Summary
Full Decision
ENGLISH TRANSLATION
The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Professor Doctor Tomás Cantista Tavares and Dr. João Menezes Leitão (arbitrators-members), who voted dissenting, designated, respectively, by the Claimant and the Respondent, to form the Arbitral Tribunal, constituted on 09-05-2014, agree as follows:
- Report
A, SGPS, S.A., NIPC ..., with registered office in … (hereinafter abbreviated as "Claimant" or "A SGPS"), submitted a request for constitution of a collective arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter only designated as RJAT), in which the Tax and Customs Authority (AT) is Respondent.
The Claimant requests the annulment of the Personal Income Tax assessment (withholding at source) No. ..., of 02-10-2013, in the amount (including compensatory interest) of €1,812,157.77, on the grounds, primarily, of the non-verification of the legal requirements for application of the provisions of article 38, no. 2, of the General Tax Law (LGT) and, subsidiarily, on the grounds that in 2009 the taxable event did not occur.
The Claimant proceeded to the designation of an arbitrator, Professor Doctor Tomás Cantista Tavares, pursuant to the provisions of article 6, no. 2, subsection b) of the RJAT.
Pursuant to the provisions of subsection b) of no. 2 of article 6 and no. 3 of article 11 of the RJAT and within the deadline foreseen in no. 1 of article 13 of the same diploma, the highest official of the Tax Administration service designated as arbitrator Dr. João Menezes Leitão.
The designated arbitrators designated the third arbitrator, Counselor Jorge Manuel Lopes de Sousa, pursuant to the provisions of subsection b) of no. 2 of article 6 of the RJAT with observance of the requirement set out in subsection b) of no. 2 of article 3 of Ordinance No. 112-A/2011, of 22 March.
The signatories designated to form part of the present collective arbitral tribunal accepted the designations, pursuant to the legal provisions.
Pursuant to the provisions and for the purposes of no. 7 of article 11 of the RJAT, the President of CAAD informed the Parties of this designation on 22-04-2014.
Thus, in accordance with what is prescribed in no. 7 of article 11 of the RJAT, after the deadline foreseen in no. 1 of article 13 of the RJAT had elapsed, the collective arbitral tribunal was constituted on 09-05-2014.
The Tax and Customs Authority submitted a response to the request for arbitral pronouncement, defending its lack of merit.
On 10-07-2014, the meeting provided for in article 18 of the RJAT took place, at which testimony evidence was produced, followed by oral arguments. At this meeting, the Tax and Customs Authority submitted two documents to the file.
The arbitral tribunal was regularly constituted.
The arbitral tribunal is competent, in accordance with the provisions of articles 2, no. 1, subsection a), of the RJAT.
The parties have legal personality and capacity and are legitimate (articles 4 and 10, no. 2, of the same diploma and article 1 of Ordinance No. 112-A/2011, of 22 March).
The proceedings do not suffer from nullities and no exceptions were raised.
The following abbreviations shall be used, which are used in the Tax Inspection Report and by the Parties.
[Abbreviation table omitted]
- Statement of Facts
3.1. Established Facts
The following facts are considered established:
a) The company D, NIF ... (D) was established on 18-12-1982, with the name L, LDA (NIF …), (hereinafter "L") with registered office in …, with shareholders M and N, with equal quota shares;
b) Over the years, company L made several capital increases to admit new shareholders, with the following quotas existing on 11-11-2003:
[Table of shareholding omitted]
c) On 24-05-2004, company L deliberated a reduction of capital to €5,000 in the proportion of each shareholder's quota, to cover accumulated losses, and on that same date made a capital increase of €495,000, having subscribed €470,666.87, with the following quotas then existing:
[Table of shareholding omitted]
d) On 09-03-2007, company L deliberated a new reduction of capital to €5,000 in the proportion of each shareholder's quota, to cover accumulated losses, with the capital thus divided:
[Table of shareholding omitted]
e) On 28-06-2007, company L made another capital increase of €295,000, subscribed by:
– J in €294,900 (thus holding 99.96%);
– A SGPS in €100.
f) Simultaneously, L was converted into a joint-stock company and also changed its name to D (D) and its registered office to … – …;
g) In terms of business activity, L (D) was engaged in the distribution of furniture for food distribution and hotel industry in the northern zone of Portugal (was based in …) and was a customer of the A group and simultaneously its competitor, as it also sold products acquired from other suppliers;
h) Between 2002 and 2008 the suppliers of L (D) and volume of business with them were as follows:
[Table omitted]
i) From 2006 onwards, L (D) became, predominantly, a distributor of products manufactured by the A group, with B (NIF ...) and C (NIF ...) recording an increase from 2006 onwards, at the expense of other suppliers outside the group;
j) From 2007 onwards, D became a customer of I (NIF ...), a company engaged in providing management services to companies in the A group;
k) In 2008, the volume of business of L (D) with suppliers not integrated in the A group was approximately 12% of the total [table from subsection h)];
l) Until the financial year of 2005 company L (D) had been undergoing a significant decrease in its sales, showing high losses successively and significantly reducing its financial situation;
m) Despite the successive capital reduction and increase operations carried out, company L (D) maintained a situation of negative equity until the financial year of 2007 (the year in which the company was transformed into a joint-stock company and changed its name to D), with accumulated losses in the years 2002 to 2005 in the amount of €1,096,447;
n) The A group was established on 02-01-2002, having been initially dominated by the Claimant, A SGPS, and having as initial share capital €10,050,000, of which €50,000 were paid in cash and the remainder paid in kind through the equity interests of the following three SGPSs:
[Table omitted]
o) Given that these financial interests had a value greater than the capital contributed (cf. table in the previous subsection), the difference was accounted for as advances, leaving A SGPS (the Claimant) with a debt of approximately €4,000,000 to its shareholders;
p) With the incorporation of these companies, the capital of the Claimant was thus distributed:
[Table omitted]
q) Being possible for the A group to be represented graphically, from its constitution until 26-10-2007, as follows:
[Organizational chart omitted]
r) Subsequently, shareholders J and K came to hold 100% of the capital of A SGPS (the Claimant), following the acquisition of the interests of II (on 26-10-2007, for the amount of €2,500,000), O and JJ (both on 17-04-2008, for the amount of €9,974,276), with the "Group A" being able to be represented on 17-04-2008 as follows: ( [1] )
[Organizational chart omitted]
s) On 24-11-2008, the two shareholders, J and K, initiated a restructuring process, which began with the registration of the merger project of companies D, E, F, G and H;
t) The merger operation described in the said project consisted of the incorporation of companies E, F, G and H into D, a project that is summarized in the following diagram: ( [2] )
[Merger diagram omitted]
u) On 03-12-2008, D, which was 99.96% held by J, acquired from A SGPS (of which J was the holder of 56% of the share capital) the equity interests that it held in E (96%), in F (59%), in G (76%) and in H (100%), for a total amount of €4,327,796.59;
v) [Details of valuation methodology omitted]
The value of this transaction resulted from an evaluation of the fair market value of companies E, F, G and H, carried out by A SGPS before the sale, the following being the assumptions and calculations of the evaluation:
w) Payment was effected with two cheques from D, both from the same account at …, in the amounts of €2,527,796.59 and €1,800,000.00, dated 26-12-2008;
