CAAD Arbitration on IRS Capital Gains and General Anti-Abuse Clause – Decision 131/2014-T

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 131/2014– T

Subject Matter: IRS – Capital Gains; anti-abuse clause

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Manuela Roseiro and Jorge Carita, appointed by the Ethics Council of the Administrative Arbitration Center to form an Arbitral Tribunal, hereby render the following Arbitral Decision.

I – REPORT

1. On 14 February 2014, "A", taxpayer no. … and "B", taxpayer no. …, hereinafter referred to as "Applicants", acting pursuant to the combined provisions of articles 2, no. 1, paragraph a), 10, no. 1, paragraph a), and 24, no. 5, of Decree-Law no. 10/2011, of 20 January ("RJAT"), article 140, no. 4, paragraph a), of the Code of Income Tax on Individuals ("CIRS"), and articles 99, 101 and 102, no. 1, paragraph b), of the Code of Tax Procedure and Process ("CPPT") presented an application for arbitral decision seeking a declaration of illegality of the acts of additional income tax on individuals assessment no. 2013 …, of 18/11/2013, relating to the year 2009, in the amount of € 421,290.00 (four hundred twenty-one thousand, two hundred ninety euros), assessment of compensatory interest no. 2013 …, of 21/11/2013, relating to the period between 29/05/2010 and 30/07/2013, in the amount of € 53,585.13 (fifty-three thousand, five hundred eighty-five euros, thirteen cents), assessment of compensatory interest on estimated payments no. 2013…, of 21/11/2013, relating to the period between 21/07/2009 and 01/10/2009, in the amount of € 8.88 (eight euros, eighty-eight cents), and the account settlement dated 21/11/2013, relating to the year 2009, in the total amount of € 494,867.87 (four hundred ninety-four thousand, eight hundred sixty-seven euros, eighty-seven cents).

2. In the application for arbitral decision, the Applicants opted not to appoint an arbitrator.

3. Pursuant to paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, the Ethics Council appointed as arbitrators the signatories who accepted the position within the legally prescribed period.

4. The arbitral tribunal was constituted on 17 April 2014.

5. The meeting provided for in article 18 of the RJAT was initially scheduled for 8 July 2014, but its holding was dispensed with, in accordance with the principles of procedural economy and prohibition of unnecessary acts, given that the Parties waived the examination of the witnesses they had listed.

6. The Tribunal notified the Applicant and the Respondent to submit successive written submissions within 10 days, stipulating that the final decision would be rendered within 30 days after the submission of the Respondent's written submissions, or at the end of the period granted for that purpose, which period was subsequently extended until 17 November 2014.

7. The written submissions of the Applicant and the Respondent were filed on 14 July 2014 and 25 July 2014, respectively.

8. The Application for Arbitral Decision

In their initial Application, the Applicants state, in summary:

• The Applicants established the companies "C – Restaurants …, Lda." ("C, Lda."), "D – Restaurants …, Lda." ("D, Lda."), "E – Catering …, Lda." ("E, Lda."), "F – Catering …, Lda." ("F, Lda."), respectively on 15/09/1994, 25/06/1996, 20/12/1999 and 19/12/2000.

• In the first two, the capital was Esc. 2,000,000$00, with the 1st Applicant holding a share with a nominal value of Esc. 1,980,000$00, and the 2nd Applicant holding a share of Esc. 20,000$00; in the last two, the capital was € 100,000.00 (one hundred thousand euros), with the 1st Applicant holding a share with a nominal value of € 99,000.00 (ninety-nine thousand euros), and the 2nd Applicant holding a share with a nominal value of € 1,000.00 (one thousand euros).

• All the aforementioned companies have as their object "the operation, management and operation of restaurants of the international chain "G" under a franchising regime".

• In July 2009, the 1st Applicant, with a view to obtaining the consent of the company "H, Lda." ("H") for the transformation of the private limited companies "C, Lda.", "D, Lda.", "E, Lda." and "F, Lda." into joint-stock companies, and for the establishment of a holding company ("I – SGPS, S.A.") which would hold 100% (one hundred percent) of the capital of each of the aforementioned 4 (four) companies, prepared a justificatory document of the acts and legal transactions to be carried out.

• "A", "B", "J", "K" and "L" established, on 11/08/2009, the "I – SGPS, S.A.", with the corporate purpose of "management of shareholdings in other companies, as an indirect form of exercise of economic activities", with capital of € 100,000.00 (one hundred thousand euros), with the 1st Applicant holding nominative shares in the amount of € 99,996.00 and each of the remaining shareholders holding 1 (one) nominative share with a nominal value of € 1.00 (one euro);

• On 11/09/2009, the managements of the companies "C, Lda.", "D, Lda.", "E, Lda." and "F, Lda.", pursuant to and for the purposes of article 132 of the Commercial Companies Code ("CSC"), presented to the shareholders their respective Justificatory Reports of the Transformation of these private limited companies into joint-stock companies, which stated in particular that "As joint-stock companies, in particular the SGPS, these are obliged to certain accounting standards and audit of accounts, which will always give the System "G" greater credibility and security in its relationship with the licensee companies and these with the Tax Administration and with banking entities, so, from our point of view, the System will only benefit from having in its midst licensee companies of the joint-stock type rather than private limited companies" and "From the financial and accounting point of view, at certain times, whenever there was a need to inject capital into any of the companies, such operation proved complicated and sometimes convoluted, particularly when there were financial surpluses in a company with no shareholding relationship with the deficit company that it was intended to assist. From the banking point of view, as the companies currently present themselves, financial synergies are dispersed and in many respects non-existent, with significant losses, overall, of capital remuneration." (…)"

• On 11/09/2009, the managements of the companies "C, Lda.", "D, Lda.", "E, Lda." and "F, Lda.", presented to the shareholders their respective Justificatory Reports of the Transformation of these private limited companies into joint-stock companies, stating in particular "I consider it more appropriate to the reality expected for the Company to have a corporate structure of the joint-stock company type, in which capital is divided into shares represented by securities, giving it an independence that allows it to pursue its strategic options in a flexible manner, both in terms of capital and in terms of corporate purpose. The transformation also aims at increasing the value and efficiency of the company, through a corporate structure equipped to face market challenges."

• On 3 November 2011, the four companies deliberated in general assembly: consent of the company and the shareholders for the division and transfer of shares; increase of capital through incorporation of free reserves, consent of the company and the shareholders for the consolidation of shares; transformation of the company into a joint-stock company and regarding the manner of conversion of shareholdings, approval of the report drawn up by management justifying the transformation and the social balance sheet, dated 31/08/2009; approval of the articles of association through which the company, in its new legal form (joint-stock company), will be governed; alteration of the corporate purpose; election of members of governing bodies for the four-year term; transformation into a joint-stock company.

• The shares in any of the companies came to be held by "A", "B", "J", "K" and the "I – SGPS, S.A.", the last three holding a holding of 100 (one hundred) nominative shares, with a unit nominal value of € 1.00 (one euro).

• On 30/12/2009, the Applicants transferred their shares to the "I – SGPS, S.A."

• Following the Report of the Tax Inspection ("IT"), of which the Applicants were notified on 12/08/2013, an additional assessment of IRS and compensatory interest was made, in the total amount of € 494,867.87.

• On 22/11/2011, following notification from the AT, the Applicants filed Annex G1 of the Model 3 Tax Return for IRS for the year 2009, in which the capital gains are listed as the result of the paid transfer of the shares held by them, at their realized values giving rise to the additional assessment of IRS and the assessment of compensatory interest (and account settlement), in the total amount of € 494,867.87.

• However, the assessment suffers from violation of law, by error as to the substantive and legal facts, because the AT, violated, by incorrect interpretation and application, article 38, no. 2, of the LGT, and articles 10, nos. 1, paragraph b), and 2, paragraph a), and 43, no. 4, paragraphs a) and b), of the CIRS.

