Summary
Full Decision
Arbitral Decision
The arbiters agree, Judge José Poças Falcão (chairman), Professor Doctor Diogo Leite Campos (member) and Doctor José Coutinho Pires (member), comprising the Collective Arbitral Tribunal constituted under the scope of CAAD:
I - REPORT
A..., SGPS, SA, taxpayer no..., with registered office at Rua de..., no..., ..., hereby, pursuant to the provisions of Decree-Law 10/2011, of 20 January, submits a request for arbitral ruling having as its object:
(i) the assessments of Personal Income Tax, relating to the years 2012, 2013 and 2014, with the nos. 2016..., 2016... and 2016... respectively, and compensatory interest in the amount of €162,463.64 (one hundred and seventy-two thousand four hundred and sixty-three euros and sixty-four cents) and
(ii) the act of rejection of the administrative complaint regarding the aforementioned assessments.
The Claimant requests:
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that the illegality of the Personal Income Tax assessment acts nos. 2016..., 2016... and 2016..., relating to the years 2012, 2013 and 2014 and of the act of rejection of the administrative complaint be declared, by virtue of a legal defect, due to the non-fulfillment of the legal prerequisites for application of the general anti-abuse clause, provided for in article 38, no. 2 of the General Tax Law (LGT)
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that the Defendant be condemned to indemnify the Claimant for the costs already incurred and that may be incurred with the provision of a bank guarantee.
Alleged, in essence and in summary, to substantiate the request:
a) It is a limited company whose corporate purpose is the management of shareholdings, being therefore subject to the regime of shareholding management companies, regulated by Decree-Law 495/88, of 30 December, as amended.
b) According to the inspection report, the assessments made are based on the application of the general anti-abuse clause, provided for in no. 2 of article 38 of the LGT, to the constitution of the Claimant and subsequent transmission, to its ownership, of shares of the shareholders of company B..., SA
c) Which cannot [in the perspective of the Tax Authority] be accepted due to absolute absence of legal foundation.
d) As stated in Annex III of the Inspection Report, the Claimant was constituted in May 2007.
e) The company "C..., Lda" carried out a capital increase in February 2006 and also its transformation into a limited company, becoming designated as "D..., SA", with its capital then divided into shares, becoming held by five shareholders: E..., F..., G..., H... and I... (Annex I of the inspection report).
f) Having, in turn, the Claimant come to acquire the capital of the aforementioned "B..." (Annexes VII and VIII).
g) The constitution of the Claimant resulted from the will of the shareholders of "B..." to structure the activity carried out by them through an "upper-tier" business "structure" that would allow, in the future, the diversification of the business and its specialization in various companies linked by the top-tier shareholding management companies, which they envisaged as possible.
h) In constructing this corporate business structure the shareholders of "B..." were merely pursuing the incentive of the Portuguese State for entrepreneurs to organize and promote the growth of their activities based on the construction of business groups, with the figure of the shareholding management company as the central figure of business structures, an idea that for more than twenty years has been promoted by the legislator.
i) The purpose of expanding the business structure, also a result of the negative economic cycle, was only possible to materialize later, with the inspection confirming that the Claimant held in the 2015 fiscal year shareholdings in the capital of both the aforementioned "B...", and the company "J..., Lda" (page 10 of the report).
j) Being certain that, indirectly, it also held shareholdings indirectly in other companies, since the company "K..., SA", VAT no..., was held by the aforementioned "J..." and the capital of the company "L..., Lda", VAT no..., was held 60% by "B" (cf. Inspection Report, page 10).
k) Since the beginning of 2016, the Claimant expanded the scope of the shareholdings held, as per the Management Report filed in the Commercial Registry Office (doc. 4), where it is stated on page 4, point 3:- "In the year 2016 the Company had a 100% stake in the capital of company J..., Lda and acquired 100% of the capital of company K..., SA, a winery in the region of ..., Alentejo, company with a strategic interest to the Group, where the Company D..., SA, distributor at the national level, also fits, company in which A..., SGPS, maintains a 99.87% stake in its capital. The company during this year 2016 acquired a 40% stake in company M..., Lda. Which is the owner of a 4-star Hotel in ... and also dedicates itself to catering activities, with event realization. During the fiscal year 2016, no shareholdings were alienated, with the aforementioned shareholdings being acquired".
l) In pursuing the corporate purpose, the Claimant, as the upper tier of the business group, holds shareholdings in the following companies: D..., SA, J..., Lda, K..., SA and M..., Lda.
m) In the contract for the sale of the shares of B... it was stipulated that payment would be made in installments, over a period of 10 years.
