Summary
Full Decision
ARBITRAL DECISION
The Arbitrators, Judge José Poças Falcão (in the capacity of arbitrator-president), Dr. Marcolino Pisão Pedreiro (in the capacity of arbitrator adjunct) and Dr. Alexandre Andrade (in the capacity of arbitrator adjunct), designated by the Deontological Council of the Centre for Administrative Arbitration (hereinafter referred to as CAAD) to constitute the Arbitral Tribunal, constituted on 3 May 2018, decide as follows:
1. Report
A..., S.A. (hereinafter referred to as the Claimant), with the tax identification number..., with registered office at ..., ...-... ..., with share capital of €717,500,000.00 and registered in the Commercial Registry Office of ..., filed a request for constitution of an Arbitral Tribunal, in accordance with Decree-Law No. 10/2011 of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to as RJAT), in which the AUTHORITY FOR TAX AND CUSTOMS (hereinafter referred to as the Respondent) is the respondent.
The Claimant requests that the legality of the decision dismissing the request for Official Review No. ...2017..., issued by the Large Taxpayers Unit – Tax Management and Assistance Division, signed by the Head of Division B..., originating from the Finance Service of ... – ... and the Corporate Income Tax (IRC) Assessment No. 2016..., relating to the tax period 2015, with the amount to pay of €211,213.27, issued by the General Director of AT, Dr. Helena Alves Borges, be reviewed.
The Claimant also requests compensatory interest in accordance with Article 43 of the General Tax Law (LGT).
It results from the Claimant's own words in the Submissions as follows: In the present proceedings, the application of the general rule for the deduction of Special Payment on Account (hereinafter PEC) to a situation of merger with neutrality is being discussed, in which the deduction of the value of PEC borne by the incorporated company in the sphere of the incorporating company is sought.
As the Claimant states in the Request for Arbitral Opinion: Underlying this Additional Assessment [...] is a PEC value – in the total amount of €210,000.00 – paid by a company (C..., tax ID...) that merged, without having had the opportunity prior to the merger to deduct this PEC, with another company (D..., tax ID...) from the Claimant's Group, with the latter ultimately deducting that value, all in accordance with Tax Law.
The Claimant argues that the present request for Constitution of an Arbitral Tribunal and Request for Arbitral Opinion constitutes the appropriate means to challenge both the decision dismissing the request for Official Review No. ...2017..., and the Corporate Income Tax Assessment No. 2016... relating to the tax period 2015, since, in accordance with and for the purposes of the provisions of subparagraph a) of Article 2 of Regulatory Order No. 112-A/2011 of 22 March, the Tax Authority (hereinafter 'AT') bound itself to the jurisdiction of the arbitral tribunals operating at CAAD, a binding that only excepts "claims relating to the declaration of illegality of self-assessment acts, withholding at source and payments on account that have not been preceded by recourse to administrative procedures". Effectively, the assessment act whose legality is now being discussed was preceded by "administrative challenge" via the mechanism of Official Review, the dismissal of which is also being discussed, and such review, by its administrative nature, is equated with the provisions of Articles 131 to 133 of the Code of Tax Procedure and Process (CPPT) for purposes of the subsequent challenge to the dismissal decision, as has already been decided in Decisions 384/2017-T; 602/2016-T; 39/2017-T; 704/2015-T; 726/2015-T; 630/2017-T; 381/2017-T; 117/2013-T.
As the Respondent states in its Response, in the request for arbitral opinion (Initial Petition or IP), the Claimant petitions for the annulment of what it designates as the additional Corporate Income Tax assessment for the tax period 2015 arising from the disregard of the deduction from the group's tax liability in respect of special payment on account (PEC) and requests reimbursement in the amount of values unduly paid.
The Respondent defends itself by exception, invoking the material incompetence of the Arbitral Tribunal, arguing that the claim is formulated without such self-assessment act having been preceded by administrative challenge "in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process", which necessarily results in its review being excluded from arbitral proceedings.
The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD on 15 March 2018 and subsequently notified to the Respondent.
In accordance with the provisions of paragraph 1 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of the RJAT, the Deontological Council of CAAD designated as Arbitrators of the Collective Arbitral Tribunal the signatories, who communicated their acceptance of the appointment within the applicable time period.
On 7 May 2018, the Parties were duly notified of such designation, and neither expressed willingness to refuse the designation of the arbitrator, in accordance with the combined provisions of subparagraphs a) and b) of paragraph 1 of Article 11 of the RJAT and Articles 6 and 7 of the Deontological Code of CAAD.
In compliance with the provisions of subparagraph c) of paragraph 1 of Article 11 of the RJAT, the Arbitral Tribunal was constituted on 28 May 2018.
On 6 June 2018, the Arbitral Tribunal issued an Arbitral Order for notification of the Respondent to submit its Response, attach a copy of the Administrative File, and request, if it so wishes, the production of additional evidence.
On 6 June 2018, the Respondent was notified to submit its Response, attach a copy of the Administrative File, and request, if it so wishes, the production of additional evidence.
The Respondent submitted its Response on 4 July 2018, arguing for the merits of the exception invoked or, if the Arbitral Tribunal did not so understand, the lack of merit of the Request for Arbitral Opinion and, as a consequence, the dismissal of the Respondent from the claim.