x) The financing of this operation was carried out through a capital increase of D, of equal amount to the payment for the shares, which was subscribed in full by J, in the amount of €4,327,796.59, paid by a cheque from …, dated 22-12-2008 and deposited in the account of D on the following day;
y) In a general meeting held on 12-12-2008, A SGPS deliberated to reduce its capital by €4,350,000.00 due to the sale of assets of identical amount, with its shareholders J and K receiving, respectively, €2,424,565 and €1,925,435;
z) After these operations, shareholder J, previously the majority shareholder of companies A SGPS and D, maintained the same shareholding;
aa) After the sale, by A SGPS, of E, F, G and H to D - the "Group A" acquired the following structure:
[Organizational chart omitted]
bb) The registration of the merger occurred on 31-12-2008, with companies E, F, G and H, incorporated into D, being legally extinct on that date, while for accounting purposes, the date of the merger was reported back to 01-01-2008;
cc) Through this process D incorporated the four companies it acquired from A SGPS, resulting in a company constituted 8.72% by the incorporating company and 91.28% by companies acquired from A SGPS, taking into account the evaluation of the fair market value of those companies carried out by A SGPS before the sale, as referred to in v);
dd) After the merger of D and as a result of the stock swap with the minority stakeholders of the incorporated companies, the shareholder structure became as follows:
[Table omitted]
ee) With the merger and the use of D as the vehicle company of the operation, tax losses generated by this company in the years 2002 to 2005 were deducted, in the amount of €686,687.86 and incorporated in the group of customer credits (many of them uncollectible) in the amount of €2,324,413;
ff) In 2008, D generated profits that allowed it to take advantage of the deduction of accumulated losses and uncollectible credits, due to the incorporation of E, F and G, which were profitable companies, in the terms set out in the following table:
[Table omitted]
gg) On 16-10-2009, A SGPS sold its 100% stake in I to J and K (50% each), for €472,877.39;
hh) On 28-12-2009, A SGPS acquired 78.23% of the capital of D from J, for the amount of €13,000,000.00, with shareholder K having intervened in the contract in representation of A SGPS (annex 12 to the Tax Inspection Report);
ii) On 30-12-2009, J and K sold 100% of the capital of A SGPS to I, for €42,000,000;
jj) With these transactions, Group A came to consist of companies C (79%), D (78.23%) and B (84%) and the parent company became I, in which the two shareholders of the group – J and K – came to hold, each one, 50% of the capital, as summarized in the following table:
[Organizational chart omitted]
kk) The comparative table of balance sheets and statements of results of companies D, E, F, G and H before and after the merger, prepared based on the last individual accounts presented by these companies (31-12-2007) and the accounts after the merger and the purchase of D by A SGPS (31-12-2009) is as follows:
[Financial tables omitted]
ll) A SGPS received dividends from its subsidiaries B, C and D, in the amounts of €324,372.01 in 2009, €496,472.94 in 2010 and €436,867.41 in 2011;
mm) A SGPS made, in 2011, payments in the amount of €800,000 to J and K (€400,000 each), accounted for in account 2781 – Other debtors and creditors, thus serving to reduce the outstanding balance resulting from the gain realized by J, these amounts not being taxed under Personal Income Tax;
nn) By the end of 2012, J and K had not received any income from capital from I, the company holding A SGPS since 2009-12-30, despite the latter having received dividends from A SGPS, in the year 2010, in the amount of €400,000, and having established free reserves in this year in the amount of €397,391.83, not distributing dividends to shareholders;
oo) With the fixing at €13,000,000 of the value of acquisition by A SGPS of 78.23% of the capital of D, shareholders J and K had as "true objective" "to provide and guarantee to shareholder J remuneration for the change in his shareholder position in the A Group, which changed from 54% to 50%, with shareholder K waiving future income relating to dividends, in exchange for a position of equality in the capital of the business group" (agreement of the Parties materialized in the content of articles 94 of the request for arbitral pronouncement and 196 and 197 of the response, and testimonies of witnesses … and …);
pp) The fixing of the sale price by J of the shares of D to A was higher than its real market value and such price was accepted by shareholder K to compensate J for the loss of the position of majority shareholder (testimonies of witnesses … and …);
qq) The choice of merger through incorporation of E, F, G and H into D was motivated by this form of merger guaranteeing the possibility of the company resulting from the merger to carry forward tax losses of D relating to the years 2002 to 2005 (proven by the reasons indicated in section 2.2.4, in the substantiation of the decision on the statement of facts);
rr) By Dispatch of the Deputy Finance Director of ..., of 21-02-2013, External Service Order OI... was issued, addressed to the Claimant, with general scope and extension to the financial year 2009, with the inspection procedure beginning on 08-03-2013, with the signing of the service order by administrator K (NIF …);
ss) In the context of that procedure, a proposal for application of the general anti-abuse clause was prepared by Tax Inspection Division II of the Finance Directorate and ..., which is contained in the Administrative File, whose content is given as reproduced, which contains, among other things, the following:
II.5. VALUE CREATION FOR THE GROUP
From the analysis of these operations, no economic benefit for A SGPS is apparent, it being evident that this operation was constructed in such a way as to allow shareholder J to obtain income exempt from tax, to the detriment of the financial situation of A SGPS, SA, which became indebted due to the acquisition of assets that 12 months before were, for the most part, its own.
According to the merger project (p. 7, paragraph 4), there were, for group A, advantages to the merger of companies: "the concentration of commercial activity in the aforementioned company will make it possible to streamline and flexibilize the operational structure and facilitate its adaptation to the volatility that the sector in which the group operates exhibits, marked by strong competitiveness and where efficiency is unquestionably a critical success factor, therefore it is important to implement a cost reduction policy, made possible by the operation in question."
However, it is difficult to understand how these advantages could be achieved through the disaggregation of the group, resulting from the sale of a strategic asset of the group, that is, its commercial structure (E, F, G and H).
Note that, in the 2007 management report, the board of directors of A SGPS foresees a merger of companies held by it, and not the sale of its commercial structure: "A merger of the five commercial companies held predominantly by this company is planned for the first half of 2008. This concentration operation aims to optimize the commercial network that covers the national market."
And perhaps for that reason, after just 12 months, A SGPS re-acquired these same assets for a value 200% higher, when the only change was the merger of these with a company that represented only 8.72% of the company resulting from the merger.
It seems evident that the decision of A SGPS to sell its commercial structure does not fit within any theory of good management and creation of value for shareholders. Note the following excerpt on this subject: "...probably the most frequent reason for spin-off is to improve efficiency. Companies sometimes refer to a business as being a 'waste of time'. By selling it, the management of the parent company can focus on its main activity." Now, it cannot be said in any way that A SGPS had no interest in maintaining its commercial structure, as its own administrators affirmed, it being merely a formal sale, since in reality the group continued to function in the same way, continuing to hold control of the commercial area, operating as a complement to the industrial area of the group (B and C).
