CAAD Case 108/2018-T: IRC SGPS Capital Gains Deductibility and Fair Value Measurement Under Art. 32(2) EBF

Arbitral Decision (consult full version in PDF)

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Prof. Dr. Luísa Anacoreta and Dr. Jorge Carita, appointed by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on 24-05-2018, agree as follows:

1. Report

A... – SOCIEDADE GESTORA DE PARTICIPAÇÕES SOCIAIS, S.A., a company with the single registration number and corporate person number ..., with registered office at Rua da ..., n.º..., .., ... ... (...-...), (hereinafter designated as "Claimant"), submitted a request for the constitution of a collective arbitral tribunal, in accordance with the combined provisions of articles 2 and 10, nos. 1 and 2, paragraph a), of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), with a view to the declaration of illegality of the assessment of Corporate Income Tax (IRC) no. 2017..., of 18-01-2017, in the assessment of compensatory interest no. 2017... and in the statement of account adjustment no. 2017..., both dated 20-01-2017, relating to the fiscal year 2012.

The Claimant further requests reimbursement of the tax paid unduly, together with the respective indemnificatory interest.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the TAX AND CUSTOMS AUTHORITY on 14-03-2018.

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

On 04-05-2018, the Parties were notified of such appointment, and did not express willingness to challenge the appointment of the arbitrators, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in conformity with the provision in paragraph c) of no. 1 of article 11 of the RJAT, the collective arbitral tribunal was constituted on 24-05-2018.

The Tax and Customs Authority responded, arguing against the merits of the request for arbitral decision.

The Claimant initially submitted a request for constitution of a Single Arbitral Tribunal, which was declared incompetent due to the value of the case. No obstacle is raised to the possibility of submission of a new request for arbitral decision.

By order of 28-06-2018 it was decided to dispense with the holding of the meeting provided for in article 18 of the RJAT and that the case should proceed with optional pleadings.

The Parties submitted pleadings.

The arbitral tribunal was regularly constituted and is competent.

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

The case does not suffer from any nullities.

It is necessary to decide.

2. Statement of Facts

2.1. Proven Facts

The following facts are considered proven:

• The Claimant is a company managing shareholdings in companies operating in different business sectors, managing a diversified set of financial investments;

• From 01-01-2012, the Claimant, by application of the Special Taxation Regime for Groups of Companies (RETGS) provided for in article 69 of the CIRC, with A... being the dominant company and the group composed of the following companies:

• The Claimant was subject to tax inspection action, carried out by the Finance Directorate of ... accredited by service order no. OI2016..., with reference to the fiscal year 2012;

• In that tax inspection action a Tax Inspection Report was drawn up which is contained in document no. 3 attached to the request for arbitral decision, the contents of which are reproduced, and the following corrections were made to the taxable matter:

• In the Tax Inspection Report, the following is stated, among other things:

III.1.1.2. Transition Adjustments – art. 5 Decree-Law no. 159/2009 of 13/07

With the approval of the Accounting Standardization System (SNC), through Decree-Law no. 158/2009, of 13 July, a new national accounting standard was introduced with the repeal of the Official Chart of Accounts (POC). With this Decree-Law, the CIRC was adapted and renumbered, taking into account the entry into force of the SNC and consequent repeal of the POC and Accounting Directives.

The legislator expressly adopted the fair value model in the valuation of financial instruments (cf. paragraph f) of no. 1 of article 20 and paragraph i) of no. 1 of article 23 of the CIRC), in accordance with paragraph a) of no. 9 of article 18 of the CIRC.

Decree-Law no. 158/2009, of 13 July, in its article 5, establishes that the effects on equity resulting from the adoption, for the first time, of the new accounting standards, which are considered fiscally relevant in accordance with the CIRC and its complementary legislation, resulting from the recognition or non-recognition of assets or liabilities, or from changes in their measurement, contribute, in equal parts, to the formation of the taxable profit of the first taxation period in which such standards apply and of the four following taxation periods.

Circular no. 7/2011, from DSIRC clarifies this standard, providing that: "(…) variations in equity resulting, in particular, from the recognition or non-recognition of assets or liabilities, as well as changes in their measurement, should only be relevant for tax purposes insofar as the expenses, income and variations in assets that are subsequently recognized are also fiscally relevant".

According to no. 1 of article 20 of the CIRC, "Income is considered to be that resulting from transactions of any nature, in consequence of a normal or occasional action, basic or merely accessory, in particular: f) Income resulting from the application of fair value in financial instruments".

In turn, no. 1 of article 23 of the CIRC, considers as expenses, "(…) those that are demonstrably indispensable for the realization of income subject to Tax or for the maintenance of the source of production, in particular: i) Expenses resulting from the application of fair value in financial instruments".

It is concluded in favor of accepting the application of fair value in financial instruments, but this approval is conditional on the requirements of no. 9 of article 18 of the CIRC, which stipulates that "(…) adjustments arising from the application of fair value do not contribute to the formation of taxable profit, being allocated as income or expenses in the taxation period in which the elements or rights that gave rise to them are disposed of, exercised, extinguished or liquidated, except when:

a) They relate to financial instruments recognized at fair value through profit or loss, provided that, in the case of equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a shareholding in the capital exceeding 5% of the respective share capital;

b) This is expressly provided (in the IRC Code);"

From the analysis of no. 9 of article 18 of the CIRC, the following results:

1. Adjustments at fair value in financial instruments only have fiscal relevance when they are recognized through profit or loss, thus excluding acceptance of these in cases where recognition is made through equity (as occurs in IAS 39 with respect to financial assets that are classified as available for sale).

2. There are some differences between the conditions provided for in paragraph a) of number 9 of article 18 of the CIRC for fair value adjustments to be fiscally accepted and the conditions for the application of the fair value model established in NCRF 27.

With respect to financial instruments not covered by paragraph a) of no. 9 of article 18 of the CIRC, or whose fair value adjustments are not, in accordance with another fiscally relevant standard (derivative financial instruments), the legislator chose to apply the regime of gains and losses contained in articles 46 et seq. of the CIRC.

Given the prohibition on changing the valuation model for financial instruments provided for in paragraph 18 of NCRF 27 (except in situations where there is no longer a publicly quoted price), assimilation to onerous transfer only occurs when:

a) There is no longer a quotation in a regulated market, or

b) When the shareholding held exceeds (or falls below) the 5% threshold established in paragraph a) of no. 9 of article 18 of the CIRC.

