IRS Presumption of Advance on Profits: CAAD Arbitration on Additional Tax Assessments 2011-2012

ARBITRATION AWARD

The arbitrators Fernanda Maçãs (presiding arbitrator), Sérgio Pereira and Vera Figueiredo, designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 25/5/2016, hereby decide as follows:

I. REPORT

1. The company A…, S.A. (hereinafter referred to as the "Claimant" or "A…"), with tax identification number…, with registered office at Rua …, no.…, …th floor, …-… Porto, filed, on 14 March 2016, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of 20 January, namely the Legal Framework for Arbitration in Tax Matters ("RJAT"), a request for the constitution of an Arbitral Tribunal for the declaration of illegality and annulment of the additional assessment acts No. 2015… and No. 2015…, relating to the tax years 2011 and 2012, respectively, concerning Personal Income Tax ("IRS"), plus compensatory interest (relating to the same periods), in the total amount of €291,512.16 (€199,412.46 and €92,099.70), as well as for the lifting of the bank guarantee provided and payment of compensation for the provision of undue guarantee, with the Tax and Customs Authority ("Respondent" or "TA") named as the defendant.

2. In accordance with subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of the RJAT, the Deontological Council of the Centre for Administrative Arbitration ("CAAD") designated the undersigned as arbitrators of the Collective Arbitral Tribunal, who communicated acceptance of the appointment within the applicable period, and notified the parties of such designation on 10 May 2016.

3. Thus, in compliance with the provision of subparagraph c) of paragraph 1 of Article 11 of the RJAT, and through communication from the President of the Deontological Council of the CAAD, the Collective Arbitral Tribunal was constituted on 25 May 2016.

4. In the request for arbitral decision, the Claimant petitioned for the declaration of illegality of the additional assessment acts mentioned above and the corresponding compensatory interest assessments, and also for the lifting of the bank guarantee duly presented by the Claimant, as well as payment of compensation for the provision of undue guarantee.

5. The TA presented a response, petitioning for the rejection of the request for arbitral decision, as unproven, and consequently the absolution of the Respondent from all claims, maintaining the assessment acts under analysis, as well as their respective compensatory interest, as they do not violate any legal provision.

6. By order dated 30 June 2016, the Collective Arbitral Tribunal, pursuant to the provision of subparagraph c) of Article 16 of the RJAT, notified the Claimant to proceed with the specification of articles concerning factual aspects of the request for arbitral decision, regarding which it intends to produce witness evidence.

7. By Order of 14 July 2016, the Collective Arbitral Tribunal scheduled 12 September 2016, at 14:30 hours, for the purposes of holding the hearing, pursuant to Article 18 of the RJAT. It further stated that at the said meeting, witnesses would be examined, followed by oral arguments, if necessary, in accordance with Article 18, paragraph 2 of the RJAT.

8. On 12 September 2016, at 14:30 hours, the hearing provided for in Article 18 of the RJAT took place at the headquarters of the CAAD, Avenida Duque de Loulé No. 72-A, Lisbon, for the purpose of producing witness evidence.

9. Two witnesses, listed by the Claimant, were examined, namely: B… and C… (Statutory Auditor and Certified Accountant of the company, respectively). The Claimant waived the third witness it had listed and requested the joining to the case file of two documents, which were annexed to the Minutes, following acceptance by the Tribunal of their joining, and 10 days were granted to the representative of the Respondent to comment on them.

10. The Arbitral Tribunal also granted a successive period of 15 days for the Claimant and Respondent to present their final written submissions, with the Respondent's period commencing from notification of the Claimant's submissions or from the expiry of the period granted for that purpose.

11. The Tribunal scheduled 25 November 2016 for the delivery of the arbitral decision, a deadline which was extended, by order of 23 November 2016, to 24 January 2017.