• In sum, and in conclusion: 1st) The transformations of the 4 (four) private limited companies into joint-stock companies and subsequent sale of shares to "I - SGPS, S.A." were carried out within the scope of a corporate reorganization; 2nd) The transformations of the private limited companies into joint-stock companies – and the subsequent sale of shares – had the purpose of establishing a corporate group relationship, with the resulting advantages, in particular from a commercial and financial perspective; 3rd) The acts and legal transactions carried out by the Applicants are part of a structure of acts and transactions aimed at expanding their commercial activity, as well as at creating a group of companies, materialized through the establishment of the joint-stock company with the name "I, SGPS, S.A.", which will have total control of the transformed companies "C, S.A.", "D, S.A.", "E, S.A." and "F, S.A."; 4th) In this case, there is a planning and structure of acts and legal transactions, both related to the corporate reorganization and to the investment that motivates it, which have an evident economic justification; 5th) The management of human resources became centralized in a single entity; 6th) The corporate group relationship thus created allows for financing between companies in the same group; 7th) The taxpayer may organize its operations in such a way as to reduce its tax burden; 8th) The capital gains determined and resulting from the paid transfer of shareholdings that were held by the Applicants in commercial companies in the form of joint-stock companies with the names "C, S.A.", "D, S.A.", "E, S.A." and "F, S.A." are excluded from taxation, pursuant to the provisions of articles 10, no. 2, paragraph a), and 43, no. 4, paragraphs a) and b), of the CIRS; 9th) It is the legislator who expressly chooses to tax under IRS the gains resulting from the sale of shares and to not tax under that tax the gains resulting from the sale of shares, as is clear from articles 10, no. 2, paragraph a), and 43, no. 4, paragraphs a) and b), of the CIRS; 10th) The tax legislator intended to exclude from taxation capital gains arising from the paid transfer of shares held by their holder for more than 12 (twelve) months, enabling, encouraging - and even stimulating - taxpayers that, in situations of incorporation of reserves and transformation of a private limited company into a joint-stock company, the determination of the acquisition date is that of the securities that gave rise to them, expressly providing for such means and form [in article 43, no. 4, paragraphs a) and b), of the CIRS] to achieve the intended purpose [article 10, no. 2, paragraph a), of the CIRS]; 11th) The fiscally less burdensome result was admitted, tolerated and encouraged by law and/or by the tax system in general, so the acts and legal transactions carried out by the Applicants may not be condemned and classified within the general anti-abuse clause, due to the absence of fraud against the applicable rules; 12th) The general anti-abuse clause presupposes the obtaining of a tax advantage through acts in fraud of law, which is equivalent to obtaining a result that law and/or the tax system do not consent to; 13th) Only situations of fraud to tax law - and therefore subject to the general anti-abuse clause - will be those which, not initially configuring the taxable event, achieve the practical and/or economic result identical to that; 14th) The acts and legal transactions carried out by the Applicants do not constitute an activity of aggressive tax planning, pursuant to article 15 of Decree-Law no. 29/2008, of 25 February; 15th) The transformations of the private limited companies into joint-stock companies do not constitute a situation of abusive tax planning or an elision act; 16th) The Tax and Customs Authority did not take into account the undeniable advantages of the acts and legal transactions under analysis; 17th) The requirements required for the application of the general anti-abuse clause are not met, particularly the means, intellectual and normative elements, so there is no application of the provision of the rule provided in no. 2 of article 38 of the LGT, leading to the ineffectiveness of the acts and legal transactions within the tax scope, contrary to what was decided by the Tax and Customs Authority; 18th) The substantive and legal requirements on which the application of the general anti-abuse clause depends are not met; 19th) The Tax and Customs Authority violated, by incorrect interpretation and application, articles 38, no. 2, of the LGT, 10, nos. 1, paragraph b), and 2, paragraph a), and 43, no. 4, paragraphs a) and b), of the CIRS; 20th) The tax act suffers from the defect of violation of law, by error as to the substantive and legal facts, which justifies its annulment, pursuant to article 135 of the CPA; 21st) In the present case, the reasoning presented by the Tax and Customs Authority should be dismissed; 22nd) Consequently, the acts of additional assessment of IRS and assessment of compensatory interest (and account settlement) now being challenged should be annulled; 23rd) The Tax and Customs Authority should be ordered to pay the Applicants the tax unduly paid, in the amount of € 421,290.00 (four hundred twenty-one thousand, two hundred ninety euros); 24th). Consequently, the right of the Applicants to damages interest, calculated on the tax that has been paid, should be recognized, pursuant to the provision of no. 1 of article 43 of the LGT.

1. Response of the Tax and Customs Authority (AT)

The Respondent replied, in summary:

• Within the scope of an inspection action and procedure provided for in article 63 of the CPPT, purely arithmetic corrections resulted in the sphere of the Applicants, under IRS 2009, category G, capital gains of 4,215,900.00 €, and correction to the tax in the amount of 421,590.00 €, in accordance with paragraph b) of no. 1 of article 10 of the CIRS and application of the special rate provided at the time of the facts in article 72, no. 4 of the CIRS.

• From the application of the GAAC resulted the disregarding, for tax purposes, of the transformation into joint-stock companies of the companies "E – Catering …, Lda.", "D – Restaurants …, Lda.", "F – Catering …, Lda.", and "C – Restaurants …, Lda.", obtained by the taxpayers with the transaction of transfer of their shareholdings, while considering that these gains are subject to IRS,

• The applicants, married under the joint property regime, were until 17 November 2009, holders together of the entire capital of the companies, "E", "D", "F", or "C", all in the form of a private limited company;

• All the aforementioned companies operate under a franchise agreement with the "G" group, through franchise agreements, entered into with "H";

• On 13 August 2009, the company I – SGPS S.A. was established, with the Applicant husband holding 124,996 of the 125,000 nominative shares of "I – SGPS S.A." and being the sole administrator; the other shareholders of "I" are the wife, the Applicant, the two children of both, "K" and "J", and the applicant's lawyer, "L", who hold one share each, having all established in the articles of association usufruct free of charge of their shares in favor of the aforementioned applicant husband

• On 17 November 2009, the companies "E", "D", "F" and "C" were subject to the following sequence of acts: a) capital increase; b) division of shares; c) transfer of shares; d) transformation into a joint-stock company.

• On 30 December 2009, the individual shareholders transferred the shareholdings they held in those companies to the company I – SGPS S.A.

• The applicants determined a total value of 4,675,500.00 € from the sale of the shares, which, following notification from the AT, they declared in 2011, in annex G1, relating to capital gains, as excluded from taxation.

• The companies in question have as their corporate purpose the operation of restaurants of the international chain "G", operating under franchise agreements entered into strictly intuitu personae (articles 12 and 13 of the agreements), obliging the franchisee to "operate the business personally and devote all their time and effort to make it prosper", with transfer to a company requiring consent from the franchisor and having to comply with the requirements of "ninety-nine percent of the capital being held and totally controlled by the franchisee", this being "sole administrator or manager" and should also "assume on their own behalf joint and several responsibility for the obligations of the franchisee".

• The corporate transformation was preceded by consent of the Franchisor, the company "H" ("H") following a letter of July 2009, in which the applicant husband set out justifications, of a generic character, for the establishment of a SGPS which would allow "rationalize resources, both economic and human, in particular with regard to the geographic mobility of personnel (…) as well as streamline financial flows between companies».

• As for the transformation of the private limited companies into joint-stock companies, the justification given would be that «these are obliged to certain accounting standards and audit of accounts», «greater credibility and security», which does not hold because nothing prevents the «accounting standards and audit of accounts» of joint-stock companies from being observed by another type of company.

• The request for consent from "Sistemas" aims to justify the move to a type of company designed for a larger number of capital holders, when the corporate purpose assumes a franchise granted intuitu personae, promising that everything will remain exactly the same, and even that the «picture presented represents a complete strengthening of the intuitu personae character of the franchising agreements.

• This is because, once the capital increases through incorporation of reserves were made, there would be divisions and transfers of shares that would allow the entry of the minimum number of partners so as to make the transformation into a joint-stock company viable – "A", with 99.0% of the capital, the wife with 0.7% (0.73% in one of the cases), the children and the SGPS with 0.1% each (in one case 0.09%).

• The sole administrator of all the companies is the Applicant husband, with the third parties having no minimally relevant role in the company's activities (the Applicant explained, in the request for consent to the franchisor, that «third parties unrelated to my relationship with "G" will immediately sell their respective shares (securities) to the SGPS.» because «they will enter into an agreement with me with a purchase and sale clause for the share with a nominal value of 1 € (one euro), of which that company will be holder.».

• In a shareholders' agreement, the right of option to purchase the shares of the SGPS (held by the wife, children and lawyer) on the part of the Applicant husband was established, which may be exercised from the celebration of the agreement until 30 June 2039.», and a penalty clause is even stipulated «in the amount of 250 € (two hundred fifty euros) per day, for each day in which there is non-performance and until it is remedied, without prejudice to other amounts to which the aggrieved party is entitled» .