n) These payments relating to the sale of the shares are being questioned by the Tax Authority which seeks to characterize them as alleged dividends.
o) Sustaining, for this purpose, both in the inspection report and in the administrative complaint, that "the payment of the acquisition of the shareholdings in that company to shareholders E... and spouse was based on a «procedure carried out with abuse of legal forms, with the aim of reducing taxes that would be due without the use of this structure set up … if the amounts were paid to shareholders in the form of profits, without the structure used, they would be subject to taxation, pursuant to the provisions of paragraph h) of no. 2 of article 5 of the Personal Income Tax Code»"".
p) It is readily apparent that the alleged tax advantages detected by the Tax and Customs Authority that would have justified the application of the general anti-abuse clause were not realized in the assets of the Claimant, as all sums it paid were delivered to third parties as payment of acquisition price.
q) The scope of article 38, no. 2 of the LGT, in establishing as a necessary effect of the application of the general anti-abuse clause the non-realization of tax advantages, presupposes the legislative understanding that «taxation in accordance with applicable rules» falls upon those who obtained the advantages and not upon those who merely participated in the acts from which they result without benefiting from them, for only thus is it possible to guarantee the desired effect of not producing the advantages fiscally referred to specially or generally.
r) Indeed, it follows from the final part of no. 2 of article 38 of the LGT that the general anti-abuse clause does not aim merely to provide the Tax Administration compensation for acts that have caused it loss of tax revenue, but rather aims, concurrently, to eliminate the illegitimate tax advantages that someone obtained, which reveals that it is underscored by concerns of equality and tax justice, which can only be satisfied with the imposition of taxation omitted on those who obtained those advantages.
s) Hence it must be imposed that those who obtained the income be taxed in income taxes and not those who did not obtain them and the value of material justice is clearly violated when, in a situation where there are undue tax advantages, the corresponding sum is to be charged to those who did not benefit from those advantages, leaving untouched those who induly benefited from them.
t) Furthermore, and without waiving that, the Claimant alleges that the legal prerequisites or requirements for the application, in this case, of the general anti-abuse clause are not fulfilled either in an alleged confusion of the concepts of "tax avoidance" and "tax planning".
u) As to the element of means, for example: it is not understood what anomalous and artificial legal forms were used by the Claimant or its shareholders to achieve the illusory aim invoked by the Tax Authority, insofar as the acts performed are based on normal acts of corporate and economic management that are justified.
v) Where a sequence of pre-ordered legal business transactions is at issue (step by step doctrine) it is important to note, however, that in the case of a structure of such a nature it should be this structure that should possess the anomalous character required by the current wording of the general anti-abuse clause, even if the acts or business transactions that comprise it are, in themselves, typical or ordinary.
w) To none of the acts challenged by the Tax Authority can its "anomalous character" be attributed.
x) There was no economic gain on the part of the Claimant that would justify its taxation.
y) The Claimant, following the institution of subsequent tax enforcement proceedings to the assessments challenged, provided a bank guarantee aimed at its suspension.
z) Hence its right to be indemnified for the provision of an undue guarantee, pursuant to articles 53 of the LGT and 171-1 of the Tax Procedure Code (CPPT).
Response of the Tax Authority
In its response the Tax and Customs Authority reiterated, in summary, the grounds on which it based the decision to apply the general anti-abuse clause, alleging or reaffirming that the Claimant created a structure that, quoting, "(...) is the nexus of causality between the accumulated results and the beginning of the distribution of B... with the reimbursement of the debt to shareholders that, had they opted for the so-called normal route, would have received dividends being, in that measure, subject to tax, pursuant to the provisions of paragraph h) of no. 2 of article 5 of the Personal Income Tax Code (...)", and that the partners proceeded to the alienation of the shares that held the capital of B... taking advantage of the non-subjection of capital gains from alienation of shares held for more than 12 months; in turn, they created another company – A..., SGPS – which served as a vehicle for the acquisition of the aforementioned shares in such a way that the structure set up allowed company B... to distribute dividends to A..., SGPS without any tax burdens in light of the provisions of article 32-1 of the Corporate Tax Code, insofar as this income in the shareholding management company never reaches dividend and, consequently, does not give rise to taxation under Personal Income Tax in the sphere of the partners (the same values serve merely to reimburse the sums lent by the shareholders, sums that served to buy something that already belonged to them. More specifically: the reimbursement to the shareholders of the credit (€1,571,850.00) resulting from the alienation to A..., SGPS, on 7-5-2007, of the shareholdings in the capital of B... had as its fundamental objective the elimination or reduction of tax burdens: the financial flow that would reach the shareholders in the form of dividend, subject to Personal Income Tax, reaches them in the form of reimbursement of credit.