12. The parties presented written submissions reiterating, in essence, the positions previously sustained by them.

13. After the final hearing phase, the Claimant filed a request, invoking supervening facts, on the basis of which it formulated an additional request for the Respondent to be condemned to refund tax subsequently paid by the former (in accordance with the regime provided for in D.L. No. 67/2016 of 3 November), in the amount of €254,681, plus compensatory interest, at the legal rate in force. The exercise of the right to be heard having been provided, the Respondent made no submission. The Tribunal delivered an order on 14 January 2017, ruling on the admissibility of the request in question, to be decided together with the others in the assessment of the merits.

II. CLAIMS OF THE PARTIES

14. To support its claim, the Claimant invokes an error concerning the factual assumptions, which led to the incorrect application of paragraph 4 of Article 6 of the IRS Code, and consequently to the incorrect taxation of mere shareholder advances as payment or advance of profits.

The Claimant began by reinforcing what has been its understanding since the beginning of the inspection procedure, according to which "the accounting entries that the TA called into question correspond solely to the refund of debt (e.g., shareholder advances) to shareholder Mr. D…".

According to the Claimant, the debit entry made in its accounts on 31 December 2010 in the amount of €3,620,000 arises from a resolution of the General Assembly of the same, held on 13 April of that year, in which it was resolved to convert shareholder advances held by one of the Claimant's shareholders into ancillary contributions.

Nevertheless, in the Claimant's view, such resolution was tainted by terminological errors, for example, "as is evident from the above, the resolution suffers from an error, resulting from the most basic rules of interpretation that where it reads 'sole shareholder' it should read 'majority shareholder'".

However, in its words, notwithstanding the terminological errors of the General Assembly Resolution under analysis, there can be no doubt about the shareholder whose shareholder advances were transformed into ancillary contributions: the company E… SGPS (and not Mr. D…).

All the more so because, according to the Claimant, "Mr. D… could never, in 2010, have converted shareholder advances in the amount of €3,620,000 into ancillary capital contributions since, at the date of the resolution, that shareholder had constituted shareholder advances in favour of the Claimant in the amount of only €47,500 (…)

In parallel, at the date of the conversion of shareholder advances into Ancillary Contributions, it was E… that held shareholder advances in the Claimant in an amount exceeding €3,620,000 which made possible this conversion into contributions (…).

Also in this sense, it is always mentioned that E… corrected the movement associated with the aforesaid resolution through a 're-titularization' by a third party, pursuant to which €3,620,000 was reduced from shareholder advances by transformation into ancillary contributions, as evidenced by the document already joined as Doc. No. 12.

Thus, this movement no longer appeared in the sphere of shareholder Mr. D…, and the balance of his current account became, at the end of 2010, and in accordance with reality, €47,500.

The entry/accounting of the resolution having been corrected in which the ancillary contributions should have been made by E…".

In parallel, the Claimant also recalls that Mr. D… assigned to it a credit of which he was the holder against F…, in the amount of €1,400,555.98, on 12 January, and became the creditor of the Claimant in the total amount of €1,448,055.98. In the context of the contract relating to that credit assignment, "it was determined that 'the consideration for this credit assignment is satisfied by A… [here Claimant] to the First Party [Mr. D…] through the extinction of credits that A… holds against the First Party, of an amount equivalent to the assigned credit'".

However, once again, the Claimant argues that the aforesaid clause was tainted by error, since "Mr. D… was not indebted to the Claimant in an amount equivalent to the credit he held over F… and which was assigned, so the compensation proposed in the contract could never proceed.

Thus (…) the contract entered into was subject to an amendment between the parties [in October, without making, unlike all other documents, reference to the year in which it was executed] (…), through which the content of the aforementioned Third Clause was altered, with the same expressing that in consideration for the aforesaid assignment, payment of its respective nominal value would be effected.

In truth, the parties agreed to reduce the executed contract to its valid part, pursuant to Article 232 of the Civil Code, substituting the tainted Third Clause with the one transcribed below: 'Third Clause – the credits subject to this contract shall be assigned at a price equal to their respective nominal value'".

The Claimant emphasizes that the aforementioned amendment had effects retroactively from 12 January 2011. However, the said contract was, once again through oversight, only recorded in accounting in the year 2012.