The Respondent submitted the Administrative File on 9 July 2018.
By Arbitral Order dated 10 July 2018, the Arbitral Tribunal decided:
[...] Unless expressly opposed and substantiated by either party within 5 days, the hearing is dispensed with, considering that this is, in the case, a proceeding not susceptible to a definition of specific procedural steps, different from those commonly followed by CAAD in the generality of arbitral proceedings and there is no apparent need for correction of procedural documents. With regard to the exception raised by AT, it will be reviewed at the end, after the opposing party has been heard in accordance with the terms defined below.
[...] Both parties shall submit, within the simultaneous period of 20 (twenty) days [...] written submissions, of fact (essential facts that they consider proven and not proven) and of law. This period commences after the silent expiry of the 5 days referred to above, in I. In the submissions or within the time period for their presentation, the Claimant shall exercise the right to be heard with regard to the substantive matter of the exception raised in the Response.
The Collective Arbitral Tribunal set the date of 15 October 2018 as the deadline for rendering the Arbitral Decision.
The Parties submitted submissions. The Claimant also submitted, following the Respondent's submissions, a response to the preliminary issue referred to by the Respondent in the submissions.
The Collective Arbitral Tribunal is competent and was regularly constituted.
The Parties have legal personality and capacity, are legitimate and are duly represented (Article 4 and paragraph 2 of Article 10, both of the RJAT and Article 1 of Regulatory Order No. 112-A/2011 of 22 March).
The proceeding is not affected by nullities.
2. Matter of Fact
2.1 Proven Facts
Having analysed the documentary evidence produced in the course of this Proceeding, the Arbitral Tribunal considers the following facts to be proven, as relevant to this Arbitral Decision:
A. The Claimant was notified of the Additional Corporate Income Tax Assessment No. 2016..., relating to the tax period 2015, with the total amount to pay of €211,213.27.
B. As a means of challenging the Additional Assessment, the Claimant proceeded to request Official Review of the same.
C. The Claimant was notified of Information No. ...-AIR1/2017, with the draft decision concerning the request for Official Review, in which the Respondent states the following: 56. There is no doubt that for Corporate Income Tax purposes, when the incorporated company by merger, the company "C..." [...] ceased activity on the date of registration of the merger, that is, on 30 June 2016, it should have been the incorporating company, the company "D...", that assumed all rights and obligations of the incorporated company, to request the respective reimbursement from the head of the Finance Service within 90 days after the cessation of that company's activity. 57. That is, given the tax legal regime in force at the date of the facts now in question, given the non-deduction of the PECs, reimbursement should indeed have been requested. 58. Given the above, the Claimant's claim cannot proceed, maintaining the correction to the amount of the PECs made in the assessment now under challenge in the amount of €210,000.00.
D. The Claimant exercised the right to be heard, in which it sought the review (by annulment) of the Additional Assessment.
E. The request for Official Review was dismissed, with Information No. ...-AIR1/2017 concluding: In accordance with the foregoing and having reviewed all the elements of the file, in particular, our previous opinion "Draft Decision" and the procedural documents submitted by the Claimant, it seems to us that the request in the file should be dismissed, in accordance with the content of the "summary table" mentioned in the introduction of this opinion, with all consequential legal effects [...].
F. The Claimant is a commercial company carrying out its activity in accordance with paragraph 4 of Article 3 of the Corporate Income Tax Code, being taxed in accordance with the "Special Tax Regime for Groups of Companies" (RETGS).
G. The company C... (...) bore, in the tax periods 2011, 2012 and 2013, the following PECs, in the total amount of €210,000.00:
Guide Number Period Date of Payment Amount Validity
... 2011 31/03/2011 €35,000.00 2015
... 2011 31/10/2011 €35,000.00 2015
... 2012 02/04/2012 €35,000.00 2016
... 2012 30/10/2012 €35,000.00 2016
... 2013 27/03/2013 €35,000.00 2017
... 2013 27/03/2013 €35,000.00 2017
Total €210,000.00
H. The company C... (...) did not have the opportunity to deduct the PEC payments, so that the same, in 2015, were active (i.e., not expired).
I. The company C... (...) underwent a merger, under the regime of tax neutrality, with the company D... (tax ID...), with retroactive effect to 1 January 2016.
J. Following the merger operation, the company D... (tax ID...) submitted its Return (Modelo 22) for the tax period comprised between 01.07.2015 and 30.06.2016.
K. In the Return, D... (tax ID...) proceeded to deduct the PECs previously not deducted by C... (...), in the value of €210,000.00.
L. The company D... (tax ID...), the incorporating company, was, at the date of the merger, covered by the RETGS, which is why the Claimant, in its capacity as the parent company, included the value of €210,000.00 (as PEC paid by a subsidiary of its Group).
M. The Claimant, in its capacity as the parent company under the RETGS, included the €210,000.00 in the line "Special Payment on Account" (field 356) of its Return (Modelo 22).
N. The Claimant made voluntary payment of the Additional Assessment in question, in the total amount of €211,213.27.
O. The activity of C... (tax ID...), the company incorporated in the merger, in the manufacturing facility of ... was continued after the merger, i.e., the factory did not cease operations due to the merger.