It requested, in conclusion, that the action be judged entirely without merit.
II - PROCEDURAL MATTERS
The Arbitral Tribunal was regularly constituted on 30-5-2018, as per communication from the President of the Ethics Council of CAAD and is competent.
The parties possess legal personality and capacity and are legitimately entitled (articles 4 and 10, no. 2, of the same Decree-Law and article 1 of Ordinance no. 112-A/2011, of 22 March).
The proceeding is not affected by nullities.
The meeting provided for in article 18 of the Arbitral Tribunal Rules was waived, without disagreement by the parties, with both parties having presented written final submissions in which, in essence, they reiterated the conclusions of their pleadings.
It is necessary to examine and decide on the merits of the claim.
III - LEGAL REASONING
FACTS PROVED
a) On 9/12/1991 the company C..., Lda, was established for the purpose of conducting wholesale beverage trading business, with registered office in ... and municipality of ....
b) On 03/01/2006, the capital of this company was increased to €300,000.00, becoming represented by 5 shares, and was thus distributed:
• E..., €179,880.00;
• F..., €44,970.00;
• G..., €74,950.00;
• N..., €100.00; and
• I..., €100.00.
c) This company was transformed into a limited company and adopted the designation D..., SA.
d) On 04 May 2007 the company A... SGPS was established, with registered office in ... s/n, ..., belonging to the Tax Service of ... (code ...), and with capital of €50,000.00 represented by 10,000 shares with a nominal value of €5.00 each, thus distributed:
Name VAT No. No. of shares % shareholding
E... ... 7900 79
F... ... 1900 19
O... ... 100 1
I... ... 50 0.5
P... ... 50 0.5
e) On 07 May 2007, a share transfer contract was executed in which G..., VAT no..., and H..., VAT no..., spouses, alienated to A... SGPS, 14,990 shares and 20 shares, respectively, of company B..., for the total value of €212,500.00, corresponding to a unit price of €14.16 (€212,500.00/15,010 shares). and E... and F..., alienated to A... SGPS, 35,936 shares and 8,994 shares, respectively, of company B..., for the total price of €1,571,850.00, to which corresponds a unit value of €35.00.
f) B... did not distribute any results to its individual shareholders from the fiscal year 1999 to the fiscal year 2006.
g) In fiscal years 2007 and thereafter B... began to distribute dividends to the Claimant, A..., SGPS...
h) ... having paid a total of dividends of €852.80 [in November 2007, €299,600; in November 2008, €249,666.67; in December 2009, €172,733.33 and in December 2010, €130,800.00] ...
i) ... and, between March 2012 and March 2015 it resolved to distribute a total of €770,000 to its shareholders A..., SGPS, SA (€768,999.00), E... (€539.00), F... (€231.00) and I... (€231.00)...
j) ... in accordance with the shareholdings in the capital held by each of those shareholders, namely: 99.87%, A..., SGPS, SA; 0.07%, E... and 0.03% each, F... and I....
k) The company "C..., Lda" carried out a capital increase in February 2006 and also its transformation into a limited company, becoming designated as "D..., SA", with its capital then divided into shares, becoming held by five shareholders: E..., F..., G..., H... and F... (Annex I of the inspection report).
l) The constitution of the Claimant resulted from the will of the shareholders of "B..." to structure the activity carried out by them through an upper-tier business structure that would allow, in the future, the diversification of the business and its specialization in various companies linked by top-tier shareholding management companies, which they envisaged as possible.
m) In constructing this corporate business structure the shareholders of "B..." were also pursuing the incentive of the Portuguese State for entrepreneurs to organize and promote the growth of their activities based on the construction of business groups, with the shareholding management company as the central figure of business structures, an idea that for more than twenty years has been promoted by the legislator.
n) The Claimant held in the fiscal year 2015 shareholdings in the capital of both the aforementioned "B...", and the company "J..., Lda" (page 10 of the report).
o) Since the beginning of 2016, the Claimant expanded the scope of the shareholdings held, as per the Management Report filed in the Commercial Registry Office (doc. 4), where it is stated on page 4, point 3:- "In the year 2016 the Company had a 100% stake in the capital of company J..., Lda and acquired 100% of the capital of company K..., SA, a winery in the region of ..., Alentejo, company with a strategic interest to the Group, where the Company D..., SA, distributor at the national level, also fits, company in which A..., SGPS, maintains a 99.87% stake in its capital. The company during this year 2016 acquired a 40% stake in company M..., Lda. Which is the owner of a 4-star Hotel in ... and also dedicates itself to catering activities, with event realization. During the fiscal year 2016, no shareholdings were alienated, with the aforementioned shareholdings being acquired".