The same argues that, "regardless of its respective accounting recognition (…), the truth is that, through the contract in question, the Claimant acquired, on 12 January 2011 and at its respective nominal value, the credit of which Mr. D… was the holder against F…, in the amount of €1,400,555.98. As such (…) Mr. D… became, from 12 January 2011, creditor of the Claimant by shareholder advances of equal value, to which were added shareholder advances of €47,500.00 previously mentioned. It thus becomes evident that the transfers made by the Claimant to Mr. D… in 2011 and 2012 corresponded to the refund of shareholder advances resulting from the credit assignment contract to which we have been referring.(…) For which reason, and as is evident, IRS cannot apply to them. Indeed, if the shareholder's account presents a situation of indebtedness of the Claimant to the former, the transfers made by the latter correspond solely and only to a debt refund to which the presumption contained in paragraph 4 of Article 6 of the IRS Code cannot be applied".

Also from another perspective, the Claimant considered that it results from the combination of the principle of tax specificity protected in Article 103 of the Constitution of the Portuguese Republic and the principle of contributory capacity, enshrined in Article 4 of the General Tax Law that "the tax act must always be based on a concrete factual situation, which must, in turn, be provided for in tax law as a situation generating the right to tax".

Now, if no income was made available to Mr. D…, it being certain that all payments received by him were, solely and only, in the form of refund of the debt that the Claimant had towards its shareholder, Mr. D… could never be taxed under IRS".

The Claimant also grants, as a mere precaution of legal representation, the possibility that the aforementioned refunds might, ultimately, take the nature of loans from the Claimant to its shareholder.

Now, even if that were the case, the Claimant considers that the same (loans) "would have been reimbursed via the Debt Assumption Contract entered into on 28 May 2013 (…)", it being irrelevant that the loan did not comply with the legally prescribed form.

Thus, from the Claimant's perspective, "if the TA's thesis were to prevail regarding the fact that Mr. D… was a debtor of the Claimant, then the amounts that the latter made available to him were done so as loans, and the distribution or advance of profits cannot be presumed, in terms of paragraph 4 of Article 6 of the IRS Code, all the more so as, if the TA's scenario were to prevail, the debt would have been satisfied in 2013.

The Claimant concludes by petitioning for the annulment of the assessment acts previously indicated and, as well, that it is owed compensation, pursuant to Articles 53 of the General Tax Law and 171 of the Code of Tax Procedure and Process.

15. The TA presented a response, invoking, among other things, that:

The nuclear issue of this arbitration proceedings concerns whether the debit entries made in the account (…) of the Claimant's shareholder – Mr. D… – are presumed to be made as payment or advance of profits, which, if verified, determines that they should have been subject to withholding of IRS.

This is because "a debit entry in the account of the said shareholder, made on 31.12.2010, in the amount of €3,620,000.00, supported by the resolution of the General Assembly set out in Minutes No. 93, originated a debit balance of €3,572,500.00 and, at the same time, made him the holder of ancillary contributions to the Claimant. The Claimant alleges that the said minutes are tainted by terminological errors, materialized in the reference to sole shareholder instead of majority shareholder, from which it follows that the shareholder advances subject to conversion could only be those held by the company shareholder E…, SGPS and not by shareholder D… who was only the holder of shareholder advances in the amount of €47,500.00. It is further added that the company E… SGPS, S.A. was the holder, on that date, of shareholder advances in an amount exceeding €3,620,000.00, so the resolution set out in the minutes to which the above refers never had effects in relation to shareholder Mr. D… . However, even if it is verified (…) that Mr. D…'s credit against the Claimant was only €47,500.00 on 10.12.2010, in reality, the accounting entry made on 31.12.2010, materializing the resolution approved at the General Assembly of 13 April 2010, debited the amount of €3,620,000.00, by counterpart to the account … – Ancillary Contributions Mr. D…, with the description Minutes No. 93 – …., was not the subject of any reversal or correction at a later date, maintaining its effects in the financial statements during the subsequent years, particularly in 2011 and in 2012. Consequently, no consequences were drawn at the accounting and patrimonial level, either of the Claimant or of its shareholders, from the alleged error committed in Minutes No. 93, since Mr. D… continued to appear as the holder of Ancillary Contributions made to the Claimant in the amount of €3,620,000.00, without the corresponding funds having been received by this company, maintaining a debit position towards this company".

