CAAD Case 144/2018-T: Deductibility of Financial Costs in Reverse Merger Under Article 23 CIRC - Preliminary Ruling

TAX ARBITRATION CASE LAW

Process no. 144/2018-T

Decision Date: 2019-10-04

IRC (Corporate Income Tax)

Value of Claim: €247,493.34

Subject Matter: IRC – Tax Deductibility of Financial Expenses – Reverse Merger – Article 23, no. 1, paragraph c) of the IRC Code

Preliminary Ruling Decision (attached to the decision)

PRELIMINARY RULING

PDF Version

ARBITRAL DECISION

The arbitrators appointed to form the Arbitral Tribunal, Dr. Alexandra Coelho Martins, arbitrator-president appointed by the Deontological Council of the Administrative Arbitration Center (CAAD), Prof. Doctor Tomás Cantista Tavares, appointed by the Claimant, and Dr. Jorge Carita, appointed by the Respondent, hereby agree as follows:

I. REPORT

A..., S.A., a legal entity and taxpayer number..., with registered office at ..., no...., ...-... ..., in Lisbon, hereinafter referred to as "Claimant," requested the establishment of an Arbitral Tribunal with appointment of an arbitrator under the terms of Articles 2, no. 1, paragraph a) and 10, no. 1, paragraph a) and no. 2 of the Legal Framework for Arbitration in Tax Matters ("RJAT"), approved by Decree-Law no. 10/2011, of 20 January, as subsequently amended.

The Claimant submitted a request for arbitral pronouncement for annulment of the dismissal order of the Assistant Director of Finance, of the Finance Directorate of Lisbon, dated 18 December 2017, which ruled on the Administrative Appeal presented against the acts of assessment of Corporate Income Tax ("IRC") and compensatory interest issued under numbers 2016... [IRC], 2016... and 2016 ... [interest], relating to the fiscal year 2013, which resulted in the amount to be paid of €247,493.34, as shown in the statement of accounts rectification no. 2016 ... (compensation no. 2016 ...).

It petitions for the declaration of illegality and annulment of the tax acts and, likewise, the condemnation of the TA to payment of indemnitory interest on the amounts paid under the Special Program for Reduction of State Indebtedness ("PERES"), established by Decree-Law no. 67/2016, of 3 November, pursuant to Articles 43, nos. 1 and 4 of the General Tax Law ("LGT") and 61 of the Code of Tax Procedure and Process ("CPPT"), under Article 24, no. 5 of the RJAT.

The respondent is the Tax and Customs Authority, hereinafter also referred to as "TA".

The Claimant, in exercise of the faculty provided for in Articles 5, no. 3, paragraph b) and 6, no. 2, paragraph b) of the RJAT, appointed the arbitrator Prof. Doctor Tomás Cantista Tavares.

On 26 March 2018, the request for establishment of the Arbitral Tribunal was accepted by His Excellency the President of CAAD and followed its normal proceedings, namely with notification to the TA on 28 March 2018.

Pursuant to the provisions of Article 6, no. 2, paragraph b) and no. 3 of the RJAT, and within the period provided for in Article 13, no. 1 of the RJAT, the highest-ranking official of the TA's service appointed arbitrator Dr. Jorge Carita.

Following the request submitted by the arbitrators appointed by the parties for the arbitrator-president to be appointed by the Deontological Council, by order of 24 May 2018 from His Excellency the President of the Deontological Council, Dr. Alexandra Coelho Martins was appointed in that capacity, pursuant to Article 6, no. 2, paragraph b), II part of the RJAT.

All arbitrators communicated their acceptance within the applicable period, and His Excellency the President of CAAD informed the parties of this appointment on 24 May 2018, for the purposes of Article 11, no. 7 of the RJAT.

The Collective Arbitral Tribunal was constituted on 14 June 2018.

1. POSITION OF THE CLAIMANT

As the basis for its claim, the Claimant invokes error in the factual and legal assumptions, based on the argument that the financial expenses, whose IRC deduction was questioned by the TA, are related to its activity and meet the assumptions of Article 23, no. 1 of the Code of this tax, and therefore should be considered fiscally deductible.

At issue are interest amounts relating to banking financing operations and supplementary contributions originally contracted by company B..., S.A. intended for the acquisition of all the social participations of the Claimant itself. With the subsequent merger by incorporation, by the Claimant, of its sole shareholder [B..., S.A.], there occurred the transmission of all of the latter's assets, with the Claimant assuming in full, by legal effect of the reverse merger, the liabilities of the incorporated entity and, consequently, the corresponding financial charges (Article 112, paragraph b) of the Commercial Companies Code – "CSC").

In this context, the Claimant alleges that:

(a) The borrowed capital was intended and applied in full by B..., S.A. in the acquisition of all of its social capital [of the Claimant]. Thus, at the subsequent moment of incorporation of B..., S.A. (incorporated company) in the sphere of the Claimant (incorporating company), the exploitation was complete, fulfilling the requirement provided for in Article 23, no. 1, paragraph c) of the IRC Code;

(b) The acquisition of all of the Claimant's social capital was effected in the interest of B..., S.A. (the acquiring company), that is, it had economic causality, being irrelevant the financial success of the operation or the actual generation of income assessed a posteriori;

(c) The indispensability of the expenses was already recognized at a pre-merger moment and cannot cease to be so post-merger, under penalty of total dissonance of tax law with civil law;

(d) The legal-economic and business reality pre-merger remains in its essence after the completion of the operation, but now under the guise of a single legal entity;

(e) Tax law cannot assess a transaction negatively based on the form it takes, given the principle of neutrality of tax law expressed in Article 81, paragraph a) of the Constitution ("CRP"). This operation follows the typical format of venture capital transactions and would achieve the same result via an upstream merger or the establishment of a group of companies to which the Special Tax Treatment Regime for Groups of Companies ("RETGS") would be applied;

(f) The logic followed by the TA contradicts the wording of no. 2 of Article 75-A of the IRC Code, introduced by Law no. 2/2014, of 16 January, with a clarifying character, i.e., along the lines of an interpretive rule;

(g) The correction advocated disrespects European Law, specifically Council Directive 2009/133/CE of 19 October 2009, which aims to eliminate fiscal obstacles to mergers, divisions, asset transfers and share exchanges within the Community. Article 23, no. 1 of the IRC Code cannot be interpreted and applied in a way that the operation ceases to be entirely neutral and the beneficiary or incorporating company is fiscally burdened (penalized) by virtue of the merger, namely by the impossibility of deducting expenses originally incurred by the incorporated entity;

(h) Having the financial charges been borne by the Claimant, a fact not contested by the TA, their non-deductibility violates the principle of prevalence of substance over form, freedom of tax management and the constitutional principles of free initiative and private property, taxation by real income and equality, contained respectively in Articles 61, 62, 104, no. 2 and 13 of the CRP.