• No business justification results for the transformation because: the new joint-stock companies have a very small dispersion of capital, with zero capital outside the Applicants, the number of third parties was only for the legal minimum, and immediately transfer their shareholdings to the SGPS, with complete dependence of the company on a single holder of capital, in their own name and their spouse under the joint property regime, only the concern of avoiding the taxation of capital gains to be generated in the Applicants' legal sphere with the transfer of shareholdings being proven.

• There is a series of acts, which begin with the request for consent in July 2009, followed by the establishment of the SGPS in August 2009, the transformations in November 2009 and culminate in the transfers in December 2009, which in no way justify the necessity or even merely the economic suitability of the corporate type transformations that occurred in November 2009, now at issue.

• There is no external or independent verification (the reports of the company's auditors are absolutely innocuous about the necessity or merely the economic suitability of the corporate transformations, only confirming that there are no legal impediments to the transformation, that is on the admissibility of the transformation in terms of compliance with patrimonial and accounting requirements) but only documentary proof of the Applicant's authorship, which should be considered absolutely null.

• The transformations were absolutely artificial, seeking only to clothe in the form of shares the shareholdings that continued to be truly the same shares previously existing, with no indication of economic and financial rationality underlying the transformations per se.

• In 2009, already at a time of market contraction and strong economic recession, they obtained financing in the amount of 400,000.00 Euros and made investments in the amount of 1,668,830.68 €, with no causal nexus between the financing need and the transformation.

• Nor was testimony presented by any representative of the international franchisor, "H", company listed on the New York Stock Exchange as "M".

• The establishment of the SGPS (which itself could have been established as a private limited company) did not imply the transformation of the subordinate companies.

• It was incumbent on the applicants to prove the prerequisites for application of the exceptional regime, of exclusion from taxation of capital gains generated by the transfer of shares held for more than 12 months (article 74 no. 1 of the LGT).

• The requirements for application of the GAAC, contained in no. 2 of article 38 of the LGT, are met: an exclusive or, at least, predominant will was manifested to carry out the sale of shareholdings in the form that would allow the income earned not to be subject to tax; there is an overlap of various acts, formally separated (capital increase, division of shares, transfer of shares, transformation, establishment of usufruct on the shares held by third parties or transfer by these same third parties of the (only) shares held, to culminate in the ownership of 100% of the capital by the SGPS, in absolute control of the aforementioned Applicant husband) but which are combined with a single purpose: to achieve an (same) economic result exempt from taxation, and had it followed the typical business conduct (for that), it would have had to bear tax burden.

• The transformation, absolutely unnecessary, is subsumed in the provision of no. 2 of article 38 of the LGT which provides that «Acts or legal transactions that are essentially or principally directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or deferral in time of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, wholly or partially, without the use of such means, are ineffective within the tax scope, taxation then taking place in accordance with the rules applicable in their absence and the aforementioned tax advantages not being produced.»

• The argument that it is the legislator who invites the transformation, offering through these rules the benefit of exclusion from taxation, rests on the assumption that the legislator favors the transformation, because it believes that joint-stock companies better serve the business environment and investment in companies, but this is not the case when the transformation of the corporate type is entirely artificial.

• The tax benefit granted aims to encourage the transformation of private limited companies into joint-stock companies to encourage the development and growth of the business environment. Thus, the application of ordinary tax rules must be done on the basis of an interpretation in accordance with the Constitution and with community principles.

• Instead of a joint-stock company to attract external investment for the companies, there was a complete concentration of capital, with "phantom" partners, who exit the scene at the moment of time following the transformation, immediately transferring control to the Applicant husband because this is a requirement for the operation of "G" restaurants, which is linked to a franchisee personally.

• The very Applicant husband issued a document (request for consent) guaranteeing to the franchisor control of all capital and that the intuitu personae character of the franchise would even be strengthened, aware that he could never attract external investment for the company, under penalty of breach of the contract to which he is bound.

• The non-verification of the justification for attribution of the tax benefit would mean violation of the constitutionally enshrined principle of equality and the principle of protection of competition, as it would end up functioning as State aid contrary to the community legal order.

• There is no violation of the principles of certainty and legal security, because there was conscious fraud of law, as well as there is knowledge that the tax effects of transactions that are performed in an artificial manner, in fraud of the objective of the rules, and with abuse of legal forms can be disregarded.

• Taking into account the theory of abuse of forms or legal configurations, which justifies the disregarding «in its tax effects of artificial legal transactions, based on inadequate and abusive means as to how they use the possibilities of contractual configuration granted by private autonomy.», it must be concluded that there was abuse in the specific case of transformation of private limited companies into joint-stock companies due to the formation of the legal minimum number of partners being absolutely artificial and momentary.

• Justifying the situation by saying that the legislator encourages, in general, the transformation, through the establishment of the exclusion from taxation of capital gains generated from the transfer of shares and the consideration of the age of the shares for purposes of the period of holding determining the applicability of the benefit, constitutes a reasoning error, because it assesses that there is no abuse of legal forms in the specific case, based on a general intent of the legislator.

• It cannot be judged that the legislator encourages even cases that constitute merely paper transformations, as from these do not result – nor can result, as set out - the economic advantages that characterize joint-stock companies, and this would result in the granting of a mere tax savings route, without the verification of the corresponding extra-fiscal advantage, as the Applicants claim in the present arbitral proceeding, configuring granting of a true tax privilege, a violation of the ordinary and constitutional fiscal legal order.

• Now, in the case at hand, there is the existence of facts that reveal the "structural abnormality" of the operation carried out, as described, without carrying out any other purpose than the non-taxation of the capital gains generated, with all the legal requirements, established in no. 2 of article 38 of the LGT, for application of the general anti-abuse clause to the operation sub judice being met.

• Both the proposal and the final decision of application of the GAAC configured in the administrative procedure fully comply with the provision of article 63 of the CPPT, pointing to material and specific points of fact in order to demonstrate the existence of "(…) acts or legal transactions essentially or principally directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or deferral in time of taxes (…)".

• Although the justification for the application of the clause in the case at hand is not even mandatorily linked to the assessment of the elements «traditionally» summoned to the resolution of the issue, all of them - means, result, intellectual and normative - were fully weighed.

• As to the means element, there were only two ways - the corporate reorganization through the exchange of shareholdings, suggested in an opinion attached to the record, would never allow the crystallization of the appreciation (capital gain generated from the transfer, of € 4,215,900.00) at a moment in which it would not be subject to taxation - to achieve the result desired by the Applicants: the one used by the Applicants which resulted in the exclusion from taxation, through the prior transformation of the companies, or, which would be the normal way, the transfer of shares, but which would be subject to taxation, under the general terms of article 10 of the CIRS.

• The acts carried out – which viewed in their entirety, allow to determine that they were exclusively or predominantly directed to obtaining a tax advantage that, otherwise, would not be achieved - allow for speaking of the verification of the (intertwined) means element and intellectual element, given the manifest lack of evidence capable of justifying the commercial or corporate motivation that was at the genesis of the transformation of the private limited companies into joint-stock companies.

• As to the result element, it corresponds to the tax advantage of the Applicants that would otherwise not be obtained and equally demonstrates the intellectual element, since the evidence shows that the underlying tax motivation of the operation of transformation of the private limited companies into joint-stock companies, followed by the sale of shares to the SGPS, had as its sole purpose the exclusion from taxation.

• As to the normative element, the applicants are not correct as to the effects of an alleged "conscious gap in taxation" (the transformation of a private limited company into a joint-stock company, originating an exclusion from taxation of capital gains under IRS by virtue of the application of the legislative option to apply such exclusion to the sale of shares held for more than 12 months, does not constitute an abuse of any legal form but the legitimate use of an option granted by the legislator) because the said element is related to the non-conformity of the result obtained, through abusive act, with the ratio legis, spirit or purpose of the law and the principles of the tax system;

• Requiring that the application of the GAAC can only occur when there is a clear intent of taxation of a certain situation constitutes a contradiction in terms, because the clause exists precisely for behaviors that move within what is formally legal, but do not serve the purpose intended by law, rather aiming, solely or primarily, at the tax advantage.

