Process: 144/2019-T

Date: October 2, 2019

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Process 144/2019-T addressed IRC tax disputes involving an SGPS holding company (formerly B... SGPS, S.A.) regarding capital gains taxation for the 2014 fiscal year under the Special Tax Regime for Groups of Companies (RETGS). The applicant sought declaration of partial illegality of IRC self-assessment, claiming €938,791.16 in excess tax, plus compensatory interest from May 30, 2015. The case centered on the revocation of fiscal benefits for SGPS companies concerning capital gains and the deductibility of related charges under IRC rules. A critical legal issue was whether Circular 7/2004 binds the Portuguese Tax Authority (AT) regarding deductible charges for SGPS entities. The Tax Authority raised procedural exceptions including incompetence of the Arbitral Tribunal and requested suspension pending resolution of related case 465/2018-T. The tribunal addressed jurisdictional questions, particularly regarding competence to order reimbursement and compensatory interest as consequences of annulment. The decision examined whether combining requests for tax annulment with condemnation to payment of compensatory interest falls within CAAD's arbitral competence under RJAT. The tribunal concluded that arbitral courts possess powers equivalent to tax courts in judicial challenge proceedings, including ordering restoration of legality and payment of compensatory interest per Article 100 of LGT and Article 24 of RJAT, ensuring effective judicial protection for taxpayers and preventing subsequent enforcement disputes.

Full Decision

ARBITRAL DECISION

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-chairman), Dr. José Ramos Alexandre and Prof. Doctor Miguel Patrício (arbitrator-members), designated by the Ethics Council of the Administrative Arbitration Center to form the Arbitral Court, constituted on 14-05-2019, agree as follows:

1. Report

A..., S.A., legal entity no. ..., with registered office at Rua ..., no. ..., ..., ...-... Lisbon, formerly known as B...– SGPS, S.A (hereinafter "Applicant"), holding company of a group, the C... Group, subject to the Special Tax Regime for Groups of Companies (RETGS) submitted, under Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT") a request for arbitral pronouncement seeking the declaration of partial illegality of the self-assessment of IRC of the C... Fiscal Group for the 2014 financial year, regarding the tax which it considers to have been assessed in excess in the amount of € 938,791.16, as well as the reimbursement to the Applicant with respect to the 2014 financial year of this amount of € 938,791.16, plus compensatory interest at the legal rate calculated from 30 May 2015 until full reimbursement.

The respondent is the TAX AUTHORITY AND CUSTOMS SERVICE.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Service on 04-03-2019.

Pursuant to subparagraph a) of article 6, paragraph 2 and subparagraph b) of article 11, paragraph 1 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated their acceptance of the assignment within the applicable deadline.

On 22-04-2019 the parties were duly notified of such designation, and did not express their will to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11, paragraph 1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

Thus, in accordance with the provisions of subparagraph c) of article 11, paragraph 1 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 14-05-2019.

The Tax Authority and Customs Service submitted a response in which it raised the exception of incompetence of the Arbitral Tribunal for the annulment of the IRC self-assessment in the specific amount of € 938,791.16 and condemnation of the Respondent to reimburse it, and argued that the requests should be judged as unfounded.

The Tax Authority and Customs Service also requested the suspension of the proceedings until the final judgment of arbitral action no. 465/2018-T.

By order of 24-06-2019, it was decided to dispense with a hearing and pleadings, with the possibility of the Applicant's response to the exception raised.

However, having noted that a decision was issued in said case no. 465/2018-T, it was decided that the proceedings should continue with pleadings, given the possible relevance to the present proceedings of the decision issued in case no. 465/2018-T.

The parties submitted pleadings.

By order of 23-09-2019, it was considered that, given the final judgment of the decision in case no. 465/2018-T, the question of suspension of proceedings was rendered moot.

The Tax Authority and Customs Service raised in its pleadings the issue of res judicata formed on the decision in case no. 465/2018-T, on which the Applicant subsequently pronounced itself.

The arbitral tribunal was properly constituted, in accordance with the provisions of articles 2, paragraph 1, subparagraph a), and 10, paragraph 1, of Decree-Law no. 10/2011, of 20 January.

The parties are properly represented, possess judicial personality and capacity, and have legitimacy (articles 4 and 10, paragraph 2, of the same decree and article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities.

It is important to examine the question of incompetence.

2. Question of Incompetence - Assessment of Requests for Reimbursement of Amounts and Compensatory Interest, as Consequences of Annulment of Self-Assessment Acts

Although there is no express rule in this sense, it has been peacefully understood in tax courts, since the entry into force of the codes of the fiscal reform of 1958-1965, that a request for condemnation to payment of compensatory interest can be combined in a judicial challenge proceeding with a request for annulment or declaration of nullity or non-existence of the act, because in those codes it is stated that the right to compensatory interest arises when, in administrative recourse or judicial proceedings, the administration is convinced that there was a factual error attributable to the services. This regime was subsequently generalized in the Tax Procedure Code, which established in paragraph 1 of article 24 thereof that "there shall be a right to compensatory interest in favor of the taxpayer when, in administrative recourse or judicial proceedings, it is determined that there was an error attributable to the services," subsequently in the LGT, in whose article 43, paragraph 1, it is provided that "compensatory interest is due when it is determined, in administrative recourse or judicial challenge, that there was an error attributable to the services resulting in payment of the tax debt in an amount superior to that legally due" and, finally, in the CPPT in which it was established, in paragraph 2 of article 61 (corresponding to paragraph 4 in the wording given by Law no. 55-A/2010, of 31 December), that "if the decision recognizing the right to compensatory interest is judicial, the payment period is counted from the beginning of the period for its voluntary execution."

This is a solution that is justified by reasons of utility and maximization of the effectiveness of judicial protection, as it removes the possibility of later eventual disputes in enforcement proceedings, namely regarding the imputability of errors to the Tax Administration and its causal nexus with payment of the tax debt in an amount superior to that legally due, required by paragraph 1 of article 43 of the LGT.

In accordance with the provisions of subparagraph b) of article 24 of the RJAT, the arbitral decision on the merits of the claim for which no appeal or challenge is available binds the tax administration from the end of the period provided for appeal or challenge, and the administration must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for voluntary execution of sentences of tax courts, "restore the situation that would exist if the tax act that was the subject of the arbitral decision had not been performed, adopting the acts and operations necessary for that purpose," which is in keeping with the provisions of article 100 of the LGT [applicable by virtue of the provisions of subparagraph a) of paragraph 1 of article 29 of the RJAT] which provides that "the tax administration is obliged, in case of total or partial success of administrative recourse, judicial challenge or appeal in favor of the taxpayer, to immediately and fully restore the legality of the act or situation that was the subject of the dispute, including the payment of compensatory interest, if applicable, from the end of the period for execution of the decision."

Although article 2, paragraph 1, subparagraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals that function in CAAD, not making reference to condemnatory decisions, it should be understood that the powers that in judicial challenge proceedings are attributed to tax courts are included in its competencies, and this is the interpretation that is in line with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as the first guideline, that "the tax arbitral proceedings must constitute an alternative procedural means to judicial challenge proceedings and to the action for recognition of a right or legitimate interest in tax matters."