When a change occurs that causes these financial instruments to come within the scope of no. 9 of article 18 of the CIRC (acceptance of the fair value model), it is as if the entity had proceeded to a disposal (and simultaneously to a reacquisition) of the same, there being verified, in the case of a financial instrument that, as a result of such change, is no longer covered by the regime of gains and

The POC/SNC transition thus includes a set of transition adjustments, related to the recognition, derecognition, change in measurement and reclassification of balance sheet items, capable of generating impact on equity (usually in retained earnings). These transition adjustments result from differences in measurement criteria and recognition policies of the SNC compared to the previous regime and result from the need to draw up an opening balance sheet as if the new standard had always been applied.

Some of those adjustments may be classified as fiscally relevant, insofar as expenses, income and variations in assets that are subsequently recognized are also fiscally relevant. If they are, that impact, which occurred in accounting terms in the transition period (2010), will be covered by a transitional regime, which will spread its effect, in fiscal terms, over five taxation periods (2010 to 2014). For this purpose, specific fields were created in table 07 of the income declaration model 22 of IRC

Paragraph b) of § 7 of NCRF 3 provides that an entity must, in its opening balance sheet in accordance with the NCRF, not recognize items as assets or liabilities if the NCRF do not permit their recognition. In turn, paragraph b) of no. 1 of the Appendix to this standard states that in preparing the opening balance sheet in accordance with the NCRF an entity may have to derecognize assets or liabilities that, under the NCRF, are not to be recognized as such.

Taking into account what is recommended in the POC and what is provided for in the SNC (NCRF 27 Financial Instruments), we can identify:

• Measurement of financial instruments at fair value that previously were at cost;

• Measurement of financial instruments at amortized cost that were previously reflected at value

On the other hand, we can find transition adjustments for fiscal purposes, without having been for accounting purposes, for example.

• Measurement at fair value of equity instruments, whose variations came to have fiscal relevance;

• Measurement of derivatives at fair value whose variations in previous years came to have fiscal relevance.

No. 3 of article 45 of the CIRC provides a restriction on the deductibility of losses relating to capital shares, which only contribute to the formation of taxable profit in only half of their value. When the variation resulting from the application of fair value is positive, the gain, in the terms of paragraph f) of no. 1 of article 20 of the CIRC, contributes in full to the formation of taxable profit.

Thus, being A... SGPS the holder of a diversified portfolio of shares, whose price is determined on the stock exchange, and holding a social participation below 5%, in the transition from POC to SNC, it determined transition adjustments, as shown in the table presented below (elements extracted from a map contained in the taxpayer's tax file):

Based on the Calculations presented, A... SGPS considered in field 703 of Table 07 of the income declaration model 22, for the period of 2012, a negative variation in assets resulting from transition adjustments POC vs SNC, in the amount of €96,003.41.

In accordance with no. 3 of article 45 of the CIRC, losses relating to capital shares resulting from the application of fair value contribute only half of their value (for the determination of taxable result) and with respect to positive variations resulting from the application of fair value, the gain, in the terms of paragraph f) of no. 1 of article 20 of the CIRC, contributes in full to the formation of taxable result, which did not occur in the case of A... SGPS, since, the balance between gains and losses resulting from the application of fair value was considered for purposes of calculating the adjustment to be made.

As for the social shares relating to the shares of B..., it should further be noted that in this case, the provision of paragraph a) of no. 9 of article 18 of the CIRC is not applicable because A.... SGPS holds directly and indirectly a participation exceeding 5% of the share capital of B..., so in this case fair value is not fiscally relevant. Thus, the negative adjustment considered by the taxpayer should be corrected.

Having examined the documents supporting the calculations of the POC vs SNC transition adjustment, we also verified the existence of minor inaccuracies, arising from the consideration of quotations at 31 December 2009 (or 1 January 2010) different from actual quotations (based on bank extracts where the quotations of each security on 31/12/2009 are perfectly identified).

Given this, we have the following:

As can be verified, with respect to positive adjustments there is a positive difference in favor of the State in the amount of €249,850.00 and in negative adjustments a difference in favor of the taxpayer in the amount of €17,937.17. It is recalled that in accordance with no. 3 of article 45 of the CIRC, losses relating to capital shares contribute to the formation of taxable profit in only half of their value.

Thus we have:

In light of the above, the amount of €347,222.21 (€251,218.80+96,003.41) should be added to the taxable result, since a positive transition adjustment of €461,472.00 and a negative transition adjustment of €210,253.20 resulted.

III.1.1.3. Financial Charges Incurred with Loans to Participated Companies

A... SGPS in the course of 2012 made non-remunerated accessory contributions to the Dutch company, C...B.V. (hereinafter designated as C...) in the total amount of €27,733,300.00, as demonstrated in the current account statement presented below:

20 days after its incorporation, A... SGPS made accessory contributions to C...., in the amount of €25,163,000, and, subsequently, on 19 October, made new accessory contributions in the amount of €4,270,000.00. At the same time, also on that date, 19 October, A... SGPS proceeded to the disposal of the 3,069,230 shares it held in B.... S.A., for €4,266,229.70, to C... (as per document no. 246, cash journal, of 19/10/2012).

When A... SGPS was questioned (via e-mail) about whether those accessory contributions were remunerated (rewarded), it was confirmed that they are not, as per e-mail dated 29 July 2016 "The ACs are not remunerated; I am forwarding the e-mail with the documents relating to their constitution."

Now, from the above, it appears that A... SGPS, by making loans in the form of non-remunerated accessory contributions (since it does not pass on any interest or financial charges to C... B.V.), incurs in financial expenses, which are not related to its activity, but to the activity of the Dutch company (note that the Dutch company acquires the shares of B... for the amount of €4,266,229.70 on 19 October and on that same day A... SGPS makes accessory contributions of equivalent value - €4,270,000.00).

As a result of this practice (the realization of non-remunerated accessory contributions), A... SGPS sees its results diminished, by virtue of the assumption of financial expenses, which should be borne by the Dutch company and not by A... SGPS.

See as an example that in the operation contained in document no. 246, cash journal documents, C... B.V. acquires the shares of B... with "money" lent by A... SGPS, in the form of accessory contributions, A... SGPS (the seller itself) being the one bearing the financial charges for the payment of something that was its own.

Therefore, A... SGPS sells the shares of B... and still bears financial expenses related to that disposal. This fact is a manifest and elucidative demonstration that financial charges incurred by a company to meet the accessory contributions made by itself to an associate cannot be accepted fiscally.