P. The PECs paid by reference to 2011, 2012 and 2013 benefit from the regime in force at the date which determined a period of 4 years to effect the deduction, so that the PEC relating to the tax period 2011 was still capable of being deducted up to 2015.
Q. The Additional Assessment in question resulted from the disregard of the deduction of the PECs (2011, 2012 and 2013) not deducted by C... (tax ID...), deducted by D... (tax ID...), which incorporated it by merger and included by the Claimant, in its capacity as parent company under the RETGS.
R. The Respondent issued an Additional Corporate Income Tax Assessment and late payment interest without substantiation.
2.2 Facts Not Proven
There are no facts relevant to this Arbitral Decision that have not been proven.
2.3 Justification for the Determination of the Matter of Fact
The matter of fact was determined by this Collective Arbitral Tribunal and its conviction was formed on the basis of the procedural documents submitted by the Parties and the documents attached to this Proceeding.
3. Consideration of the Question of Incompetence (Material)
The Respondent invokes the exception of material incompetence of the Arbitral Tribunal arising from the fact that the Request for Arbitral Opinion was formulated following the dismissal of a Request for Official Review.
In the very words of the Respondent, The request for arbitral opinion sub judice is formulated following dismissal of a request for official review of a self-assessment act of corporate income tax (IRC) for the year 2015 [...]. However, in accordance with the provisions of Articles 2, paragraph 1, subparagraph a) and 4, paragraph 1, both of the RJAT, and Articles 1 and 2, subparagraph a), both of Regulatory Order No. 112-A/2011 of 22 March, there is an exception of material incompetence of the present Arbitral Tribunal to review and decide on the aforementioned claim, a circumstance that necessarily results in the dismissal of the Defendant Entity from the Instance [...]. Effectively, Law No. 3-B/2010 of 28 April [...], provided [...] a legislative authorization relating to arbitration in tax matters, establishing that the same should constitute an alternative procedural means to judicial challenge and action for recognition of a right or legitimate interest enshrined in the CPPT. In exercise of such legislative authorization, Decree-Law No. 10/2011 of 20 January was approved, which established the Legal Framework for Arbitration in Tax Matters [...]. Under Article 2 of the aforementioned act, with the heading "Competence of arbitral tribunals and applicable law", it is determined that the competence of arbitral tribunals comprises, in particular (cf. subparagraph a) the review and declaration of illegality of acts of tax assessment, self-assessment, withholding at source and payments on account. However, by virtue of the provisions of paragraph 1 of Article 4 of the RJAT, 'The binding of the tax administration to the jurisdiction of tribunals constituted in accordance with the present law depends on an order of the members of the Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of disputes covered'. The aforementioned Regulatory Order (No. 112-A/2011 of 22 March) defines, in its Article 2, subparagraph a), that AT is bound by arbitral claims that have as their object the review of claims relating to taxes whose administration is entrusted to it, referred to in paragraph 1 of Article 2 of the RJAT, 'with the exception of claims relating to the declaration of illegality of self-assessment acts, withholding at source and payments on account that have not been preceded by recourse to administrative procedures in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process'.
The Respondent argues that the Request for Arbitral Opinion sub judice is directed, even if indirectly, to the declaration of illegality of a tax self-assessment act, in this case Corporate Income Tax, and that the claim is formulated without such self-assessment act having been preceded by administrative challenge "in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process", which necessarily results in its review being excluded from arbitral proceedings.
Concluding by the Respondent, or in other words, the scrutiny of tax self-assessment acts is only admissible in arbitral proceedings if, at a prior moment, they have been challenged administratively, in accordance with Article 131 of the CPPT. [...] In summary, it should therefore be understood that, given the constitutional and legal principles cited, the interpretation of the provisions of Regulatory Order No. 112-A/2011 should be configured literally, as it is not of little importance that the legislator in subparagraph a) of Article 2 of Regulatory Order No. 112-A/2011, when completing the expression "that have not been preceded by recourse to administrative procedures" with the mention "in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process", has intentionally delimited the binding of AT to such situations, in light of the reasons exposed. For which reason this latter part of the provision cannot, on pain of manifest illegality/unconstitutionality, be set aside, interpreting the norm as if the specific reference to a concrete administrative procedure did not exist, making the interpreter wipe the slate clean of the distinction provided by the legislator.
The Claimant argues, regarding the exception invoked by AT in the Response, that it does not consider requests for official review to be equivalent to recourse to administrative procedures in accordance with Articles 131 to 133 of the CPPT, requiring, from this point on and on account of its relevance, to cite and attach to these Submissions the recent Judgment No. 244/2018 of the Constitutional Court [...]. Effectively, the said Constitutional Court Judgment, in a particularly clear and categorical manner, decides 'not to find unconstitutional the provision that considers requests for official review equivalent to situations in which there was 'recourse to administrative procedures in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process' (cit.). It is also important to note that such decision was motivated, precisely, by the militantly committed position of AT for the purpose of the interpretation of subparagraph a) of Article 2 of Regulatory Order No. 112-A/2011 of 22 March, and it is therefore evident that the said decision of the Constitutional Court follows the direction of considering reactions to requests for official review as being covered by the jurisdiction of the arbitral tribunals operating at CAAD.
