits of the company, provided that the worker is assured by the contract of fixed, variable or mixed remuneration, adequate to his/her work", except when the same are due by force of the contract or of the norms governing it or, by their importance and regular and permanent character, should, according to custom, be considered as an element forming part of the remuneration (cf. subparagraphs b) and d) and no. 3 of article 260 of the CT).

• [t]hus, in the concept of "annual remuneration" provided for in subparagraph b) of no. 13 of article 88 of the Corporate Income Tax Code, all returns (remuneration) fixed, variable or mixed should be included which, under the contract, the norms governing it or custom, the worker is entitled to in the tax period as consideration for his/her work, being excluded from this concept, among others, the amounts referred to in the preceding point.

• [t]hus, "both bonuses and bonuses by application of results, when allocated regularly even if their respective value is not previously fixed or their payment guaranteed, should be considered included in the concept of annual remuneration for purposes of autonomous taxation of bonuses and variable remuneration.

• (...) on the other hand bonuses and bonuses by application of results will be excluded when these are allocated irregularly"»;

• "(...) if the remuneration in kind cannot be included in the concept of fixed remuneration, according to the Inspection Services they were paid only once and do not have a regular character, neither can they integrate the concept of variable remuneration for purposes of subparagraph b) of no. 13 of article 88 of the Corporate Income Tax Code";

• «(...) if the remuneration in kind cannot integrate the concept of annual remuneration - of fixed remuneration, nor variable remuneration - even in this case, only would the rule of deferment not be met by "a minimum period of three years and conditioned by the positive performance of the company over that period" in the case of Administrator with the W/F ... S. It would always be met in the case of the remaining Administrators, and therefore for these, autonomous taxation could never be required».

Analysed the grounds above reproduced, contained in the document through which the Insurer carried out the exercise of the hearing right with respect to the point in question, it is verified that the framing carried out by the Taxpayer and in which it sustains its argument is based on the view that if the remuneration in kind in question cannot be included in the concept of fixed remuneration, then, neither can it integrate the concept of variable remuneration, and therefore cannot be considered "annual remuneration" for purposes of possible subjection to autonomous taxation.

In a first phase, it is important to mention that the Taxpayer alleges that the Tax Authority in response to Requests for Binding Information clarifies what was previously transcribed, without however identifying the Request for Binding Information in question.

On the other hand, it is important to clarify that the Tax Inspection has never questioned that the remuneration in question is covered by the concept of "annual remuneration", it merely disagreed with its classification as "fixed remuneration", as follows:

A... included, and correctly so, such remuneration, with respect to each of the five beneficiaries, in dependent labour income reported to AT through monthly income reports (DMR), complying with no. 1 of article 119 of the Personal Income Tax Code. It thus made available the elements necessary for the inclusion of such dependent labour income in the individual income tax returns Model 3 of Personal Income Tax to the members of the Executive Committee,

It is tax legislation, namely subparagraph a) of no. 3 of article 2 of the Personal Income Tax Code, which states that "remuneration of the members of the statutory bodies of legal persons and equivalent entities, with the exception of those participating as official auditors", are also considered dependent labour income.

In turn, subparagraph b) of no. 3 of article 2 of the Personal Income Tax Code establishes a definition of "accessory remuneration", in it "comprising all rights, benefits or perquisites not included in the main remuneration that are received due to the provision of work or in connection with it and constitute for the respective beneficiary an economic advantage", followed by an exemplary list of remuneration considered accessory, which includes, among others, amounts spent, mandatory or discretionally, by the employer with insurance and operations in the "Life" class, contributions to pension funds, savings-retirement funds or any other supplementary social security regimes, provided that they constitute acquired and individualized rights of the respective beneficiaries [Article 2, no. 3, subparagraph b), point 3), sub-paragraph i) of the Personal Income Tax Code].

The Taxpayer itself stated that «[w]ith respect to the nature of the "Remuneration in Kind" of the members of the Executive Committee, we inform that this was realised through a supplementary retirement insurance constituted by A... by means of "Poupança Activa" insurance policies. Given that the amounts delivered for the "Poupança Activa" policy represented an acquired and individualized right of the administrators, the value of the Premiums paid by A... were properly taxed as dependent labour income of the respective administrator.»

From the above, it is undoubtedly apparent that the remuneration in kind here under analysis, approved by deliberation of the Remuneration Committee, is included in the concept of annual remuneration and that the same was allocated under the contract and the norms governing it.

As to its nature, fixed versus variable, the Remuneration Policy of the Governing Bodies of A..., S.A. - Annex to Minutes no. 5 of the meeting of the Remuneration Committee held on 2015-10-20, considers that remuneration comprises a fixed component adjusted to the functions and responsibilities of the administrators and a variable component, the latter being comprised of a portion that aims to remunerate short-term performance and another, with the same purpose, applied to medium-term performance and states that the fixed component of remuneration is paid in cash, in 14 monthly instalments, including those corresponding to holiday and Christmas allowances in accordance with applicable legislation.

It is important, furthermore, to recall that in accordance with the Labour Code (CT), only what, under the contract, the norms governing it or customary practice, the worker is entitled to as consideration for his/her work is considered remuneration, comprising the base remuneration and all other regular and periodic benefits made, directly or indirectly, in cash or in kind, and remuneration can be fixed, variable or mixed (as per articles 249 and 251), article 261 adding that remuneration is considered fixed when calculated on the basis of work time (no. 2), while variable remuneration can be calculated according to the reasonable discretion of the judge (no. 4).

Thus, this accessory remuneration (insurance policies "Poupança Activa") does not meet the requirements to integrate the concept of fixed remuneration contained in the Remuneration Policy of the Governing Bodies of A..., thus assuming an undeniable variable character (the same is associated with the reasonable discretion of the judge), and therefore the correction originally proposed in the Draft Report is maintained.

IX.3 - Addendum to the Draft Tax Inspection Report

Regarding point III.1.7, A..., among points 30 and 35 of its submission, stated that, when submitting the Model 22 Income Tax Return, it included in the taxable base dividends distributed by entity F..., G..., in the amount of €1,435,982.23, because it did not have at the time the declaration referred to in no. 1 of article 51-B of the Corporate Income Tax Code, having deducted the amount of €143,600.00, relating to the tax credit for double legal taxation internationally under article 91 of the Corporate Income Tax Code.

In this sense and following the presentation of the certificate of residence and declaration, both documents issued by G..., which refer to the tax to which the company is subject, respecting the form defined in article 2 of Directive no. 2011/96/EU, of the Council, of 30 November, an Addendum to the Draft Tax Inspection Report was prepared, in order to contemplate the situation previously described, which led to alterations to points III.1.3, III.1.7 and III.2.1.1.

The Addendum to the Draft Tax Inspection Report was notified to the Taxpayer, in compliance with the provisions of articles 60 of the General Tax Law and the Tax Inspection Procedure Code, by letter no. ... of 3 January 2018, to exercise, if it so wishes, within the period of 15 (fifteen) days, the right to prior hearing on the proposed corrections. The Taxpayer did not exercise the hearing right with respect to the proposed alterations, as per email sent on 2018-01-