In the case under analysis it is clearly demonstrated that there is no direct association between the expenses recognized in the statement of results and the obtaining of specific income. This process, generally referred to as the balancing of costs with revenues, involves the simultaneous or combined recognition of revenues and expenses that result directly and jointly from the same transactions or other events. In fact, A... SGPS incurs financial expenses and does not pass them on to the sphere of its associate, but rather does the opposite, bears the expenses and consequently sees its results diminish, both the net result for the period and the taxable result.

In these terms, as provided in no. 1 of article 23 of the CIRC and in consonance with the accounting standard, it is concluded that part of the financial charges borne by A... SGPS are demonstrably unnecessary for the realization of income subject to tax, as well as for the maintenance of its source of production.

It should be noted that the intention is not to question the free initiative and private autonomy or to question the management choices made by the Administration of A... SGPS. The intention is that the choices made have correct tax treatment in accordance with the CIRC, in order to ensure the direct and connected allocation of expenses incurred by A... SGPS with the generation of income subject to IRC or for the maintenance of its source of production, rejecting expenses borne that may benefit third parties (subsidiary company based in the Netherlands in this case), even if reflected in the sphere of A... SGPS, in the form of dividends or gains.

Nor is it the case that an act of management may be considered legitimate in light of Commercial Law, that this does not imply that in Tax Law the respective consequences (indebtedness and interest) are accepted without further ado.

Indeed, although accessory contributions come from shareholders, the legal form they assume (e.g. loan) brings them closer to third-party capital, since:

• They are transferred temporarily, and the shareholder can freely demand their reimbursement;

• They can be remunerated like third-party capital;

• They confer no social rights.

It should also be added that the corporate object of SGPS is the management of social participations of other legally independent companies, as an indirect form of exercising an economic activity. In this sense, SGPS are constituted with the aim of intervening in the management and control of their participated companies, thus exercising the social rights inherent to their respective social participations, so as to receive the respective profits or dividends, as well as income resulting from possible disposals of those participations.

It is also true that paragraph c) of no. 1 of article 5 of Decree-Law no. 495/88 enumerates as a general principle the prohibition of SGPS granting credit, notwithstanding, it establishes exceptions to that principle, since those entities may grant credit to dominated companies under certain conditions.

However, although SGPS are given the faculty to be able to grant credit to companies in which they participate, when they incur financial expenses arising from loans obtained with the aim of being applied to the economic activity of those companies, in accordance with no. 1 of article 23 of the CIRC those expenses do not contribute to the formation of taxable result, simply because they did not generate any direct, measurable and evident inflow in the exercise of its activity (here the A... SGPS is invoked).

With regard to the requirement of indispensability, Vítor Faveiro states that it is present with respect to any and all cost as a condition for its fiscal acceptance, and cannot be referred to the nature of the charge, but rather to the circumstances in which it occurred. The same author further states that when it should be concluded that the charge was determined by other motivations (personal interest of shareholders, administrators, creditors, other companies in the same group, business partners, etc.) then such cost should not be deemed indispensable.

Indeed, the financial charges incurred by A... SGPS, arising from recourse to banking and recourse to third-party capital from associates and subsidiaries, for the purpose of freeing up financial resources for the participated companies (C... B.V.), cannot be considered as directly related to the activity of A... SGPS (management of social participations, as a form of indirect exercise of an economic activity).

In this sense, we will proceed to calculate the financial charges not accepted fiscally in accordance with no. 1 of article 23 of the CIRC. Thus, the financial charges accounted for in A... SGPS will be corrected to reflect only and solely the effective cost of the capital used by it. Thus, part of the financial charges borne by it will be disregarded, which relate only to the non-remunerated financing granted to C... B.V. in the form of accessory contributions.

For this purpose, we will proceed, in the first instance, to calculate the average balance of annual third-party financing of A... SGPS, with a view to determining the effective cost rate of third-party financing. Next, the average balance of financing to C... B.V. is determined, in order to apply the effective cost rate of third-party capital to the amount of the loan made in the form of accessory contributions, thereby calculating the financial expense not accepted fiscally in accordance with no. 1 of article 23 of the CIRC.

So we have:

1 - Calculation of the average balance of annual third-party financing of A... SGPS (As per ANNEX I):

Whereby, the average annual balance of third-party financing amounts to €42,624,424.89.

2 – Financial charges borne by A... SGPS in 2012 amounted to €1,074,399.04 (corresponds to the sum of the accounts of item 69S1 - Financing Expenses and Losses and item 68881 – Banking Services), as shown in the tables below:

(...)

Whereby, the financial charges actually borne by A... SGPS amounted to €1,074,399.04.

3 - Determination of the effective cost rate of third-party financing, which amounts to 2.52%, as demonstrated in the table that follows:

4 - Determination of the average annual balance of financing granted to C... B.V.:

Given the dates on which the accessory contributions were made and their respective amounts, it appears that the average balance of financing to C... B.V. amounts in 2012 to €13,668,917.21.

5 - Apply the effective cost rate of third-party capital to the value of the accessory contributions made:

6 - Disregard as a financial expense the value allocated to the non-remunerated accessory contributions made, being determined as follows:

In light of the above, it is concluded that the amount of €344,456.71, because it is allocated to the realization of non-remunerated accessory contributions, should be disregarded fiscally, so it should be added to the taxable result.

III.1.1.4. Financial Charges Incurred with the Acquisition of Capital Shares, in accordance with no. 2 of article 32 of the EBF

During the period of 2012, A... SGPS incurred financial charges, which were considered as a tax expense in the respective income declaration model 22, without having proceeded, in the same declaration, to add the corresponding amount of financial charges not fiscally deductible, in accordance with the provision of no. 1 of article 23 of the CIRC and no. 2 of article 32 of the EBF.

The State Budget for 2003 made a change to the taxation regime for gains of SGPS, following, in an optical of strengthening the competitiveness of those companies, the common trend to most member countries of the European Community, i.e. excluding gains arising from the disposal of social participations held for more than one year from taxation and not considering deductible for fiscal purposes either the losses suffered by virtue of the disposal of social shares under identical conditions, nor the financial charges borne for the acquisition of assets of the same nature (no. 2 of article 32 of the EBF).

The legislator's intention would have been to prevent this type of company from accumulating two benefits: on the one hand, the tax exemption applicable to income from gains realized with the disposal of social participations and, on the other, the inclusion of relevant expenses related to obtaining such income in the determination of fiscal result.

In light of doubts raised about the application of that fiscal regime applicable to SGPS, and given the extreme difficulty of using a method of direct or specific allocation and the possibility of manipulation that it could generate, the understanding of the Tax Administration on this matter was transmitted through Circular no. 7/2004, of 30/03, from the IRC Services Directorate, as well as the method to use for the purpose of allocating financial charges to social participations.