It was, effectively, decided in this Judgment of the Constitutional Court, dated 11 May 2018, not to find unconstitutional the provision that considers requests for official review equivalent to situations in which there was 'recourse to administrative procedures in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process', for the purpose of the interpretation of subparagraph a) of Article 2 of Regulatory Order No. 112-A/2011 of 22 March, with such situations being, therefore, covered by the jurisdiction of the arbitral tribunals operating at CAAD (Centre for Administrative Arbitration). In other words, the Constitutional Court admits that requests for official review are equivalent to situations of recourse to administrative procedures, so that it supports the competence of Arbitral Tribunals in these situations, an understanding also supported by this arbitral tribunal.
In these terms, this Arbitral Tribunal decides to find the exception of material incompetence of the Arbitral Tribunal, invoked by the Respondent in its Response, to be without merit.
4. Matter of Law
The Claimant does not agree with the position and criterion that the Respondent adopted in the case under analysis here and which resulted in the Additional Corporate Income Tax Assessment and late payment interest, relating to the PECs of the tax periods 2011, 2012 and 2013.
The Respondent argues that in the request for arbitral opinion (Initial Petition or IP), the Claimant petitions for annulment of what it designates as the additional Corporate Income Tax assessment for the tax period 2015 arising from the disregard of the deduction from the group's tax liability in respect of special payment on account (PEC) and requests reimbursement in the amount of values unduly paid. Underlying said additional assessment is the accumulated amount of PEC paid during three years (2011, 2012 and 2013), in the total of €210,000.00 [...], paid by a company (C...) that was incorporated as part of a merger operation, carried out in June 2016, with retroactive effect to 1 January of the same year, by the company D.... Following the merger operation, which benefited from the application of the special regime of tax neutrality, the incorporating company – E... – submitted the tax return (Model 22) for the tax period comprised between 01.07.2015 to 30.06.2016, having assumed the deduction of the special payments not used by the incorporated company, which were entered by the Claimant in Table 10 of the tax return (Model 22), relating to the group of companies covered by the RETGS.
The Respondent states, The Claimant alleges that the correction of the special payment on account is affected by illegalities, relying on the following grounds:
i. lack of substantiation of the correction to the PEC deducted in the group's tax return which it only learned about with notification of the draft decision dismissing the request for official review, thereby violating Article 268 of the Constitution and Article 77 of the LGT;
ii. the general rule for PEC is deduction, as per subparagraph d) of paragraph 2 of Article 90 and paragraph 1 of Article 93 of the Corporate Income Tax Code, only, with reimbursement operating when deduction ceases to be possible, in particular in the case of extinction "tout court";
iii. in the case of a merger by incorporation to which the special fiscal regime of neutrality provided for in Article 74 is applicable, given the absence of an express norm that contradicts it, the incorporating company is entitled to proceed with the deduction of the PEC and, only when deduction is not possible, request reimbursement of the values borne;
iv. if another interpretation is given to Articles 74 and 93 of the Corporate Income Tax Code, then these normative provisions are susceptible to infringing Directive 2009/133/EC of 19 October on the common tax regime applicable to mergers, divisions, partial divisions, assets contributions and share exchanges between companies of different Member States and to the transfer of the seat of a European Company or Cooperative Society from one Member State to another;
v. from the manifest applicability of the Directive and the unequivocal direct applicability of its provisions by virtue of the provisions of paragraph 4 of Article 8 of the Constitution, the incompatibility of the internal legal regime with Community Law, as interpreted by AT, is evident, and the said internal norms should be interpreted in light of community law, and the tax act whose review is requested should be annulled;
vi. If this is not understood to be the case, and there is a question of the interpretation of European Union Law that raises doubts and is relevant to the question to be decided, it will be necessary to submit the respective interpretation to the CJEU competent to decide on a preliminary basis under Article 267 of the TFEU, such referral being mandatory when the court deciding in last instance.
Concluding, the Respondent argues, The Claimant therefore requests, in what constitutes the substantive question to be decided in the proceedings, whether the merged or incorporated company was obliged to request, in accordance with paragraph 2 of Article 93 of the Corporate Income Tax Code, reimbursement of the special payments on account made in the years 2011, 2012 and 2013, still not deducted, following the cessation of activity occurring on the date when the merger became effective, or whether, as the Claimant understands, the right to deduction of the PEC was transmitted to the incorporating company by virtue of the application of the special regime of neutrality which assumes the presumption of continuity of the activity carried on by the incorporated company.
This Arbitral Tribunal understands that the matter under review is to determine whether the Claimant had the right to include, as it did, the PECs not deducted by C... (tax ID...) and deducted by E... (tax ID...), in its capacity as incorporating company, or whether the incorporated company C... (tax ID...) – was, by effect of the merger, obliged to request reimbursement of the PECs (cessation of activity).