p) In pursuing the corporate purpose, the Claimant, as the upper tier of the business group, holds shareholdings in the following companies: D..., SA, J..., Lda, K..., SA and M..., Lda.
q) In the aforementioned contract for the sale of the shares of B... it was stipulated that payment would be made in installments, over a period of 10 years.
r) Due to disagreement with the factual and legal grounds of the assessments in question, the Claimant submitted an administrative complaint processed under no. ...2017... and in which a total rejection ruling was issued, notified to the Claimant on 20-12-2017 (doc. 1, with the initial petition).
s) The Claimant, following the institution of subsequent tax enforcement proceedings to the assessments now challenged, provided a bank guarantee aimed at its suspension.
FACTS NOT PROVED
It was not demonstrated:
- that there was on the part of the Claimant and/or its shareholders the purpose of, with the actions or procedures described above in the list of facts proved, including the alienation of shares to the Claimant, obtaining tax advantages, namely at the level of taxation in Personal Income Tax.
MOTIVATION AND ASSESSMENT OF THE FACTS PROVED
The Tribunal founded its conviction regarding the factual framework described, by critically analyzing the documents incorporated in the proceeding by both parties [including the administrative proceeding, containing the inspection report to the Claimant carried out by the Tax Inspection Services and which substantiated the application of the General Anti-Abuse Clause and consequent assessment of withholding tax on Personal Income Tax and compensatory interest (Docs 1 to 3, attached with the request for arbitral ruling)], in conjunction with the circumstance that no controversy was raised between the parties regarding the pure or objective reality of the facts. The controversy lies rather in the intentions or purposes pursued.
In line with other arbitral decisions issued by Tribunals constituted under the scope of CAAD [cf., e.g., the arbitral decisions in cases nos. 47/2013 ("It is not proved that the corporate transformation was motivated by matters related to management, size, or corporate image"), 62/2014 ("It was not proved that the Claimants chose to sell their shareholdings to.... with the intent of obtaining tax advantages, namely at the level of taxation in Personal Income Tax") and 267/2013 ("It was not proved that the Claimants chose to sell their shareholdings to …… S.A. with the intent of obtaining tax advantages, namely at the level of taxation in Personal Income Tax"), it was considered not proved that the Claimant (and/or its shareholders) carried out the acts and legal business transactions attributed to them by the Respondent with the sole or principal intent of achieving tax advantages, namely at the level of taxation in Personal Income Tax.
Being a matter at the borderline between "facts" and "conclusions" it was decided in this case, following what had already happened in CAAD proceeding no. 180/2014, to further examine the matter in the legal reasoning of the decision (cf. below).
II LEGAL REASONING (cont.)
THE LAW
1- Article 38, no. 2, of the General Tax Law establishes a general anti-abuse clause, whereby «acts or legal business transactions are ineffective within the tax sphere when they are essentially or primarily directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal business transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, wholly or partially, without use of such means, tax being then imposed in accordance with applicable rules in their absence and the aforementioned tax advantages not being realized»
In the case at hand, the Tax Authority decided to apply the general anti-abuse clause considering that, for purposes of taxation under Personal Income Tax, the artificiality of the constitution of the shareholding management company, and the purchase and sale of the shareholdings of B..., are, essentially, the set of acts that lead to the ineffectiveness of the reimbursement act for tax purposes, an act that must be characterized as distribution of dividends.
Or, quoting the Respondent in the Response [Cf. item 19] presented herein, " (...)the creation of the structure (described) is the nexus of causality between the accumulated results and the beginning of the distribution of B... with the reimbursement of the debt to shareholders that, had they opted for the so-called "normal" route, would have received dividends being, in that measure, subject to tax pursuant to the provisions of paragraph h), of no. 2 of article 5 of the Personal Income Tax Code(...)".
Let us examine the issues raised, namely the alleged artificiality of the creation of the shareholding management company, now Claimant, as well as the question of the purchase and sale of shares or shareholdings of B... as a disguised form of distributing, in reality, dividends, distribution that would thus be removed from the necessary taxation under Personal Income Tax in light of article 5-2/h) of the Personal Income Tax Code.
A – THE GENERAL ANTI-ABUSE CLAUSE: GENERAL CONSIDERATIONS
It must be emphasized, as a preliminary note, the nature of an exceptional [absolutely exceptional] norm of the General Anti-Abuse Clause.
The exceptional nature of this norm results both from the fact that it allows taxation to be effected by application of other rules than the general norms that the law provides for the business transaction(s) actually performed, and, more importantly, because it constitutes a departure from the principle of legal security, in its dimension of predictability of the applicable tax law, which is a fundamental principle of tax law.