That circular (7/2004 of DSIRC) clarifies the following:

• The period in which financial charges should be disregarded as expenses, for tax purposes, "should proceed, in the fiscal year to which they relate, to the tax correction of those that have been borne with the acquisition of participations that are likely to benefit from the special regime established in no. 2 of article 31 of the EBF, regardless of whether all the conditions for application of the special taxation regime for gains are already met..." (point 6).

• As to the method to use for the purpose of allocating financial charges to social participations, point 7 provides that "given the extreme difficulty of using... a method of direct or specific allocation and the possibility of manipulation that it would allow, such allocation should be made on the basis of a formula that takes into account the following: the remunerated liabilities of SGPS and SCR should be allocated, in the first place, to loans remunerated by these granted to participated companies and to other investments generating interest, affecting the remainder to other assets, namely social participations, proportionally to their respective acquisition cost".

The general principle of indispensability of expenses, provided for in article 23 of the CIRC, establishes that "Expenses are those demonstrably indispensable for the realization of income subject to tax or for the maintenance of the source of production", so financial charges that have been borne with the acquisition of social participations do not contribute to the formation of taxable profit, being a matter of allocating the charge to the tax regime applicable to the result of the transaction for which it was assumed (capital shares held for a period of not less than 1 year).

Whereby, it is the responsibility of the taxpayer, with reference to each taxation period, to determine taxable profit, following for this purpose the methodology described by the fiscal legislator, aiming at the taxation of real effective income, the taxpayer must make the increase, in order to disregard, as the law requires, the charges borne with the acquisition of social participations.

Now, as already mentioned, in the course of the 2012 period, A... SGPS incurred financial charges, which were considered as a tax expense in their entirety in the respective income declaration, since that company did not proceed in the same declaration to add the corresponding amount of financial charges not fiscally deductible, in accordance with the provision of article 23 of the CIRC and no. 2 of article 32 of the EBF.

Given the fact that the burden of proof of the deductibility of financial charges or others rests with the taxpayer, on 6 June 2016 the taxpayer was questioned via e-mail to present the following elements:

"1 - Identification, of the total financial charges (by items as shown in the trial balance as of 31/12/2012) recognized in the Financial Statements, which of these were borne with the acquisition of capital shares of which A... SGPS is the holder, in the conditions enumerated in no. 2 of article 32 of the EBF;

2 - The amount to be added to the net result of the period for purposes of determining the taxable matter, in compliance with the provision of the aforesaid no. 2 of article 32 of the EBF, or the reason why such correction is inapplicable to the company;

3 - The method of calculation used to determine the amount of financial charges to be corrected, with specification of the reasons why it appears most appropriate to the situation of the company, if applicable.

4 - Identification by item (identifying the accounting posting account(s)), taking into account the amounts in the trial balance as of 31/12/2012, of the amounts considered as.

• Remunerated assets;

• Remunerated liabilities:

• Other assets;

• Capital shares (acquisition cost duly documented), as well as

• Financial charges borne.

5 - In account 267, "Financing granted to subsidies, associates. (...)" are recorded. Of these financings, please identify which ones are remunerated, and if so identify the accounts where the respective interest is reflected in the accounting.

6 - In account 253 - Capital Participants and 254 - Treasury Operations, please identify which operations are remunerated, and if so identify the accounts where the respective interest is reflected in the accounting.

7 - In account 4111137 - Accessory Contributions, the amount of €27,733,300 is recorded. Please attach contracts/documents relating to their constitution, as well as identify whether they are remunerated or not. If so, identification of the account where the respective interest is reflected."

On 20 June 2016, via e-mail, the taxpayer responded to the requested elements, as transcribed below:

"With regard to points 1 and 2, since it is not possible to explicitly allocate financial charges to acquisitions of participations, I made the calculation of financial charges to be added by the supplementary application of circular 7/2004. Thus, it appears that in the fiscal year 2012 there are no financial charges to be added, as shown in the attached file which I send "E-mail 06.06.2012 request 2 Charges to add".

In that file, in addition to the respective calculation, are the sheets "Trial Balance" and "Balance Sheet" which are intended to answer the request listed in point 3.

Please see the remaining responses below, following the respective questions.

5 - In account 267, "Financing granted to subsidies, associates. (...)" are recorded. Of these financings, please identify which ones are remunerated, and if so identify the accounts where the respective interest is reflected in the accounting. These are remunerated financings, with interest being recorded in account #7918

6 - In account 253 - Capital Participants and 254 - Treasury Operations, please identify which operations are remunerated, and if so identify the accounts where the respective interest is reflected in the accounting. Operations with D..., E..., and F... are remunerated, with interest accounted for in accounts #69112

7 - In account 4111137 - Accessory Contributions, the amount of €27,733,300 is recorded. Please attach contracts/documents relating to their constitution, as well as identify whether they are remunerated or not. If so, identification of the account where the respective interest is reflected. The accessory contributions in question are not remunerated; I am sending the supporting documents in annex."

The calculations relating to the application of Circular 7/2004 made by the taxpayer are then presented, where it concludes that there are no financial charges to be added to the taxable result, allocated to social shares acquired more than one year ago, as provided for in no. 2 of article 32 of the EBF:

Now, in light of the elements presented by the taxpayer, it was found strange that there were no financial charges to be added in accordance with no. 2 of article 2 of the EBF. Whereby the financial income (account 7018) declared by the taxpayer was analyzed, and it was concluded that it amounted to €1,057,076.46. See the current account statement extracted from the accounting shown below:

But, although the net result for the period is positively influenced by the amount of €1,057,076.46, the same cannot be said of the taxable result, since in the income declaration model 22, the amount of €565,380.16 was deducted in table 07, line 767, in compliance with the provision of no. 6 of article 18 of the CIRC "the revenues relating to sales and provision of services not allocable to the taxation period to which they relate by the nominal amount of the consideration". That amount arises from the recognition in expenses of interest related to the disposal of social shares of company G... to H... SGPS, SA, in the course of 2011. Whereby, only after expunging the amount of €665,380.16 is the value of financial income actually taxed determined (€491,696.30), as shown below:

Whereby, considering the financial charges declared and corrected by the addition to the result made in table 07 of the income declaration model 22, as well as the financial income declared after the expunging of the amount deducted in table 07 of the said declaration, we have the following:

As can be concluded, financial charges exceed by more than half the financial income

Meanwhile, as already mentioned, A... SGPS proceeded to the supplementary application of Circular 7/2004 to determine the financial charges associated with social shares and concluded that there were no charges to be added.