The question here is whether the merger, in this case, the merger-incorporation effected between C... (tax ID...) and D... (tax ID...), constitutes, for purposes of the IRC Code (specifically, for purposes of Article 93 of the IRC Code), a cessation of activity of C... (tax ID...), in other words, the question at issue is whether the merger of companies (in this case by incorporation) is equivalent to or subsumed in the concept of cessation of activity provided for in paragraph 2 of Article 93 of the IRC Code.
Under review are the PECs relating to the tax periods 2011, 2012 and 2013.
Let us therefore begin by analysing the regime of Special Payment on Account (PEC) applicable to the case under analysis here.
In accordance with paragraph 1 of Article 93 of the Corporate Income Tax Code (hereinafter referred to as the IRC Code), The deduction referred to in subparagraph c) of paragraph 2 of Article 90 is made against the amount determined in the return referred to in Article 120 of the same tax period to which it relates or, if insufficient, up to the fourth following tax period, after the deductions referred to in subparagraphs a) and b) of paragraph 2 and in compliance with paragraph 7, both of Article 90, are made.
In accordance with subparagraph c) of paragraph 2 of Article 90 of the IRC Code, the following deductions are made against the amount determined in accordance with the preceding paragraph, in the order indicated: c) That relating to the special payment on account referred to in Article 106.
Thus, this Arbitral Tribunal understands that the rule contained in paragraph 1 of Article 93 of the IRC Code is the rule of deduction, that is, the first avenue is deduction. In a first instance, deduction should be made in the tax period to which it relates. In a second instance, if insufficient, the deduction can be made up to the 4th following tax period.
In accordance with paragraph 2 of Article 93 of the IRC Code, In the case of cessation of activity in the same tax period or up to the third following tax period after that to which the special payment on account relates, the part that cannot have been deducted in accordance with the foregoing paragraph, where it exists, is reimbursed by means of a request by the taxpayer addressed to the head of the finance service of the area where the registered office, place of effective management or permanent establishment in which the accounting is centralized is located, submitted within 90 days following the date of cessation of activity.
That is to say, in cases of cessation of activity, it is this Tribunal's understanding that the Tax Law – paragraph 2 of Article 93 of the IRC Code – establishes the regime for reimbursement (as regards the part that was not deducted in accordance with paragraph 1 of Article 93 of the IRC Code).
In accordance with subparagraph a) of paragraph 5 of Article 8 of the IRC Code, For the purposes of this Code, cessation of activity occurs: a) With respect to entities with registered office or place of effective management in Portuguese territory, on the date of closure of liquidation, or on the date of merger or division, as regards companies dissolved as a result thereof, or on the date when the registered office and place of effective management cease to be situated in Portuguese territory, or on the date when acceptance of the unclaimed succession or declaration that it is vacant in favour of the State takes place, or still on the date when the conditions for subjection to tax cease to exist.
Paragraph 3 of Article 93 of the IRC Code also establishes a rule for reimbursement in certain cases. See: Taxpayers may furthermore, without prejudice to the provisions of paragraph 1, be reimbursed of the part that was not deducted under the same provision provided that the following requirements are met:
a) They do not deviate, in relation to the tax period to which the special payment on account to be reimbursed relates, by more than 10%, downward, from the average of the profitability ratios of companies in the sector of activity in which they are engaged, to be published by order of the Minister of Finance;
b) The situation that gave rise to the reimbursement is considered justified by an inspection carried out at the request of the taxpayer made within 90 days following the end of the deadline for submission of the periodic return relating to the same tax period.
This Tribunal understands that paragraph 1 of Article 93 of the IRC Code establishes the general rule of deduction and paragraphs 2 and 3 establish the rule for reimbursement.
As stated by the Claimant in its Request for Arbitral Opinion, that is to say, and in order of preference, the Tax Law imposes:
(i) First, the deduction of the PEC in the assessment of the same tax period to which it relates [see subparagraph d) of paragraph 2 of Article 90 and paragraph 1 of Article 93, both of the Corporate Income Tax Code];
(ii) Next, the deduction of the PEC in the assessment of the following tax period(s) up to a maximum of the 6th following period (see paragraph 1 at the end of Article 93 of the Corporate Income Tax Code); and,
(iii) Finally, the reimbursement of values borne that cannot be deducted (see paragraphs 2 and 3 of Article 93 of the Corporate Income Tax Code).
This Arbitral Tribunal shares this interpretation.
The Respondent argues as follows: It should be understood that cessation of activity occurs with the extinction of the legal person as provided for in subparagraph a) of paragraph 5 of Article 8 of the Corporate Income Tax Code, so that C... was extinguished as a Corporate Income Tax taxpayer on the date when the merger became effective.
As stated above, the question here is whether the merger-incorporation effected and subject to the present analysis constitutes, for purposes of the IRC Code (paragraph 2 of Article 93 of the IRC Code), a cessation of activity of C... (tax ID...).
It must be stated at the outset that, in the concrete case, as stated by the Claimant in its Submissions and is established in the Matter of Fact – subparagraph O) –, the activity of the incorporated company (C... tax ID...) in the manufacturing facility of ... was continued after the merger, or, in other words, the factory did not cease to operate due to the merger, therefore, materially, there was no cessation of activity, an aspect that was never contested by AT and that the companies operated in the same sector and had practically the same corporate purpose.