As stated, judicial challenge proceedings, although essentially a proceeding for annulment of tax acts, admit the condemnation of the Tax Administration to payment of compensatory interest, as appears from article 43, paragraph 1, of the LGT, which provides that "compensatory interest is due when it is determined, in administrative recourse or judicial challenge, that there was an error attributable to the services resulting in payment of the tax debt in an amount superior to that legally due" and article 61, paragraph 4 of the CPPT (in the wording given by Law no. 55-A/2010, of 31 December, corresponding to paragraph 2 in the original wording), that "if the decision recognizing the right to compensatory interest is judicial, the payment period is counted from the beginning of the period for its voluntary execution."

Thus, paragraph 5 of article 24 of the RJAT in stating that "payment of interest is due, regardless of its nature, in accordance with the terms provided for in the General Tax Law and the Code of Tax Procedure and Process" should be understood as allowing recognition of the right to compensatory interest in arbitral proceedings, when it is a consequence of the annulment of assessment acts.

On the other hand, since the fixing of compensatory interest derives from the illegality of an assessment act and presupposes the existence of an amount to be reimbursed, one must conclude that it falls within those competencies of arbitral tribunals to determine the payment of the amount to be reimbursed, which is a prerequisite of the right to compensatory interest.

Different from this question of competence is the question of whether there are in the proceeding sufficient elements to fix the amount of reimbursement and compensatory interest, with the security indispensable for a judicial decision, in which case, if such elements do not exist, one must resort to the rule of article 609, paragraph 2, of the Civil Procedure Code, subsidiarily applicable by virtue of the provisions of article 29, paragraph 1, subparagraph e), of the RJAT, from which it results that a judgment should be issued for whatever is liquidated in enforcement of the judgment. This is a solution that is additionally justified in tax contentious proceedings for annulment of assessment acts, as these requests assume a merely secondary nature in relation to the primary object which is the assessment of the legality of such acts.

Therefore, the exception of incompetence of the Arbitral Tribunal to assess requests for reimbursement of amounts as a consequence of annulment decisions of assessment acts is unfounded, as well as the exception regarding the assessment of corresponding requests for compensatory interest.

3. Facts

3.1. Proven Facts

The following facts with relevance for the decision of the case are considered proven:

A) The Applicant is the holding company of a group of companies, called the C... Fiscal Group, which, in 2014, was composed of the following companies (document no. 2 attached with the request for arbitral pronouncement, the contents of which are reproduced herein):

• D... SGPS, S.A. ("D... SGPS" hereinafter), TAX ID...;
• E..., S.A., TAX ID ...;
• F..., S.A., TAX ID ...;
• G..., S.A., TAX ID...;
• H..., S.A. (formerly I..., S.A.), TAX ID...;
• J..., S.A. (formerly K..., S.A.), TAX ID...;
• L..., S.A., TAX ID...;
• M..., S.A., TAX ID...;
• N..., S.A., TAX ID...;
• O..., S.A., TAX ID...;
• P..., S.A., TAX ID...;
• Q..., S.A., TAX ID...;
• R..., S.A., TAX ID...;
• S..., S.A., TAX ID ...;
• T..., S.A., TAX ID...;
• U..., S.A., TAX ID... .

B) Until 2013 inclusive, the companies D..., SGPS, S.A. ("D..."), T..., S.A. ("T...") and U..., S.A. ("U...") that form part of the scope of the Group of companies subject to RETGS in 2014, of which A... is the holding company, constituted an autonomous fiscal group, headed by D...;

C) The Applicant, as the holding company of said C... Fiscal Group, proceeded to self-assess IRC, state surtax and municipal surtax for the 2014 financial year, through submission of Form 22 declaration (Document no. 3 attached with the request for arbitral pronouncement, the contents of which are reproduced herein);

D) The Applicant did not deduct from the taxable profit of the C... Fiscal Group € 4,081,700.69 in financial charges relating to equity stakes held by itself and by the company D... SGPS, which is part of the Fiscal Group, still held on 31 December 2013, which in previous financial years had not been deducted from taxable profits under article 32, paragraph 2, of the Fiscal Benefits Statute ("FBS"), in conjunction with the provisions of Circular no. 7/2004 of the IRC Services Directorate, amounting to € 3,726,681.12 relating to the Applicant and € 355,019.57 relating to D... (document no. 21 attached with the request for arbitral pronouncement and tables contained in the decision refusing the administrative recourse, the contents of which are reproduced herein);

E) Of the amounts mentioned, the following financial charges not deducted by the Applicant relate to financial years 2007, 2008 and 2009:

2007 2008 2009 Total

€ 167,338.09 € 370,290.37 € 216,791.88 € 754,420.34

F) On 29-05-2017, the Applicant submitted an administrative recourse regarding the self-assessment;

G) The administrative recourse was denied by order of 05-12-2018, issued by the Head of the Service Division of Central UGC-UNIT.MAJOR TAXPAYERS - 6122, pursuant to delegation of powers (document no. 4 attached with the request for arbitral pronouncement, the contents of which are reproduced herein);

H) Said order manifests agreement with an information whose contents are reproduced, in which the following is stated, among other things:

§ IV. OF THE FACTS

  1. From consultation made to the Tax Authority's computer system database, the following was verified:

  2. According to the current registration information of the claimant, it is verified that the latter carries out, as its main activity, activity with CAE 70220 - Other Consulting Activities for Business and Management, being classified for IRC purposes in the general regime (cfr. fls. 183 and 184).

  3. According to the Permanent Certificate of the claimant, until 2015-02-25 the latter was named B...- SGPS S. A. and had as its corporate purpose "management of equity stakes in other companies, as an indirect form of exercise of economic activities" (cfr. fls, 166 and 175 verso).

  4. In the 2014 financial year, the claimant was the holding company of a group of companies subject to RETGS, which included the entity D..., TAX ID... (cfr. fls. 185).

  5. On 2015-05-29, the claimant proceeded to submit the IRC tax return for the 2014 financial year (cfr. fls. 187), which gave rise to assessment no. 2015... of 2015-08-12, now the subject of recourse.

  6. With relevance for the assessment of the present procedure, the claimant added in the individual Form 22 declarations, for the financial years 2007 to 2013, the following amounts (cfr. documents no. 2 to 8, contained in fls. 23 to 49):

    • The Form 22 declaration considered by the claimant (cfr (fls. 30 and 31) was substituted on 2013-10-11 (declaration identification:...) - cfr. fls. 188.
  1. For its part, the entity D..., TAX ID..., which became part of the fiscal group headed by the claimant on 2014-01-01, added in the individual Form 22 declarations for the financial years 2007 to 2013, and with relevance for the question under analysis, the following amounts (cfr. documents no. 9 to 15, contained in fls, 50 to 74):

§ V. ANALYSIS OF THE REQUEST

  1. Having examined the contents of the initial pleading submitted by the Claimant, and considering that, in the case, the issue is to determine whether the tax acts to be examined are or are not affected by the vices of illegality attributed to them and, if so, to decide on recognition of the right to compensatory interest for improper payment in accordance with the terms provided in art. 43 of the LGT, to be attributed in accordance with the regime provided in art. 61 of the CPPT, we are then to assess the quality of the arguments brought to our knowledge on this matter. This pari passu with the route taken by the applicant.