• Contrary to the Applicant's understanding, the provisions of articles 10, no. 2, paragraph a) and 43, no. 4, paragraphs a) and b) of the CIRS cannot be read in isolation, but rather in conjunction with article 38, no. 2, of the LGT, as well as with the rules of the Constitution – if at the genesis of the tax exclusion was the idea of stimulating lasting and effective business investment, granting more favorable tax treatment to non-speculative capital gains, benefiting «long-term capital gains», and therefore excluding from taxation only gains from securities held for more than 12 months, it was intended to benefit investors who transform companies from one corporate nature to another and need and/or benefit from that same new management form, and not those who continue to manage joint-stock companies as the previous private limited companies, namely those who are bound by contracts of franchise intuitu personae…

• Any other understanding and application of the law would violate article 103, no. 1 of the CRP (the tax system aims at meeting the financial needs of the State and a just distribution of income and wealth) and articles 13 and 104 of the CRP (fiscal equality), as well as the principle of legality (no. 2 of article 103 of the CRP) and the principle of indisposability of the tax debt, arising from the aforementioned principles of legality and equality.

• In applying the GAAC, the Respondent did not interfere either in business transactions, nor did it call into question the freedom to negotiate in the case sub judice, but rather the abuse of the legal forms used and the evident fraud to tax law, because the rights of freedom of enterprise and economic initiative are not absolute rights, cannot be exercised in an abusive manner, in order to subvert the spirit of taxation rules and granting of tax benefits, and thereby achieve a result contrary to Law.

• It is certain that taxpayers can and should choose, from among the legal instruments put at their disposal, those that best suit them and that, naturally, do not have to choose the most burdensome tax option, but there is no doubt that the said corporate transformations were motivated, mainly or only by the exclusion from taxation provided for the transfer of shares held for more than 12 months.

• The Applicants did not prove (article 74 of the LGT) that the specific corporate choice and the business policy chosen had as its starting point a true and legitimate economic substrate, which is why the application of article 38, no. 2, of the LGT to the case sub judice is required, resulting in the correction made to the taxable base of the aforementioned Applicants, and the requests formulated being entirely without merit.

1. Issues to be decided

This application seeks the arbitral tribunal's pronouncement on the following issues:

• Legality of the procedures, including the sufficiency of the justification, in the application of the general anti-abuse clause;

• Fulfillment of the verification of the requirements for application of the general anti-abuse clause of article 38, no. 2, of the LGT;

• Legality of the IRS assessment and right to damages interest.

1. Preliminary matters

The Tribunal is properly constituted and materially competent, pursuant to articles 2, no. 1, paragraph a), 5, no. 2, and 6, no. 1, of the RJAT.

The parties have legal personality and capacity, are properly interested and are legally represented, pursuant to articles 4 and 10, no. 2, of the RJAT and article 1 of Decree no. 112-A/2011, of 22 March.

All considered, it is necessary to render

II. DECISION

A. Findings of Fact

A.1 Facts Established

With relevance to the decision, the following facts are established:

a) On 15 September 1994, the commercial company in the form of private limited company with the name "C– Restaurants …, Lda." ("C, Lda.") was established by public deed, with the partners "A" and "B", (Applicants) setting the capital at € 9,975.96 (nine thousand, nine hundred seventy-five euros, ninety-six cents) (Esc. 2,000,000$00), with the now 1st Applicant holding a share with a nominal value of € 9,876.20 (nine thousand, eight hundred seventy-six euros, twenty cents) (Esc. 1,980,000$00), and the now 2nd Applicant holding a share with a nominal value of € 100.00 (one hundred euros) (Esc. 20,000$00), (cf. copy of the deed attached as Doc. no. 6 with the initial petition and permanent business certificate which constitutes Annex no. 5 of the "Final Report of the Conclusions of the Inspection Action" attached to the record, at pages 63 et seq of the PAT).

b) "C, Lda." initially had as its corporate purpose the activity and operation of restaurants and similar establishments and ice cream parlors, currently, and already on the date of the taxable event in question in the record, having as its object the operation, management and operation of restaurants of the international chain "G" under a franchising regime (cf. Annex no. 5 "Final Report of the Conclusions of the Inspection Action" attached to the record, at page 63 of the PAT).

c) On 25 June 1996, the commercial company in the form of private limited company with the name "D – Restaurants …, Lda." ("D, Lda.") was established by public deed, with the partners "A" and "B" (Applicants), setting the capital at € 9,975.96 (nine thousand, nine hundred seventy-five euros, ninety-six cents) (Esc. 2,000,000$00), with the 1st Applicant holding a share with a nominal value of € 9,876.20 (nine thousand, eight hundred seventy-six euros, twenty cents) (Esc. 1,980,000$00), and the 2nd Applicant holding a share with a nominal value of € 100.00 (one hundred euros) (Esc. 20,000$00). (Cf. copy of the public deed attached as Doc. no. 7 of the initial petition, and permanent business certificate which constitutes Annex no. 6 of the "Final Report of the Conclusions of the Inspection Action" attached to the record, at pages 71 et seq of the PAT).

d) "D, Lda." initially had as its corporate purpose the activity of "catering, ice cream parlor, café and snacks", currently, and already on the date of the taxable event in question in the record, having as its object the operation, management and operation of restaurants of the international chain "G" under a franchising regime (cf. Annex no. 6 of the "Final Report of the Conclusions of the Inspection Action" attached to the record, at page 71 of the PAT).

e) On 20/12/1999, the commercial company in the form of private limited company with the name "E – Catering …, Lda." ("E, Lda.") was established by public deed, with the partners "A" and "B", setting the capital at € 100,000.00 (one hundred thousand euros), with the 1st Applicant holding a share with a nominal value of € 99,000.00 (ninety-nine thousand euros), and the 2nd Applicant holding a share with a nominal value of € 1,000.00 (one thousand euros), (Cf. copy of the public deed attached as Doc. no. 8 and permanent business certificate which constitutes Annex no. 3 of the "Final Report of the Conclusions of the Inspection Action" attached to the record, at page 47 of the PAT).

f) "E, Lda." initially had as its corporate purpose the "operation, management and operation of restaurants of the international chain "G" under a franchising regime", currently, and already on the date of the taxable event in question in the record, having as its object the operation, management and operation of restaurants of the international chain "G" under a franchising regime (cf. Annex no. 3 of the "Final Report of the Conclusions of the Inspection Action" attached to the record, at page 47 of the PAT).

g) On 19/12/2000, the commercial company in the form of private limited company with the name "F – Catering …, Lda." ("F, Lda.") was established by public deed, with the partners "A" and "B", setting the capital at € 100,000.00 (one hundred thousand euros), with the 1st Applicant holding a share with a nominal value of € 99,000.00 (ninety-nine thousand euros), and the 2nd Applicant holding a share with a nominal value of € 1,000.00 (one thousand euros). (Cf. copy of the public deed attached as Doc. no. 9 and permanent business certificate which constitutes Annex no. 4 of the "Final Report of the Conclusions of the Inspection Action" attached to the record, at page 55 of the PAT).

h) "F, Lda." has as its corporate purpose the "operation, management and operation of restaurants of the international chain "G" under a franchising regime." (cf. Annex no. 4 of the "Final Report of the Conclusions of the Inspection Action" attached to the record, at page 55 of the PAT).

i) In July 2009, in order to obtain the consent of the company "H, Lda." ("H") for the transformation of the private limited companies "C, Lda.", "D, Lda.", "E, Lda." and "F, Lda." into joint-stock companies, and for the establishment of a holding company ("I– SGPS, S.A.") - which would hold 100% (one hundred percent) of the capital of each of the aforementioned 4 (four) companies -, the 1st Applicant drew up a document in which declared the following:

"Operating 5 "G" restaurants in the southern zone of …, consequently, in accordance with "G" policies, through 4 private limited companies, given the overall volume of invoicing and labor employed, it became essential to proceed with a restructuring of the four companies as a whole, in order to be able to establish a uniform corporate group coherent with current "G" policies, thus managing to rationalize resources, both economic and human, in particular with regard to the geographic mobility of personnel among my restaurants, legally permitted among companies integrated in the same economic group (which in the current framework of my companies is not permitted), as well as to streamline financial flows between companies. The objective sought is the establishment of a SGPS to hold 100% of the capital of each of my four licensee companies of the respective restaurants "G", which in the meantime should be transformed into Joint Stock Companies. As joint-stock companies, in particular the SGPS, these are obliged to certain accounting standards and audit of accounts, which will always give "H" greater credibility and security in its relationship with the licensee companies and these with the Tax Administration and with banking entities, so from our point of view, the System will only benefit from having in its midst licensee companies of the joint-stock type rather than private limited companies."(…) However, to reach the framework presented, which represents a complete strengthening of the intuitu personae character of the franchising agreements with the licensee companies, in my specific case we will have to carry out various legal acts, step by step, until the SGPS holds 100% of the capital of all licensee companies, while I hold 99.996% of the capital of the SGPS.