For J, as administrator and majority shareholder of A SGPS, the only reason for carrying out a transaction that did not create value for this company and which must be considered abnormal, could only be the obtaining of a non-economic gain, in this case, tax.
(...)
Now, as previously described in this report, the decisions that led to the sale of A SGPS assets and the purchase of D, after 12 months, in no way fit the concepts of good management cited, being instead perfectly contrary to what could be considered appropriate decisions for value creation.
II.6 MERGER MBO VS. INCORPORATION MERGER
As stated in the merger project, to carry out the merger of companies D, E, F, G and H, the choice was to carry out an operation in the Management Buy Out (MBO) mode, that is a merger consisting of the acquisition of company capital by its management, in this case, J.
Regarding the MBO merger, see the following definition: "Sometimes the administrators of a company organize themselves to, together, take the entirety or part of the company and transform it into a company not open to the public. Commonly the administration shares ownership with a small group of external investors. When a large capital application is concentrated in a few hands, the benefit of risk sharing is lost. Thus, managers, with such acquisitions, put all their eggs in one company basket. On the other hand, they are now working largely for themselves which gives rise to a wonderful incentive."
However, note in what situations buy-out operations are applicable: "Acquisitions of companies or assets supported by high levels of indebtedness, (90%-95%), are technically designated buy-outs. These are recent restructuring forms being associated with the recession in the early 80s when some companies decided to sell non-essential assets or subsidiaries to obtain fresh money."
As can be seen, the merger carried out, in no way fits these definitions, since J was already the holder of all assets integrated in the merger, directly (D - 99.96%) or indirectly (through A SGPS - 56%), group A was not indebted, having no need to sell assets to finance its activity, all the more so because the end result of this restructuring was an increase in indebtedness, due to the price to be paid for the purchase of D (€13,000,000.00) and on the other hand, after the sale of its assets, immediately made a capital reduction, implying payments to shareholders of equal amount to that made in that sale.
That is, the characterization of this operation as being an MBO merger served only to justify the carrying out of acts perfectly unsuitable for the economic purpose intended to be achieved.
It would be possible to achieve the same objective, without resorting to the sale of companies E, F, G and H, followed by the repurchase of the commercial area of the group at a much higher price than the sale, by proceeding to a merger by incorporation in which the incorporating company would be one of the 4 companies held by A SGPS, or a company to be created for that purpose.
See the following explanation on the operationalization of the incorporation merger: "Company A which acquired or incorporated the other two - B and C - can deliver to the shareholders of these the money corresponding to the negotiated value... As an alternative, the buying company could deliver shares, instead of money for which it would need to increase its capital, at least equivalent to the value of companies B and C... This is an operation of exchange of shares (OPT), long in common use in the USA, called buying companies without money..."
Thus, it is clear that there were more rational and financially more advantageous options for A SGPS, it being evident that the carrying out of the restructuring operation of group A, carried out in this way, did not have as motivations the creation of value, nor criteria of good management, but, mainly, motivations of a fiscal nature.
(...)
III.1 DESCRIPTION OF THE ACTS AND LEGAL TRANSACTIONS CARRIED OUT
Summarizing the facts presented in the previous section, the legal transactions that motivate the application of the General Anti-Abuse Clause (CGA) are:
• On 2008-12-03, A SGPS sells to D, the shares of companies E, F, G and H that it held, for the amount of €4,327,796.59.
• On 2008-12-31, companies D, E, F, G and H merge, by the incorporation of companies E, F, G and H into D.
• On 2009-12-28, A SGPS acquires from J the shares that he held in the capital of D, representing 78.20%, for the amount of €13,000,000.00.
III.2. ECONOMIC SUBSTANCE OF THE TRANSACTIONS CARRIED OUT
As was demonstrated in section II of this report, the final objective of the transaction was the merger of the commercial area of the A Group in a single company, maintaining control of this activity.
However, in carrying out this restructuring in the manner previously described, it carried out acts useless for the intended purpose, not maximizing gains for A SGPS.
IV. TAX CHARACTERIZATION OF THE SITUATION DESCRIBED
From the description of the legal acts contained in section II of this information, it appears that J obtained, in just 12 months, a substantial gain (approximately 8 million euros), excluded from taxation, under the provisions of art. 10, no. 2, subsection a) of the CIRS, in force at the time of the sale.
However, a gain is a profit obtained, resulting from the paid sale of a certain asset or right.
Now, in this transaction, J was always the interested party and with the capacity to decide, both in the sale of the shares of E, F, G and H, from A SGPS to D, and later in the sale of his shares of D to A SGPS, it fell to him to fix the sale price and to accept buying at the price he contracted:
• In the sale of E, F, G and H by A SGPS: He was majority shareholder of A SGPS (seller) with 56% of capital and also of D (buyer) with 99% of capital.
• In the sale of D to A SGPS: He was the seller of the shares and majority shareholder of A SGPS (buyer) with 56% of capital.
Thus, it is concluded that the exempt gain results solely from successive transfers of ownership of the shares, without there being an effective sale of the commercial structure of Group A, being only a formal and momentary change, which aimed at obtaining the intended result.
Note that the form of valuation of the assets traded was changed according to the interests of whoever had the power to make that decision:
• In the sale of E, F, G and H the price was calculated based on the accounting value of their own capital and their real estate, thus obtaining a lower value.
• In the sale of D the price was calculated using forecasts of future profits and cash-flows, obtaining a value substantially higher than what had been determined in the previous transaction, allowing the creation of a substantial gain.
It is thus evident that there was intention to generate, artificially, an untaxed gain, through the use of acts useless for the intended economic purpose (restructuring of group A), but essential to the obtaining of a tax advantage, embodied in the possibility of A SGPS making payments to shareholder J, without there being place to taxation under capital income.
Note that if this transaction had not been carried out in this way, J would not be a creditor of A SGPS, in the amount of €12,763,561.31 (balance on 2009-12-31).
This balance allows him to withdraw money from the company, without the latter having the need to distribute dividends that would be taxed in accordance with the provisions of art. 5, no. 2, subsection h) of the Personal Income Tax Code, at the exempting rate of 20%, provided for in art. 71, no. 3, subsection c) of the Personal Income Tax Code (Amendment given by Decree-Law No. 192/2005, of 7 November) and later in art. 71, no. 1, subsection c) of the Personal Income Tax Code (Amendment given by Law No. 3-B/2010, of 28 April).
(...)
Means Element
The means element corresponds to the form chosen by the taxpayer to achieve the intended tax advantage, as a set of acts or legal transactions carried out, being that, in this case, it took the form of the sale of companies E, F, G and H to shareholder J, who merged them with a company he already held, D, which represented only 8.72% of the market value of the merged companies and after 12 months, A SGPS, buys D (after incorporation of the other D), for a value much higher than that which had been the sale value of the companies that represent 91.28% of the value of the company now acquired.