The Claimant attached 15 documents with the request for arbitral pronouncement ("ppa").

2. POSITION OF THE RESPONDENT

On 3 September 2018, the Respondent presented a Response, in which it defends itself by opposition, having attached the administrative process ("PA") on 4 September 2019.

It concludes by advocating the lack of merit and consequent absolution of the claim, holding that the financial charges were not indispensable for the realization of income subject to tax or for the maintenance of the source producing the Claimant's income, the leveraged merger having obeyed the short and medium-term interests of the investors and not of the company, as an economic unit producing goods and services.

According to the Respondent, the legislator requires that the borrowed capital to which the financial charges in the form of interest relate be applied in the exploitation of the entity that bears them, in order for the requirement of indispensability to be considered met. This cannot mean the opposite, that is, that interest not applied in the exploitation is also deductible (Article 23, no. 1, paragraph c) of the IRC Code).

In this case, the merger had an anomalous effect, as the incorporating company did not incorporate all of the assets of the incorporated company, as they consisted of own shares, but incorporated the liabilities associated with those shares. Therefore, the connection that, before the merger, was possible to establish between the financial charges associated with the financing obtained for the acquisition of those shares and the activity of the entity bearing them ceased to exist. Therefore, the expenses incurred with that financing cannot be considered indispensable for the pursuit of the business activity carried out by the Claimant, because it became impossible to establish any nexus of economic causality between them and the obtaining of income or the maintenance of the source producing the entity bearing them.

The TA also does not accept that it is a logical and legal consequence of the merger to maintain, in the fiscal years following the merger, the relationship of economic causality between the charges and the interest of the company that existed in the sphere of the incorporated company.

On Article 75-A of the IRC Code, it argues that Article 23 of the IRC Code constitutes a prior screen in terms of qualification of expenses relevant from a fiscal standpoint and, for that reason, has precedence over the quantitative limitation of net financing expenses established by Article 67, and likewise over the application of Article 75-A, no. 2 of that Code.

It adds that the scrutiny of the indispensability of financial expenses does not crystallize at the moment when borrowed capital is obtained and must be exercised during the life of the loans, in the determination of taxable profit for each period or fiscal year (Articles 18, no. 1 and 23, no. 1 of the IRC Code).

In this case, the conclusion that imposes itself is that the borrowed capital was applied to the acquisition of assets that constitute a productive source integrated in the patrimony of an entity distinct from the one bearing them, that is, such expenses satisfy only the individual interest of the Claimant's shareholder and have no connection with the activity developed by it, nor serve the realization of its corporate purpose. These expenses never served or were intended to pursue the activity and business of the Claimant. It is not possible to discern a causal nexus with profits or gains, explained in terms of normality, necessity, congruence and economic rationality.

On the other hand, the TA argues that there is no disrespect of European Law, since Directive 2009/133/CE, which was transposed into Articles 74 and 75 of the IRC Code, does not regulate the deductibility of financial charges, which must be treated according to national law, nor does the fiscal regime applicable to mergers lose its neutrality by the non-deduction of financial expenses that cease to meet the requirement of indispensability.

On freedom of tax management, without prejudice to the Claimant being able to structure operations differently, what is at issue is the assessment of the situation in light of the conditions of Article 23, with no need to assess hypothetical situations and the options that could have been taken.

Regarding the alleged violation of constitutional principles, it considers that such does not occur, whether with respect to the principle of taxation of real income, which admits exceptions, such as limitations on the deductibility of expenses for tax purposes, or with respect to the principle of equality.

As for indemnitory interest, since the acts do not have vices that justify their annulment, the same are not due. But even if they were, such interest cannot accrue on the amount of default interest and costs included in the payments of the installment plan, since the object of the dispute is the IRC assessment that determines the payment of €247,493.34 and not the default interest and costs that may come to be paid under tax enforcement proceedings, which do not fall within the obligation to enforce an annulling judgment of the tax act, provided for in Articles 100 of the LGT and 24, no. 1, paragraph b) of the RJAT.

Finally, the TA requests a preliminary ruling to the Court of Justice ("CJ"), given the lack of knowledge of CJ jurisprudence relating to the issues to be resolved, specifically, given the possible non-conformity with European Law and with the principle of neutrality enshrined in Directive 2009/133/CE, in terms identical to those deduced in arbitral process no. 521/2017-T. It concludes by advocating the lack of merit of the request for arbitral pronouncement, with the absolution of the Respondent from all claims.

3. ALLEGATIONS AND PRELIMINARY RULING

The Claimant, notified to pronounce on the request for preliminary ruling, came to argue for its lack of merit, holding that there is no interpretive doubt, considering it unequivocal that the position adopted by the TA, in promoting the corrections in question, violates European Law and, in particular, the aforementioned Directive 2009/133/CE.

By reason of lack of necessity, the meeting of Article 18 of the RJAT was dispensed with, with the parties making oral submissions on 16 October 2018.

Given the doubts raised about the conformity of the interpretation advocated by the TA, of non-acceptance of the deduction of financial charges in the legal sphere of the company benefiting from the reverse merger, with the regime of Directive 2009/133/CE of the Council of 19 October 2009, this Arbitral Tribunal decided to proceed with a preliminary ruling to the CJ on 22 November 2018, with the consequent suspension of arbitral proceedings.

Following notification of the Court of Justice of the European Union, by letter of 15 July 2019, of the Order issued in preliminary proceeding C-438/18, which confirmed the non-opposition of European Law to Portuguese legislation on a matter identical to that raised in preliminary proceeding C-751/18 relating to the present arbitral action, the doubts raised about conformity with European Law were clarified. Indeed, the CJ states in the cited Order that:

"Council Directive 90/434/EEC of 23 July 1990 on the common tax arrangement applicable to mergers, divisions, partial divisions, asset transfers and exchange of shares between companies of different Member States and on the transfer of the seat of a European Company (SE) or of a European Cooperative Society (SCE) from one Member State to another, as amended by Council Directive 2006/98/CE of 20 November 2006, should be interpreted to the effect that it does not preclude national legislation such as that at issue in the main proceedings, which leads to expenses not being considered fiscally deductible, for the incorporating company, where such expenses were deductible, for the incorporated company, before the merger between those companies, and would have been so if that merger had not taken place."

In light of the supervening decision of preliminary proceeding C-438/18 and concluding that there was no longer any reasonable doubt regarding the same issues raised in the present process ("clarified act"), the withdrawal of the preliminary ruling request was determined by arbitral order of 19 August 2019, with the suspensive effect ceasing. On 2 September 2019 the deadline for issuing the arbitral decision was extended for two additional months.