That said,

§ V.I. Arguments of the Claimant

  1. In the request submitted, the claimant seeks the correction of the IRC self-assessment for the 2014 financial year and the refund of the amount of € 938,791.16, on the grounds contained in fls. 3 to 16, which are hereby fully reproduced and which are summarized below:

i) Until 2013, the companies D..., SGPS, S, A. (D...), T..., S. A. (T...) and U..., S, A. (U...) constituted an autonomous fiscal group headed by D... (cfr. § 1 of the recourse at fls. 3).

ii) The stake held by A... in the capital of D... did not observe the minimum percentage (90%) of capital ownership provided for the application of the Special Tax Regime for Groups of Companies (RETGS), so that, together with the companies held by it T... and U..., they constituted an autonomous group of companies subject to RETGS (cfr. § 2 and 3 of the recourse at fls. 3 verso).

iii) As a result of the amendments introduced to the RETGS by Law no. 2/2014, of 16 January, the companies that constituted the previous fiscal group headed by D... began to be part of the group of companies subject to RETGS headed by the claimant, from the 2014 financial year onwards (cfr. § 4 and 5 of the recourse at fls. 3 verso).

iv) The corporate purpose of the claimant in the 2014 financial year consisted in the management of equity stakes in other companies of the Group as an indirect form of exercise of the economic activities carried out by them (cfr. § 10 of the recourse at fls, 4).

v) Until May 2015, the claimant adopted the legal form of equity stake management company (SGPS), which determined its subjection to the tax regime provided for in art. 32 of the Fiscal Benefits Statute (FBS) - cfr. § 11 of the recourse at fls. 4.

vi) Similarly, D..., having adopted the legal form of SGPS, was equally subject to the tax regime provided for in art. 32 of the FBS (cfr. § 12 of the recourse at fls, 4).

vii) By virtue of the provisions of that norm, in the tax periods comprised between 2007 and 2013, the claimant and, likewise, D..., increased for purposes of determining taxable profit financial charges in the amounts of € 4,550,461.33 and € 355,019.57, respectively (cfr. § 14 of the recourse at fls. 4 verso).

viii) Of that total amount, € 3,726,681.12 relate to financial charges allocated, in accordance with the methodology of Circular no. 7/2004, to the equity stakes held by the claimant on 2013/12/31 detailed in paragraph 15 of the recourse, the contents of which are hereby fully reproduced,

ix) On the other hand, all of the financial charges (€ 355,019.57) incurred by D... were allocated to equity stakes held by it on 2013/12/31, that is, to U... and T... (cfr. § 16 of the recourse at fls. 5 verso).

x) Law no. 83-C/2013, of 31 December repealed the norm under which those expenses were increased for purposes of determining the taxable profit of the claimant (paragraph 2 of art. 32 of the FBS) - cfr. § 17 of the recourse at fls. 5 verso.

xi) The repealed art. 32, paragraph 2 of the FBS provided that "the gains and losses realized by SGPSs of equity stakes of which they are holders (...), as well as financial charges incurred with their acquisition do not contribute to the formation of taxable profit (...)" (cfr. § 24 of the recourse at fls. 6).

xii) The purpose underlying paragraph 2 of art. 32 of the FBS was not to limit the deductibility of financial expenses incurred by SGPSs per se, translating instead into the logical consequence of tax neutrality (cfr. § 33 of the recourse at fls. 6).

xiii) Given this, the claimant considers that we are dealing with a tax fact dependent on the verification of a condition (conditio iuris) the determination of a gain or loss (cfr. § 37 of the recourse at fls. 7 verso).

xiv) In order to demonstrate the consistency of the tax treatment given to financial charges and to income typical of an SGPS, the claimant considers that the charges incurred with the acquisition of equity stakes the ownership of which it maintained on 31 December 2013, increased for purposes of determining taxable profit for the tax periods from 2007 to 2013, should now be deducted from the taxable profit determined for the 2014 tax period, since the equity stakes were not transferred during the validity of the regime provided for in art. 32 of the FBS (cfr. § 47 of the recourse at fls. 8 verso).

xv) As to the timing at which adjustments to taxable profit regarding the non-deductibility of charges incurred with the acquisition of equity stakes should be made, Circular no. 7 /2004, of 30 March recommended that, regarding financial charges "the fiscal correction thereof should be made (...) in the financial year to which they relate (...) regardless of whether all the conditions for application of the special regime for taxation of gains have already been met" (cfr. § 54 of the recourse at fls. 9 verso).

xvi) The understanding underlying the principle of non-deductibility proposed by the Tax Authority and Customs Service (TA) goes in the direction that when it was impossible to benefit from the regime of art. 32 of the FBS, it would be up to the SGPSs to deduct from their respective taxable profit the amounts of financial charges increased in prior financial years under that regime, canceling the effect of that principle (cfr. § 56 of the recourse at fls. 10).

xvii) Having the financial charges with the acquisition of the equity stakes been increased by virtue of the application of the understanding advocated by the TA, they should now be deducted from the taxable profit of the claimant as a result of the repeal of the regime provided for in art. 32 of the FBS (cfr § 98 of the recourse at fls. 14).

xviii) The claimant considers that the deduction of the financial charges that were increased in the past should be made only in the 2014 tax period, to the extent that, until 2013/12/31, the regime provided for in paragraph 2 of art. 32 of the FBS was still in effect (cfr. § 99 of the recourse at fls. 14 verso).

§ V.II. Assessment

  1. On this point, the claimant seeks to have recognized the right to deduct in 2014 the financial charges incurred by itself and by the entity D..., between the periods of 2007 to 2013, and increased in their respective taxable profit, as they were SGPSs taxed under the regime provided for in art. 32 of the FBS.

  2. First of all, it should be noted that there is no evidence in the case capable of proving that the amounts added to the individual IRC declarations of the claimant and of the entity D..., with reference to the years 2007 to 2010 (cfr. point 11 and 12 of this information), are related to financial charges incurred with the acquisition of equity stakes.

  3. It should also be noted that the claimant neither alleged nor demonstrated any facts related to the elements on which the application of paragraph 2 of art. 32 of the FBS depends, such as the date and the entities from which they were acquired.

  4. Notwithstanding, and as to the specific question under analysis in these proceedings, it is important to recall the provision of paragraph 2 of art. 32 of the FBS which provided as follows: "The gains and losses realized by SGPSs of equity stakes of which they are holders, provided they are held for a period not less than one year, as well as financial charges incurred with their acquisition do not contribute to the formation of taxable profit of these companies."

  5. This regime would not apply, and the financial charges incurred would become deductible, when the equity stakes held by the SGPSs had been acquired from entities related to it, in accordance with the terms established in art. 32 of the FBS.

  6. As to the timing of the non-deductibility for tax purposes of financial charges incurred with the acquisition of equity stakes, the Tax Authority issued an interpretive guidance in the direction of preventing their deductibility as soon as they were incurred, regardless of the possible applicability of the exemption provided for gains generated by the equity stakes with which such financial charges are connected.