Security and predictability imply that taxpayers can rely on the typical nature of the tax statute, that they can be certain that, once the business transactions that the tax base rule provides for are performed, they will be taxed in accordance with its provision.
The General Anti-Abuse Clause will only be applicable in cases where it should be considered that the value of legal security is not called into question, the idea of confidence in the legal norm inherent to the concept of State governed by the rule of law, because the taxpayer, objectively, should know that the act or business transaction that he performed, in the circumstances in which it occurred, cannot be subsumed within the legal prediction because it is not coherent with the "spirit of the law", even though formally it may find "support" in the literal element of the norm.
However, differently from what occurs with norms having an identical intent, which we find in other branches of the legal order, such as the institute of abuse of right or the principle of good faith, the General Anti-Abuse Clause is not an open general clause that permits the interpreter to set aside the legal solution (taxation) that would result from the applicable norm (from the tax base rule whose hypothesis the facts fulfill) invoking considerations of material justice or substantive coherence of the tax legal system.
The General Anti-Abuse Clause is, itself also, a typical norm – as it could not be otherwise, given that it is a norm that directly impacts the tax base rules - that can only be applied when, indubitably, all and each of the prerequisites provided therein are fulfilled.
This means that the interpreter must abstain from any judgments about, namely, whether the tax economy achieved is or is not "justified" or "acceptable", whether the concrete situation offends or not a supposed horizontal equality among taxpayers.
The interpreter, the judge, has only the duty to verify whether, in the concrete case, each and every one of the prerequisites for application of the General Anti-Abuse Clause are or are not, indubitably, present.
And such analysis, such interpretation, must be performed in a restrictive manner, as required by the rules of legal hermeneutics regarding exceptional norms.
It is completely forbidden to the interpreter to give the General Anti-Abuse Clause a broader scope of application [make an extensive interpretation] than that which results from the legal text itself, even under the pretext of realizing material justice in the concrete case.
It will be said that, being so, the efficacy of the General Anti-Abuse Clause in combating forms of tax avoidance that can reasonably be considered abusive is greatly reduced. This may be the reality, but it indubitably results from the exceptional nature of the norm and what such nature imposes on the interpreter, the judge.
Analyzing the elements of the General Anti-Abuse Clause
It is settled, in doctrine and jurisprudence, that the applicability of the General Anti-Abuse Clause presupposes the verification of four prerequisites (or elements): element of means; element of result; intellectual element; normative element.
Let us examine, in a synthetic analysis, each of them.
a) Element of means
"This element corresponds to the route chosen by the taxpayer to obtain the desired gain or tax advantage, i.e., the act(s) or legal business transaction(s) whose structure is determined based on a given tax result (Gustavo Courinha, The General Anti-Abuse Clause in Tax Law, 2009, p. 165)
"It is, in conclusion, from the level of incoherence between the form or structure chosen and the factual fiscal economic purpose of the taxpayer, between the purpose for which that adopted form is concretely delivered and the cause that is its own" (ibid., p. 166) that the verification of this element will be assessed.
Where a sequence of pre-ordered legal business transactions (step by step doctrine) is at issue, "it is important to note, however, that in the case of a structure of such a nature it should be this structure that should possess the anomalous character required by the current wording of the General Anti-Abuse Clause, even if the acts or business transactions that comprise it are, in themselves, typical or ordinary" (ibid., p. 168).
No "anomalous character" can be detected in this case with respect to each of these legal business transactions: where the purpose pursued is the creation of a company having as its object the holding of shares, the corporate form chosen, shareholding management company, is the appropriate one; where the company intends to acquire the shares necessary for the realization of its corporate purpose, the form chosen (purchase and sale) is the correct one, since this is the typical legal form that the law provides for the onerous acquisition, inter-vivos, of assets and rights. The sequence of the business transactions is also "normal": the creation of the company could not be understood without the subsequent acquisition of the shares in question.
However, the non-existence of "anomalous legal business transactions", or of an "anomalous sequence of legal business transactions", is not, in our view, sufficient to exclude the possible application of the General Anti-Abuse Clause.
It is also necessary to determine whether the set of business transactions performed is not, in itself, artificial, merely a façade that substantially changed nothing regarding the prior reality, which we will analyze in the following points.
For now, it should still be noted that, where different typical legal routes exist for achieving a given economic result, the taxpayer is not obliged to choose the route that would be most burdensome for him. The route chosen will only prove inadmissible if it is understood as artificial, purposeless or abusive insofar as it represents a disguising of a reality capable of taxation.