For the Respondent, despite it being stated in the initial petition of the Claimant that there was a correction in the "movement associated with the aforesaid minutes through a 're-titularization' by a third party, pursuant to which the shareholder advances were reduced by transformation of €3,620,000.00 into ancillary contributions (…) and thus at this moment no longer appeared in the sphere of shareholder Mr. D… and the balance of his current account became, at the end of 2010, and in accordance with reality, €47,500, the truth is that the movements of the account … – Mr. D… in Company A…, S.A. (Claimant), between 01.01.2011 and 31.12.2012, do not reflect any reversal in order to restore the alleged reality of facts'".

Furthermore, "no extract is presented regarding the movements of the account of shareholder E… SGPS (Portugal), S.A., in order to confirm the alleged reduction of shareholder advances by transformation of €3,620,000.00 into ancillary contributions. The IT report further reveals that, despite the debit balance of the shareholder's account and therefore indicative of the non-existence of shareholder advances, there were other movements, 'over the years 2011 and 2012, bank transfers from company accounts to the shareholder's personal accounts, as well as payment of expenses on his behalf, movements which are always recorded as refund of shareholder advances…'. Indeed, in the context of the clarifications provided by the Claimant, it was stated (…) that '… no shareholder advance contracts were entered into because the repayment period was not fixed…'".

In light of the above, the Respondent considers that D… became, with the conversion of those shareholder advances into ancillary contributions, a debtor position towards the Claimant, being, in its opinion, that which supports "the credit entry made on 12.03.2012 in the account … of the amount of €1,400,555.96, with the description Credit Assignment Contract, which resulted in the reduction of that shareholder's debt".

The Respondent is unaware of "the reason why the Credit Assignment was only recorded in accounting in 2012". Furthermore, it also considers that the alterations which resulted from the amendment to the contract for the assignment of said credits do not alter the essence of that operation. "Well, with due respect, the new wording of the Third Clause did not alter the essence of the credit assignment operation, which was embodied in the transfer to the Claimant of a credit against F… of which Mr. D… was the holder, it merely served to clarify that the price of the assignment was equal to the nominal value".

It further reinforces that "the entry made in the account …, dated 12.03.2012, was not subject to reversal, so its effects subsisted". In this regard, the Respondent drew four conclusions, namely: "On 31.12.2010, the shareholder assumed a debtor position, by becoming the holder of ancillary contributions which were only partially satisfied (€47,500.00) through conversion of shareholder advances, remaining indebted for the remainder; The credit assignment operation recorded in 2012 contributed to the reduction of the debt balance; The shareholder did not make shareholder advances to the Claimant in the years under analysis; The corrections of the alleged errors committed in Minutes No. 93, in the Credit Assignment Contract and, later, in the Debt Assumption Contract, ultimately, did not have adequate accounting reflection".

Thus, and alluding to Article 75 of the General Tax Law, the Respondent considered that the Claimant failed to make alterations to the relevant accounting elements in order to reflect the aforementioned changes, particularly in the financial statements relating to the tax years 2011 and 2012.

The Respondent concludes that the alleged errors raised by the Claimant "were not attributed sufficient relevance to justify the correction of elements reflected in the accounting". In light of the above, the Respondent considers "that since the Claimant insists that these were refunds of shareholder advances, despite the non-existence of shareholder advances, as a matter of law, the financial movements between the company and a shareholder were analyzed in light of what is provided in paragraph 4 of Article 6 of the IRS Code, according to which 'entries in any current accounts of members, recorded in commercial or civil companies in commercial form, when they do not result from loans, the provision of work or the exercise of corporate offices, are presumed to be made as profits or advances on account of profits'". It thus understands that it is incumbent upon the Respondent, in terms of Article 74 of the General Tax Law, to "prove the assumptions on which the presumption is based, namely the actual transfer of funds to the members and that its origin does not result from loans, the provision of work or the exercise of corporate offices (…). Thus, the Tax Inspection (…) concluded (…) that those fund transfers would have to be presumed as having been made as an advance on account of profits, qualified as income from capital, in terms of subparagraph h) of paragraph 2 of Article 5 of the same Code".