II. CASE MANAGEMENT

The Tribunal was duly constituted and is competent, ratione materiae, to rule on the acts of IRC assessment and inherent compensatory interest in dispute, in light of the provisions of Articles 2, no. 1, paragraph a), 5, no. 3, paragraph a), 6, no. 2, paragraph a) and 11, no. 1, all of the RJAT.

The parties have judicial personality and capacity, have legal standing and are duly represented (cf. Articles 4 and 10, no. 2 of the RJAT and Article 1 of Order no. 112-A/2011 of 22 March).

The request for arbitral pronouncement is timely, being presented within the period provided for in Article 10, no. 1, paragraph a) of the RJAT.

No procedural nullities or prior issues were identified that would prevent the examination of the merits.

III. FACTUAL GROUNDS

1. PROVEN FACTUAL MATTERS

Matters of relevance to the decision are as follows:

A. A..., S.A., here Claimant, is a joint-stock company, constituted in 1992, that engages in the activity of advertising agencies, CAE 73110, in the sector of communication services and direct marketing, specifically in the distribution of advertising leaflets in mailboxes of undifferentiated recipients, and is subject to the general regime of IRC taxation – cf. Tax Inspection Report ("RIT"), contained in the administrative process ("PA").

B. Until December 2010, the social capital of the Claimant was entirely held by company C..., SGPS, S.A. – cf. document 6 attached with the ppa.

C. On 11 November 2010, company B..., S.A., hereinafter "B..." was constituted, with the corporate purpose of distribution and promotion of leaflets, commercial and advertising promotions, marketing and communication actions – cf. information published in https://publicacoes.mj.pt/.

D. On 27 December 2010, B... acquired all of the shares representing all of the social capital of the Claimant – cf. documents 6 and 7 attached with the ppa.

E. B..., sole shareholder of the Claimant, was, in turn, held 100% by company D..., SGPS, S.A., hereinafter "D..." constituted on 23 July 2010, being the latter dominated by E... – Venture Capital Fund ("Fund"), which held 100% of its social capital and which was managed by company F... – VENTURE CAPITAL COMPANY, S.A. – cf. RIT, contained in PA, information published in https://publicacoes.mj.pt/ and documents 6 and 7.

F. The said chain of participations may be schematized as follows:

G. To acquire all of the social participations of the Claimant, B... obtained financing from its sole shareholder, D..., by way of supplementary contributions, and through a loan granted by Bank of ..., ... and ..., hereinafter "G..." – cf. RIT and documents 8 and 9 attached with the ppa.

H. The supplementary contributions were granted by D... to B... in the amount of €6,400,000.00, for a period of eighteen months renewable for equal and successive periods, at a fixed interest rate of 15%, pursuant to a contract dated 28 December 2010 entered into between these two companies – cf. RIT and document 8 attached with the ppa.

I. G... granted B... a loan in the total amount of €23,000,000.00, with a fixed nominal interest rate of 6%. Of that amount, tranche B, in the amount of €3,500,000.00, was intended to finance, among others, the acquisition of the shares of the Claimant, pursuant to a financing contract dated 28 December 2010 – cf. RIT and document 9 attached with the ppa.

J. On 30 June 2011, the merger project was filed in the form of global transfer of the patrimony of the incorporated company (B...), sole shareholder of the Claimant, to the incorporating company (the Claimant itself), an operation usually referred to as reverse or inverted merger, as provided for in the financing contract concluded with G..., which stipulated that the merger must be completed within a period of 24 months – cf. RIT, documents 9 and 10 attached with the ppa and information published in https://publicacoes.mj.pt.

K. The merger was registered on 1 September 2011, with accounting effects reported to 1 January 2011 – cf. information published in https://publicacoes.mj.pt.

L. With the completion of the merger, the Claimant (incorporating company) came to be directly held entirely by D..., as illustrated below – cf. RIT:

M. Also as a consequence of the merger, there occurred the transfer of all of the patrimony of the incorporated entity (B...) to the Claimant, which thus assumed, (i) all of the financing obtained by B... from the Banking sector and its sole shareholder (D...) intended for the acquisition of the shares of the Claimant and (ii) the charges deriving from that financing, which, in 2013, amounted globally to €858,649.02 – cf. RIT.

N. In fact, in the fiscal year 2013, the Claimant accounted for and bore the following charges deriving from the financing granted to B... (incorporated):

– cf. RIT.

O. Following internal tax inspection actions, of partial scope, carried out by the TA's services under service orders nos. OI2016... and OI2016..., an arithmetic correction was proposed in the amount of €858,649.02 to the taxable matter of the Claimant's fiscal year 2013, by fiscal disregard of these financial charges, the amount of which the TA added to the taxable income of €48,408.79, thus causing the Claimant to present taxable income of €907,057.81 – cf. RIT.

P. In this connection, after the expiration of the period for presentation of the right to be heard, which the Claimant did not exercise, it was notified of the Tax Inspection Report, the contents of which are reproduced, which contains the reasoning relating to the matter under discussion in the present arbitral proceedings, as set out in the illustrative excerpts transcribed below:

"III.1. DESCRIPTION OF FACTS
[…]

III.2. GROUNDS FOR PURELY ARITHMETIC CORRECTIONS

The deduction of financial charges is set out in Article 23 of the IRC Code which states in no. 1: "Expenses are those which are proven to be indispensable for the realization of income subject to tax or for the maintenance of the productive source, namely:" and in paragraph c) of no. 1: "Of a financial nature, such as interest on borrowed capital applied in operations, discounts, premiums, transfers, exchange differences, expenses with credit operations, debt collection and issuance of bonds and other securities, redemption premiums and those resulting from the application of the effective interest method to financial instruments valued at amortized cost;".

At this point, it is necessary to frame the situation of the companies:

In the financing contract, in its Annex 5 entitled "Business Plan", which consists of the Analysis of Financing Opportunity, Gold Project, of October 2010, by F...("Strictly private and confidential"), is set out on page 2 the "Overview of the Transaction", which states that "E... signed a promise contract for the acquisition of 100% of the capital of Group A... and the closing of the operation is scheduled for the end of November" and that "E... expects to finance the transaction with €25,000,000.00 of Debt (approximately 2.7x 09 EBITDA)".

In clause five "Prior Conditions," in its paragraph (h), page 12 of the contract, it states that "E... Fund contributed to D..., at least, the amount of EUR 25,000,000.00 (twenty-five million euros), by way of supplementary contributions, supplements and capital."

D..., SGPS, SA (constituted on 2010/07/2[3]), on 2010/12/28 prepared a supplementary contribution contract with B..., SA (constituted on 2010/11/11), in which it assigned the amount of €6,400,000.00 (six million four hundred thousand euros).

The financing contract between G... and B... is in the amount of €3,500,000.00 (three million five hundred thousand euros), for the acquisition of the shares of A... and H... .

On 2011/09/01 the merger by global transfer of the patrimony of the incorporated B... company to the incorporating company A... was registered, decision date: 2011/08/18, merger already provided for in the financing contract, pages 7 and 26.