The assertion that the same economic result could be obtained in a manner permitting what, in this case, the Respondent designates as the "normal form", namely without avoiding taxation under Personal Income Tax, as distribution of dividends, is irrelevant in terms of the applicability of the General Anti-Abuse Clause.
This is because, on one hand, no taxpayer has, as stated and hereby reaffirmed, the duty to adopt the more burdensome form of taxation to achieve the desired results, and on the other, the freedom to structure the legal form of tax facts has only the limits of abuse of that same freedom expressed, for example, in the resort to fraudulent, simulated, dissimulated or artificial forms, that is, when they are disapproved by the legal order as a whole.
b) Element of result
"In this element of result it is necessary only to demonstrate that the subject achieved, through its acts, the realization of a certain tax advantage and the equivalence of the economic effects with those of the normal taxed act" (Gustavo Courinha, cit., p. 176).
In the concrete case, it is implicit in the factual framework described above that the partners or shareholders of the Claimant (but not necessarily the Claimant itself) obtained a significant tax advantage, which they would not have achieved if they had refrained from performing them, that is, if they remained shareholders of B..., SA, in that capacity, receiving, in such capacity, the dividends that the latter would distribute.
c) Intellectual element
This is, without doubt, the most characteristic prerequisite of the General Anti-Abuse Clause.
"The manifestation of fraud against the law is revealed in the taxpayer's intent to primarily obtain a tax advantage, directing the business transactions or acts they perform in this direction. The non-tax purpose that, in turn, should guide the action of any subject (…) is here substituted, in its normal preponderance, by a tax purpose, ending up secondary" (ibid., p. 179).
In the concrete case we have, as facts proved, the tax advantage - which is, it should be recalled, significant.
It is extremely difficult to weigh the "relative weight" of each of the motivations present, since, from the outset, they do not translate into "savings" in monetary terms that can be directly compared.
The non-tax importance of the business transactions in question results evident from the assessment of the facts previously made.
We can thus affirm that the business transactions performed allowed the achievement of a result of relevant interest for the pursuit of the normal activity of the company: ensuring, for example, unified control of the company, through the existence of a sole controlling vote, preventing the risk of occasional alliances of shareholders with the minority shareholder.
The importance of the existence of a controlling vote, for example, of a single shareholder controlling a company, cannot be minimized.
Experience shows that many companies have serious problems, which may even make the pursuit of their activity impossible, due to the existence of divergences between majority shareholders and/or the realization of occasional alliances of one or some of them with minority shareholders, so as to impose their will on the other (or other) majority shareholders.
And, even when such a risk does not exist, good business strategy recommends the prevention of potential risks and not waiting for problems to happen to then seek to find solutions.
Being objectively impossible to assess the relative importance of the two interests (tax and non-tax) present, doubt would necessarily have to benefit the taxpayer in a context - as is the case herein - where the burden of proof of the facts alleged for application of the general anti-abuse clause falls on the Tax and Customs Authority - article 74, no. 1, of the General Tax Law [See also articles 414 of the Civil Procedure Code, 346 of the Civil Code, 100 of the Tax Procedure Code and 29-1/c) of the Arbitral Tribunal Rules; defending, in essence, this orientation, see also, in arbitral jurisprudence, e.g., the awards of CAAD in cases nos. 62/2014-T, of 1-9-2014 and 267/2013-T, pages 34 and 23, respectively, published on the website www.caad.org.pt.
Hence, in this framework, it would result, in the case, the absence of proof regarding the exclusivity or preponderance of the tax interest in the performance of the succession of acts which also led to an effective and significant tax saving.
However and despite this, in the concrete case, the weight that should be attributed to the intellectual element is necessarily greatly diminished in the weighing of interests that must be performed here, due to what will follow regarding the normative element.
d) Normative element
"It can be said, given the existence (and requirement) of this element, that the General Anti-Abuse Clause is, after all, not merely an expedient for obtaining tax revenue at any cost, based on the fact that the taxpayer obtained a tax advantage [emphasis added]. The tax disregard of such acts or business transactions will only occur when, cumulatively meeting all of the aforementioned requirements, it is demonstrated that the tax effect obtained (always taking into account the effects identically obtained) deserves a judgment of disapproval by the Law "(ibid., p. 189).
We will begin by emphasizing the following: one question, which has already been addressed, is that of the tax motivation of the business transaction or transactions performed; another, different question, is, on the assumption that the business transactions performed are not anomalous or artificial, whether to know "of the contrariety of the result to the Law". It is only with this latter question that we will now deal.