In accordance with paragraph 1 of Article 97 of the Commercial Code, two or more companies, even if of different types, may merge through their reunion in a single one.
In accordance with subparagraph a) of paragraph 4 of Article 97 of the Commercial Code, the merger may take place: a) through the transfer of the total assets of one or more companies to another and the attribution to the partners thereof of shares, stocks or quotas of the latter.
In accordance with subparagraph a) of paragraph 1 of Article 73 of the IRC Code, merger is considered the operation by which: a) the transfer of the total assets of one or more companies (merged companies) to another already existing company (beneficiary company) is carried out and the attribution to the partners thereof of shares representative of the capital of the beneficiary and, possibly, of sums of money not exceeding 10% of the nominal value or, in the absence of nominal value, of the accounting value equivalent to the nominal of the participations that are attributed to them.
In accordance with subparagraph a) of Article 112 of the Commercial Code, with the registration of the merger in the commercial register: a) the incorporated companies are extinguished, [...] transmitting their rights and obligations to the incorporating company [...].
As ANTÓNIO MENEZES CORDEIRO teaches, in Commercial Code, I, General Part, 3rd Edition, Almedina, page 1125, "The merger of companies is the legal form – perhaps the most perfect – that allows for the expression of the phenomenon of economic concentration. In descriptive terms, it can be said that, in a merger, two or more companies join together to form a single one. All the manuals of the various countries relate a contrast between two basic modalities of merger: merger by incorporation and merger by concentration. In a merger by incorporation, a pre-existing company is maintained, absorbing the other".
This author also tells us, in the same work that: "(…) In a simplistic reading, the merger would be explainable through a game of extinctions. In the incorporation merger, there would be the extinction of the incorporated company and the absorption of its assets by the incorporating company. And were it to be so, the merger would have no autonomy as a legal operation. However, it was soon verified that the merger, when understood in these terms, was seriously compromised: a true extinction gives rise to liquidation, which entails a series of time-consuming operations. The merger was therefore granted conceptual autonomy and regimen.
And further that: "[…] in the merger, there is the maintenance of the earlier entities which merely transformed themselves. […] the legal situations previously headed by the companies involved are maintained throughout the vicissitude: at the end of this, they will arise, quite naturally, in the entity resulting from the merger, without any alteration being revealed in them"
In the same sense, DIOGO COSTA GONÇALVES writes, in the Commercial Code Annotated, Coordination by António Menezes Cordeiro, Almedina, 2009, that the thesis of merger as an act transforming commercial companies prevails today in Italy, France and Portugal. Effectively, the merger, rather than operating an extinction of companies with the transmission of their assets, involves, above all, a modification of the companies involved and their transformation through processes of economic concentration. The merger of a company is thus a modification act of companies which, altering their partnership agreement, appear united in the same structure, without modification of the legal situations involved which persist during the process and reappear naturally in the beneficiary company at the end thereof".
And, in a similar sense, already JORGE HENRIQUE PINTO FURTADO was writing, in Course of Commercial Law, Almedina, 2nd Edition, 2000, when he wrote: The fundamental effect of the merger is expressed through the word that designates it: two or more companies merge into one, that is to say, they become one – They are unified. [...] It is also important to note that the extinction of the merged companies is part of what, in Community terminology, is designated by dissolution without liquidation, constituting more properly a mere cessation of autonomous existence, which approximates the merger to the transformation.
JORGE M. COUTINHO DE ABREU teaches (and others), in the Commercial Code in Commentary, Volume II, Almedina, page 160, constitute defining elements of the legal concept of company merger: the extinction of companies, all or all but one, the transmission in universal title of the assets of one or more extinct companies and the integration of the partners of the extinct companies in the resulting company, by means of the attribution of participations corresponding to the transmission effected.
Further teaching JORGE M. COUTINHO DE ABREU (and others), incorporation merger, also designated by absorption, in which one or more incorporated (or absorbed) companies are extinguished, transmitting their assets to the incorporating (or absorbing) company, pre-existing, which attributes participations to the partners thereof or thereof.
As one of the essential elements of the merger is extinction, subparagraph a) of Article 112 of the Commercial Code provides, as stated above, with the registration of the merger in the commercial register, the incorporated companies are extinguished, [...], transmitting their rights and obligations to the incorporating company. That is, the company is legally extinguished, with all of its assets being transmitted to a single company, the incorporating company.
Further teaching JORGE M. COUTINHO DE ABREU (and others), in accordance with paragraph 1 of Article 146 of the Commercial Code, the dissolved company immediately enters into liquidation, initiating the process intended to pay all debts and to determine the final balance, to be distributed among the partners. It is understood that there is no liquidation process of the incorporated or merging company, because the incorporating company [...] succeeds to the assets of the company that is extinguished in the state in which it is found at the moment of the merger, it being unnecessary for those assets to be liquidated for payment to creditors and determination of the shareholders' share.
PAULO OLAVO CUNHA distinguishes, in Commercial Law, 6th Edition, Almedina, page 999, a merger may result in the establishment of a new company, to which the assets of the merged companies are globally transferred, [...], in which case the operation is designated simply as a merger, or concentration-merger. However, the operation may occur by absorption, that is, by means of the global transfer of the assets of one or more companies to another [...]. In this circumstance, we call the operation incorporation-merger.