Furthermore, the Respondent sought to rebut the argument made by the Claimant that the refunds of shareholder advances could, in theory, be equivalent to loans made by the latter to its shareholder, subsequently reimbursed by virtue of the debt assumption contract.

In fact, in the Respondent's opinion, if it were "a loan made by the Claimant to the shareholder, it would be incumbent on the borrower – Mr. D… – to proceed with the corresponding repayment, however, what results from the Credit Assignment and Compensation Contract is that the debt was settled by compensation between the two companies – the Claimant and the company E…".

Secondly, in the Respondent's view, the Claimant did not comply with the formal requirements related to the constitution of loans.

Therefore, the conclusion reached by the Respondent is that "the amounts transferred to shareholder Mr. D… as refunds of shareholder advances constitute, by virtue of the presumption established in paragraph 4 of Article 6 of the IRS Code, advances on account of profits, so the Claimant was obliged to proceed with the withholding at source on the date on which they were paid or made available to the shareholder, at the liberatory rate provided in subparagraph c) of paragraph 1 of Article 71 of the same Code". Thus, "the request for arbitral decision should be judged inadmissible, as unproven, and consequently the Respondent absolved of all claims, all with the due and legal consequences".

III. PRELIMINARY MATTERS

16. This Collective Arbitral Tribunal was regularly constituted and is competent to assess the matters indicated (Article 2, paragraph 1, subparagraph a) of the RJAT), the parties have legal personality and capacity and have legitimacy (Articles 4 and 10, paragraph 2 of the RJAT and Article 1 of Order No. 112-A/2011 of 22 March).

16.1. The Tribunal is materially competent, in terms of subparagraph a) of paragraph 1 of Article 2 of the RJAT to judge the request for annulment of the IRS assessment acts.

16.2. The Claimant combines claims, regarding the IRS assessments for 2011 and 2012. Combination of claims which appears to be legitimate, in terms of Article 104 of the Code of Tax Procedure and Process and Article 3, paragraph 1 of the RJAT, according to which "the combination of claims, even if relating to different acts and the joinder of claimants, are admissible when the success of the claims depends essentially on the assessment of the same factual circumstances and the interpretation and application of the same principles or rules of law". Which is manifestly the case.

16.3. Concerning the timeliness of this initial petition, given that the Claimant was notified, on 14 December 2015, of the express rejection of the Administrative Complaint submitted to challenge the additional assessments indicated above, the deadline for submitting this document, taking into account Article 10, paragraph 1, subparagraph a) of the RJAT, ended on 21 April 2016.

16.4. Having this initial petition been presented on 14 March 2016, the same is timely.

16.5. There are no irregularities, nor have the parties alleged exceptions or preliminary matters that should be analyzed immediately, so nothing precludes the judgment on the merits.

IV. FACTUAL MATTERS

A. Established Facts

This Tribunal judges as established, with relevance to the decision of the case, the following facts:

a) The Claimant is a public limited company that is part of a group of companies of family origin, held predominantly by an individual shareholder (D…), as per the diagram of corporate holdings (2010-2013), attached to the case file and reproduced below:

b) As results from the above diagram, the Claimant had, on that date, two shareholders: E… SGPS Portugal, S.A. (hereinafter "E…SGPS"), with 99.64% of the company's capital, and Mr. D…, with 0.36% of the company's capital.

c) On 13 April 2010, by corporate resolution, it was established that the sole shareholder of the Claimant would convert shareholder advances it held over the latter, in the amount of €3,620,000.00, into ancillary contributions of capital in the same.

d) On 20 December 2010, one of the shareholders – D… – had a credit, in the form of shareholder advances, against the Claimant, in the amount of €47,500.

e) On 31 December 2010, shareholder Mr. D… became indebted to the Claimant in the amount of €3,572,500, resulting from the difference between the shareholder advances held and the debt incurred by him to constitute the ancillary contributions, in terms of the corporate minutes indicated above.