  7. However, in the interpretive guidance in question the following proviso is made: "If it is concluded, at the moment of sale of the equity stakes, that not all the requirements for application of that regime are met, the financial charges that were not considered as a tax expense in prior financial years should be considered as a tax cost in that financial year."

  8. However, art. 32 of the FBS was repealed by article 210 of Law no. 83-C/2013, of 31 December, which, in the claimant's understanding, prevents the possibility of the latter benefiting from the exemption of taxation of gains.

  9. However, unless we are mistaken, the position defended by the claimant does not merit acceptance, as will be demonstrated below.

  10. First of all, it should be noted that, while it is true that in the drafting of the regime of art 32 of the FBS the legislator was sensitive to reasons of tax neutrality, it is equally true that this objective of neutrality is mainly concretized in the disregard of gains and losses for the formation of taxable profit.

  11. Indeed, it appears that the non-deductibility of financial charges directly associated with the acquisition of equity stakes will be a legislative measure independent of that which establishes the disregard of gains and losses realized for purposes of determining taxable matter.

  12. In this sense, see the State Budget Report for 2003, where, after noting a budget shortfall of 2002 regarding IRC, announces the introduction of various measures, aimed at "broadening the tax base and measures of moralization and neutrality," among which "the disregard of the deductibility, for purposes of determining taxable profit, of financial charges directly associated with the acquisition of equity stakes by SGPSs" (cfr. page 53).

  13. Furthermore, contrary to what is alleged by the claimant, it does not appear to be a matter of a tax fact dependent on the verification of a condition, as otherwise it would be difficult to understand why the disregard of financial charges incurred with the acquisition of equity stakes whose sale resulted in a loss could result in a quid pro quo relationship with the latter, since both situations would represent an aggravation of taxable profit.

  14. Notwithstanding, it should always be said that, contrary to the thesis defended by the claimant, one cannot assert that, with the repeal of the special tax regime for SGPSs, these ceased to be able to benefit from the non-taxation of fiscal gains.

  15. In fact, what ceased to exist was a specific regime for SGPSs, with the general regime established by Law no. 2/2014, of 16 January now applying to them.

  16. This Act introduced in the IRC Code (CIRC) the so-called participation exemption regime which aims, when certain conditions and requirements are met, at the non-taxation in respect of IRC of profits and reserves earned, and also of gains realized with the onerous transfer of equity stakes, by IRC taxpayers with headquarters or effective management in Portuguese territory.

  17. With the entry into force of said Law, financial charges accrued from 2014-01-01 onwards become deductible, under the conditions of articles 23 and 23-A of the CIRC, being limited only by the provisions of art. 67 of the CIRC (relating to the limitation on the deductibility of financing expenses).

  18. As to gains and losses that may be obtained from the sale of equity stakes, the new regime called "participation exemption," provided for in art. 51-C of the CIRC, now became applicable to them, provided that the requirements therein provided are met.

  19. By the foregoing, notwithstanding the fact that art. 32 of the FBS was repealed, the exemption from taxation of gains continued to be enshrined in the participation exemption regime, thus extending such exemption to all companies, regardless of the status of SGPS or SCR.

  20. Thus, any transfer of equity stakes that occurs in the future will see its result (losses or gains) receive the same tax treatment as it would receive if the regime provided for in art. 32 of the FBS were still in effect.

  21. Therefore, it appears that the understanding advocated by the claimant would only merit consideration if the legislator had resolved this problem of succession of laws in time through transitional provisions, which, in this case, did not occur.

  22. And if it is so, it is because the legislator understood that no transitional regime should be established for the financial charges incurred by SGPSs with the acquisition of equity stakes.

  23. For all the foregoing, it appears to us that the claimant's request to have the financial charges incurred and increased in the past deducted, relating to the equity stakes held on 2013/12/31, from its taxable profit and from the taxable profit of entity D... cannot be granted.

  24. It should also be noted that, given that the requirements of paragraph 1 of article 43 of the LGT are not met in this case, the assessment of the right to compensatory interest is rendered moot.

  25. After assessment of the arguments invoked by the Claimant in its initial pleading, the Lisbon Finance Directorate elaborated the appropriate "Draft Decision" in the case, embodied in the information whose order is dated 25 October 2018, notified on 5 November 2018.

  26. By letter issued by the Lisbon Finance Directorate, the Claimant was duly notified to, if it so wished, exercise its right to participate, in the form of prior hearing, in written form, in accordance with the provisions of subparagraph b) of paragraph 1 of art. 60 of the LGT, in turn combined with the provisions of art. 122 of the Administrative Procedure Code ("CPA").

  27. After the period granted for the exercise of its right to participate, in the form of prior hearing, in written form, neither the Claimant, on the one hand, added any other elements to the case that had not already been resolved in our previous "Draft Decision," nor did this UGC, on the other hand, discover any other elements capable of calling into question the conclusions previously proposed.

§ VI. CONCLUSION

In accordance with the foregoing and having examined all the elements of the case, namely the previous "Draft Decision" and the procedural documents submitted by the Claimant, it seems to us that the request contained in the case should be denied, in accordance with the contents of the "summary table" mentioned in the opening of our Information, with all legal consequences, namely, if applicable, regarding the provisions of art. 163 of the CPA and, as well as, compliance with the determination of art. 100 of the LGT.

It is further reported that, in case of Superior Agreement, the notification of the Claimant be promoted, by letter in accordance with the provisions of articles 35 to 41, all of the CPPT, with all legal consequences.

I) Following the self-assessment, IRC assessments no. 2015..., dated 12-08-2015, and no. 2018..., dated 10-01-2018, were issued, which appear on pages 149 and 152 of the administrative process section called "PA-compactado-175-350.pdf";

J) In arbitral case no. 465/2018-T, initiated by the now Applicant, the IRC self-assessments carried out by the now Applicant in the financial years 2010, 2011, 2012 and 2013 were challenged.

K) In that case, a judgment was issued on 18-06-2019, published on the CAAD information website, in which, among other things, it was decided to "annul the IRC self-assessments for the financial years 2010, 2011, 2012 and 2013 of the Fiscal Group to the exact extent that they disregard the deduction of financial charges in the amounts of € 461,414.30 (2010), € 780,399.55 (2011), € 1,062,530.93 (2012) and € 667,968.41 (2013)";

L) The arbitral decision issued in case no. 465/2018-T became final;

M) On 30-03-2004, the IRC Services Directorate issued Circular no. 7/2004, available at: https://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/legislacao/instrucoes_administrativas/Documents/circular_7-2004_de_30_de_marco_da_dsirc.pdf

N) In points 6 and 7 of this Circular the following is stated:

"Financial year in which fiscal corrections of financial charges should be made

  1. With regard to the financial year in which financial charges should be disregarded as expenses, for tax purposes, a fiscal correction should be made, in the financial year to which the same relate, of those that were incurred with the acquisition of equity stakes likely to benefit from the special regime established in paragraph 2 of art. 31 of the FBS, regardless of whether all the conditions for application of the special regime for taxation of gains have already been met. If it is concluded, at the moment of sale of the equity stakes, that not all the requirements for application of that regime are met, the financial charges that were not considered as a tax expense in prior financial years should be considered as a tax cost in that financial year.