Through the creation of vehicle companies D..., SGPS, SA and B..., SA, the FUND E... acquired the group A... .

In the Merger Project, in the legal certification of accounts carried out by I..., SROC, SA, to B..., on page 2 it is stated that "B... was constituted, during 2010, with the objective of implementing the acquisition of an indirect participation of 100% in A..., SA and H...–, SA, by the Fund E... .".

In the financial statements of the legal certification mentioned above, on page 2, the balance sheet of B... at 2010/12/31 appears, in which it is verified that the majority of the company's Assets consist of financial participations, itemized on page 11 as being the shares of A... and H... and where it is verified that the majority of the liabilities consist of Shareholders/Shareholders and Obtained Financing (current and non-current).

In the financial statements of the legal certification mentioned above, on page 3, the Statement of Results appears, in which it is verified that there were no sales and services rendered, therefore there was no operation, nor any income earned, only there were Supplies and External Services and Other Expenses and Losses, in the total of €24,005.00, which constitutes the negative operating result and "… essentially relate to costs with stamp duty for the use of credit and with audit, litigation." (page 2 of the legal certification report of accounts).

Adding to the operating result the Interest and Similar Expenses Borne, we have the Net Result for the Negative Fiscal Year of €36,422.00.

Also in the Merger Project, in the legal certification of accounts carried out by I..., SROC, SA, to A..., company constituted on 1992/07/03, there is the existence of a net result for the fiscal year of €962,602.00, an Asset with Client account of €1,056,816.00, the absence of non-current liabilities and a current liabilities of €505,590.00.

In the statement of results, there are sales and services rendered of €3,182,203.00 and a positive operating result of €1,113,152.00; it is thus concluded that this is a company in operation, that generates income, with a conquered market share.

From the above, it is considered proven that B..., SA was a company created to acquire the shares of A..., SA and H..., SA, and that the financing costs used for this acquisition, both at the level of supplementary contributions from D..., SA, and at the level of the financing from G..., are not within the scope of Article 23 of the IRC Code, given that they were not expenses incurred for the realization of income subject to tax or for the maintenance of the productive source, which, in 2010, did not exist.

The costs of this acquisition, through the merger of B... by incorporation in A..., were transferred to the acquired company.

The merger, according to point IX, on page 7 of the merger project, from an accounting and tax perspective should be reported to zero hours of 1 January 2011.

In Annex III of the merger project, entitled "Pro forma Balance Sheet of A..., SA, after the merger, reported to 31 December 2010", it is verified that A... absorbs the non-current liabilities of the G... financing and the supplementary contributions of D..., and on the asset side, financial participations increase, which consist of its own shares and the shares of H... .

Thus, the financial charges that A... bears with these supplementary contribution and financing contracts contribute in no way to the realization of income subject to tax or to the maintenance of the productive source, in accordance with Article 23 of the IRC Code, and should not be considered deductible expenses.

In summary, from what is set out above, it follows that:

• Both the financing contract obtained by B..., SA from G... and the supplementary contribution contract entered into with D..., SA, both made on 2010/12/28, had as their objective the acquisition of the indirect participation of A..., SA, by the FUND E...;

• B..., SA, was created for this purpose, having had no operation nor obtained any income.

• After the merger with A..., SA, carried out on 2011/09/01, but which for accounting and tax purposes is reported to 2011/01/01, B..., SA was extinguished by incorporation in A..., and this assumed the financial charges of these financings.

• Contrary to the provisions of no. 1 of Article 23 of the IRC Code, the aforementioned financings are in no way related to the activity of A..., as costs or losses are considered those which are proven to be indispensable for the realization of profits or income subject to tax or for the maintenance of the productive source. The financings in question were intended for the acquisition of the company's own shares by the FUND E..., in no way related to the company's activity or served to realize profits or income subject to tax.

In light of the above, the following corrections are proposed:

For the purposes of determining the taxable income for the fiscal year 2013, an increase in the amount of €858,649.02, which is the sum of the following values:

• interest, in the amount of €843,759.27 (€127,375.40 + €716,383.87)
• stamp duty, in the amount of €5,245.01
• management commission, in the amount of €9,644.74.

[…]

CONCLUSION

[…]" – cf. RIT and document 5 attached with the ppa.

Q. This correction resulted in the issuance of IRC Assessment no. 2016..., relating to the fiscal year 2013, with the amount to be paid of €209,396.11, as well as the corresponding assessments of compensatory interest nos. 2016... (€3,031.07) and 2016 ... (€16,920.27), the global balance to be paid, resulting from the statement of accounts rectification no. 2016... (compensation no. 2016...), amounting to €247,493.34, with a deadline for (voluntary) payment of 10 November 2016 – cf. documents 2, 3 and 4 attached with the ppa.

R. The Claimant did not accept the aforementioned tax acts and filed an Administrative Appeal against them. After notification of the respective draft decision and exercise of the right to be heard, the Administrative Appeal was dismissed by order of 18 December 2017 from the Assistant Director of Finance of the Finance Directorate of Lisbon, pursuant to the Letter from the Finance Directorate of Lisbon of 20 December 2017 – cf. pa and document 1 attached with the ppa.

S. The dismissal of the Administrative Appeal adheres to the content of the Information drawn up by the Administrative Justice Division of the Finance Directorate of Lisbon, which contains the following grounds:

"IV-ANALYSIS OF THE REQUEST

[…]

1. The issue under discussion in the present proceeding is limited to determining whether the financial expenses borne with banking financing obtained, in the total amount of €858,649.02, fall or do not fall under paragraph c) of no. 1 of Article 23 of the IRC Code.

2. Now, following the inspection and also in the context of administrative appeal, the appellant did not succeed in proving that it actually applied that amount of banking financing obtained to normal activity, to any action from which income subject to payment of tax would result. That is, the contraction of this debt and the charge with the respective interest "(...) contributed in no way to the realization of income subject to tax or to the maintenance of the productive source" (pages 15 and 16 of the report at fls. 53 verso and 54).

3. In fact, on the one hand, company B..., at the date of acquisition of all of the social capital of the appellant, in 2010, was constituted almost entirely of financial participations that had not yet been realized;

4. on the other hand, it presented a negative net result of €36,422.00 (page 15 of the inspection report, at fls. 53 verso).

5. To respond again to the appellant stating that the reference to the fiscal year 2010 is only due to the fact that it was in that year that its purchase by B... occurred, assessing at that date the initial moment, the starting point for assessing the possible indispensability of the costs.

6. A concept which we understand to be not met on that date as on that of the fiscal year 2013, under consideration in the present proceeding.

7. If you will, in both moments the cost with interest for financing does not respect the criteria defined in point 40 above and, consequently, fall outside the legal requirements for its deductibility, contained in Article 23 of the IRC Code.