f) On 12 January 2011, D… assigned credits to the Claimant, in the amount of €1,400,555.98, which the former held against F…, S.A. (hereinafter "F…").

g) In the context of the said credit assignment contract, it was stipulated that the consideration for those credits would be the extinction of credits that the Claimant held against Mr. D…, of an equivalent amount.

h) Subsequently, such contract was amended, in October (the year is not identified), through modification of the third clause, with retroactive effects to the date of execution of the credit assignment contract previously indicated, where it was established that the "credits subject to this contract shall be assigned at a price equal to their respective nominal value".

i) The said credit assignment contract was only recorded, in accounting, on 12 March 2012.

j) D… signed several receipts of discharge, in which he attests to the receipt of amounts as refund of shareholder advances, in the total amount of €875,615, over the years 2011 and 2012 (see table below).

k) The balance of operations in the current account of shareholder D… in the Claimant, relevant for the purposes of this discussion, can be illustrated as follows:

l) On 28 May 2013, the Claimant, D… and E… SGPS entered into a debt assumption contract, in which the latter obliged itself to assume the debt that D… had towards the Claimant, in the amount of €3,054,887.

m) In consideration, the company E… SGPS became the holder of a credit against D…, in an equal amount to that indicated in the preceding number.

n) Nevertheless, on 23 October 2014, and already after the commencement of the inspection action previously referred to, the parties involved in the debt assumption contract previously indicated promoted its revocation, replacing it with a Credit Assignment and Compensation Contract, which had retroactive effects to the date of execution of the replaced contract, and in which it was provided that the debt in question would, after all, be between the Claimant (debtor) and its majority shareholder (creditor), with the holder of the respective assigned credit now being transferred by E… SGPS to Mr. D… (new creditor).

o) In 2014, a general inspection action was carried out, under service order No. OI2014… and with reference to the tax years 2011 and 2012, which gave rise to the following assessments:

§ Assessment No. 2015…, relating to 2011, in the amount of €172,281.00;

§ Assessment No. 2015…, relating to 2012, in the amount of €82,400.00.

p) The Claimant made an administrative complaint regarding the additional assessments listed below, with the express rejection of the said complaint being notified to it on 14 December 2015.

q) In view of the rejection of the Administrative Complaint, the Claimant presented the present request for the constitution of an Arbitral Tribunal on 14 March 2016.

r) In parallel, the Claimant presented a bank guarantee for suspension of the tax enforcement proceedings No. …2015… and No. …2015… instituted for the forced collection of the additional IRS assessments.

s) On 6 December 2016, the Claimant proceeded to pay the tax in question in the amount of €254,681 calculated in accordance with the special program for reduction of indebtedness to the State (PERES) - document attached to the case file by the Claimant.

B. Unestablished Facts

With relevance to the assessment and decision of the case, there are no facts that have not been established.

C. Justification of the Judgment on Factual Matters

The Tribunal's conviction concerning the facts as established resulted from the entire examination of the documents attached to the case file, as well as from the assessment of the content of the pleadings and the administrative procedure equally attached to the case file.

V. ON THE LAW

The essential legal question in the present case comes down to determining whether the financial flows carried out by the Claimant for the benefit of one of its shareholders (D…) in 2011 and 2012 assume or not the nature of profits, namely whether the same are refunds of shareholder advances, advances on account of profits, or even loans constituted in his favour.

The amounts in question correspond to the transfers and payments of expenses which, in the year 2011, totaled €629,054.31 and which, in the year 2012, amounted to €253,982.94. Amounts which, from the Respondent's perspective, should have given rise to withholdings at source in the amounts of €172,281 and €82,400, respectively.

The centrality of the aforementioned question results from the fact that, should it be concluded that profits are at issue, there should be withholding at source by the Claimant. In this hypothesis, and given that there was no such withholding, it would be appropriate to consider the request formulated by the Claimant as inadmissible, given that the assessment made was precisely based on the omission of withholding at source by the objecting party.

The opposite conclusion would lead to the inverse result.