The means used is perfectly unsuitable for the intended purpose. Note that the intention to rationalize the operation of the commercial companies of the group was achieved through the sale of the commercial area and its subsequent repurchase at a much higher value, making it possible to conclude that there was no gain of value for A SGPS in this operation, existing only gains for shareholder J.
The tax gains resulting from this artificial legal transaction are:
• Exclusion of taxation under Personal Income Tax, in the personal sphere of J, of the gains obtained with the sale of the equity interests held in D, benefiting from the provisions of subsection a) of no. 2 of article 10, combined with subsection b) of no. 4 of article 43, both of the CIRS;
• Establishment of a right - a credit against A SGPS resulting from the sale of D, of which J can freely dispose, namely, by assigning it free or for consideration or receiving it, without any taxation. Note that, thus, the distributions of dividends of companies B, C and D to A SGPS, which are not subject to taxation in the sphere of SGPS, can later be paid to J without the latter being taxed under Personal Income Tax, with there being thus no taxation on these dividends, violating the rules of incidence and the spirit of Tax Laws.
Note that these acts were carried out between 2008-12-03 and 2009-12-28, in a clear intention to benefit from the exclusion provided for in art. 10 of the CIRS, for the sale of shares held for more than 12 months. We can therefore speak of the presence of a structure, as a set of sequential, logical and planned acts or transactions, organized in a unitary manner (linked), with a view to achieving the intended tax objective, while also ensuring the intended economic effect, which was the concentration of commercial activity within group A.
In the same way, we find that the structuring of the transaction, in addition to being directed at obtaining the aforementioned tax advantage, was further and simultaneously, given an anomalous and artificial form, in consideration of the economic purposes sought by the taxpayer, notwithstanding, the acts and legal transactions that make up this structure are, in themselves, valid and lawful, and corresponded to the actual will of the subject.
Result Element
The result element corresponds to the tax advantage obtained, as referred to in no. 2 of article 38 of the LGT, with acts or legal transactions that are anomalous and were "essentially or mainly directed ... at reduction, elimination or temporal deferral 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, totally or partially, without the use of these means..."
For Gustavo Lopes Courinha: "One of the most striking characteristics, however, of acts or transactions that configure the means used for tax avoidance, is their equivalence as to the non-tax effects obtained, with those other acts or transactions 'normal'."
In this case, the anomalous acts were the sale of companies E, F, G and H, so that the merger with D would be carried out, outside Group A, and after 12 months the repurchase of D, by the seller, for a value much higher than the sale of companies that were property of A SGPS, when these represented 91.28% of the value of the merged company.
As analyzed in section II.6, the merger could have been carried out without recourse to share sales, nor by resorting to a merger called MBO, since this option is perfectly unsuitable for the intended purpose, being possible to obtain the same non-tax (economic and financial) result through a more appropriate and normal operation for that purpose.
The carrying out of the merger of D with E, F, G and H, without being preceded by the sale of shares held by A SGPS, but through the exchange of shares of the incorporating company or vehicle company, with the shares of the incorporated companies would result in the same economic result, but in a very different tax result.
Calculation of the gain exempt from Personal Income Tax resulting from this transaction:
The gain is calculated, in accordance with art. 10, no. 4, subsection a) of the CIRS, as follows:
Gain = Realization Value - Acquisition Value
Thus, through the carrying out of these artificial acts and transactions, J was left with the right to receive an amount of €7,906,636.54, excluded from taxation under Personal Income Tax, which by carrying out the normal transaction he would not have obtained, leaving A SGPS obliged to distribute dividends (or advances on account of dividends), taxed in accordance with the provisions of art. 5, no. 2, subsection h) of the Personal Income Tax Code, at the exempting rate of 20%.
Note that A SGPS received dividends from its subsidiaries B, C and D, in the amounts of €324,372.01 in 2009, €496,472.94 in 2010 and €436,867.41 in 2011, making, in 2011, payments in the amount of €800,000 to J and K (€400,000 each), accounted for in account 2781 - Other debtors and creditors, thus serving to reduce the outstanding balance resulting from the gain realized by J, these amounts not being taxed under Personal Income Tax.
Thus, J and K, despite ceasing to be shareholders of A SGPS in 2009, continue to receive money from this company, without being subject to taxation, thanks to the artificial transaction carried out in 2009.
By the end of 2012, J and K had not received any income from capital from I, the company holding A SGPS since 2009-12-30, despite the latter having received dividends from A SGPS, in the year 2010, in the amount of €400,000, and having established free reserves in this year in the amount of €397,391.83, not distributing dividends to shareholders.
Intellectual Element
It is a requirement of the General Anti-Abuse Clause that the obtaining of a fiscally advantageous result and an equivalent non-fiscal result, cannot be based solely on the analysis of the acts or legal transactions in question.
As Gustavo Lopes Courinha refers, in the aforementioned work, it is equally required that the choices and forms adopted by the taxpayer be fiscally directed (tax driven), and that the latter (fiscal result) prevail over the latter (non-fiscal result).
That is, there must be motivation with respect to, not only the means, but also the results.
In the case in question, as widely demonstrated, there is no doubt that the sale of companies held by A SGPS and subsequent repurchase, after merger, aimed, in the first instance, at obtaining the fiscal result – exclusion of taxation of the gain.
In fact, being the objective to concentrate the companies that exercised the commercial activity of group A, such a goal could and should have been achieved with the simple merger of those five companies. Instead, one resorted to a series of legal acts, more or less complex, that given the concrete economic reality, does not demonstrate their imperious necessity, which clearly reveals the artificial intention of its use.
We thus verify, in the case in question, the existence of a prevailing fiscal motivation that manifests itself in the forms adopted and that makes the fiscal purpose of the transaction prevail over the non-fiscal purpose.
Normative Element
This element underlies the non-conformity of the result obtained with the ratio legis, the spirit or purpose of the law, the principles of the Code in question or of the Tax System.
As Gustavo Lopes Courinha states: "The fiscal disregard of such acts or transactions will only succeed when, cumulating all the above-mentioned elements, it is demonstrated that the fiscal effect obtained (always in attention to the identically obtained non-fiscal effects) deserves a judgment of disapproval by Law."
Also as to this element, there is no doubt that it is verified in the case in question, insofar as the Constitution and tax law presuppose taxation according to taxpaying capacity, even when such taxation falls on taxable facts, such as the result of the sale of equity interests.
In the concrete case, the exclusion of taxation of gains from the sale of shares (held for a period longer than 12 months, had underlying exclusive criteria of tax policy, in the sense of encouraging and promoting the capital market and attracting investments, without, however, ceasing to tax short-term speculation on securities, or any artificial form of exclusion.