Method to be used for purposes of allocating financial charges to equity stakes

  1. As to the method to be used for purposes of allocating financial charges incurred with the acquisition of equity stakes, given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that the same would permit, such allocation should be effected on the basis of a formula taking into account the following: the interest-bearing liabilities of SGPSs and SCRs should be allocated, first of all, to interest-bearing loans granted by these to related companies and to other investments generating interest, with the remainder being allocated to the other assets, namely equity stakes, proportionally to their respective cost of acquisition."

O) On 24-02-2011, an order was issued by the Director-General of the Tax Authority and Customs Service on the Binding Instruction regarding case no. 39/2011, a copy of which is contained in document no. 24 attached with the request for arbitral pronouncement, the contents of which are reproduced herein;

P) On 30-05-2015, the Applicant paid the amount self-assessed in the 2014 financial year, in the amount of € 1,942,202.21 and on 19-06-2015 paid an additional € 0.06 (document no. 28 attached with the request for arbitral pronouncement, the contents of which are reproduced herein);

Q) On 01-03-2019, the Applicant submitted the request for arbitral pronouncement that gave rise to the present case.

3.2. Unproven Facts and Justification of the Determination of Facts

The proven facts are based on the documents submitted by the Applicant and those contained in the administrative process.

As to the amount of financial charges not deducted by the Applicant in the financial years 2007, 2008 and 2009 and by D... in the financial years 2007 to 2013, these were set at the values indicated by the Applicant in document no. 21, which offers special credibility as it is issued by a certified accountant, and which are confirmed by the tables contained in the decision of the administrative recourse, noting that, regarding financial year 2009, the amount that the Applicant intends to be considered is even less than that indicated by the Tax Authority and Customs Service, based on the "consultation made to the Tax Authority's computer system database."

Thus, the question of the burden of proof, to which the Tax Authority and Customs Service refers, does not arise, as it is to be positively considered that these are those values, confirmed in the decision of the administrative recourse.

Moreover, the values indicated in Form 22 declarations are presumed to be true, by virtue of the provisions of article 75, paragraph 1, of the LGT, since no irregularity or deficiency in the record was pointed out to the Applicant.

Furthermore, "when the elements of proof of facts are in the possession of the tax administration, the burden (of proof) is considered satisfied if the interested party has proceeded to its correct identification with the tax administration" (article 74, paragraph 3, of the LGT). In this case, the Applicant invokes the Form 22 declarations that it submitted to the Tax Authority and Customs Service and which are identified.

4. Effects of Res Judicata of the Decision Issued in Arbitral Case No. 465/2018-T

The Applicant challenges in the present case the IRC self-assessment for the 2014 financial year, "regarding the tax assessed in excess in the amount of € 938,791.16."

This amount of tax was calculated by the Applicant based on the value of € 4,081,700.69 relating to financial charges relating to equity stakes held by it and by company D... SGPS, which is part of the Fiscal Group, still held on 31-12-2013, which in the financial years 2007 to 2013 had not been deducted from taxable profits under article 32, paragraph 2, of the Fiscal Benefits Statute ("FBS"), in conjunction with the provisions of Circular no. 7/2004 of the IRC Services Directorate.

Having the IRC self-assessments for the financial years 2010, 2011, 2012 and 2013 of the Fiscal Group been annulled to the extent that they disregard the deduction of financial charges in the amounts of € 461,414.30 (2010), € 780,399.55 (2011), € 1,062,530.93 (2012) and € 667,968.41 (2013) and having the arbitral decision become final, the request formulated by the Applicant in the present case was partially satisfied, in which it challenges the 2014 self-assessment on the grounds of non-deduction of such charges in prior financial years.

The Tax Authority and Customs Service raises in its pleadings the exception of res judicata, having the decision issued in case no. 465/2018-T become final.

The exception of res judicata presupposes the repetition of a cause (article 580, paragraph 1, of the Civil Procedure Code), which occurs "when an action identical to another is filed as to subjects, claim and cause of action" (article 581, paragraph 1, of the same Code).

In this case, it is clear that there is no identity of cause of action between the present case and case 465/2018-T, as the ground invoked in the present case is the repeal of the regime provided for in article 32, paragraph 2, of the FBS, as interpreted by Circular no. 7/2004, which does not occur in case no. 465/2018-T.

Therefore, the exception of res judicata is ruled out from the outset.

However, the final judgment of the decision in arbitral case no. 465/2018-T has the consequence of making definitive the deductibility of the financial charges incurred by the Applicant in the financial years 2010, 2011, 2012 and 2013, which means that knowledge of the question of whether, by not having been deducted in those years, they should be deducted in the 2014 financial year, as the Applicant contends in the present case, is rendered moot by becoming superveniently useless.

Therefore, the proceedings must be terminated as moot, by supervening uselessness of the dispute [article 287, subparagraph e), of the Civil Procedure Code, applicable to tax arbitral proceedings by virtue of the provisions of article 29, paragraph 1, subparagraph c), of the RJAT], as regards the deductibility of the financial charges incurred by the Applicant in the financial years 2010, 2011, 2012 and 2013.

5. Question of Deductibility of Financial Charges in the 2014 Financial Year

The question on the merits that is the subject of this case is, as the Applicant states, whether the Fiscal Group has or does not have the right to recover in 2014 the deduction of financial charges excluded from deduction in prior financial years under article 32, paragraph 2, of the FBS, supplemented by Circular no. 7/2004.

5.1. Positions of the Parties

The Applicant defends, in summary, the following:

– in light of the logic and spirit that animate the provision of article 32, paragraph 2, of the FBS, a logic that is in turn inferred from its own legal text, and also from the Report of the State Budget Law for 2003, it is a definitive conclusion that in the sale of the equity stakes the provision of paragraph 2 of article 32 of the FBS will not be capable of application, so the exclusion that was made of the deduction of financial charges should be corrected;

– such a solution is advised by the principle of justice;

– that was the understanding that the TA established in General Guidance, the first of which is contained in Circular no. 7/2004, of 30 March 2004, of the IRC Services Directorate (DSIRC), namely its point 6;

– and also a Doctrinal Note published on the Finance Portal containing the prescriptive content of the Order of 24 February 2011 of the Director-General of Taxes, issued in Case no. 39/2011, allows concluding that the provision of paragraph 6 of Circular no. 7/2004 is to be applied in situations in which it is possible to conclude, prior to sale, that the provision of paragraph 2 of article 32 of the FBS will not apply;

– the Tax Authority and Customs Service is bound by the general guidance published;

– it is unconstitutional by violation of the principle of protection of legitimate expectations that derives from article 2 of the Constitution (principle of the rule of law) and paragraph 2 of article 268 of the Constitution (principles of justice and good faith) the interpretation intended by the TA and the provision of paragraph 1 of article 68-A, of the LGT, if interpreted as relieving the Tax Authority and Customs Service of the obligation to observe said general guidance, in case of cessation of application of article 32, paragraph 2, of the FBS;

– the participation exemption regime is different from that provided for in article 32, paragraph 2, of the FBS, as it does not include a requirement for non-deductibility of financial charges with equity stakes;

– the general quantitative limit to the deduction of financial charges already existed prior to the 2014 IRC reform;

– what is at issue is only the application of paragraph 2 of article 32 of the FBS to financial charges incurred up to 31-12-2013, incurred, therefore, at a time when the rule that governs is still that of paragraph 2 of article 32 of the FBS, at a time within the scope of temporal and material competence of application of this rule, prior to the entry into force of the participation exemption regime;

– there is also no problem with the principle of specialization of financial years, as, if there is a supervening fact (e.g., verification of impossibility of applying the regime of article 32 of the FBS), it is by reference to the financial year in which such supervening fact occurs (2014, in the case) that the effects triggered by it must be recognized, by virtue of precisely the principle of specialization of financial years, which remained what it is and always was in the transition from 2013 to 2014. That is what respects the principle of specialization of financial years.