Having analyzed the data considered for the purpose of disregarding the financial charges allocated to social shares held for a period of not less than one year, the following was found:

• The effective calculation was based on the balance sheet and analytical trial balance as of 31/12/2012;

• However, it appears that the financial structure of A... SGPS changed substantially during the period of 2012, since:

1. Remunerated liabilities underwent a substantial change, as demonstrated below:

In fact, it is noted that the financial position of A... SGPS with respect to remunerated liabilities changed substantially in the month of December. Indeed, as stated in the "Report and Accounts 2012" "(...) Bank Debt at the end of the year was 31.2 million Euros and was reduced to 3.3 million Euros, which represents a decrease of more than 70%".

1. The acquisition cost of social shares underwent change, with the disposal of B... shares and with the reduction of capital of I..., as shown in the following table:

As can be verified, account 412114 was in June 2012 decreased in relation to previous periods in the amount of approximately €27,459,620, as a result of the capital reduction that occurred in I... and also due to the disposal of B... shares in October 2012. With the remaining social shares remaining unchanged, it is verified that at the beginning of the 2012 period the acquisition cost associated with social shares amounted to €97,044,624.50, to in December 2012 be at €66,394,386.66 (decrease of €31,650,237.84).

1. In turn, the other assets item also underwent a substantial change, as demonstrated:

It is verified that in June 2012, the accessory contributions made to C... B.V. were responsible for the increase in the other assets item by approximately €25,000,000.00.

Whereby, since A... SGPS incurred financial charges throughout the entire period of 2012 and the financial structure has changed in a materially significant way, not reflecting in any way the financial and equity situation existing throughout the year, the analysis as of 31 December 2012 becomes too reductive, as it respects only a moment regarding the elements contained in the company's balance sheet and, simultaneously being applied to the financial charges incurred in the entire 2012 period. Therefore, there is a need to carry out a monthly analysis. In this sense, monthly analytical trial balances were requested from A... SGPS, which served as the basis for the preparation of the table presented below; where the calculation of financial charges allocated to Social shares is carried out, with the aid of Circular 7/2004:

In December there are no financial charges to disregard since the value of remunerated assets exceeds the value of remunerated liabilities, as can be verified in the table above.

Based on the analysis carried out, the financial charges borne with the acquisition of social shares amount to €185,033.61, as shown in the summary table that follows:

(...)

After determining the charges allocated to the acquisition of social shares, account must be taken of the existence of financial expenses not accepted fiscally, in accordance with no. 1 of article 23 of the CIRC, by virtue of non-remunerated financing in the form of accessory contributions to C... B.V. Thus we have:

Whereby, the amount to be disregarded fiscally in accordance with no. 2 of article 32 of the EBF and no. 1 of article 23 of the CIRC amounts to €125,711.01.

(...)

• Following the inspection action, assessment no. 2017..., of 18-01-2017, the assessment of compensatory interest no. 2017... and the statement of account adjustment no. 2017..., dated 20-01-2017, relating to the fiscal year 2012 (document no. 1 attached to the request for arbitral decision, the contents of which are reproduced);

• On 13-02-2017, the Claimant paid the assessed amount of €6,858.91 (document no. 9 attached to the request for arbitral decision, the contents of which are reproduced);

• On 13-03-2018, the Claimant submitted the request for arbitral decision that gave rise to the present case.

2.2. Facts Not Proven and Justification of the Decision on the Facts

The facts were taken as proven based on the documents attached to the initial petition and that are part of the administrative file.

There is no controversy about the facts.

3. Legal Issues

Of the corrections made by the Tax and Customs Authority, only three corrections to the Claimant's taxable matter relating to the 2012 IRC fiscal year are in issue in the present case:

• Addition to the taxable result of the fiscal year of the amount of €347,222.21, relating to a positive transition adjustment, based on the provision of article 5 of Decree-Law no. 159/2009, of 13 July, and articles 18, no. 9, paragraph a) and 45, no. 3, of the CIRC;

• Addition to the taxable result of the fiscal year of the amount of €344,456.71, relating to non-remunerated accessory contributions, based on the provision of article 23 of the IRC Code;

• Addition to the taxable result of the fiscal year of the amount of €125,711.01, relating to financial charges borne with the acquisition of capital shares, based on the provision of article 32, no. 2, of the Tax Benefits Statute.

Question of Application of the 50% Percentage Provided for in Article 45, No. 3, of the CIRC (as worded in 2012) to Losses from Reductions in Fair Value in Equity Instruments to Negative Variations in Assets from Reductions in Fair Value Relating to Capital Shares Deriving from POC to SNC Transition Adjustments (the Correction in the Amount of €347,222.21, being Challenged as to the Amount of €210,253.19 (article 179 of the Request for Arbitral Decision)

Article 45, no. 3, of the CIRC, as worded by DL 159/2009, of 13 July, establishes the following:

3 – The negative difference between gains and losses realized by onerous transfer of capital shares, including their redemption and amortization with capital reduction, as well as other losses or negative variations in assets relating to capital shares or other components of equity capital, in particular supplementary contributions, contribute to the formation of taxable profit in only half of their value.

The general rule for determining IRC taxable profit is article 17 of the CIRC, which establishes that

1 – The taxable profit of legal persons and other entities mentioned in paragraph a) of no. 1 of article 3 is constituted by the algebraic sum of the net result of the period and positive and negative variations in assets verified in the same period and not reflected in that result, determined on the basis of accounting and possibly corrected in accordance with this Code.

With respect to adjustments arising from the application of fair value, no. 9 of article 18 of the same Code provides that:

9 – Adjustments arising from the application of fair value do not contribute to the formation of taxable profit, being allocated as income or expenses in the taxation period in which the elements or rights that gave rise to them are disposed of, exercised, extinguished or liquidated, except when:

a) They relate to financial instruments recognized at fair value through profit or loss, provided that, in the case of equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a shareholding in the capital exceeding 5% of the respective share capital; or

b) This is expressly provided (in the IRC Code).

Article 20, no. 1, of the CIRC specifies the concept of income, establishing, as relevant here, the following:

"Income is considered to be that resulting from transactions of any nature, in consequence of a normal or occasional action, basic or merely accessory, in particular:

(...)

f) Income resulting from the application of fair value in financial instruments;

(...)

h) Gains realized;".