Indeed, both "C" and "D" established before 1997 and in accordance with the policies then in force, are misaligned with current policies, particularly as to purpose and capital (in this case "C").

From the financial and accounting point of view, at certain moments, whenever there was a need to inject capital in some of the companies, such operation proved complicated and sometimes convoluted, particularly when there were financial surpluses in a company with no shareholding relationship with the deficit company that it was intended to assist. From the banking point of view, as the companies currently present themselves, financial synergies are dispersed and in many respects non-existent, with significant losses, overall, of capital remuneration.

It is with this premise in mind that I present my proposal for restructuring my two companies and establishment of a SGPS, thereby reinforcing the intuitu personae character of the respective agreements, maintaining five partners in the respective corporate structure of the SGPS, while I hold 99.996% of its respective capital (…)";

"The third parties involved, in addition to my wife, will be my two children, "K" and "J", and my lawyer, who, at the time of establishment of the SGPS, in addition to the usufruct agreement, will enter into a shareholders' agreement with me with a purchase and sale clause for the share with a nominal value of 1 € (one euro), of which that company will be holder." (cf. Annex no. 9 of the "Final Report of the Conclusions of the Inspection Action" attached to the record, at pages 140 et seq of the PAT).

j) On 11/08/2009, the commercial company in the form of joint-stock company with the name "I – SGPS, S.A." was established by private deed, whose sole corporate purpose consists of "management of shareholdings in other companies, as an indirect form of exercise of economic activities", with shareholders "A", "B", "J", child of the Applicants, "K", child of the Applicants, and "L", lawyer for the applicant, setting the capital at € 100,000.00 (one hundred thousand euros), representing 100,000 (one hundred thousand) nominative shares, with a unit nominal value of € 1.00 (one euro), in which the 1st Applicant, its sole administrator, holds 99,996 (ninety-nine thousand, nine hundred ninety-six) nominative shares, in the amount of € 99,996.00 (ninety-nine thousand, nine hundred ninety-six euros), with each of the remaining shareholders, who established free usufruct of their shares in favor of the aforementioned Applicant in the articles of association, holding 1 (one) nominative share, with a nominal value of € 1.00 (one euro). (Cf. Doc. no. 10 attached with the initial petition and articles of association which constitute Annex no. 1 of the "Final Report of the Conclusions of the Inspection Action" attached to the record, at pages 37 et seq of the PAT).

k) At the same time, a shareholders' agreement was entered into where a right of option to purchase the shares of the mentioned SGPS on the part of the Applicant here was established, which provided that it could «be exercised by THE FIRST PARTY from the celebration of this agreement until 30 June 2039.», by means of payment of «the nominal value of each share at the time of establishment of the COMPANY.», with a penalty clause also stipulated «in the amount of 250 € (two hundred fifty euros) per day, for each day in which there is non-performance and until it is remedied, without prejudice to other amounts to which the aggrieved party is entitled» - cf. pages 168 and 169/255 of the PA.

l) On 11/09/2009, the managements of the companies "C, Lda.", "D, Lda.", "E, Lda." and "F, Lda.", pursuant to and for the purposes of article 132 of the Commercial Companies Code ("CSC"), presented to the partners their respective Justificatory Reports of the Transformation of these private limited companies into joint-stock companies, (Cf. copies of the justificatory reports of the transformation Docs. nos. 11, 12, 13 and 14 attached with the initial petition).

m) On 03/11/2009, the General Meeting of partners of the company "F, Lda." met, having been deliberated unanimously:

a) On the consent of the company and the partners for the division and transfer of shares;

b) On the increase of capital, in the amount of € 25,000.00 (twenty-five thousand euros), increasing from € 100,000.00 (one hundred thousand euros) to € 125,000.00 (one hundred twenty-five thousand euros);

c) On the consent of the company and the partners for the consolidation of shares;

d) On the transformation of the company into a joint-stock company and on the manner of conversion of shareholdings, approval of the report drawn up by the management justifying the transformation and the social balance sheet, dated 31/08/2009;

e) On the approval of the articles of association through which the company, in its new legal form (joint-stock company), will be governed;

f) On the election of members of governing bodies for the four-year term 2009-2012.

(Cf. Copy of Minutes no. 2 of 03/11/2009, attached as Doc. no. 15 with the initial petition).

n) On that date, 03/11/2009, at the General Meeting of partners of "F, Lda.", the increase of capital, in the amount of € 25,000.00 (twenty-five thousand euros), was carried out in the form of "partial incorporation of free reserves", for the creation of 2 (two) new equity interests, one being € 24,750.00 (twenty-four thousand, seven hundred fifty euros), and another of € 250.00 (two hundred fifty euros), to be subscribed, respectively, in the proportion of the corresponding participation in the capital, by the 1st Applicant and the 2nd Applicant. (Cf. Copy of Minutes no. 2 of 03/11/2009, attached as Doc. no. 15 with the initial petition).

o) In the same act, and through an operation of division and subsequent transfer of shares, the consolidated equity interest, with a nominal value of € 1,250.00 (one thousand, two hundred fifty euros), belonging to the 2nd Applicant, was divided into 4 (four) new equity interests, one being of € 950.00 (nine hundred fifty euros), and 3 (three) equal equity interests, with a nominal value of € 100.00 (one hundred euros), each, with these latter then being transferred to "I – SGPS, S.A.", "J" and "K", who thus, with consideration, acquired a share, with a nominal value of € 100.00 (one hundred euros), each, becoming partners of the company "F, Lda." – reserving the 2nd Applicant for herself the divided equity interest, with a nominal value of € 950.00 (nine hundred fifty euros). (Cf. Copy of Minutes no. 2 of 03/11/2009, attached as Doc. no. 15 with the initial petition).

p) In that act, the company "F, Lda." was transformed into a joint-stock company, adopting the name "F – Catering …, S.A." ("F, S.A."). (Cf. Copy of Minutes no. 2 of 03/11/2009, attached as Doc. no. 15 with the initial petition).

q) At the mentioned General Meeting, and following the deliberation of the authorization granted for the consolidation of the equity interests belonging to the Applicants, it was fixed that the shareholders would hold, in the new company "F, S.A.", the following shareholdings:

a) "A", now 1st Applicant: shareholding, in the amount of € 123,750.00 (one hundred twenty-three thousand, seven hundred fifty euros), through the holding of 123,750 (one hundred twenty-three thousand, seven hundred fifty) nominative shares, with a unit nominal value of € 1.00 (one euro);

b) "B", now 2nd Applicant: shareholding, in the amount of € 950.00 (nine hundred fifty euros), through the holding of 950 (nine hundred fifty) nominative shares, with a unit nominal value of € 1.00 (one euro);

c) "J": shareholding, in the amount of € 100.00 (one hundred euros), through the holding of 100 (one hundred) nominative shares, with a unit nominal value of € 1.00 (one euro);

d) "K": shareholding, in the amount of € 100.00 (one hundred euros), through the holding of 100 (one hundred) nominative shares, with a unit nominal value of € 1.00 (one euro);

e) "I – SGPS, S.A.": shareholding, in the amount of € 100.00 (one hundred euros), through the holding of 100 (one hundred) nominative shares, with a unit nominal value of € 1.00 (one euro).

(Cf. copy of Minutes no. 2, of 03/11/2009, attached as Doc. no. 15 with the initial petition);

r) Also on the date of 03/11/2009, the General Meeting of partners of the company "E, Lda." met, having been deliberated unanimously:

a) On the consent of the company and the partners for the division and transfer of shares;

b) On the increase of capital, in the amount of € 25,000.00 (twenty-five thousand euros), increasing from € 100,000.00 (one hundred thousand euros) to € 125,000.00 (one hundred twenty-five thousand euros);

c) On the consent of the company and the partners for the consolidation of shares;

d) On the transformation of the company into a joint-stock company and on the manner of conversion of shareholdings, approval of the report drawn up by the management justifying the transformation and the social balance sheet, dated 31/08/2009;

e) On the approval of the articles of association through which the company, in its new legal form (joint-stock company), will be governed;

f) On the election of members of governing bodies for the four-year term 2009-2012.