The Tax Authority and Customs Service defends, in summary, the following:

– the content of the Circular does not result in what the Applicant seeks, as it refers the timing to the sale of the equity stakes, which is not at issue here;

– the doctrinal note issued in case no. 39/2011 does not apply to this situation;

– if the legislator did not define any transitional regime in Law no. 83-C/2013, of 31/12, which repealed art. 32 of the FBS, nor in Law no. 2/2014, such a regime cannot be conceived and applied, either by the TA or by taxpayers, under penalty of violating the principle of legality;

– Circular no. 7/2004 was issued in the context and for purposes of application of the special regime for SGPSs, as defined in article 32 of the FBS, so it was exhausted with the repeal of the regime;

– it cannot be deduced that the automatic consequence of the repeal of article 32 of the FBS is the recapture of non-deducted financial charges and their deduction from the taxable profit of the 2014 financial year;

– circulars cannot derogate from the principle of tax legality;

– in 2014, the referred special regime for taxation of SGPSs is repealed, with a general "participation exemption" regime and a general regime limiting the deductibility of financing charges existing instead, without any discrimination between SGPSs and other IRC taxpayers;

– regarding the financial charges that were limited in terms of their deductibility in the legal provision of article 32 of the FBS, in the IRC reform, for reasons of simplicity, the legislator opted to strengthen the restriction on the deductibility of financing expenses provided for in article 67 of the IRC Code, thus avoiding the creation of more special deductibility-limiting rules;

– what is stated by the IRC Code Review Commission;

– nor would respect for the principle of protection of legitimate expectations require attribution of retroactive effect to the deduction of financial charges incurred with the acquisition of equity stakes held on 01-01-2014, to the extent that the regime called participation exemption does not prove to be penalizing – on the contrary – to SGPSs that benefited from article 32 of the FBS;

– having not existed identity of conditions until 31-12-2013, one cannot reasonably consider that the repeal of article 32 of the FBS placed, on 01-01-2014, SGPSs in a globally disadvantageous situation for SGPSs;

– it is not apparent that the elimination of a special taxation regime such as that provided for in article 32 of the FBS, as it stood on 31-12-2013, which already by itself discriminated in a positive way, taxpayers in apparent equal circumstances, violates the constitutional principle of equality, in its fiscal dimension;

– if the invoked injustice stems from the repeal of the special regime for SGPSs and the absence of a transitional regime, it was a choice of fiscal policy, in the exercise of the powers conferred by the Constitution on the legislator to shape the legal system;

– the alleged violation of the principle of taxpaying capacity is not verified, as, in case of sale of the equity stakes, the Applicant was entitled to non-concurrence of gains and losses for the formation of taxable profit and to non-recapture of non-deducted financial charges from taxable profit;

– the non-deductibility of financial charges was always associated with the exemption of gains, which in turn was subject to conditionalities;

– the legislator's choice, within its freedom of legislative configuration, to expressly alter, with Law no. 2/2014, from 01-01-2014 onwards, the conception of balancing between expenses and income does not collide with the principle of equality, taxpaying capacity, legal security or protection of legitimate expectations, arising from the principle of the Democratic Rule of Law, contained in article 2 of the Constitution;

– the legislator never created high expectations of continuity and stability of the SGPSs regime;

– the interpretation, or rather, integration of tax law, in the terms proposed by the Applicant in the present case, would violate the principles of certainty and legal security and equality of all citizens, as well as the principle of legality;

– the interpretation of the legal norm proposed by the claimant is materially unconstitutional, in the sense that deduction of financial charges incurred between 2007 and 2013, therefore during the validity of article 32 of the FBS, from the taxable profit of 2014 is permitted, in light of the absolute non-existence of a legal rule providing for it, by violation of the principle of tax legality;

– such interpretation of the legal norm is materially unconstitutional also by violation of the principle of tax legality, in the aspect of generality and abstraction of tax law, arising from the principle of legality and as instruments of tax equality, and therefore equally by violation of the principle of tax equality, which arise, namely, from the provisions of article 13 and article 103 of the Constitution;

– such interpretation is materially unconstitutional by violation of the principle of the Democratic Rule of Law, the reserve of tax law, and separation of powers, with the consequent subordination of courts to law, which arise, namely, from the provisions of articles 2, 103, 165 and 202 of the Constitution;

– the claim to deduct the charges in 2014 violates the constitutional principle of taxpaying capacity and taxation of real profit (article 104, paragraph 2, of the Constitution);

– the imputation of expenses incurred to the taxable profit of each tax period is governed by the principle of specialization of financial years and, given that these are financial expenses, such as interest on loans, the general criterion for temporal imputation is linked to the time of use of borrowed capital and the capital in debt in each financial year;

– only the financial charges incurred by the Applicant in 2014 and subsequent financial years, even if arising from financing contracted in prior financial years, by virtue of the criteria governing the temporal imputation of expenses (paragraph 1 of art. 18 of the IRC Code) are covered by the general deductibility rules for expenses provided for in articles 23 and 67 of the same Code;

– what is sought by the Applicant is in manifest disrespect for the principle of taxation of real profit and of taxpaying capacity, to the extent that it violates the principle of specialization of financial years and completely abstracts from the concrete situation of taxation (or not) of equity stakes at the time (future) when they come to be sold;

– no elements of proof were submitted, in administrative proceedings, aimed at verifying the truthfulness of the facts invoked by the then Claimant, namely regarding the values allegedly incurred and added to the taxable profit in the financial years 2007 to 2013.

5.2. Assessment of the Question

Regime Applicable to Financial Charges Incurred by SGPSs with the Acquisition of Equity Stakes Held for at Least One Year

Article 31, paragraph 2, of the FBS, as amended by Law no. 32-B/2002, of 30 December, provided as follows:

2 - The gains and losses realized by SGPSs and by SCRs through the onerous transfer, whatever the grounds on which it operates, of equity stakes of which they are holders, provided they are held for a period not less than one year, as well as financial charges incurred with their acquisition, do not contribute to the formation of the taxable profit of these companies.

With the renumbering of the FBS effected by Decree-Law no. 108/2008, of 26 June, this article 31 became article 32, having then the following wording:

2 - The gains and losses realized by SGPSs, by SCRs and by ICRs of equity stakes of which they are holders, provided they are held for a period not less than one year, as well as financial charges incurred with their acquisition do not contribute to the formation of taxable profit of these companies.