Article 23, no. 1, of the CIRC defines the concept of "expenses", establishing the following:

1 – Expenses are those demonstrably indispensable for the realization of income subject to tax or for the maintenance of the source of production, in particular:

(...)

i) Expenses resulting from the application of fair value in financial instruments;

(...)

l) Losses realized;".

With respect to positive variations in assets, article 21, no. 1, of the CIRC provides that:

"Positive variations in assets not reflected in the net result of the taxation period shall also contribute to the formation of taxable profit, except:

(...)

b) Potential or latent gains, even if expressed in the accounting, including revaluation reserves under tax legislation;

With regard to negative variations in assets, article 24, no. 1, of the CIRC states that:

Under the same conditions referred to for expenses, negative variations in assets not reflected in the net result of the taxation period shall also contribute to the formation of taxable profit, except:

(...)

b) Potential or latent losses, even if expressed in the accounting;".

With respect to gains and losses, article 46, no. 1, of the same Code provides that:

1 – Gains or losses realized are considered to be those obtained or suffered by onerous transfer, whatever the title by which it is made and also those arising from losses or those resulting from permanent allocation to purposes unrelated to the activity carried out, relating to:

(...)

b) Financial instruments, with the exception of those recognized at fair value in accordance with paragraphs a) and b) of no. 9 of article 18"

Article 5 of DL no. 159/2009, of 13 July, establishes the following:

Article 5

Transitional regime

1 - The effects on equity resulting from the adoption, for the first time, of the international accounting standards adopted in accordance with article 3 of Regulation no. 1606/2002 of the European Parliament and Council, of 19 July, which are considered fiscally relevant in accordance with the IRC Code and its complementary legislation, resulting from the recognition or non-recognition of assets or liabilities, or from changes in their measurement, contribute, in equal parts, to the formation of taxable profit of the first taxation period in which such standards apply and of the four following taxation periods.

(...)

It is accepted by the Parties that the financial participations in question should be accounted for in accordance with the fair value criterion and that the adjustments were recognized through profit or loss and their quantification.

The divergence concerns the application to the transition adjustment of the provisions of article 45, no. 3, of the CIRC, as worded in 2012.

In analyzing this issue, the reasoning of the arbitral award of 25-11-2013, made in case no. 108/2013-T, will be followed closely.

Article 45, no. 3, of the CIRC results from the renumbering of the previous article 42, no. 3, made by Decree-Law 159/2009.

This no. 3 of article 42 in question was, in turn, introduced by Law 32-B/2002, of 30 December, with the following wording:

"The negative difference between gains and losses realized by onerous transfer of capital shares, including their redemption and amortization with capital reduction, contributes to the formation of taxable profit in only half of its value."

According to the Report of the Ministry of Finance for the 2003 State Budget (p. 33), the legislative intervention in the area in question (IRC) was guided by "two priorities, namely, the fight against tax fraud and evasion and the broadening of the tax base", with the amendment in question fitting within the scope of "Broadening the tax base and measures of moralization and neutrality" (p. 51).

The current wording of the rule in question resulted from the amendment implemented by Law 60-A/2005 of 30 December, and in accordance with the corresponding Report of the Ministry of Finance (p. 31), the measure in question was framed within the "FIGHT AGAINST TAX EVASION AND FRAUD AND OTHER MEASURES AIMED AT BUDGET CONSOLIDATION".

Now, no. 9 of article 18 of the CIRC applicable obtains its justification directly in the preamble of DL no. 159/2009, of 13 July, which introduced it in the said Code, where it can be read:

"Still in the field of approximation between accounting and fiscal treatment, the application of the fair value model in financial instruments is accepted, whose counterpart is recognized through profit or loss, but only in cases where the reliability of the determination of fair value is in principle assured. Thus, equity instruments that do not have a price formed in a regulated market are excluded. Furthermore, the application of the realization principle was maintained with respect to financial instruments measured at fair value whose counterpart is recognized in equity, as well as capital shares corresponding to more than 5% of the share capital, even if recognized at fair value through profit or loss. (...)

In the same sense, assets covered by the regime of fiscal gains and losses are identified as tangible fixed assets, intangible assets, investment properties, financial instruments, with the exception of those for which adjustments arising from the application of fair value contribute to the formation of taxable profit in the taxation period."

These expressed intentions have correspondence in that rule of no. 9 of article 18, as well as in the introduction, by the same legal instrument, of paragraphs f) and i) of number 1 of articles 20 and 24 of the CIRC, as well as of paragraph b) of no. 1 of article 46.

Within the set of amendments introduced by the aforementioned Decree-Law 159/2009, of 13 July, it should also be noted that where previously there was talk of revenues and gains (article 20), there is now talk of income, and where previously there was talk of costs or losses (article 23), there is now talk of expenses.

Prior to the adoption of fair value for shares with the characteristics of the case sub judice, due to the entry into force of the SNC, variations in assets relating to financial instruments were irrelevant from the point of view of the formation of taxable profit for each period, due to the rule of article 21, no. 1, paragraph b), of the CIRC, which established that "potential or latent gains, even if expressed in the accounting, including legally authorized revaluation reserves" did not contribute to the formation of taxable profit. Only at the moment of realization of the gain or loss did the variation in assets verified take on tax relevance.

This tax framework, which was based on single taxation (which occurred only once throughout the entire holding period of financial instruments), dependent on a voluntary action by the taxpayer (insofar as the transaction of the instruments generating the variation in assets, condition of its tax relevance, would only occur if and when the taxpayer disposed of the assets) and in which the valuation of the variation in assets was fixed in function of the concrete transaction that triggered its tax relevance provided fertile ground for accounting and tax manipulations, since the taxpayer could seek to trigger the tax relevance at the moment and in the terms in which it was fiscally most advantageous for him.

On the other hand, given the relevance of the taxpayer's will in the mechanism of tax relevance of the variation in assets, the system established was suited to the adoption of mechanisms for conditioning that will, in order to conform it to economically more desirable behaviors, which, in this case, pass through the preference for realization of gains over the realization of losses.

It is in this context that the emergence of the rule of the former article 42, no. 3, of the CIRC, which precedes the current article 45, no. 3, of the same, is explained.

Such a rule, whether in its primitive wording, resulting from Law 32-B/2002, of 30 December, or in the one given to it by Law 60-A/2005 of 30 December, is explained objectively and subjectively (i.e., in light of the motivation expressed by the legislator) by needs related to the fight against tax fraud and evasion and the broadening of the tax base, directed to the desired consolidation of the budgetary accounts.