What is at issue in this point is the fact that an alienation of shares, generating capital gains (which, economically, correspond, among other factors, to the realization [receipt] of dividends accumulated in the company and the dividends that the alienator would expect to obtain in the future, had he maintained the condition of shareholder) was, at the time, not subject to taxation under Personal Income Tax, the verified certain prerequisites, while the distribution of dividends was (and was) subject to taxation in this tax, as capital income.
Now, it is unequivocal that this different tax treatment of different legal forms of obtaining income that are, to a large extent, economically equivalent [that is, the privileged tax treatment of the alienation of shares] corresponded, while such a regime was in force, to a deliberate choice by the legislator.
As stated in the arbitral award issued in case no. 180/2014-T of CAAD, "it seems evident that the General Anti-Abuse Clause cannot prevent the choices of taxpayers that, faced with the choice between dividends (distributable or merely potential), opt, even if for tax reasons, for the obtaining of capital gains.
In truth, the application of the General Anti-Abuse Clause, in this context, would result in the disregard of the very choice of the tax legislator that, deliberately and for more than twenty years, promoted precisely that legal formula, maximizing the tax advantage associated with capital gains through their pure and simple non-taxation (…), in total contrast with the taxation of the respective dividends.
This understanding is settled in doctrine and in CAAD arbitral jurisprudence, being already numerous the awards issued with incidence on this matter, which, with a single exception, go in the direction we advocate.
Decisions that concluded, in summary, that it is absolutely legitimate for the taxpayer to choose to organize his legal business transactions in a manner to realize untaxed capital gains (e.g. by transforming a limited partnership into a limited company and then alienating, with gain, the shares thus obtained), even when the sole motivation for the alteration of the corporate form was of a tax nature (cf., for example, Arbitral Awards, CAAD nos. 123/2012, of 9/05/2013, 124/2012, of 06/06/2013, 138/2012, of 12/07/2013 and 139/2013, of 19/12/2013, the latter signed by the arbiter who also chairs this arbitral tribunal).
B – The case at hand: subsumption and conclusions.
The application of the general anti-avoidance clause to the acts performed by the Claimant required, in the case under analysis, that the Tax Authority prove that the Claimant performed acts or legal business transactions essentially or primarily directed by artificial or fraudulent means and with abuse of legal forms to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal business transactions of identical economic purpose (…) – article 38, 2 of the General Tax Law.
There are thus requirements of means and requirements of purpose.
As to the requirements of means, it will be necessary that the acts or business transactions be based on artificial or fraudulent means and with abuse of legal forms.
The purpose means that those acts must be essentially or primarily directed to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal business transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved without the use of such means ( Cf. Diogo Leite de Campos and João Costa Andrade, Contractual Autonomy and Tax Law ( The General Anti-Avoidance Norm), Almedina Coimbra, 2008, pages 9 /10).
It should be emphasized that the responsible party is the one who performed, directly or through an intermediary, the acts and obtained the fiscal economic advantages. If the avoidance operated in an organized manner, step by step, only the effective beneficiary of the advantages is responsible. This, without prejudice to other intervening parties not being beneficiaries potentially being responsible on other grounds.
The general rule inherent to the dignity of the person guaranteed in the Constitution of the Republic should always be kept in mind, that of freedom of contract/ private autonomy. The person must be able to freely decide the destiny of their material assets, namely in their relationship with others (Authors and cited work, pages 49 and following). The beneficiary must have, in the application of the anti-avoidance clause, exceeded the limits of their legitimacy to manage their interests, invading the field of the interests of the public entity (Authors, cited work, pages 63 and following).
It happens that the Respondent does not follow this line of reasoning.
It does not focus on the direct economic advantages obtained by the Respondent. As referred to, it should have been the Respondent that obtained direct economic results aimed at by the acts or business transactions. And not any other person.
There is thus a missing legal prerequisite for the application of the anti-avoidance norm to the Claimant.
Then, the reorganization operations performed present advantages that are not solely or primarily a possible eventual tax advantage. They have, in other words, economic-financial rationality.
Therefore, the requirement of the principal or exclusive fiscal purpose cannot be taken as proved. And this fiscal purpose should have been proved by the Respondent. ( Authors cited work, pages 77 and following.).
Follows the legal requirement for the use of artificial or fraudulent means by the Claimant.
These means should be understood as business transactions or acts that are useless or unnecessary for the pursuit of the Claimant's management project. Having only the objective of tax avoidance.
Yet another requirement that the Respondent did not prove.
Follows then the legal requirement for abuse of legal forms, in formally and materially similar terms to those that govern indirect business transactions. (Authors cited work, p. 80).