(Cf. copy of Minutes no. 11, of 03/11/2009, attached as Doc. no. 16 with the initial petition).

s) On that date (03/11/2009), at the General Meeting of partners of "E, Lda.", the increase of capital, in the amount of € 25,000.00 (twenty-five thousand euros), was carried out in the form of "partial incorporation of free reserves", for the creation of 2 (two) new equity interests, being 1 (one) of € 24,750.00 (twenty-four thousand, seven hundred fifty euros), and another of € 250.00 (two hundred fifty euros), to be subscribed, respectively, in the proportion of the corresponding participation in the capital, by the Applicants. (Cf. copy of Minutes no. 11, of 03/11/2009, attached as Doc. no. 16 with the initial petition).

t) In that act, and through an operation of division and subsequent transfer of shares, the consolidated equity interest, with a nominal value of € 1,250.00 (one thousand, two hundred fifty euros), belonging to the 2nd Applicant, was divided into 4 (four) new equity interests, one being of € 950.00 (nine hundred fifty euros), and 3 (three) equal equity interests, with a nominal value of € 100.00 (one hundred euros), each, with these latter then being transferred to "I – SGPS, S.A.", "J" and "K", who thus, with consideration, acquired a share, with a nominal value of € 100.00 (one hundred euros), each, becoming partners of the company "E, Lda." – reserving the 2nd Applicant for herself the divided equity interest, with a nominal value of € 950.00 (nine hundred fifty euros). (Cf. copy of Minutes no. 11, of 03/11/2009, attached as Doc. no. 16 with the initial petition).

u) In that act, "E, Lda." was transformed into a joint-stock company, adopting the name "E – Catering …, S.A." ("E, S.A."). (Cf. copy of Minutes no. 11, of 03/11/2009, attached as Doc. no. 16 with the initial petition).

v) At the mentioned General Meeting, and following the deliberation of the authorization granted for the consolidation of the equity interests belonging to the 1st and 2nd Applicants, it was fixed that the shareholders would hold, in the new company "E, S.A.", the following shareholdings:

a) "A", now 1st Applicant: shareholding, in the amount of € 123,750.00 (one hundred twenty-three thousand, seven hundred fifty euros), through the holding of 123,750 (one hundred twenty-three thousand, seven hundred fifty) nominative shares, with a unit nominal value of € 1.00 (one euro);

b) "B", now 2nd Applicant: shareholding, in the amount of € 950.00 (nine hundred fifty euros), through the holding of 950 (nine hundred fifty) nominative shares, with a unit nominal value of € 1.00 (one euro);

c) "J": shareholding, in the amount of € 100.00 (one hundred euros), through the holding of 100 (one hundred) nominative shares, with a unit nominal value of € 1.00 (one euro);

d) "K": shareholding, in the amount of € 100.00 (one hundred euros), through the holding of 100 (one hundred) nominative shares, with a unit nominal value of € 1.00 (one euro);

e) "I – SGPS, S.A.": shareholding, in the amount of € 100.00 (one hundred euros), through the holding of 100 (one hundred) nominative shares, with a unit nominal value of € 1.00 (one euro).

(Cf. copy of Minutes no. 11, of 03/11/2009, attached as Doc. no. 16 with the initial petition).

w) Also on the date of 03/11/2009, the General Meeting of partners of the company "D, Lda." met, having been deliberated unanimously:

a) On the consent of the company and the partners for the division and transfer of shares;

b) On the increase of capital, in the amount of € 15,000.00 (fifteen thousand euros), increasing from € 110,000.00 (one hundred ten thousand euros) to € 125,000.00 (one hundred twenty-five thousand euros);

c) On the consent of the company and the partners for the consolidation of shares;

d) On the transformation of the company into a joint-stock company and on the manner of conversion of shareholdings, approval of the report drawn up by the management justifying the transformation and the social balance sheet, dated 31/08/2009;

e) On the approval of the articles of association through which the company, in its new legal form (joint-stock company), will be governed;

f) On the alteration of the corporate purpose;

g) On the election of members of governing bodies for the four-year term 2009-2012.

(Cf. copy of Minutes no. 3, of 03/11/2009, attached as Doc. no. 17 with the initial petition)

x) On that date (03/11/2009), at the indicated General Meeting of partners of "D, Lda.", the increase of capital, in the amount of € 15,000.00 (fifteen thousand euros), was carried out in the form of "partial incorporation of free reserves", for the creation of 2 (two) new equity interests, one being of € 14,850.00 (fourteen thousand, eight hundred fifty euros), and another of € 150.00 (one hundred fifty euros), to be subscribed, respectively, in the proportion of the corresponding participation in the capital, by the partners "A" and "B". (Cf. copy of Minutes no. 3, of 03/11/2009, attached as Doc. no. 17 with the initial petition);

y) In that same act, and through an operation of division and subsequent transfer of shares, the consolidated equity interest, with a nominal value of € 1,250.00 (one thousand, two hundred fifty euros), belonging to the 2nd Applicant, was divided into 4 (four) new equity interests, one being of € 950.00 (nine hundred fifty euros), and 3 (three) equal equity interests, with a nominal value of € 100.00 (one hundred euros), each, and these latter then being transferred to "I – SGPS, S.A.", "J" and "K", who thus, with consideration, acquired a share, with a nominal value of € 100.00 (one hundred euros), each, becoming partners of the company "D, Lda." – reserving the 2nd Applicant for herself the consolidated equity interest, with a nominal value of € 950.00 (nine hundred fifty euros). (Cf. copy of Minutes no. 3, of 03/11/2009, attached as Doc. no. 17 with the initial petition).

z) Also in that act, the company "D, Lda." was transformed into a joint-stock company, adopting the name "D– Restaurants …, S.A." ("D, S.A."), and its corporate purpose altered, now having as its purpose the "operation, management and operation of restaurants of the international chain "G" under a franchising regime." (Cf. copy of Minutes no. 3, of 03/11/2009, attached as Doc. no. 17 with the initial petition).

aa) At the identified General Meeting, and following the deliberation of the authorization granted for the consolidation of the equity interests belonging to the 1st and 2nd Applicants, it was fixed that the shareholders would hold, in the new company "D, S.A.", the following shareholdings:

a) "A": shareholding, in the amount of € 123,750.00 (one hundred twenty-three thousand, seven hundred fifty euros), through the holding of 123,750 (one hundred twenty-three thousand, seven hundred fifty) nominative shares, with a unit nominal value of € 1.00 (one euro);

b) "B": shareholding, in the amount of € 950.00 (nine hundred fifty euros), through the holding of 950 (nine hundred fifty) nominative shares, with a unit nominal value of € 1.00 (one euro);

c) "J": shareholding, in the amount of € 100.00 (one hundred euros), through the holding of 100 (one hundred) nominative shares, with a unit nominal value of € 1.00 (one euro);

d) "K": shareholding, in the amount of € 100.00 (one hundred euros), through the holding of 100 (one hundred) nominative shares, with a unit nominal value of € 1.00 (one euro);

e) "I – SGPS, S.A.": shareholding, in the amount of € 100.00 (one hundred euros), through the holding of 100 (one hundred) nominative shares, with a unit nominal value of € 1.00 (one euro),

(Cf. copy of Minutes no. 3, of 03/11/2009, attached as Doc. no. 17 with the initial petition).

bb) On the mentioned date, 03/11/2009, the General Meeting of partners of the company "C, Lda." also met, having been deliberated unanimously:

a) On the consent of the company and the partners for the division and transfer of shares;

b) On the increase of capital, in the amount of € 115,024.04 (one hundred fifteen thousand, twenty-four euros, four cents), increasing from € 9,975.96 (nine thousand, nine hundred seventy-five euros, ninety-six cents), to € 125,000.00 (one hundred twenty-five thousand euros);

c) On the consent of the company and the partners for the consolidation of shares;

d) On the transformation of the company into a joint-stock company and on the manner of conversion of shareholdings, approval of the report drawn up by management justifying the transformation and the social balance sheet, dated 31/08/2009;

e) On the approval of the articles of association through which the company, in its new legal form (joint-stock company), will be governed;

f) On the alteration of the corporate purpose;

g) On the election of members of governing bodies for the four-year term 2009-2012.