8. Furthermore, and with respect to the argument of the legal regime of the merger, it should be said, as was stated in the inspection report, that the costs were not incurred by the entity itself that wants to deduct them but by the incorporated entity.

9. And notwithstanding the rules of the merger having the consequence, among others, of the assumption of the incorporated entity's debts, the question was raised only because it is singular the fiscal acceptance of the deduction of charges of an entity with its own acquisition.

10. However, this is not the basis nor is it the basic reasoning of the inspection correction, and therefore the appellant should not fear violation of the principle of fiscal neutrality.

11. The inspection services conclude by the correct interpretation of no. 1 of Article 23 of the IRC Code by demonstrating that "(...) the aforementioned financings are in no way related to the activity of A..., as costs or losses are considered those which are proven to be indispensable for the realization of profits or income subject to tax or for the maintenance of the productive source. The financings in question were intended for the acquisition of the company's own shares by the FUND E..., in no way related to the company's activity or served to realize profits or income subject to tax" (page 16 of the report, at fls. 54).

V – SUPPLEMENTARY INFORMATION

1. The appellant was notified of the order with draft dismissal, by registered mail, under Letter no. ... dated 2017-10-25 (at fls. 441 and 442), being considered notified on 2017-10-30 (at fls. 443), being granted a period of 15 days for the presentation of prior hearing.

2. The request with the exercise of the prior right to be heard was delivered to this Finance Directorate on 2017-11-10 (at fls. 444 to 474) and, as such, was timely, and therefore should be considered.

3. The appellant reiterates, broadly, the content of the initial petition, reinforcing existing arbitral jurisprudence, namely through process no. 537/2016-T, with a decision favorable to the appellant dated 2017-05-19, as well as other arbitral decisions issued in processes nos. 560/2016-T and 120/2017-T.

4. However, it happens that, in the case at hand, the TA is not bound by these decisions, when they relate to factual and legal matters with different objects and claims than those analyzed here.

5. Nor does the wording of no. 4 of Article 68-A of the LGT establish any obligation or binding to jurisprudential orientations, also to be understood as arbitral.

6. As to the substantive matter, the fiscal disregard of the expenses presented, the appellant reiterates its position, saying that "(...) the acquisition of all of the capital of an operational company with the same purpose was in the interest of the acquiring company, that is, presented economic causality" (point 32 of the pre-hearing request of the appellant, at fls. 449).

7. In this context, the appellant brings no new factual and legal documentation or exposition, and therefore the intended decision should be maintained as already contained in the project, the dismissal of the request.

8. In sum, the appellant does not prove that it joined all and any legal-economic reality of company J..., nor does it prove the connection of the costs of this with the activity of the appellant, thus failing in their deductibility. […]"

– cf. pa and document 1 attached with the ppa.

T. Tax enforcement proceedings were instituted regarding the assessment acts in dispute, with the Claimant adhering to the Special Program for Reduction of State Indebtedness "PERES" (Adhesion Agreement no....), approved by Decree-Law no. 67/2016 of 3 November, in the context of which it is proceeding with the payment in installments of the following amounts: tax: €227,542.00; compensatory interest: €19,951.34; default interest: €700.85; costs €891.19 – document 11 attached with the ppa.

U. In disagreement with the IRC and compensatory interest assessments identified above and with the decision to dismiss the corresponding Administrative Appeal, the Claimant presented to CAAD on 23 March 2018 the request for establishment of an Arbitral Tribunal at the origin of the present proceedings.

2. UNPROVEN FACTUAL MATTERS

With relevance to the decision there are no facts that should be considered unproven.

3. RATIONALE FOR THE DECISION ON THE FACTUAL MATTERS

The pertinent facts for the judgment of the case were selected and delineated based on their legal relevance, in light of the plausible solutions of the legal issues, pursuant to the combined application of Articles 123, no. 2 of the CPPT, 596, no. 1 and 607, no. 3 of the Code of Civil Procedure ("CPC"), applicable by reference from Article 29, no. 1, paragraphs a) and e) of the RJAT.

Allegations made by the parties and presented as facts, consisting of strictly conclusive statements, incapable of proof and whose validity must be assessed in relation to the concrete factual matters established, were neither considered proven nor unproven.

With respect to the proven facts, the conviction of the arbitrators was based on the critical analysis of the documentary evidence attached to the record by both parties and on the positions assumed by them with respect to the facts.

IV. ON THE LAW

1. DELIMITATION OF THE ISSUE TO BE DECIDED. LEGAL FRAMEWORK AND PRELIMINARY RULING

The question to be decided and analyzed is identical to that raised in arbitral process no. 521/2017-T, whose preliminary ruling gave rise to preliminary proceeding C-438/18, and is summarized to the application of Article 23, no. 1 of the IRC Code to the financial charges borne in 2013 by the Claimant, relating to loans – from shareholder and from third parties – contracted for the purchase of the capital of the Claimant itself and which it now bears by virtue of and as a consequence of the merger (reverse) with its shareholder B..., which originally contracted these debts.

According to the Claimant, the said charges are fiscally deductible, by meeting the assumptions provided for in Article 23, no. 1 of the IRC Code. With a different perspective, the Respondent argues that such financial charges were not applied in the exploitation of the Claimant and in no way related to its activity or served to realize that entity's profits, and therefore are not indispensable or subsumable as a deductible expense for IRC purposes.

In this matter, the provisions of Article 23, no. 1 of the IRC Code apply, which, with reference to the fiscal year 2013, determined:

"Article 23
Expenses

1 – Expenses are those which are proven to be indispensable for the realization of income subject to tax or for the maintenance of the productive source, namely:

[…]

c) Of a financial nature, such as interest on borrowed capital applied in operations, discounts, premiums, transfers, exchange differences, expenses with credit operations, debt collection and issuance of bonds and other securities, redemption premiums and those resulting from the application of the effective interest method to financial instruments valued at amortized cost; […]"

According to this rule, fiscal deductibility depends on the establishment of a causal nexus between the expenses and the economic activity potentially generating income, or, in other words, with corporate interest. According to established jurisprudence, the criterion of indispensability was created to prevent the fiscal consideration of expenses that do not fall within the scope of the activity of entities subject to IRC. That is, of charges that were incurred in the pursuit of interests of others, notably of shareholders.

It is also worth noting that the financial charges in question passed to the sphere of the Claimant by operation of law, by effect of a merger operation (by incorporation) of its sole shareholder, an operation commonly referred to as "reverse merger," with no question raised about its indispensability for tax purposes in the sphere of the parent company, subsequently incorporated, nor the fact that they legally constitute an obligation to which the Claimant is bound, by virtue of the transfer of the liabilities (financing) associated with them to its legal-patrimonial sphere, as provided for in Article 112 of the CSC, regarding the civil law effects and corporate law produced by the merger, which provides as follows:

"Article 112
Effects of Registration

With the registration of the merger in the commercial register:

a) The incorporated companies are extinguished, or, in the case of the establishment of a new company, all merged companies, with their rights and obligations transmitted to the incorporating company or to the new company;

b) The shareholders of the extinguished companies become shareholders of the incorporating company or of the new company."