The acceptance of the application of the fair value model in financial instruments, effected by Decree-Law 159/2009, of 13 July, introduced, in the part covered, a radically different model, both of valuation and of tax relevance of variations in assets relating to the holding of those instruments.

Indeed, the intention of the legislator when adopting the fair value model, duly evidenced, was, assumed and expressly, to maintain "the application of the realization principle with respect to financial instruments measured at fair value whose counterpart is recognized in equity, as well as capital shares corresponding to more than 5% of the share capital, even if recognized at fair value through profit or loss".

Already with respect to "financial instruments" that correspond to less "than 5% of the share capital", "whose counterpart is recognized through profit or loss, (...) in cases where the reliability of the determination of fair value is in principle assured", the legislative intention was to accept "the application of the fair value model", excluding the realization principle.

In consonance with this legislative intention, article 18, no. 9, of the CIRC came to provide that, as a general rule, "Adjustments arising from the application of fair value do not contribute to the formation of taxable profit, being allocated as income or expenses in the taxation period in which the elements or rights that gave rise to them are disposed of, exercised, extinguished or liquidated", which constitutes an evident and deliberate surfacing of the assumed realization principle.

However, the same rule, in its paragraph a), establishes the exception to this regime, "when: a) They relate to financial instruments recognized at fair value through profit or loss, provided that, in the case of equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a shareholding in the capital exceeding 5% of the respective share capital;".

That is, when the "income or expenses (...) relate to financial instruments recognized at fair value", "contribute to the formation of taxable profit" "provided that":

• They are recognized "through profit or loss";

• They are "equity instruments";

• "have a price formed in a regulated market"; and

• "the taxpayer does not hold, directly or indirectly, a shareholding in the capital exceeding 5% of the respective share capital".

Provided these conditions are met:

• Income resulting from the application of fair value in financial instruments is considered (article 20, no. 1, paragraph f) of the CIRC); and

• Expenses resulting from the application of fair value in financial instruments are considered (article 23, no. 1, paragraph i) of the CIRC).

Thus, where previously we had a single tax relevance, at the time of transaction of those instruments, we now have continuous tax relevance. That is, in light of the new rules comprising the regime of tax relevance of accounting at fair value of financial instruments, income or expenses resulting from the application of fair value to these now directly determine the formation of taxable profit (articles 20, no. 1, paragraph f), and article 23, no. 1, paragraph i), of the CIRC) of the very year in which they occur, provided that determined conditions are met (article 18, no. 9, of the CIRC), which include the formation of price in a regulated market, with variations in assets verified not being taxed as gains or losses (article 46, no. 1, paragraph b), of the CIRC).

In this context, there are no longer any needs related to the fight against tax fraud and evasion, not only because the tax relevance of variations in assets is no longer conditional on a voluntary act by the taxpayer, but also because the valuation is objectively fixed.

On the other hand, and for the same reasons, there is equally no sense to any measure of conditioning the taxpayer's will in order to favor behaviors that are economically more "desirable" and, as such, in conformity with the interests of broadening the tax base and budgetary consolidation.

Notwithstanding these amendments introduced by Decree-Law 159/2009, of 13 July, the former article 42, no. 3, of the CIRC, renumbered to article 45, no. 3, maintained its validity, with its wording unchanged.

Hence the question, as occurs in the present proceedings, whether such a rule shall apply or not to depreciations relating to financial instruments that contribute to the formation of taxable profit in accordance with article 18, no. 9, paragraph a), of the CIRC.

In a first analysis, based exclusively on the literal content of no. 3 of article 45, an affirmative answer is suggested to this question, given the breadth of the provision of this rule.

But a careful and coordinated interpretation of the rules relevant to analyzing the question, which were indicated, leads to a different conclusion.

In fact, article 45, no. 3, of the CIRC states that:

"The negative difference between gains and losses realized by onerous transfer of capital shares, including their redemption and amortization with capital reduction, as well as other losses or negative variations in assets relating to capital shares or other components of equity capital, in particular supplementary contributions, contribute to the formation of taxable profit in only half of their value."

The analysis of the normative text reveals with clarity that the legislator chose, for inclusion therein, three types of situations that should be taken, by virtue of the presumption of good legislative technique, as distinct, namely:

• "The negative difference between gains and losses realized by onerous transfer of capital shares";

• "other losses (...) relating to capital shares or other components of equity capital";

• "other (...) negative variations in assets relating to capital shares or other components of equity capital".

Let us then see whether the situation of the present case falls under any of the situations listed.

The situation alluded to under paragraph a) above will be manifestly inapplicable, not only because there was no realization effected by onerous transfer, but also because article 46, no. 1, paragraph b), of the CIRC excludes the situations described in article 18, no. 9, paragraph a), from the concept of gains realized.

Thus, there remain the possibilities of integrating the situation of the present case into some of the situations listed in paragraphs b) and c) above.

The apparent indiscriminate breadth of the provisions in question may, however, be reasonably mitigated by noting that "losses" and "other negative variations in assets" will be concepts, not redundant, but with their own distinct meaning.

To understand this, it will be necessary to go back to articles 23 and 24 of the same Code, paying attention to the terminological evolution made by article 159/2009, of 13 December.

Indeed, before the entry into force of the latter statute, the articles referred to of the CIRC stated, respectively, that:

– "Costs or losses are those demonstrably indispensable for the realization of revenues or gains subject to tax or for the maintenance of the source of production, namely the following: (...)";

– "Under the same conditions referred to for costs or losses, negative variations in assets not reflected in the net result of the fiscal year shall also contribute to the formation of taxable profit, except: (...)".

It is thus verified that when the wording of article 45, no. 3, of the CIRC currently in force was established, this Code expressly distinguished, for what is relevant here, three types of situations, namely:

• Costs;

• Losses;

• Negative variations in assets not reflected in the net result of the fiscal year.

The provision of article 42, no. 3 of the CIRC (predecessor of article 45, no. 3, as worded by Decree-Law no. 159/2009, of 13 July), should be considered, thus, as referring to these concepts, defined in articles 23 and 24, in the versions prior to this Decree-Law.

Thus, and for obvious reasons, from the provision of that rule should be excluded the costs relating to "capital shares or other components of equity capital", including therein, solely, the losses (as defined in article 23) and negative variations in assets (as defined in article 24), relating to those shares.

And that this is so, that is, that the expression "other losses or negative variations in assets" used in article 45, no. 3, of the CIRC, as worded in 2012, does not have an indiscriminately broad sense, but rather a precise sense, defined in articles 23 and 24, results from the very fact that the legislator employed the same distinction.