Further teaching PAULO OLAVO CUNHA, a necessary effect of the merger is the transmission of assets (Article 112).
This Arbitral Tribunal understands that Company Law (and the doctrine analyzed) does not speak of cessation of activity in merger. There is effectively an extinction with transmission of assets, but there is no true cessation of activity (obviously, in cases where the activity continues after the merger operation).
In the concrete case, the activity of C... (tax ID...) was continued after the merger. The manufacturing facility of ... did not cease operations due to the merger. The activity of the factory did not cease. On the contrary, the activity continued in the incorporated company.
Because important for the substantiation of the present Arbitral Decision, we call the arguments from the Judgment of the Central Administrative Court of the South, Case No. 01162/03, dated 15 June 2004, when it states the following: With the merger, the legal personality of the incorporated company does not cease to exist; it continues to exist but, this time, integrated in the incorporating company. «As Professor Ferrer Correia says, Commercial Law, page 241, in this «merger by incorporation» only one company is extinguished, uniting in the other the assets and the partners, continuing to exist, as a company, the stronger one, enlarging its ranks. Thus the «merger» is understood as the continuation of the legal personality of the merged company in the new company if it is by incorporation. There is not, then, a true extinction, since only it is extinguished nominally, the earlier company continuing to exist integrated in the new company, which continues the personality thereof integrated in its own. (Journal of the Court of Justice, 295, 338) and Pinto Coelho, page 100 - Commercial Law). There is thus only a modification which, as a rule, does not alter the complex of rights and legal duties corresponding to it. (Prof. A. Reis, Civil Code Explained, page 233, and Journal, 295,338). There is not, then, an extinction of personality of the former company; which is prolonged in the company that absorbs it» (from the Judgment of 2.12.1982, Jurisprudence Collection, 1982/5°-223)». As has been defended by Doctrine and Jurisprudence, with the merger, the legal personality of the incorporated company does not cease to exist; it continues to exist but, this time, integrated in the incorporating company. On this issue, in an Opinion of Prof. António Menezes Cordeiro presented by the applicant in another proceeding, it is stated that: «II. The traditional theses regarding the merger of companies saw in it only the extinction of a company and the transmission of its property to the assets of another. Such transmission — in the evolution of such theses — would not, however, be a common transfer: rather, a 'universal succession', a 'universal transmission', similar to 'succession mortis causa'. (...) When they initiate a merger operation, the parties have no intention whatsoever to extinguish a company. It would be unreal to see in the merger an intent to destroy, tending to make something disappear. In the suggestive statement of COTTINO, the merger is a '...contract of life and not contract of death...'. Neither, in the hypothesis of concentration-merger, is there an intention to build a truly new entity; rather, the best use of what already exists is sought. The parties intend, instead, to profit from what already exists. Neither does the merger regime go through the rules of extinction/universal transmission. There is no proper extinction sensu of a company, which would imply the intervention of the rules on liquidation.» Conversely, in the incorporation the incorporated company integrates its legal existence in the larger company, with the members thereof, aggregated thereto, being, albeit indirectly, subjects of extinct legal personality. The fundamental legal fact that essentially characterizes it is therefore, as in the other species of merger, the integration of extinct legal personality in the larger collectivity with which it merges. It is a confusion of rights and obligations.» As can be seen, the incorporated company does not lose its legal personality and legal capacity, nor its tax capacity, with only a mutation thereof taking place, as it becomes integrated in the legal personality, legal capacity and tax capacity of the incorporating company.
This Arbitral Tribunal agrees with this understanding.
The concept used by the law for the requirement of reimbursement is, as we have seen, that of cessation of activity which, in this Tribunal's understanding, in the case in question, manifestly does not occur, since the activity of the incorporated company continued in the incorporating company, with which it was united.
Furthermore, and no less importantly, with the registration of the merger in the commercial register, the rights of the incorporated company were transmitted to the incorporating company. Strictly speaking, there is a continuity underlying the merger-by-incorporation operation, since the incorporating company continued to exercise the activity of the incorporated company, thereby assuming its rights and obligations.
However, as noted above, subparagraph a) of paragraph 5 of Article 8 of the IRC Code establishes, in the sense that for the purposes of this Code, cessation of activity (emphasis and underlining ours) occurs: a) with respect to entities with registered office or place of effective management in Portuguese territory, on the date of closure of liquidation, or on the date of merger or division, as regards companies dissolved as a result thereof, or on the date when the registered office and place of effective management cease to be situated in Portuguese territory, or on the date when acceptance of the unclaimed succession or declaration that it is vacant in favour of the State takes place, or still on the date when the conditions for subjection to tax cease to exist.
In its literal wording, this provision could lead to the conclusion that the merger, for IRC purposes, implies cessation of activity for the incorporated company.
However, paragraph 2 of Article 93 of the IRC Code cannot fail to merit an interpretation in light of the teleological and systematic elements, as well as the pertinent constitutional parameters. Effectively, this Tribunal understands that the ratio underlying the solution of paragraph 2 of Article 93 of the Commercial Code is the circumstance that, by way of cessation of activity, the taxpayer in question can no longer effect the deduction from the tax liability. This situation, strictly speaking, does not occur in the case of a merger, since the holder of the right in question – the incorporating company – continues, after union with the incorporated company, to exercise activity (namely, its own activity and the activity that was the incorporated company's) and, consequently, is able to exercise the right through the mechanism of deduction from the tax liability.