It is necessary that unusual or inadequate forms or business transactions have been chosen for the purposes to which the acts or business transactions performed are regularly intended, aiming to evade the tax system. (Authors cited work, pages 80/82).
Once again here the Respondent proved nothing regarding the Claimant.
Whence it is concluded that the Respondent Tax Authority did not prove the avoidance of the Claimant on the basis of the legal requirements indicated and, consequently, the arbitral petition must proceed in this part.
C - Request for indemnification for undue guarantee
Pursuant to article 53 of the General Tax Law, «1 - The debtor who, to suspend enforcement, offers a bank guarantee or equivalent shall be indemnified wholly or partially for the losses resulting from its provision, should he have maintained it for a period exceeding three years in proportion to the maturation in administrative recourse, challenging or opposition to enforcement that have as their object the guaranteed debt. 2 - The period referred to in the previous number does not apply when it is verified, in administrative complaint or judicial challenge, that there was error attributable to the services in the tax assessment».
Doctrine has understood, regarding the cited legal provision, that «the reason that justifies the granting of the right to indemnification is the presumed loss caused to the individual by an illegal action of the tax administration, when it incorrectly made a tax assessment» (Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, Annotated and Commented General Tax Law, 3rd Edition, Vislis Publishers, p. 230).
Convergently, the Supreme Administrative Court observed, in Award of 21 November 2007, appeal case no. 633/07, that «the foundation of the right to indemnification lies in the complex fact integrated by the loss resulting from the provision of a guarantee and by the illegal action of the administration due to its error, when it incorrectly assessed, forcing the taxpayer to incur expenses with the constitution of the guarantee that, had it not been for that action of it, would not have been necessary to provide».
Regarding the request for condemnation to the payment of indemnification for the provision of an undue guarantee, article 171 of the Tax Procedure Code establishes that «indemnification in case of a bank guarantee or equivalent unduly provided shall be requested in the proceeding in which the legality of the enforceable debt is contested» and that «indemnification must be requested in the complaint, challenge or appeal or in case its foundation is subsequent within 30 days after its occurrence».
It results from this that the recognition of the taxpayer's right to be reimbursed for the costs borne with the provision and maintenance of a guarantee is based essentially on the verification of an error attributable to the services, determining the illegality of the challenged or contested act and, consequently, the provision — necessarily undue — of a guarantee by the taxpayer.
The same is to say, therefore, that the success of the present arbitral ruling petition will imply the recognition of an error attributable to the Tax Administration, and to this, in turn, the payment of the losses caused to the Claimant by the guarantee provided within the scope of the enforcement proceeding.
Being public and notorious that for the service of providing a bank guarantee, charges/commissions are paid to Banks depending, namely, on the risk, value and period of the guarantee, it must be concluded that, although not alleged, the Claimant bore [and certainly continues to bear] charges for the maintenance of the guarantee provided.
In light of the foregoing, it becomes evident that the Claimant has the right to indemnification for the guarantee provided.
And, there being no elements that permit determining the amount of indemnification, the condemnation must be effected with reference to what comes to be assessed in execution of the present award (articles 609-2 of the Civil Procedure Code and 565 of the Civil Code).
IV. DECISION
Based on the foregoing, this Arbitral Tribunal decides to judge the arbitral petition filed as entirely well-founded and, consequently:
a) Revokes the ruling on rejection of the administrative complaint referred to in paragraph r) of the facts proved;
b) Annuls the withholding tax assessments on Personal Income Tax nos. 2016..., 2016... and 2016... and compensatory interest, the object of this proceeding;
c) Condemns the Tax and Customs Authority to pay indemnification to the Claimant, in accordance with the terms and limits provided for in article 53 of the General Tax Law and to be assessed in execution of judgment, resulting from the success of the petition referred to in the preceding paragraphs and
d) Condemns the Respondent in costs.
Value of the Proceeding
The value of the proceeding is set at €162,463.64, in accordance with article 97-A, no. 1, a), of the Tax Procedure and Process Code, applicable by force of paragraphs a) and b) of no. 1 of article 29 of the Arbitral Tribunal Rules and of no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
Costs
The amount of the arbitration fee is set at €3,672.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, as well as no. 2 of article 12 and no. 4 of article 22, both of the Arbitral Tribunal Rules, as well as no. 4 of article 4 of the cited Regulation, to be borne by the Respondent as previously decided, as the unsuccessful party.
• Let it be notified.
Lisbon and CAAD, 26 November 2018
The Collective Arbitral Tribunal
José Poças Falcão
(arbitrating chairman)
José Coutinho Pires
(arbitrating member)
Diogo Leite de Campos
(arbitrating member)
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