Thus, in the situation at hand, the fundamental question that needs to be assessed and decided relates to the determination of the necessary relationship, prescribed by rule in Article 23, no. 1 of the IRC Code, between the financial expenses incurred by the Claimant and the purpose of obtaining or realizing income subject to this tax by the latter, for the purposes of applying the provision regarding the fiscal deductibility of such charges.

In this context, the question of the conformity of the interpretation advocated by the TA with European Law was raised preliminarily, bearing in mind that the reverse merger that is at the origin of the transfer to the legal sphere of the Claimant of the liabilities generating the financial charges here disputed and whose associated assets are the shares of the Claimant itself that passed to D..., was carried out under the fiscal neutrality regime provided for in internal law (Articles 73 and 74 of the IRC Code), based on Council Directive 2009/133/CE of 19 October 2009 (hereinafter Directive).

The Claimant advocates a reading of Directive 2009/133/CEE, supported by the principle of neutrality and the purpose of removing obstacles to the internal market, according to which the TA cannot fail to consider the financial charges incurred by it in the factual context outlined above, in which the liabilities associated were used to acquire the shares of the Claimant itself, as fiscally deductible, under penalty of distortion of the objectives of the Directive and violation of European Law.

The Respondent raises doubts about this interpretation of European Law and considers that it does not oppose the position advocated by it in the origin of the tax acts in dispute, without prejudice to, being unaware of CJ jurisprudence on the issues to be decided, a preliminary ruling should be made to that Court, regarding the alleged non-conformity of the TA's position (in denying to the incorporating company, following the merger, the deductibility of financial charges, due to non-fulfillment of the requirement of indispensability provided for in paragraph c) of no. 1 of Article 23 of the IRC Code) with the principle of neutrality enshrined by the European legislator in the said Directive.

It is relevant in this context to recall Recital (2) of the said Directive according to which operations such as "mergers" are considered as potentially necessary to create conditions in the Community analogous to those of an internal market, and therefore such operations should not "be hindered by restrictions, disadvantages or distortions resulting in particular from the tax provisions of the Member States".

Existing a doubt, it was decided to suspend the proceedings and proceed with a preliminary ruling to the CJ, in accordance with the provisions of Article 267 of the Treaty on the Functioning of the European Union ("TFEU"), formulating the following questions:

First Question

When interpreted in the sense that, following the said reverse merger, interest and other financial charges of loans contracted with third parties or shareholders (which would be deductible in the incorporated company, if there had been no merger), for the acquisition of the capital of the subsidiary-incorporating company, transmitted by effect of the merger, cease to be fiscally deductible from the profits of the incorporating company, will Article 23, no. 1, paragraph c) of the IRC Code, in the wording in force in 2013, be compatible with European Law, namely, in the sense that this non-deductibility of financial charges is capable of constituting an obstacle or restriction to the concentration operations covered by Council Directive 2009/133/CE, violating its principles and objectives and, as well, the provisions of Article 4 thereof?

Second Question

If the answer to the first question is in the sense of the compatibility of this non-deduction of fiscal financial charges with the Directive, will the same remain given the circumstance that such correction was not carried out based on the anti-abuse provision of the Directive (Article 15) or of national law that replicates it (Article 73, no. 10, of the IRC Code), but of another provision of national law (Article 23 of the IRC Code)?

As referred to above, the CJ, in process C-438/18, relating to another arbitral process (C-521/2017-T) where the same questions were raised, clarified that, within the framework of European Law, there is no opposition to the non-deductibility of the interest, a finding that falls within the interpretation of that Court, in the sphere of competence of the Member States.

In these terms, with the argument of lack of neutrality and incompatibility with European Law dismissed, it remains to determine whether, in the case under consideration, there is a lack of connection between the financial expenses that the Claimant came to bear, as a consequence of the reverse merger, with its activity and social interest, in light of Article 23 of the IRC Code.

2. FISCAL DEDUCTIBILITY OF FINANCIAL EXPENSES IN REVERSE MERGERS

The legal basis for the corrections made to the taxable matter of the Claimant's IRC is only one and relates to the interpretation and application of the criterion established in the said Article 23, no. 1 of the IRC Code, specifically to the alleged "non-indispensability" of the financial expenses resulting from the loan that was contracted for the acquisition of the social participations of the Claimant itself, prior to the merger (reverse), an operation by virtue of which that loan passed to its sphere.

The application of the concept of indispensability as a condition delimiting fiscal deductibility in IRC has raised some divergences which, over the years, have been resolved through jurisprudence and promoted, together with doctrine, a greater densification.

As J. L. SALDANHA SANCHES recognizes, it is in the "concept of indispensability that resides the essential problematic of the consideration of business costs and that rests one of the principal points of distinction between the cost effectively incurred in the collective interest of the company and that which may result only from the individual interest of the shareholder, of a group of shareholders or their entirety and which therefore cannot be considered a cost", adding that "the requirement of indispensability of costs for the formation of profits must be assessed by criteria of economic rationality given the statutory objectives" – "The Limits of Tax Planning", Coimbra Editor, 2006, 215-216.

It is now consensual that the concretization of the general clause of indispensability of expenses does not imply a judgment of opportunity and merit regarding their realization.

Such a notion, as it appears in the reasoning of the Supreme Administrative Court (plenary) decision in process no. 049/11 of 15 June 2011 – must be interpreted as "a indeterminate concept requiring case-by-case filling, as a result of an analysis from an economic business perspective, in the perception of an economic causality relationship between the assumption of a cost and its realization in the interest of the company, given the corporate purpose of the commercial entity in question, being forbidden to the Tax Administration actions that place in crisis the principle of freedom of management and autonomy of will of the taxpayer".

Thus, the "Administration can only exclude costs not directly removed by law under strong motivation that convinces that they were incurred beyond the social objective, that is, in the pursuit of another interest than the business one, or, at least, with clear excess, deviating from the objective needs and capacities of the company", as advocated by the Supreme Administrative Court decision in process no. 01236/05 of 29 March 2006.

What means, in the clarification of the Supreme Administrative Court decision in process no. 107/11 of 30 November 2011, that "the indispensability between costs and profits should be assessed from a positive judgment of subsumption in the corporate activity: indispensable costs will be equivalent to expenses incurred in the interest of the company […]. As a rule, therefore, the fiscal deductibility of the cost depends only on a causal and justified relationship with the company's activity […]. Indispensability cannot, however, be assessed in light of criteria of opportunity and merit. And outside the concept of indispensability will remain only acts inconsistent with the social purpose, those that are not inserted in the interest of the company, especially because they do not aim at profit."