Indeed, and in accordance with what is provided in Article 5 of the I.R.S. Code:

"1 - Income from capital shall be considered the fruits and other economic benefits, whatever their nature or designation, whether pecuniary or in kind, deriving, directly or indirectly, from patrimonial elements, goods, rights or legal situations of a property nature, as well as from their respective modification, transmission or termination, with the exception of gains and other income taxed in other categories.

2 - The fruits and economic benefits referred to in the preceding number comprise, in particular:

(…)

e) The interest and other forms of remuneration due by reason of the members not withdrawing the profits or remuneration placed at their disposal".

On the other hand, it is provided in Article 71 of the same Code that:

"1 - The following income obtained in Portuguese territory is subject to withholding at source as a definitive payment at a liberatory rate of 28%: (Amended by Law No. 66-B/2012 of 31 December)

(…)

c) The income referred to in subparagraphs d), e), h), i), l) and q) of paragraph 2 and paragraph 3 of Article 5".

Of particular relevance in this proceeding is also the provision contained in Article 6, paragraph 4 of the IRS Code, according to which, within the scope of income from category E, the following presumption applies:

"4 - Entries in any current accounts of members, recorded in commercial or civil companies in commercial form, when they do not result from loans, the provision of work or the exercise of corporate offices, are presumed to be made as profits or advances on account of profits".

By virtue of this stipulation (which establishes a presumption that inverts the burden of proof), the general rule, contemplated in Article 74, paragraph 1 of the General Tax Law, is not applicable in the case at hand, in terms of which "The burden of proof of facts constituting the rights of the tax administration or taxpayers rests with whoever invokes them."

These are the main legal provisions of relevance in the present action, whose interpretation must take place in accordance with the criterion provided in Article 11, paragraph 3 of the General Tax Law ("General Tax Law"), according to which: "If doubt persists regarding the meaning of the applicable tax incidence rules, regard must be had to the economic substance of the tax facts".

In these terms, by virtue of what is provided in Article 6, paragraph 4 of the IRS Code, it is presumed, in the situation under analysis, that the benefits realized, by the Claimant, to the member D…, assume the nature of profit, and it falls to the latter to rebut such presumption, through demonstration, in this instance, of the opposite.

It is thus important to consider whether the Claimant succeeded in proving its version of the facts.

This version (the Claimant's version) corresponds to the defense that the amounts indicated above correspond, not to advances on account of profits, but to the refund of shareholder advances.

A defense which the Claimant sustains by counter-arguing some of the arguments invoked by the Respondent.

Indeed, one of the grounds invoked by the Tax and Customs Authority had been the fact that on 31 December 2010, a value was entered, in the account of shareholder D…, as a debit in the amount of €3,620,000, as title of transformation of shareholder advances into ancillary contributions. Having, at that moment, the account a credit balance of €47,500, the said shareholder became indebted to the Claimant in the amount of €3,572,500 (amount resulting from the deduction of €47,500 from €3,620,000).

In these terms, being the shareholder in question a debtor and not a creditor, the transfers effected in 2011 and 2012 would not have taken place as title of refund of shareholder advances (as recorded in the accounting records), but of advance of profits.

The Claimant counter-argues by invoking that the resolution of the General Assembly, No. 93, of 13 April 2010, which contains the conversion of shareholder advances in the amount of €3,620,000, held by the "sole shareholder", into ancillary contributions of equal value, suffers from terminological errors.

It is necessary to observe, firstly, that the presumption contained in Article 75 of the General Tax Law does not apply to this document, according to which:

"1 - The declarations of taxpayers submitted in accordance with the terms provided by law, as well as the data and calculations recorded in their accounting records or books, are presumed to be true and in good faith when these are organized in accordance with commercial and fiscal legislation",

As, as results from paragraph 2 of the same provision, such presumption lapses when "the declarations, accounting records or books reveal omissions, errors, inaccuracies or well-founded evidence that they do not reflect or prevent knowledge of the real taxable matter of the taxpayer".

Indeed, it is the Claimant itself that refers that the content of the said resolution does not correspond to reality, given that, according to the understanding of the latter, the expression "sole shareholder" would refer to D… and not, as by error would have occurred, to E…, SGPS.