With Law no. 64-B/2011, of 30 December, this article 32, paragraph 2, came to have the following wording:

2 - The gains and losses realized by SGPSs of equity stakes of which they are holders, provided they are held for a period not less than one year, as well as financial charges incurred with their acquisition do not contribute to the formation of taxable profit of these companies.

This provision was subsequently repealed by Law no. 83-C/2013, of 31 December.

The general regime regarding the relevance of gains and losses and financial charges for the formation of taxable profit of IRC taxpayers translated into the concurrence of gains realized and financial charges in their entirety [articles 20, paragraph 1, subparagraph h), and 23, paragraph 1, subparagraph a), of the CIRC as resulting from Decree-Law no. 159/2009, of 13 July), and the concurrence of losses realized at 50% [in accordance with articles 23, paragraph 1, subparagraph l) and 45, paragraph 3, of the same Code].

For SGPSs, article 32, paragraph 2, of the FBS (in addition to other situations provided for in its paragraph 3) established a special regime, which was not necessarily reduced to a tax benefit, which translated generally into the irrelevance for the formation of the taxable profit of SGPSs of gains and losses realized from equity stakes held for at least one year, accompanied by non-concurrence of financial charges incurred with their acquisition.

Question of Bindingness of the Tax Authority and Customs Service by General Guidance

Article 31, paragraph 2, of the FBS, as amended by Law no. 32-B/2002, of 30 December, in effect in 2007, provides as follows:

"2 - The gains and losses realized by SGPSs and by SCRs through the onerous transfer, whatever the grounds on which it operates, of equity stakes of which they are holders, provided they are held for a period not less than one year, as well as financial charges incurred with their acquisition, do not contribute to the formation of taxable profit of these companies."

With Law no. 67-A/2007, of 31 December, this provision came to have the following wording:

"2 - The gains and losses realized by SGPSs, by SCRs and by ICRs of equity stakes of which they are holders, provided they are held for a period not less than one year, as well as financial charges incurred with their acquisition, do not contribute to the formation of taxable profit of these companies."

With the renumbering effected by Decree-Law no. 108/2008, of 26 June, article 31 of the FBS became article 32.

In its final wording, introduced by Law no. 64-B/2011, of 30 December, paragraph 2 of article 32 provides as follows:

"2 - The gains and losses realized by SGPSs of equity stakes of which they are holders, provided they are held for a period not less than one year, as well as financial charges incurred with their acquisition do not contribute to the formation of taxable profit of these companies."

This paragraph 2 of article 32 of the Fiscal Benefits Statute was repealed by article 210 of Law no. 83-C/2013, of 31 December, with entry into force on 01-01-2014 (article 260 of this Law).

Subsequently, on 16 January 2014, Law no. 2/2014 was published, which implemented the IRC reform, and established in its article 14 that "this law applies to tax periods that commence, or to tax facts that occur, on or after 1 January 2014."

Thus, by virtue of this transitional provision of Law no. 2/2014, article 32, paragraph 2, could no longer be applied to determine the IRC taxable matter for the 2014 and subsequent periods.

The Applicant contends, in summary, that during the period 2007 to 2013, it and D..., which began to be part of the Fiscal Group in 2013, were holders of equity stakes covered by the regime referred to, having in the Form 22 IRC declarations for the years mentioned increased for the formation of taxable profit the amounts of financial charges incurred with their acquisition, applying the regime referred to as defined in Circular no. 7/2004 of the IRC Services Directorate.

Being no longer able to apply the regime of article 32, paragraph 2, the Applicant considers that "the exclusion that was made of the deduction of financial charges should be corrected," in line with general guidance from the Tax Authority and Customs Service and the principles of protection of legitimate expectations deriving from article 2 of the Constitution (principle of the rule of law) and paragraph 2 of article 268 of the Constitution (principles of justice and good faith).

The Applicant contends that the interpretation intended by the TA and the provision of paragraph 1 of article 68-A of the LGT would be unconstitutional, "if interpreted as relieving the Tax Authority and Customs Service of the obligation to observe said general guidance," namely Circular no. 7/2004 and the Order issued in Case no. 39/2011.

The Tax Authority and Customs Service contends that such principles are not violated and that the interpretation of the Applicant violates other constitutional principles.

Regardless of the correct interpretation of the scope of the regime of article 32, paragraph 2, of the FBS, it appears to be of decisive relevance to the interpretation adopted by the Tax Administration in Circular no. 7/2004 and the binding character that article 68-A, paragraph 1, of the LGT, in the wording of Law no. 64-A/2008, of 31 December, attributes to it, as well as the corresponding subparagraph b) of paragraph 4 of article 68 in the original wording of the LGT.

By virtue of the provisions of paragraph 1 of article 68-A of the LGT, "the tax administration is bound by general guidance contained in circulars, regulations or instruments of identical nature, regardless of their form of communication, aimed at standardizing the interpretation and application of tax rules."

Therefore, even if the interpretation of the law made in said Circular is wrong, the fact that it was adopted in general guidance published binds the Tax Authority and Customs Service, by virtue of the provisions of article 68-A of the LGT, so it is obliged to adopt it.

This is an express legislative choice in the direction of the prevalence of the principles of good faith and legal security over the principle of legality, as recognized by the Constitutional Court in ruling no. 583/2009, of 18-11-2009, case no. 873/08: "it is true that the administered person can invoke, against the administration, the content of the publicly disclosed administrative guidance and, if applicable, make it prevail before the courts, even at the expense of the principle of legality (...). But it is under the principle of good faith and legal security, not by its normative value, that the content of circulars prevails."

Circular no. 7/2004 was issued by the Director-General of Taxes on 30-03-2004 and is published at:

https://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/legislacao/instrucoes_administrativas/Documents/circular_7-2004_de_30_de_marco_da_dsirc.pdf

In its point 6 the following is stated:

Financial year in which fiscal corrections of financial charges should be made

  1. With regard to the financial year in which financial charges should be disregarded as expenses, for tax purposes, a fiscal correction should be made, in the financial year to which they relate, of those that were incurred with the acquisition of equity stakes likely to benefit from the special regime established in paragraph 2 of art. 31 of the FBS, regardless of whether all the conditions for application of the special regime for taxation of gains have already been met. If it is concluded, at the moment of sale of the equity stakes, that not all the requirements for application of that regime are met, the financial charges that were not considered as a tax expense in prior financial years should be considered as a tax cost in that financial year.

In this point 6, the Tax Authority and Customs Service defined its understanding regarding the application of the principle of specialization of financial years for financial charges that were incurred with the acquisition of equity stakes, in situations potentially encompassed by article 32, paragraph 2, of the FBS: even before knowing whether the regime will be applicable, it is applied immediately, with the charges being non-deductible only because there is the possibility of them coming to be considered non-deductible if the regime comes to be applied. It is, therefore, a provisional non-deductibility, whose consolidation depends on verification of the "requirements for application of that regime."