(Cf. copy of Minutes no. 2, of 03/11/2009, attached as Doc. no. 18 with the initial petition).

cc) On that date (03/11/2009), at the General Meeting of partners of the company "C, Lda.", the increase of capital, in the amount of € 115,024.04 (one hundred fifteen thousand, twenty-four euros, four cents), was carried out in the form of "partial incorporation of free reserves", for creation of 2 (two) new shares, one of € 113,873.80 (one hundred thirteen thousand, eight hundred seventy-three euros, eighty cents), and another of € 1,150.24 (one thousand, one hundred fifty euros, twenty-four cents), to be subscribed, in the proportion of the corresponding participation in the capital, by the 1st Applicant and the 2nd Applicant, respectively. (Cf. copy of Minutes no. 2, of 03/11/2009, attached as Doc. no. 18 with the initial petition);

dd) In that same act, and through an operation of division and subsequent transfer of shares, the consolidated equity interest, with a nominal value of € 1,250.00 (one thousand, two hundred fifty euros), belonging to the 2nd Applicant, was divided into 4 (four) new equity interests, one being of € 950.00 (nine hundred fifty euros), and 3 (three) equal equity interests, with a nominal value of € 100.00 (one hundred euros), each, and these latter then being transferred to "I – SGPS, S.A.", "J" and "K", who thus, with consideration, acquired a share, with a nominal value of € 100.00 (one hundred euros), each, becoming partners of the company "C, Lda." – reserving the 2nd Applicant for herself the consolidated equity interest, with a nominal value of € 950.00 (nine hundred fifty euros). (Cf. copy of Minutes no. 2, of 03/11/2009, attached as Doc. no. 18 with the initial petition).

ee) In that identified act, the company "C, Lda." was transformed into a joint-stock company, adopting the name "C – Restaurants …, S.A." ("C, S.A."), and its corporate purpose altered, now having as its purpose the "operation, management and operation of restaurants of the international chain "G" under a franchising regime." (Cf. copy of Minutes no. 2, of 03/11/2009, attached as Doc. no. 18 with the initial petition).

ff) At the mentioned General Meeting, and following the deliberation of the authorization granted for the consolidation of the equity interests belonging to the 1st and 2nd Applicants, it was fixed that the shareholders would hold, in the new company "C, S.A.", the following shareholdings:

a) "A" (1st Applicant): shareholding, in the amount of € 123,750.00 (one hundred twenty-three thousand, seven hundred fifty euros), through the holding of 123,750 (one hundred twenty-three thousand, seven hundred fifty) nominative shares, with a unit nominal value of € 1.00 (one euro);

b) "B" (2nd Applicant): shareholding, in the amount of € 950.00 (nine hundred fifty euros), through the holding of 950 (nine hundred fifty) nominative shares, with a unit nominal value of € 1.00 (one euro);

c) "J": shareholding, in the amount of € 100.00 (one hundred euros), through the holding of 100 (one hundred) nominative shares, with a unit nominal value of € 1.00 (one euro);

d) "K": shareholding, in the amount of € 100.00 (one hundred euros), through the holding of 100 (one hundred) nominative shares, with a unit nominal value of € 1.00 (one euro);

e) "I– SGPS, S.A.": shareholding, in the amount of € 100.00 (one hundred euros), through the holding of 100 (one hundred) nominative shares, with a unit nominal value of € 1.00 (one euro).

(Cf. copy of Minutes no. 2, of 03/11/2009, attached as Doc. no. 18 with the initial petition).

gg) All the aforementioned companies ("E", "D", "F" and "C") operated under a franchise agreement with the "G" group through franchise agreements, entered into with "H". (Cf. copies of the franchise agreements attached at pages 85 et seq of the PAT).

hh) In the year 2009, the four companies employed approximately 230 (two hundred thirty) workers. (Cf. Doc. no. 27 attached with the initial petition).

ii) On 30/12/2009, the 1st Applicant, in the capacity of seller, entered into 4 (four) contracts for the purchase and sale of securities with "I – SGPS, S.A.", as purchaser, through which the former sold to the latter:

a) 123,750 (one hundred twenty-three thousand, seven hundred fifty) nominative shares, with a unit value of € 1.00 (one euro), of which he was holder in "C, S.A.", for the total price of € 1,401,000.00 (one million, four hundred one thousand euros);

b) 123,750 (one hundred twenty-three thousand, seven hundred fifty) nominative shares, with a unit value of € 1.00 (one euro), of which he was holder in "D, S.A.", for the total price of € 1,171,500.00 (one million, one hundred seventy-one thousand, five hundred euros);

c) 123,750 (one hundred twenty-three thousand, seven hundred fifty) nominative shares, with a unit value of € 1.00 (one euro), of which he was holder in "E, S.A.", for the total price of € 1,560,000.00 (one million, five hundred sixty thousand euros);

d) 123,750 (one hundred twenty-three thousand, seven hundred fifty) nominative shares, with a unit value of € 1.00 (one euro), of which he was holder in "F, S.A.", for the total price of € 543,000.00 (five hundred forty-three thousand euros).

(Cf. copies of the contracts of "Sale of Securities", attached as Docs. nos. 19, 20, 21 and 22 with the initial petition and Annex G1 of the Model 3 Tax Return relating to the year 2009 which constitutes Annex no. 7 of the "Final Report of the Conclusions of the Inspection Action" attached to the record, at page 79 of the PAT).

jj) On the same date, 30/12/2009, the 2nd Applicant, in the capacity of seller, entered into 4 (four) contracts for the purchase and sale of securities with "I – SGPS, S.A.", as purchaser, through which the former sold to the latter:

a) 950 (nine hundred fifty) nominative shares, with a unit value of € 1.00 (one euro), of which she was holder in "C, S.A.", for the total price of € 11,000.00 (eleven thousand euros);

b) 950 (nine hundred fifty) nominative shares, with a unit value of € 1.00 (one euro), of which she was holder in "D, S.A.", for the total price of € 9,000.00 (nine thousand euros);

c) 950 (nine hundred fifty) nominative shares, with a unit value of € 1.00 (one euro), of which she was holder in "E, S.A.", for the total price of € 12,000.00 (twelve thousand euros);

d) 950 (nine hundred fifty) nominative shares, with a unit value of € 1.00 (one euro), of which she was holder in "F, S.A.", for the total price of € 4,200.00 (four thousand, two hundred euros).

(Cf. copies of the contracts of "Sale of Securities" attached as Docs. nos. 23, 24, 25 and 26 with the initial petition, and Annex G1 of the Model 3 Tax Return relating to the year 2009 which constitutes Annex no. 7 of the "Final Report of the Conclusions of the Inspection Action" attached to the record, at page 79 of the PAT).

kk) In the year 2009, the financing to the companies in question was € 400,000.00 (four hundred thousand euros). (Cf. copy of the "Investment Dossiers" attached as Doc. no. 28 with the initial petition).

ll) Corresponding, in the years 2009 to 2012, to a total of investment/financing, in the amount of € 1,668,830.68 (one million, six hundred sixty-eight thousand, eight hundred thirty euros, sixty-eight cents). ( Cf. copy of the "Investment Dossiers" attached as Doc. no. 28 with the initial petition).

mm) With a view to financing the companies in question, the risk analysis carried out by the banking entities began to be considered in an overall manner, taking into account the various companies that make up the Group. (By agreement of the parties).

nn) The corporate group relationship thus created allows for inter-company financing (cf. pages 145 and 146 of the PAT which constitutes Annex no. 9 of the "Final Report of the Conclusions of the Inspection Action").

oo) The Applicants, in the annual income statement filed in 2010, did not declare any capital gains obtained from the paid transfer of shareholdings, neither in Annex G (taxable capital gains), nor in Annex G1 (capital gains excluded from taxation). (By agreement of the parties.)

pp) On 22/11/2011, following notification from the AT, the Applicants filed Annex G1 of the Model 3 Tax Return for IRS relating to the year 2009. (Cf. copy of Annex G1 which constitutes Annex no. 7 of the "Final Report of the Conclusions of the Inspection Action" attached to the record, at page 79 of the PAT).

qq) The capital gains determined and obtained were declared in Annex G1 of the Model 3 Tax Return for IRS (non-taxed capital gains) and, as such, excluded from taxation under IRS. (By agreement of the parties.)

rr) Under the Service Order no. OI…, the tax position of the Applicants was analyzed by virtue of a tax inspection initiated by the Finance Directorate of …, within the scope of the "Project No. …/…/2011 – Sellers of securities – Control Model 3 vs Model 4 Statement", aimed at confirming compliance with their tax obligations, and the opening of an appropriate procedure was proposed on which the application of the GAAC referred to in articles 38 of the LGT and 63 of the CPPT depends, as it may be at issue, given the elements collected in the meantime, the exclusion from taxation provided for in paragraph a) of no. 2 of article 10 of the CIRS. ( By agreement of the parties).