As a result, shareholder J obtained the right to receive €7,906,636.54 from A SGPS, excluded from taxation under Personal Income Tax, when in reality, the transaction carried out does not fit within the spirit of the law that was taken advantage of, through an artificial means, benefiting from an exclusion of taxation that would not exist, if the transaction were carried out in the manner considered normal, as there is no justification of a rational business-economic nature that supports such an operation, except, exclusively, the obtaining of the intended final result.
Sanctioning Element
Once the four previous elements are verified, the requirements for application of the CGA are met, which is embodied in the Inefficacy of acts or transactions, which through artificial means aimed at the reduction of taxation.
For Gustavo Lopes Courinha: "...the CGAA had the purpose to prevent tax law from being defrauded, carrying out taxation in accordance with the tax burden that would result from the direct application of the evaded rule and without recourse to the means that, while always ensuring the equivalent non-fiscal result, allow the tax advantage."
Thus, once the five elements that make up the CGA are verified, the conditions are met for the disregard of the tax effects of the sale and purchase of companies between A SGPS and J, and the transaction is taxed as usual for obtaining the economic effect in question, which consisted only in the merger of the commercial companies within the sphere of A SGPS. The facts established are as follows;
a) Acquisition by J (through D) of the commercial area of group A (held by A SGPS) at its asset value;
b) Acquisition by A SGPS, at a substantially higher price than the companies previously sold, after the merger with D;
c) J obtained a credit against A SGPS, without there being a fact justifying the gain obtained.
(...)
V.2.2.1. Description of the legal transaction concluded or the legal act carried out and the transactions or acts of identical economic purpose, as well as the indication of the rules of incidence applicable to them (art. 63, no. 3, subsection a) CPPT)
Article 63, no. 3, subsection a) of the CPPT provides that the substantiation of the application of the CGAA must contain the description of the legal act carried out, the act of identical economic purpose and the rule of incidence applicable to it.
As described in detail in this report, the legal act carried out was the sale of companies E, F, G and H and the subsequent purchase of company D, after its merger with those.
The act of identical economic purpose would be the merger of the companies without any sale of equity interests, by A SGPS.
As to the rule of incidence, resulting from the application of the CGA, it is the taxation of the balance artificially created in favor of J, as advances on account of profits, at the exempting rate provided for in art. 71, no. 1, subsection c) of the CIRS, should be retained at source by the entity owing the income (art. 101, no. 2, subsection a) of the CIRS), when placed at disposal (art. 7, no. 3, subsection b), sub-subsection 2) of the CIRS) and delivered to the State coffers by the 20th of the following month (art. 98, no. 3 of the CIRS).
With the sale of D to A SGPS occurring on 2009-12-28, the withholding at source at the rate of 20% on €7,906,636.54, that is €1,581,327.31, should have been delivered to the State coffers, by A SGPS, on 20 January 2010.
V.2.2.2. Demonstration that the conclusion of the legal transaction or practice of the legal act was essentially or mainly directed at the reduction, elimination or temporal deferral of taxes that would be due in case of transaction or act with identical economic purpose, or at the obtaining of tax advantages (art. 63, no.3, subsection b) CPPT).
On the other hand, article 63, no. 3, subsection b) of the CPPT provides that the substantiation of the application of the CGA must also contain the demonstration that the legal act was essentially directed at the reduction of taxation. In this report it was demonstrated that the sale of companies E, F, G and H did not aim at the pursuit of the final objective which was the rationalization of the functioning of the commercial area of the group, having only served to achieve the fiscal result, allowing the creation of a balance in favor of J avoiding its taxation under the distribution of dividends, through the artificial obtaining of a gain exempt from taxation under Personal Income Tax.
It was evident that the sale of the commercial structure of A SGPS, unanimously considered the main driver of any economic group, was completely unsuitable, in light of the intended objective, of rationalizing the structure of the group.
(...)
VII. CONCLUSION
It is verified, according to the above, that the conditions for application of the provisions of art. 38 of the LGT and art. 63 of the CPPT are met.
In fact, if the merger of companies D, E, F, G and H were carried out without the sale of equity interests, by A SGPS, which would be an act considered normal, would not have been obtained a gain exempt from taxation under Personal Income Tax, with the outflows of money from A SGPS, in favor of shareholders being taxed as distribution of dividends.
Thus, the Tax Administration seeks to consider inefficacious within the tax scope, the legal act carried out by A SGPS, SA, since it was practiced with abuse of legal forms and had as its essential objective the elimination of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, obtaining tax advantages that would not be achieved, without the use of these means, proceeding then to taxation in accordance with the applicable rules in their absence and not producing the aforementioned tax advantages, as provided by art. 38, no. 2 of the LGT.
That is, proceeding to the taxation of the gain obtained by J, in the amount of €7,906,636.54, as if it were an advance on account of profits, with there thus being missing from the State coffers the amount of €1,581,327.31, relating to the exempting rate of Personal Income Tax provided for in art. 71, no. 1, subsection c) of the CIRS.
Pursuant to the provisions of art. 63, nos. 4 and 5 of the CPPT, the taxpayer must be notified to, within a period of 30 days, exercise the right to a prior hearing on this project of decision on the application of the CGAA.
tt) Notified of this project of decision on the application of the general anti-abuse clause, the Claimant did not exercise the right to a hearing;
uu) In the Tax Inspection Planning and Coordination Services Directorate, Information No. 166/2013 was prepared for purposes of application of the general anti-abuse clause, which is contained in the administrative file, whose content is given as reproduced, in which several parts of the decision proposal drawn up by the Finance Directorate of ... are reproduced textually, and in which reference is made, among other things, to the following:
8 - The temporal sequence in which the legal transactions listed above were concluded allows one to foresee a scheme of fraudulent nature with the exclusive objective of evading the taxation that in usual manner, without the artificial and fraudulent means used, would fall on capital income from the distribution of dividends by A SGPS S.A. to its shareholder J.
9 — That is, the sale of the entirety of the shares representing the share capital of companies E; F; G; and, H, by A SGPS S.A. to D; followed by the merger in the mode of incorporation of the first four companies (incorporated) into D (incorporating company), and, finally, the acquisition by A SGPS S.A. of the shares representing 78.23% of the share capital of D that J held, were nothing more than an expedient to evade the applicable tax norms and thereby avoid the taxation due if the operation proceeded in the modes considered typical and usual, that is, by the distribution of profits of A SGPS S.A. to shareholder J.
10 - The logical-chronological sequence in which the legal transactions listed above were concluded allows one to foresee a concerted scheme of fraudulent nature constituted by several legal transactions whose legal forms - lawful when considered per se - were abusively used and whose objective, exclusive, or, at a minimum, principal or essential, was to evade the taxation that in usual manner, that is, without the legal manipulation used, would fall on the distribution of profits generated by A SGPS S.A. to its shareholder J.
11 - It is highly apparent that the only way for this set of legal transactions to make sense, despite their unitary lawfulness, is solely to integrate and view them globally as a scheme of tax avoidance whose process unfolded as is listed in point 7 above and whose objective, exclusive, or, at a minimum, principal or essential, consisted in the subtraction from the regime of taxation of the distribution of profits of entities subject to Corporate Income Tax contained in subsection h) of no. 2 of art. 5 of the Personal Income Tax Code (CIRS), in the wording in force during the period in which the legal transactions described in point 9 above were concluded.