Furthermore, the inclusion in the scope of the rule in question not only of losses (as defined in article 23) and negative variations in assets (as defined in article 24), but also of costs (as defined in article 23 prior to Decree-Law no. 159/2009), would lead to the fact that, for example, the acquisition cost of capital shares would only contribute half of the respective value to the determination of taxable profit, which would obviously be inconceivable to a minimally reasonable legislator and, consequently, this is an interpretation to be rejected by virtue of the rule of article 9, no. 3, of the Civil Code, which requires that it be presumed that the legislator established the most correct solutions.

The normative change made by Decree-Law 159/2009, of 13 July, did not change anything significant on the matter in question. Indeed, although the body of article 23 now refers only to expenses, the fact remains that the CIRC continues to use the expression "losses", including in article 23 itself (cf. no. 1, paragraph h)). This occurs in consistency, moreover, with the SNC, which pursuant to point 2.1.3.e) of the annex to Decree-Law 158/2009 of 12 July, maintains the distinction between "expenses" and "losses".

Thus, it is concluded that article 45, no. 3, of the CIRC will refer to:

• negative differences between gains and losses realized by onerous transfer of capital shares;

• other losses relating to capital shares or other components of equity capital; and

• other negative variations in assets relating to capital shares or other components of equity capital.

Being that by "losses" should be understood the facts qualifying as such in light of the CIRC, and by "negative variations in assets" should be understood negative variations in assets not reflected in the net result of the fiscal year, as defined in article 24.

Thus, shall not be included, within the scope of the rule in question, the facts qualifying as "expenses" in light of the CIRC, even if relating to capital shares or other components of equity capital.

The Tax Administration itself seems to acknowledge this, since in the "Manual for Filling in Table 07, Model 22" ([1]), with regard to field 737, it states that "In this field are entered, at 50%, the amounts relating to other losses (which are not losses, since these follow the "mechanism" of gains and losses) relating to capital shares or other components of equity capital. For example, the amounts corresponding to 50% of losses from reductions in fair value are added in this field 737 when they fall within the scope of article 23, no. 1, paragraph i), due to the provision of article 18, no. 9, paragraph a)".

However, article 23, no. 1, paragraph i), of the CIRC does not refer to the amounts in question as "losses", but as "expenses", so their entry in the field in question would be incorrect.

For that matter, and if there were any doubt, if the legislator, upon the entry into force of Decree-Law 159/2009 of 13 December, intended to cover the situations listed in article 18, no. 9, paragraph a), of the CIRC, within the scope of article 45, no. 3, of the same, it would have:

– included "Expenses resulting from the application of fair value in financial instruments", not in article 23, but in article 24 of the CIRC ([2]); or

– referred to such situations as "losses resulting from the application of fair value in financial instruments" and not as "expenses".

In the framework just set out, it should then be considered that Decree-Law 159/2009, of 13 July, introduced, with respect to the part covered by the acceptance of the application of the fair value model in financial instruments, a special regime of relevance for the computation of taxable profit, justified both by its own objectivity and by the expressed intention to approximate accounting to fiscal treatment.

This circumstance is not, in light of the CIRC resulting from Decree-Law no. 159/2009, capable of generating any type of doubts, as is verified, in particular, by the wording of articles 20, no. 1, paragraphs f) and h), 23, no. 1, paragraphs i) and l), and, in particular, 46, no. 1, paragraph b), in light of which the legislator's intention to remove adjustments arising from the application of fair value criterion to financial instruments, in accordance with the terms recognized by the CIRC, from the regime of gains and losses is clearly evident.

Now, the regime resulting from the combination of articles 45, no. 3, and 46 of the CIRC only makes sense from the perspective of the acceptability of the variations in assets in question under the lens of the aforementioned realization principle.

For, being in question, in light of such principle, the measurement of the variation in assets in function of a transaction, there will always be a voluntary factor in relation to that.

That is, in the regime for which the rule of article 45, no. 3, was thought out and instituted, the realization of losses and other situations listed was dependent on a voluntary action corresponding to their realization. Now, in this context, it will be understandable that the legislator institute mechanisms of discouragement of an action capable of being considered as undesirable, in the case the realization of losses or other negative variations in assets. By providing that such situations will only be relevant in 50% of the accounted amount, the fiscal legislator is objectively conditioning the actions covered by the legal provision, imposing a negative incentive to the same.

On the other hand, and being in question financial instruments of non-objectively quantifiable value, the disregard in 50% of negative variations in assets verified would also have a function of "compensating" the natural tendency of economic operators to, at the fiscal level, inflate losses.

However, those aspects will no longer be verified in the situations covered by article 18, no. 9, paragraph a). Here, being in the presence of adjustments resulting from fair value accounting, determined by objective criteria (with "a price formed in a regulated market"), there is no doubt or intervention of the taxpayer's will in the verification of the negative or positive asset adjustment. That is, these will occur or not, regardless of the action and will of the taxpayer.

Now, to penalize, in these cases, the taxpayer with a disregard of 50% of the expense incurred, would be wholly unjustified, both from an economic and from a legal point of view.

For, it must be remembered, this situation of contingent (random, even) unjustified penalty would only occur by virtue of the exception of the situations covered by article 18, no. 9, paragraph a), of the CIRC to the regime of the realization principle. That is, if with respect to those situations the general regime of the body of article 18, no. 9, applied, according to which they would not contribute "to the formation of taxable profit, being allocated as income or expenses in the taxation period in which the elements or rights that gave rise to them are disposed of, exercised, extinguished or liquidated", the pointed incoherence would not be verified, since the fact that would trigger the contribution to the formation of taxable profit would only occur by the will of the taxpayer, so it would be up to it to choose whether to realize the negative asset variation, with the consequent tax penalty, or defer it to a moment when it was less voluminous or even positive, reducing or eliminating the penalty arising from the transaction for itself and the Public Exchequer. It is the exception of paragraph a), by removing the situations provided for therein from the scope of the realization principle, that justifies the new regime of relevance for taxable profit, which was instituted.

Evidence of all that has been said is presented in the table prepared below, which demonstrates the unreasonableness of applying the rule of article 45, no. 3, to the situations covered by article 18, no. 9, paragraph a):

The non-application of the rule of article 45, no. 3, of the CIRC to expenses, and concretely to "Expenses resulting from the application of fair value in financial instruments", with the consideration full of the asset repercussions verified, whether positive or negative, leads to a coherence of taxation regardless of when the disposal of the financial instrument takes place. That is, at whatever time one chooses to dispose of the financial instrument, the positive and negative asset changes offset each other, so that, at the end, the