Through this point 6, it is evident that the Tax Authority and Customs Service interpreted the regime of article 32, paragraph 2, of the FBS as constituting a regime applicable globally, with the application of the rule of non-deductibility of financial charges provided in the final part being dependent on the application to gains of the special regime provided in the first part (in that point of Circular no. 7/2004, the Tax Authority and Customs Service does not make reference to losses).

For the Tax Authority and Customs Service, although, in light of the regime provided for in article 32, paragraph 2, of the FBS, gains were only disregarded for purposes of forming taxable profit in the financial year in which they were realized, financial charges incurred with the acquisition of equity stakes should be disregarded as expenses (costs) in the financial year in which they were incurred, being added to the taxable profit of each of those financial years, regardless of whether all the conditions for application of the special regime for taxation of gains had already been met, which could only be determined at the time of realization.

However, as the application of this special regime depended on verification of conditions to be determined later, the Tax Administration adopted in that paragraph 6 of Circular no. 7/2004 the understanding that "if it is concluded, at the moment of sale of the equity stakes, that not all the requirements for application of that regime are met, the financial charges that were not considered as a tax expense in prior financial years should be considered as a tax cost in that financial year."

This understanding was judged constitutionally permissible by Constitutional Court ruling no. 42/2014, of 09-01-2014, issued in case no. 564/12, which decided "not to find unconstitutional the provision contained in article 31, paragraph 2, of the Fiscal Benefits Statute, in the wording conferred by Law no. 32-B/2002, of 30 December, in the part in which it imposes the tax non-deductibility of financial charges incurred with the acquisition of equity stakes as soon as these are incurred, regardless of the realization of gains exempted from taxation with the sale of such equity stakes."

This interpretation, which reduces to the provisional partial application, in the part unfavorable to the taxpayer, of the stipulation provided for in a special regime, before the requirements provided in the legal hypothesis for its application have been met, has evident interpretive weaknesses, but, regardless of its incorrectness, the fact that it was adopted in general guidance published binds the Tax Authority and Customs Service, by virtue of the provisions of article 68-A of the LGT, so it is obliged to adopt it.

The Applicant and D... adopted the interpretation provided for in this point 6 of Circular no. 7/2004, having disregarded in the financial years 2007 to 2013 the financial charges incurred with the acquisition of equity stakes, despite, as regards equity stakes held on 31-12-2013, the requirements of application of the special regime referred to not having been met.

Therefore, by virtue of this understanding disclosed in point 6 of said Circular, binding on the Tax Authority and Customs Service, the provisional and anticipated disregard of financial charges incurred by the Applicant and D... with the acquisition of equity stakes was conditioned on verification of the requirements for application of this regime of non-concurrence of realized gains for formation of taxable profit: if it came to be established, "at the moment of sale of the equity stakes, that not all the requirements for application of that regime are met, the financial charges that were not considered as a tax expense in prior financial years should be considered as a tax cost in that financial year."

On the assumption adopted in said Circular, the fiscal disadvantage constituting the disregard of financial charges is conditioned on obtaining the later fiscal benefit constituting the non-taxation of gains. This fiscal advantage will be a counterpart to the disadvantage constituting non-consideration of financial charges, so one must conclude that, in the perspective of said Circular, the impossibility of coming to apply the privileged regime at the level of sale will be justification for the disadvantage referred to being eliminated.

Using the terminology of said Circular, it may be said that, having the regime referred to been repealed before the "moment of sale of the equity stakes" and being unable to apply to sales the repealed regime (namely by virtue of the transitional provision of article 14 of Law no. 2/2014, of 16 January), one must conclude, safely and definitively, that "at the moment of sale of the equity stakes (...) not all the requirements for application of that regime are met."

And, having acquired, in a given financial year,

Frequently Asked Questions

Automatically Created

What was the IRC tax dispute regarding SGPS capital gains in CAAD process 144/2019-T?
The IRC tax dispute in CAAD Process 144/2019-T involved an SGPS holding company (C... Group) challenging the IRC self-assessment for fiscal year 2014, claiming €938,791.16 in excess taxation. The case concerned capital gains treatment under the Special Tax Regime for Groups of Companies (RETGS), specifically addressing issues related to revocation of fiscal benefits applicable to SGPS entities and the deductibility of charges associated with capital gains. The applicant sought both declaration of partial illegality of the self-assessment and reimbursement with compensatory interest calculated from May 30, 2015.
How does the revocation of fiscal benefits affect capital gains taxation for SGPS companies in Portugal?
The revocation of fiscal benefits significantly impacts SGPS capital gains taxation by eliminating previously available exemptions or reduced tax treatment. Under Portuguese IRC rules, SGPS companies historically benefited from favorable capital gains regimes when holding participations in subsidiaries. Following benefit revocation, capital gains become fully taxable unless specific conditions are met. The key issue in Process 144/2019-T was determining deductibility of charges related to capital gains after benefit elimination. Circular 7/2004 provides administrative guidance on this matter, establishing interpretative criteria that the Tax Authority must follow regarding deductible charges for SGPS entities under the modified fiscal regime.
What is the role of Circular 7/2004 in binding the Portuguese Tax Authority (AT) on SGPS deductible charges?
Circular 7/2004 plays a binding role in establishing the Portuguese Tax Authority's administrative position on deductible charges for SGPS companies. Administrative circulars constitute internal binding acts that ensure uniform tax administration across the AT's services. In Process 144/2019-T, the applicability and binding nature of Circular 7/2004 was central to determining whether specific charges related to capital gains qualified as IRC-deductible expenses. The circular provides interpretative guidance on expense deductibility rules for SGPS entities, particularly concerning financial charges and participation-related costs. Tax courts and arbitral tribunals examine whether the AT properly applied its own circular's criteria when assessing SGPS deductions.
Can SGPS companies deduct charges related to capital gains under Portuguese IRC rules after benefit revocation?
Whether SGPS companies can deduct charges related to capital gains after fiscal benefit revocation depends on meeting general IRC deductibility requirements under Articles 23 and following of the IRC Code. After benefit revocation, SGPS entities lose special exemptions but may still deduct charges if they are indispensable for obtaining or guaranteeing taxable income, properly documented, and recorded according to accounting standards. Process 144/2019-T examined whether specific charges met these criteria. The deductibility analysis requires demonstrating direct connection between expenses and taxable activity, which becomes more restrictive post-revocation. Circular 7/2004 provides administrative interpretation on qualifying deductible charges for SGPS companies under these general IRC rules.
What is the Special Taxation Regime for Groups of Companies (RETGS) and how did it apply in this CAAD arbitration case?
The Special Taxation Regime for Groups of Companies (RETGS - Regime Especial de Tributação de Grupos de Sociedades) allows consolidated taxation of corporate groups meeting specific legal requirements. Under RETGS, a dominant holding company and controlled subsidiaries are taxed as a single entity, with profits and losses offsetting within the group. In CAAD Process 144/2019-T, the applicant was the C... Group's holding company subject to RETGS for fiscal year 2014. The arbitration examined how RETGS applied to capital gains taxation when fiscal benefits were revoked, specifically addressing whether group consolidation rules affected deductibility of charges and calculation of taxable income. The case raised questions about interaction between RETGS provisions and SGPS-specific fiscal treatment under IRC legislation.