(...)
14 - It is nonetheless deeply perplexing that from among the five companies to merge "- D; E; F; G; and, H - the one chosen to be the incorporating company is precisely the one that possesses the smallest dimension and business weight - excluding from this comparison H whose results are residual - as is the case with D, as indeed, the DF...-DITII, laconically demonstrates in point 11.4 of the information of 15/05/2013 reproduced at pages 13/4 of the present information.
15 - From the economic-business point of view what will be the reasonableness of an option of this nature? Conversely, would not business logic instead point to it being the company of larger dimension, that is, with preponderant weight in the set of the group, to absorb the others, considering that its object is coincident?
16 - However, if we think that the fiscal result sought would only be achieved in the way in which the fraudulent scheme proceeded, should we not assess the analysis of the legal transactions concluded by any judgment of logic or economic-business rationality, for, manifestly, these were not the values underlying their conclusion.
(...)
19 - A nuclear aspect of the fraudulent and abusive scheme under analysis is the fact that A SGPS S.A., after the sale of the entirety of its share capital to I, lost the status of leader of the economic group A inherent to any SGPS.
(...)
21 - Now, it is all too evident that the situation in which A SGPS S.A. was left after the conclusion of the set of legal transactions under analysis could not be in greater contradiction with the daily reality of any economic group portrayed in the doctrinal position reproduced above.
22 - That is, A SGPS S.A., despite maintaining this designation was completely emptied of the means that enabled it to be bearer of the corporate characteristics listed in the doctrinal position above. The same is to say that in practice it was no longer possible to pursue the corporate purpose of an SGPS.
23 - In this way, it is from the unfolding of the process constituted by the legal transactions under analysis as well as the corresponding visualization as a whole logical-sequential that results the flagrancy that the sole, and, a fortiori, principal objective - as required by no. 2 of art. 38 of the LGT - of the conclusion of the legal transactions listed in point 7 above was the elimination of taxes.
(...)
27 - What happens in most economic groups is that they are headed by an SGPS responsible for the management of the equity interests of the various companies that make up the group, indeed, its sole admissible corporate purpose under the terms of the provision of art. 1 of D.L. No. 495/88, which then becomes responsible for the technical services of administration and management of the companies forming the group through service provision contracts as is regulated in art. 4 of this diploma.
28 — On the other hand, the legal regime for the merger of companies contained in arts. 97 et seq. of the Companies Code constitutes an efficient instrument that allows the union of companies with the inherent increase of the economic and financial capacity of the company resulting therefrom capable of making possible the adequacy of business structures to different periods of economic dynamism.
29 - Now, naturally that SGPSs, as mechanisms for organization and strengthening of the Portuguese business fabric, as well as the legal-corporate regime for mergers cannot constitute legal instruments capable of promoting or facilitating the design and execution of tax avoidance schemes.
30 — It is, thus, clear that the unlawful exploitation, through artificial or fraudulent means and with abuse of legal forms, of the tax exclusion regime cannot fail to merit systematic-normative censure. In this sense, the understanding that has been followed by the Central Administrative Court South in decisions No. 04255/10 of 15/02/2011, and No. 05104/11 of 14/02/2012, points to a latu concept of anti-legality.
(...)
33 - The sanctioning element consists of the disregard of the fiscal effects
• of the sale by A SGPS S.A. to D of the shares of E.; F; G; and, H;
• merger of the incorporated companies E; F; G; and H into the incorporating company D;
• acquisition by A SGPS S.A. from J of the shares representing 78.23% of the share capital of D.
34 - Under normal conditions, that is, without the exclusive motivation of tax avoidance, profits would have been distributed to J by A SGPS S.A. and qualified as capital income and whose taxation is provided for in subsection h) of no. 2 of art. 5 of the CIRS, in the wording in force at the date. This fact would determine taxation under Personal Income Tax, with respect to the year 2009, to be realized through withholding at source in the amount of €1,581,327.31 (€7,906,636.54 × 20% - exempting rate provided for in subsection c) of no. 3 of art. 71 of the CIRS, in the wording in force in 2009).
(...)
35 - Since the anti-abuse provision contained in no. 2 of art. 38 of the LGT can only operate in a residual manner, that is, in the impossibility of application of a special anti-abuse provision that aims to address that specific abusive situation, it is important to exclude from the start the application of any of the special anti-abuse provisions so as to be able to apply the first, directed at the entirety of situations not covered by these.
36 - Thus, they are capable of being qualified as special anti-abuse provisions articles 63, 65, 66 and 67, all of the Corporate Income Tax Code. It happens, however, that the factual framework constituted by the above-described transactions and object of the present procedure does not find placement in the provision of any of these legal norms.
37 - Therefore, in the absence of any specific anti-abuse provision directed at the tax situation such as that which this specific procedure addresses, there is no alternative - hence its application is residual - except to apply the anti-abuse provision contained in no. 2 of art. 38 of the LGT.
(...)
40 - Considering the facts brought to our knowledge, namely, the description of the legal transactions concluded and their true economic substance, the elements that demonstrate that the conclusion of the legal transactions had as their sole or determining purpose to avoid the taxation that would be due in case of a legal transaction of equivalent economic substance; and verifying the legal transactions of economic substance equivalent to those actually concluded and the rules of incidence applicable to them, the requirements provided for in no. 2 of art. 38 of the LGT and meeting the above substantiation the requirements established in no. 3 of art. 63 of the CPPT, in the wording of Law No. 64-B/2011, of 30/12, are fully verified, the conditions are met for authorization, pursuant to no. 7 of article 63 of the CPPT, in the wording of Law No. 64-B/2011, of 30/12, the application of the anti-abuse provision contained in the first legal norm mentioned to the factual framework embodied in the information of DF...-DJTII for purposes of assessment of the tax that may be due.
vv) By dispatch of 02-08-2013, the Director-General of the Tax and Customs Authority authorized the application of the procedure relating to the application of the general anti-abuse clause, manifesting agreement with Information No. 166/2013;
ww) By notice of 21-08-2013, the Claimant was notified of the dispatch authorizing the application of the general anti-abuse clause;
xx) On 26-08-2013, the Claimant was notified of the Draft Tax Inspection Report, for exercise of the right to a hearing, a right which it did not exercise;
yy) On 13-09-2013, within the inspection procedure the Tax Inspection Report was prepared, whose content is given as reproduced, which contains, among other things, the following:
III. DESCRIPTION OF THE FACTS AND GROUNDS OF THE MERELY ARITHMETIC CORRECTIONS
III.1. DESCRIPTION OF THE FACTS
In the course of the present Inspection procedure, legal transactions were ascertained as being essentially or mainly directed through artificial means and with abuse of legal forms, at the reduction of taxes that would be due without the use of these means, constituting grounds for recourse to the application of the anti-abuse norm provided for in no. 2 of article 38 of the LGT.