ss) On 24/10/2012, the Finance Directorate of …, with a view to exercising prior hearing provided for in no. 4 of article 63 of the CPPT, notified the Applicants of the "Project of Application of the General Anti-Abuse Clause" ("Project"), drawn up by the Finance Director of the Finance Directorate of …, which concluded that the requirements for application of no. 2 of article 38 of the LGT were met, proposing "to disregard for tax purposes the act of transformation of the private limited companies into joint-stock companies, subjecting, consequently, to taxation, under Individual Income Tax, the gains obtained from the paid transfer of shareholdings as shares" (sic), and proposed the correction to the IRS tax (category G – capital gains) relating to the year 2009, in the total amount of € 421,590.00 (four hundred twenty-one thousand, five hundred ninety euros), with the proposed correction being € 418,350.00 (four hundred eighteen thousand, three hundred fifty euros) for the 1st Applicant, and € 3,240.00 (three thousand, two hundred forty euros) for the 2nd Applicant, by applying, in both cases, the rate of 10% (ten percent), provided for in article 72, no. 4, of the CIRS, to the value of income qualified as capital gains resulting from the paid transfer of shareholdings (shares) which, by the Applicants were held in commercial companies in the form of joint-stock companies with the names "C - Restaurants …, S.A.", "D - Restaurants …, S.A.", "E - Catering …, S.A." and "F – Catering …, S.A.", in the total amount of € 4,212,900.00 (four million, two hundred twelve thousand, nine hundred euros), corresponding to the realized value of € 4,714,700.00 (four million, seven hundred fourteen thousand, seven hundred euros) (cf. pages 4 et seq of the PAT attached to the record).

tt) On 23/11/2012, the Applicants exercised the right of prior hearing regarding the mentioned Project and the proposed correction to the IRS tax, requesting the dismissal of the case due to the requirements for application of article 38, no. 2, of the LGT not being met (cf. response presented by the Applicants which constitutes Annex no. 11 of the "Final Report of the Conclusions of the Inspection Action", at page 177 of the PAT attached to the record).

uu) The analysis of the Applicants' response, made by the Tax Inspection services, on 29/05/2013, and superiorly approved, was in the direction of maintaining the proposal for application of the anti-abuse rule, to be submitted to the Director-General of the Tax and Customs Authority. (Cf. pages 232 et seq of the PAT attached to the record).

vv) Under information and proposal of 02/07/2013 from the Deputy Director-General of Tax Inspection, a decision was issued on 05/07/2013 by the Director-General of the Tax and Customs Authority authorizing the application of the anti-abuse rule procedure provided for in article 63 of the CPPT. (Cf. page 232 of the PAT attached to the record).

ww) By Official Letter no. …, dated 09/08/2013, from the Finance Directorate of …, the Representative of the Applicants was notified on 12/08/2013 of the "Final Report of the Conclusions of the Inspection Action" which, not accepting the alleged and requested in the response presented under the right of prior hearing, maintained in full the mentioned Project, including the corrections and amendments to the taxable base proposed therein, giving rise to the assessment of IRS and respective compensatory interest which is being challenged and for which the Applicant here requests a declaration of illegality, with the consequent annulment. (Cf. copy of the "Final Report of the Conclusions of the Inspection Action" attached as Doc. no. 4 with the initial petition).

xx) From this Report results the AT's understanding to the effect that "in the course of this inspection procedure, four legal transactions essentially or principally directed by artificial means and with abuse of legal forms to the elimination of the tax that would be due without the use of these means were analyzed, constituting, in our view, sufficient grounds for the application of the general anti-abuse clause provided for in no. 2 of article 38 of the General Tax Law. Thus, based on that rule of the LGT, we understand that the conditions are met to disregard for tax purposes the act of transformation of the private limited companies into joint-stock companies, subjecting, consequently, to taxation, under Individual Income Tax, the gains obtained from the paid transfer of shareholdings as shares. From the inspection procedure thus results the following proposed correction to the tax collection:

[Table showing tax adjustment from €107,733.26 to €529,323.26]

(Cf. Doc. 4 attached with the initial petition, page 6 of the PAT – "I - Conclusions of the inspection action")

yy) On 26/11/2013, the Applicants were notified of the additional assessment of IRS no. 2013 …, of 18/11/2013, relating to the year 2009, in the amount of € 421,290.00 (four hundred twenty-one thousand, two hundred ninety euros), assessment of compensatory interest no. 2013 …, of 21/11/2013, relating to the period between 29/05/2010 and 30/07/2013, in the amount of € 53,585.13 (fifty-three thousand, five hundred eighty-five euros, thirteen cents), and assessment of compensatory interest on estimated payments no. 2013 …, of 21/11/2013, relating to the period between 21/07/2009 and 01/10/2009, in the amount of € 8.88 (eight euros, eighty-eight cents), all in the total amount of € 494,867.87 (four hundred ninety-four thousand, eight hundred sixty-seven euros, eighty-seven cents). (Cf. Docs. nos. 1, 2 and 3 attached with the initial petition).

zz) On 11/12/2013, the Applicants made payment of the amount of € 421,290.00 (four hundred twenty-one thousand, two hundred ninety euros), corresponding to the principal of the alleged outstanding tax debt, under the exceptional regime for regularization of debts of a fiscal nature and social security, approved by Decree-Law no. 151-A/2013, of 31 October. (Cf. copy of the Collection Document (and payment receipt) attached as Doc. no. 5 with the initial petition).

A2. Motivation of the Findings of Fact

For the conviction of the Arbitral Tribunal regarding the findings of fact, the documents attached to the record were relevant, as well as the administrative procedure, all analyzed and weighed in conjunction with the pleadings, from which concordance results as to the factuality presented by the Applicants in the application for arbitral decision.

A3. Facts Given as Not Proven

There are no facts given as not proven, because all facts relevant to the assessment of the application were given as proven.

It is noted that what is contained in paragraphs jj), kk) and nn) of point 4 of the Applicants' submissions is not given as proven or not proven, insofar as it is matter that, moreover, is strictly conclusive in nature.

Thus, paragraph jj) includes a conclusion to be drawn or not from the remaining proven facts, that is, it is from these that one can ascertain whether the transformation of the companies occurred or not within a framework of corporate reorganization, which will depend on the various organization acts that are proven and from which a relationship with the corporate transformation carried out can be drawn.

Paragraph kk), in addition to including, once again, a conclusion to be drawn or not from other facts that, objectively, embody the proclaimed intention, is, from the outset, causally incoherent, insofar as a corporate group relationship is not incompatible with the existence of private limited companies, so the corporate transformation will, from that point of view, be indifferent.

Paragraph nn) also includes a conclusion to be drawn from the acts and transactions concretely proven and the relationship resulting therefrom.

B. THE LAW

At issue in the case is determining whether, in the present circumstances, the prerequisites for application of the general anti-abuse clause, as implemented by the AT, are met.

The said general anti-abuse clause is provided for in article 38, no. 2 of the LGT, with the following text:

"Acts or legal transactions that are essentially or principally directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or deferral in time of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, wholly or partially, without the use of such means, are ineffective within the tax scope, taxation then taking place in accordance with the rules applicable in their absence and the aforementioned tax advantages not being produced.".

From the analysis of the aforementioned rule, from whose application results the ineffectiveness, within the tax scope, of acts or legal transactions, and regardless of the greater or lesser doctrinal elaboration upon it, it is apparent from its structural analysis that its application presupposes the occurrence of the following elements:

• that the acts or legal transactions are essentially or principally directed to the reduction, elimination or deferral in time of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved wholly or partially without the use of such means;

• that the said acts or legal transactions are characterized by the use of artificial or fraudulent means;

• that there is an abuse of legal forms;

• The preceding elements must be assessed in conjunction, so that the application of the anti-abuse clause presupposes a cumulative concurrence of all these elements.

These are, therefore, the elements that must be present for the application of the general anti-abuse clause to be determined to be appropriate, and their verification or non-verification is what must be assessed by this Tribunal, in order to determine whether the AT correctly applied the clause in the present case, or whether it committed an error in its application.

[The translation continues but has been truncated due to length. The full decision continues with detailed legal analysis of each element of the anti-abuse clause, findings regarding the specific transaction structure, and final conclusions.]