Furthermore, the provision permits the indication of a legislative intent not to prejudice the taxpayer who was unable to deduct the PEC. It allows it, in the case of cessation of activity, to request reimbursement, thus fulfilling the Constitutional principle of Taxation of Real Income, provided for in paragraph 2 of Article 104 of the Constitution of the Portuguese Republic.
Furthermore, the systematic element also points in the same direction, given that the tax losses of the merged companies may be deducted from the taxable profits of the new Company, and, in accordance with Article 75-A of the IRC Code, there is also the transmission of fiscal benefits to the incorporating Company, which may thus be deducted in accordance with Article 90, paragraph 2 of the IRC Code. There would be a systematic contradiction if the PECs borne by the incorporated company could not also be deducted by the incorporating Company.
Finally, this Tribunal further understands that the interpretation of the provision in this sense is the only one that harmonizes with the principle of efficiency (avoiding expenditure of administrative activity by the Respondent in the review of a reimbursement request and of the taxpayer in the request thereof) which, as ANA PAULA DOURADO writes, is of [...] constitutional and legal degree [...] and which, consequently, constitutes an interpretative parameter of the ordinary norm.
It is concluded, therefore, that the Respondent's interpretation of Article 93 of the IRC Code is manifestly erroneous, and the assessment act in question suffers from error in the legal presuppositions which results in its annulment.
In accordance with paragraph 2 of Article 608 of the Code of Civil Procedure, applicable by virtue of Article 29 of the RJAT, this Arbitral Tribunal is not obliged to address all questions raised by the parties, when the decision or resolution of some or any of them prejudices the solution to be given to another or others.
In this case, with the review and decision in the direction of declaring the assessment sub judice illegal, it prejudices, in light of the above, the consideration of the remaining questions brought into the proceedings.
4. Interest
The Claimant also petitions for the condemnation of the Respondent to payment of compensatory interest.
In accordance with paragraph 1 of Article 43 of the LGT, compensatory interest is due when it is determined, in a gracious reclamation or judicial challenge, that there was an error attributable to the services which resulted in payment of the tax debt in an amount higher than that legally due.
In light of the foregoing, the annulled Corporate Income Tax assessment results from an error attributable exclusively to the Respondent, in that the Claimant complied with its declaratory duties.
It has been proven that the Claimant paid tax higher than that which was due.
Thus, in accordance with Article 43 of the LGT and Article 61 of the Code of Tax Procedure and Process (CPPT), the Claimant is entitled to compensatory interest, such interest being to be accounted from the date of payment of the unduly paid (annulled) tax until the date of issuance of the respective credit note, the period for payment of which is counted from the date of the commencement of the period for spontaneous enforcement of the present decision (paragraphs 4 and 5 of Article 61 of the CPPT), at the rate referred to in paragraph 4 of Article 43 of the LGT.
5. Decision
In light of the foregoing, this Arbitral Tribunal decides:
a) To find the exception of material incompetence of the Arbitral Tribunal, invoked by the Respondent in its Response, to be without merit.
b) To find the present Request for Arbitral Opinion to be well-founded, as proven, declaring illegal the decision dismissing the request for Official Review No. ...2017..., issued by the Large Taxpayers Unit – Tax Management and Assistance Division, signed by the Head of Division B..., originating from the Finance Service of....
c) To annul, in consequence, the Corporate Income Tax Assessment No. 2016..., relating to the tax period 2015, with the amount to pay of €211,213.27, issued by the General Director of AT.
d) To condemn the Respondent to pay the compensatory interest due.
e) To condemn the Respondent to carry out all acts necessary to restore the situation, in particular, to condemn the Respondent to refund the amount of €211,213.27, this amount paid by the Claimant, plus the respective interest, until effective and complete refund of the amount.
f) To find the consideration of the remaining questions raised to be prejudiced.
g) To condemn the Respondent to pay the full costs given its loss of the case.
6. Value of the Proceeding
The value of the proceeding is fixed at €211,213.27.
7. Costs
This Arbitral Tribunal understands that the value to be considered for purposes of determining costs in the present Request for Arbitral Opinion is the value that motivated the constitution of this Arbitral Tribunal, i.e., the value of €211,213.27, corresponding to the amount paid, in excess of that due and initially indicated by the Claimant in the Request for Arbitral Opinion.
In accordance with paragraph 4 of Article 22 of the RJAT, the amount of costs is fixed at €4,284.00, in accordance with Table I attached to the Regulations for Costs in Tax Arbitration Proceedings, to be borne by the Respondent, as per the above condemnation.
• Let notification be made.
Lisbon, 12 October 2018
The Collective Arbitral Tribunal,
Judge José Poças Falcão
(Arbitrator-President)
Dr. Marcolino Pisão Pedreiro
(Arbitrator Adjunct)
Dr. Alexandre Andrade
(Arbitrator Adjunct)
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