Thus and with a view to the application of the general anti-abuse clause, the following procedures were carried out:
• On 08 April 2013, the subject of taxation was notified through notice No. …, to exercise the right to a hearing on the Information relating to the application of anti-abuse norms, pursuant to nos. 4 and 5 of article 63 of the CPPT (annex No. 1 - 87 sheets);
• The subject of taxation did not exercise the right to a hearing;
• By notice …, of 20 May 2013, Information was sent to the Director General of the Tax and Customs Authority, pursuant to and for the purposes of no. 7 of article 63 of the CPPT (annex No. 2-1 sheet);
• On 02 August 2013, the Director General of the Tax and Customs Authority authorized the application of the proposed procedure.
• On 21 August 2013, the subject of taxation was notified, through notice No. …, of this authorization (annex No. 3 -20 sheets).
III.2 TAX CHARACTERIZATION AND PROPOSED CORRECTIONS
As a consequence of the application of the general anti-abuse clause, provided for in no. 2 of article 38 of the LGT, whose procedure was carried out pursuant to article 63 of the CPPT, it was ascertained that the administrator of the subject of taxation, J, benefited from an advance on account of profits, in the amount of €7,906,636.54 which should have been taxed at the exempting Personal Income Tax rate of 20%, provided for in art. 71, no. 1, subsection c) of the CIRS, with there thus being missing from the State coffers the amount of €1,581,327.31, based on the grounds contained in the Information notified to the subject of taxation for the exercise of the right to a hearing - through notice No. 8402811, and upon which the authorization of the Director General fell.
Pursuant to the demonstration and substantiation in the Information already notified to the subject of taxation, the taxation of the balance artificially created in favor of J must be effected, as an advance on account of profits, at the exempting rate provided for in art. 71, no. 1, subsection c) of the CIRS, should be retained at source by the entity owing the income (art. 101, no. 2, subsection a) of the CIRS), when placed at disposal (art. 7, no. 3, subsection b), sub-subsection 2) of the CIRS) and delivered to the State coffers by the 20th of the following month (art. 98, no. 3 of the CIRS).
With the sale of D to A SGPS occurring on 2009-12-28, the withholding at source at the rate of 20% on €7,906,636.54, that is €1,581,327.31, should have been delivered to the State coffers, by A SGPS, on 20 January 2010.
zz) By dispatch of 19-09-2013, the Head of Division (acting in substitution, by sub-delegation of 01-10-2012, made by Dispatch No. …/2012, published in the Official Gazette, II Series, of 05-12-2012) manifested agreement with the corrections proposed in the Tax Inspection Report regarding Personal Income Tax – withholdings at source on capital income, resulting from the application of the general anti-abuse clause;
aaa) By notice dated 23-09-2013, the Claimant was notified of the final version of the Tax Inspection Report contained in the 2nd part of the Administrative File, whose content is given as reproduced;
bbb) Following the application of the general anti-abuse clause, the Tax and Customs Authority issued, with the subject of taxation being the Claimant, the assessment of Personal Income Tax withholdings at source No. 2013 ..., in the amount of €1,581,327.31 and the assessment of compensatory interest No. 2013 ..., in the amount of €230,830.46, which totals €1,812,157.77, pursuant to the Demonstration of Assessment of Personal Income Tax Withholdings at Source No. 2013 ..., notifying them to the Claimant, indicating as payment deadline 02-12-2013 (document No. 1, attached with the request for arbitral pronouncement, whose content is given as reproduced);
ccc) On 17-02-2014, the Claimant submitted the request for constitution of the arbitral tribunal that gave rise to the present proceedings.
2.2. Facts Not Established and Substantiation of the Decision on the Statement of Facts
2.2.1. The facts were given as established, in general, on the basis of documents contained in the Administrative File, mainly the proposal for decision on the application of the general anti-abuse clause, the information upon which it was based and the Tax Inspection Report and, in the points where a special indication is made, on the basis of the assertions of the Parties and the testimonies of witnesses … and …, who appeared to testify with impartiality and demonstrated having personal knowledge of the facts about which they testified.
With respect to the fact that the "true objective" aimed at with the acquisition of the shares by the Claimant from J was "to provide and guarantee to shareholder J remuneration for the change in his shareholder position in the A Group, which changed from 54% to 50%, with shareholder K waiving future income relating to dividends, in exchange for a position of equality in the capital of the business group" there is agreement of the Parties, resulting from the allegations in articles 94 of the request for arbitral pronouncement and 196 and 197 of the response, in addition to the testimonial evidence being to the same effect.
2.2.2. It was not proven that the Claimant, in the year 2009, had distributed profits to its shareholders or that it had profits available to distribute in the amount of €7,906,636.54 or greater to distribute to its shareholders in 2009, nor that in that year it had paid any amount to shareholder J or had provided him with the possibility of obtaining collection of that amount.
No evidence was made of the existence of profits of the Claimant that had been distributed or were available for distribution in 2009 in the amount referred to and the Tax and Customs Authority only speaks of payments of amounts to shareholders J and K in 2011, in the amount of €400,000 to each, as referred to in subsection mm) of the statement of facts established.
2.2.3. It was not proven that the operations carried out to effect the merger were aimed at creating conditions to enjoy the tax benefit provided for in article 81 of Law No. 67-A/2007, of 31 December, which approved the State Budget for 2008.
In fact, as is inferred from the documents submitted by the Tax and Customs Authority at the meeting, the Claimant in 2009 did not enjoy the aforementioned benefit and no acceptable explanation was put forward for the omission, therefore it is presumed that the Claimant only subsequently became aware that it could be in a position to enjoy that fiscal benefit.
2.2.4. It was not proven that the operation of acquisition by D of the Claimant's interests in the capital of E, F, G, and H and the subsequent merger of the latter with D, in which they were incorporated, were aimed at allowing shareholder J to obtain income exempt from Personal Income Tax.
In fact, from the outset, no evidence was produced to the effect that the merger had that objective.
To the contrary, the testimonial evidence produced was convergent to the effect that the choice of merger of those companies into D, in which they were incorporated, and not the incorporation of this and others into one of the companies of the group was motivated, on the one hand, by the fact that it had the advantage of guaranteeing the exploitation, for purposes of reducing taxable profit, of the tax losses of D in previous years, which was not guaranteed if the merger were carried out with D into one of the group companies, as the Tax and Customs Authority argues should have occurred, for in this case, the exploitation of the tax losses would be dependent on authorization, pursuant to article 75 of the CIRC.