There is thus rejected the understanding that indispensability is reduced to the requirement of a necessary and direct causal relationship between expenses and income (rather, costs and profits) – see Supreme Administrative Court decisions in processes no. 0779/12 of 24 September 2014; no. 372/16 of 15 November 2017; and no. 0627/16 of 28 June 2017.

This latter decision considers "definitively removed a teleological view of indispensability (as a requirement for costs to be accepted as fiscal costs), according to which there would be required a cause and effect relationship, of the type conditio sine qua non, between costs and profits, so that only costs for which it is possible to establish an objective connection with profits can be considered deductible".

The link must therefore be made between the expenses and the activity developed by the taxpayer. "«As a rule, therefore, fiscal deductibility depends only on a causal and justified relationship with the company's productive activity» (TOMÁS CASTRO TAVARES, Da Relação..., loc. cit., page 136.). In other words, only costs that have no causal and justified relationship with the company's productive activity will not be indispensable." – Supreme Administrative Court decision in process no. 0627/16 of 28 June 2017.

The restrictive understanding of indispensability was strongly criticized by doctrine, and can be seen in this regard, TOMÁS CANTISTA TAVARES, "On the Relationship of Partial Dependence between Accounting and Tax Law in the Determination of Taxable Income of Legal Entities: Some Reflections at the Level of Costs", Ciência e Técnica Fiscal no. 396, October-December 1999, pp. 131 to 133, and "Tax Deductibility of Costs under IRC", Fisco no. 101/102, January 2002, p. 40, and ANTÓNIO MOURA PORTUGAL, "The Deductibility of Costs in Portuguese Tax Jurisprudence", Coimbra Editor, 2004, pp. 243 et seq.

The development of jurisprudence and doctrine thus established the generic causal relationship of the expense to the activity globally considered (surpassing the strict nexus expense-income) and emphasized the removal of the assessment by the Administration of the rightness, convenience or opportunity of the management and business decisions of corporate entities.

On the other hand, the jurisprudential construction requires a nexus of subjective imputation that is implicit in the relationship required between the expense and the activity. This is because that connection must be made with the specific activity of the taxpayer and not with any other activity, in particular of its shareholders or third parties.

It is the interest and corporate purpose of the entity deducting the expenses that is at issue and which can serve as the measure of assessing indispensability. As noted in the Supreme Administrative Court decision in process no. 0571/13 of 21 September 2016, "[t]he concept of indispensability of costs, to which Article 23 of the IRC Code refers, concerns costs incurred in the interest of the company or borne in the context of activities deriving from its corporate purpose".

In this sense, the Supreme Administrative Court decision in process no. 01046/05 of 7 February 2007 confirmed as non-deductible, under Article 23 of the IRC Code, the charges (financial) borne by a company relating to bank loans contracted to meet supplementary contributions made to an affiliated company for which no remuneration was charged. This was due to the fact that such amounts were not related to the corporate purpose and activity pursued by the company, which was engaged in "the manufacture of tiles and not in the management of social participations or financing of venture companies".

Likewise, the already cited Supreme Administrative Court decision in process no. 0107/11 considered non-deductible the costs with interest and stamp duty on bank loans contracted by a company and applied in the free financing of its associated companies, in relation of total dominance, in light of Article 23 of the IRC Code. Decisions in line with the Supreme Administrative Court decisions in processes no. 1077/08 of 20 May 2009, and no. 0171/11 of 30 May 2012, on identical matters.

The uniform character of this jurisprudence is reinforced by recent Supreme Administrative Court decisions in processes no. 0473/13 of 21 February 2018 and no. 01206/17 of 28 February 2018 which, regarding the question of whether financial charges borne with loans used for the realization of supplementary contributions in held companies are deductible under Article 23, no. 1 of the IRC Code, use as a decision parameter the corporate purpose or scope of the entity.

In the first case, being a company managing social participations, the decision to make the supplementary contribution is qualified by the Supreme Administrative Court as the exercise of [its] business activity of managing those same participations, with the associated costs being fiscally deductible. However, in the second case, of a company whose activity is real estate, not pursuing the social purpose of holding and managing social participations, "the financing operations either of the companies it participates in or of any other company are matters that concern those participated companies and companies, not integrating the social purpose", and therefore the "reinforcement of the capital of the participated company through supplementary contributions made by the claimant is not the exercise of the business activity of the […]" and consequently "the costs incurred with these or because of the realization of such contributions are not deductible costs under IRC in light of Article 23 of the IRC Code".

From which it is concluded that the test of indispensability is assessed "given the corporate purpose and scope and the economic congruence of the operation", thus containing a subjective connection of the expense with the interest of the company itself bearing it and not with the individual interest of the shareholder, a group of shareholders or third parties. The expenses must be imputed to the activity of the entity itself delimited by its corporate purpose (also in this sense, the Central Administrative Court of the South decision no. 01276/06 of 16 October 2007).

Whenever a direct relationship between the expenses and the corporate purpose pursued by the taxpayer is demonstrated, the Supreme Administrative Court has understood that such expenses must be considered indispensable for the purposes of Article 23 of the IRC Code – Supreme Administrative Court decision in process no. 570/13 of 5 November 2014.

ANTÓNIO MOURA PORTUGAL notes in this context that "[t]he solution adopted among us (at least in doctrine), following the understandings advocated by Italian doctrine, has been to interpret indispensability based on the corporate purpose" (op. cit. p. 112), also associating this solution with the writings of VÍTOR FAVEIRO, who considers that "all managerial action whose purpose is the application of factors with the objective of realizing the purposes of the company's activity must be considered indispensable" ("The Status of the Taxpayer", Coimbra Editor, 2002, p. 847).

ANTÓNIO MARTINS seems to defend an exceptionally broad notion of activity, disconnected from the corporate purpose and centered on the accounting definition of assets, which is not accompanied (only) insofar as it does not submit to the scrutiny of the statutory purpose which, according to our understanding, cannot fail to delimit social interest. See in this regard, "The Deductibility of Interest and the Notion of 'Activity' of Companies: On the Subject of Article 23 of the IRC Code", Journals of Public Finances and Tax Law, Year V, 4, April 2013, pp. 79 to 111.

With the theoretical points of consensus stated, divergent positions remain on fundamental questions, especially as regards the moment and frequency with which indispensability must be assessed. When the facts that are at the origin of the charges generate continued production of multiannual effects that project into various fiscal years, as occurs in the present situation, the question arises of the temporal scope of application of the concept of indispensability.