The Tax and Customs Authority, in its Response, says, on this point, firstly, that "D could always benefit from this saving, under Corporate Income Tax, without J being left with a right to receive the amount of €7,906,636.54" and that "it was sufficient for this that, the sale of the companies it acquired a year earlier, on 2008-12-03, was effected at a value similar to that of the acquisition" (articles 175 and 176 of the Response). These statements are entirely correct, but, obviously, have nothing to do with the ground invoked: what the Claimant argues is that if the merger were not effected with the incorporation of E, F, G and H into D there was no guarantee of being able to exploit the tax losses of D, which corresponds manifestly to reality and is not disputed by the later sale price to the Claimant of J's interest in D, agreed some twelve months later. Regardless of what sale price would eventually be agreed, without the incorporation of E, F, G and H into D the possibility of exploiting D's tax losses was not guaranteed.
Secondly, on this matter of the guarantee of exploitation of the losses, the Tax and Customs Authority responds that one cannot invoke "the existence of tax losses existing in the sphere of D to justify said operation, when the latter company, at the moment it obtained the saving, had no connection to group A". But, obviously, what is at issue, from the perspective of J, whom the Tax and Customs Authority recognizes as having a determining role in the operations, was the possibility of deducting D's tax losses in D's own profits, which became a merger of companies with profits, as it came to happen, as referred to in subsection ee) of the statement of facts established.
On the other hand, it was also pointed out by the witnesses for the choice of that form of merger the inconvenience that would be the choice of one of the group companies (E, F, G and H) to effect the merger, as all of them had founding minority shareholders who could become sensitive if another of the group companies that was not their own were chosen to continue to exist while theirs was extinct.
The first of these reasons, by itself alone, perfectly explains the option for the form of merger adopted, for it is manifest that reportable tax losses have an economic value, as they result in a tax saving, which is particularly consistent in cases of merger in which the incorporated companies have profits. Moreover, it is normal that, among a form of merger that assured that advantage and others that made obtaining merely hypothetical, as it was dependent on authorization, economic agents would choose the safer form, therefore it is to be presumed that this is the reason for that option. Moreover, it is ascertained that it corresponds to reality that D, before the merger, did not generate profits that would allow the tax exploitation of all those losses and that only with the merger was that exploitation possible, as is inferred from the facts indicated in subsections m), ee) and ff) of the statement of facts established.
For this reason, the relevance of the second reason referred to being more questionable, it is to be considered proven that that first reason was, at least, the main reason for the option for the merger of E, F, G and H with D, through the incorporation of those into this.
On the other hand, no documentary or testimonial evidence was made that the choice for this merger was aimed at allowing shareholder J to obtain income exempt from Personal Income Tax.
Thus, a hypothetical judgment on this matter could only be based, in light of the general means of evidence admitted in arbitral proceedings (which are only the general means admitted in law, as results from article 115, no. 1, of the CPPT, applicable by force of the provision of article 29, no. 1, of the RJAT), on a natural presumption, based on the rules of life and experience.
Now, in the case in question, it is ascertained that, as the Claimant argues, the merger operation referred to was unnecessary for the creation of a credit of J against SGPS, for if that one sold his interest in D to A without the merger taking place or the merger were made through the incorporation of D into one of the group A companies, the transfer of J's interest in D at a price that allowed obtaining a credit of that amount of €7,906,636.54 (such as the real value of D before the merger plus €7,906,636.54), would lead to the same result, with the gain obtained being exempt from Personal Income Tax, by virtue of the regime then in force, as the shares of D were held by J for more than 12 months (the last acquisition of an equity interest in D by J occurred on 28-06-2007, upon the occasion of the last capital increase).
On the other hand, the fixing of the price in such a way as to allow that gain, even only on the basis of D's value before the merger, was not a difficulty, for, as is stated in the Tax Inspection Report, "J was always the interested party and with the capacity to decide, both in the sale of shares of E, F, G and H, from A SGPS to D, and later in the sale of his shares of D to A SGPS, it fell to him to fix the sale price and to accept buying at the price he contracted". "In the sale of E, F, G and H by A SGPS: He was majority shareholder of A SGPS (seller) with 56% of capital and also of D (buyer) with 99% of capital"."In the sale of D to A SGPS: He was the seller of the shares and majority shareholder of A SGPS (buyer) with 56% of capital".
Furthermore, also not a difficulty was the existence of another shareholder of A SGPS, K, for this one shared the same objective of J of creating a credit of the latter against the company in the amount of €7,906,636.54 as consideration for the loss of majority in the capital of that company (as the Tax and Customs Authority itself recognizes in articles 196 and 197 of the Response).
Being thus, being able the untaxed gain under Personal Income Tax, in the aforementioned amount of €7,906,636.54, to be obtained with or without the merger of E, F, G and H into D, it cannot be considered proven, by presumption, that the choice of the form of merger was aimed at the creation of that gain, for this form was irrelevant for that effect.
In truth, the natural presumption that can be formulated in a situation of this type, resting on the known facts and on the behavior that can be considered normal, is in the sense of a negative probative judgment as to this point of the form of merger being aimed at the formation of the aforementioned gain, for it cannot be considered normal that the agents interested in obtaining a tax advantage would practice an act useless to obtain it, the merger of E, F, G and H with D, all the more with the costs inherent thereto. That is, the presumption that can be formulated under these conditions, with a criterion of normality, is to the effect that it was not with the objective of allowing shareholder J to obtain, about a year later, income exempt from Personal Income Tax that the merger was effected in the manner referred to.
This negative probative judgment is corroborated by the fact that there is the aforementioned tax advantage derived from D's tax losses, in the amount of €686,687.86, which, as was referred, is sufficient, by itself alone, to explain the option for that form of merger.
On the other hand, the correspondence of this explanation to reality is confirmed indicially by the fact that D's tax losses prior to the merger were actually exploited for tax purposes, as is referred to in subsection ee) of the statement of facts established.
- Statement of Law
3.1. Powers of Cognition of Arbitral Tribunals in Tax Disputes
The tax arbitral process was created by the RJAT as an alternative to the judicial impugnation process ([4]), therefore, like this procedural means, it is a contentious process for annulment of mere legality, in which only the declaration of illegality of acts of the types provided for in subsections a) and b) of no. 1 of its article 2 is sought.
Therefore, such acts of the referred types being the object of the process, their legality must be assessed as they were practiced, with the substantiation used in them, other possible substantiations that could serve as support for other acts, of decisional content totally or partially coincident with the acts practiced, being irrelevant. Thus, substantiations invoked a posteriori, after the end of the tax procedure in which the act whose declaration of illegality is sought was practiced, are irrelevant, including those put forward in the jurisdictional process.
3.2. Interpretation of the Impugned Act
By the impugned act being the object of the impugning process, it is important to clarify the relevant content of the act whose declaration of illegality is sought not only as to its decisional content, but also as to its substantiation, this being a priority task when, as is the case in question, more than one act of an administrative nature, in a broad sense, was practiced before the final assessment act, namely the act that authorized the application of the general anti-abuse clause (administrative act in tax matters of an authorizing type) and the act of the Head of Division that defined the terms of its application, adhering to the substantiation of the Tax Inspection Report.
With respect to the act authorizing the application of the general anti-abuse clause, the substantiation is based, synthetically, on the following understanding:
– the sale of the entirety of the shares representing
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Frequently Asked Questions
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