The Claimant adheres to the thesis that this requirement [indispensability] should be assessed once and for all, at the level of the entity that contracted the loan and at the moment it did so. Concluding that if the expense is indispensable at the date of the financing it cannot become dispensable subsequently, in particular when the loan passes to the sphere of a new entity in the context of a merger, by force of the legal regime of transmission (or better said, in the present case, of universal succession) of the patrimony of the incorporated company to the incorporating company under the provision of Article 112, paragraph a) of the Commercial Companies Code ("CSC").

For this purpose, it convokes the exegetical interpretation of Article 23, no. 1, paragraph c) of the IRC Code which refers to the deduction of "interest on borrowed capital applied in operations", and therefore the requirement of indispensability should be evaluated in relation to the borrowed capital applied and not to the financial charges derived from it, becoming exhausted at the moment of that application.

This is also the understanding of jurisprudence. Regarding a matter in all respects identical to the one dealt with here, the Supreme Administrative Court, in the decision issued in process no. 02176/15.3BEPRT 0915/17 of 30 January 2019, advocates that "the temporal moment to assess the admissibility of costs for tax purposes should be determined by the instant they are generated and not by the moment they are borne in the sense that they mature or are paid".

This decision further states, supported in the decision it comes to affirm, that:

"[…] the Public Finance Authority is assessing the fiscal admissibility of costs by reference to the connection these must have, at the moment they are borne, with the profits realized or the maintenance of the productive source of income.

However, if it had done so by reference to the moment when it occurs their genesis (read when the obligation giving rise to them is born) the result would be the opposite.

In fact, the assessment of the connection of expenses with profits must be made by reference to their operative fact, especially where expenses depend on the verification of temporal conditions.

Thus, to assess the admissibility of the consideration of the fiscal relevance of the payment of interest it is necessary to analyze the underlying operation that gave rise to it, that is, this will depend not on the moment these mature or are paid, but on the possible connection with profits existing at the moment when the obligation of these is born - the contraction of the onerous loan that gives rise to them.

[…]

From which emerges the conclusion that this connection between the source generating the expenses and the potential formation of profits taxable under IRC/maintenance of the productive source should be assessed by reference to the moment the loans are contracted and not at the moment the interest matures.

In casu, this connection exists and is not questioned by the Tax Authority. Thus emerging the evidence that the expenses should be considered.

Moreover, it is uncontested in the record that "B…………, S.A." before incorporation could deduct the charges/expenses of the financing obtained, since the acquisition of the Claimant's capital was capable of generating profits in its taxable sphere, either in the form of dividends or in the form of possible gains from a possible sale of its participation.

With the merger operation this right to the fiscal consideration of the expenses does not become extinct by effect of the merger, on the contrary, by operation of law, it is maintained and arises, this time, in the legal sphere of the Claimant.

There is yet a third order of reasons which determine the consideration of such expenses in the definition of the taxable matter: the neutrality of the merger regime.

In this regard, J. L. SALDANHA SANCHES [in "Tax Law", no. 34], in an article dedicated to the reverse merger, stated:

«The legal question analyzed in the present article is very simple and is easily identifiable: to know whether there is any rule or principle, of national or community or international law, that leads to exclude from the fiscal neutrality regime provided for in Article 67 of the IRC Code an operation through which a company is incorporated and dissolved in its subsidiary that holds 100% (operation commonly known as reverse merger). It can be anticipated the answer to the question: the merger by incorporation of a participating company in the participated company is covered by the fiscal neutrality regime, since it is the operation described in Article 67, no. 1, paragraph a), of the IRC Code, that is, the "global transfer of the patrimony of a (...) company (merged company)" - company A - "to another already existing company (beneficiary company)" - company B - «and the attribution to the shareholders of that» - company S - «of parts representative of the capital of the beneficiary» - parts of company B. Now, there being in our legal system, or in the community legal system, no rule that exceeds the effect of neutrality of the merger, this effect cannot be denied in the operation described, under penalty of illegality of the assessment resulting from it.

(...)

The Public Finance Authority argues that what is at issue here is the mere disregard of costs under Article 23 of the IRC Code and not the neutrality of the merger.

To some extent it is right, however, if the expenses that were previously considered for the purposes of determining the taxable matter of each of the incorporated companies cease to be so in the legal sphere of the incorporating company, as a result of the merger operation, then it is clear that the merger is anything but neutral.

Even if there may have been "fiscal neutrality" as far as "patrimonial movements" are concerned, the truth is that by ceasing to permit the fiscal consideration of expenses previously admissible, one arrives at a result that appears contrary to the spirit of the Directive, that is, to prevent fiscal matters from distorting the market in the sense of favoring, restricting (or even preventing) business reorganization operations, with the inherent consequences at the level of competition in the single market.

It is possible thus, in the nature of a summary of what has been expended, to state that:

i) the temporal moment to assess the admissibility of costs for tax purposes should be determined by the instant they are generated and not by the moment they are borne in the sense that they mature or are paid;

ii) having the incorporated company the right to fiscally recognize the expenses in its taxable matter, under IRC, this right persists, by operation of law, in the legal sphere of the incorporating company;

iii) Any different understanding would result in violation of European Law, especially of the principle of fiscal neutrality of mergers.».

In summary, the sentence analyzed the question of the deductibility of said costs in light of the reasoning that underpinned the contested corrections, and judged that the charges assumed by the incorporated company and which by force of the merger came to be borne by the incorporating company could be relevant as fiscal costs for the determination of the taxable matter of this, since the temporal moment to assess their admissibility is determined by the instant they are generated and not by the moment they are borne; and since the incorporated company had the right to recognize them in its taxable matter, this right persisted, by operation of law, in the legal sphere of the incorporating company, and any different understanding would result in violation of the community principle of fiscal neutrality of mergers.

[…]

Similarly, the decision of 22/03/2018, in proceeding no. 0208/17, issued by the Supreme Administrative Court in the appeal lodged by the Public Finance Authority of an analogous decision issued in a judicial challenge process instituted by the same company to contest the same corrections made for the fiscal year 2009, where that entity had formulated identical allegations and appeal conclusions."

A position that is seconded by the Central Administrative Court of the South decision in process no. 1550/15.0BELRS of 5 June 2019, which reiterates that:

"what is relevant is the indispensability of the cost at the date of financing, which is not put in question (cf. in this respect the arbitral decision issued in process 101/2013-T of 02.12.2013). Being indispensable, its expenses are covered by paragraph c) of Article 23 of the IRC Code, and this character cannot simply disappear due to the circumstance that there was subsequently a merger.

[…]

In summary, for all that has been expounded, this Central Administrative Court of the South understands that it is to confirm entirely the judgment of the Tax Court of Lisbon which, starting from the premise that the determining moment for making the judgment of fiscal relevance of the expense (of indispensability) is that of the contraction of "loans" and not the moment in which the related charges are borne, judged the same charges (value of interest) assumed by the Respondent with the financing for the acquisition of the companies M