The Claimant argues that, where it says "sole shareholder", it should read "majority shareholder", and this corresponds to E… SGPS (Portugal), S.A., so that it was as regards this (and not as regards D…) that there was conversion of shareholder advances into ancillary contributions. With which the ground invoked by the Respondent would lack reason.

Now, if it is true, on the one hand, that on the date on which that conversion occurred (31 December 2010), shareholder D… only held €47,500 in credits against the Claimant, in the form of shareholder advances, it is also true that, according to the accounting information demonstrated by the Respondent, that information reflects such conversion for the benefit of D…, being unequivocal that, closed that financial year, he had a debt towards the Claimant in the amount of €3,572,500.

The Claimant subsequently presented internal accounting documents which demonstrate the subsequent reversal of that operation. Such documents contain the correction of the operation of conversion of shareholder advances into ancillary contributions, such conversion being reported to E… SGPS and not to shareholder D…

It is to be noted, however, that apart from this being the only evidence presented by the Claimant with respect to the aforementioned matter, it is internal accounting documents, they cannot serve as a sufficient basis for proof of the Claimant's version, since, per se, they do not demonstrate the reversal of the prior accounting error. Furthermore, being the Claimant obliged to have its accounts legally certified (as is its majority shareholder), it is not understood why the financial statements of the same, duly certified, were not attached to this proceeding, so that, in reliable terms, one could conclude regarding the identity of the true holder of the said ancillary contributions.

It is also important here to recall that if, in terms of Article 75, paragraph 1 of the General Tax Law, on the date of the facts, the "declarations of taxpayers submitted in accordance with the terms provided by law were presumed true and in good faith, as well as the data and calculations recorded in their accounting records or books, when these were organized in accordance with commercial and fiscal legislation", that presumption lapses, in terms of paragraph 2 of the same article, when "the declarations, accounting records or books reveal omissions, errors, inaccuracies or well-founded evidence that they do not reflect or prevent knowledge of the real taxable matter of the taxpayer".

In these terms, considering all that has been set out so far (which highlights the various inconsistencies of the Claimant's internal documentation), the argument invoked by the Claimant is not such as to allow the rebuttal of the presumption that the financial flows operated in 2011 and 2012 for the benefit of D… correspond to advances on account of profits.

With a view to demonstrating that shareholder D… was indeed a creditor of the Claimant and that, consequently, the transfers of 2011 and 2012 correspond to refunds of shareholder advances, the Claimant invokes a credit assignment contract executed on 12 January 2011.

Neither to this document does the presumption provided in Article 75 of the General Tax Law, paragraph 1, apply, in view of what is provided in its paragraph 2.

Indeed, it is also the Claimant that points out the existence of an error in the aforementioned document. In this regard, it argues that, although the contract in question provides that D… assigned to the Claimant the credit (in the amount of €1,400,555.98) that the former held against F…, S.A., thereby extinguishing his debt, in the same amount, to the Claimant, this does not correspond to the truth, since D… was not, after all, indebted to the Claimant in that amount. An error which would have determined a subsequent correction of the said contract (with retroactive effects to 12 January), with it now providing that, following the said credit assignment, shareholder D… would not see his debt extinguished to the Claimant, rather becoming entitled to receive payment equal to the value of the assigned credit.

With which, in the Claimant's perspective, shareholder D… would have become, from 12 January 2011, for that reason, a creditor of shareholder advances in the amount of €1,400,555.98. Shareholder advances which would have been at the basis of the movements (of refund) effected in 2011 and 2012.

It is, however, necessary to observe several aspects.

On the one hand, that despite the said credit assignment contract being dated 12 January 2011, it was only recorded in accounting on 12 March 2012, the reason for this procedure being unknown. In these terms, once again, the internal accounting is shown to be tainted by errors that are material in light of the duties of account inspection that fall, in particular, on Statutory Auditors.

All the more so when the matter is not a small amount – rather a substantial sum – which, strangely, was not validated by the entity responsible for the legal review of accounts.

Everything that, added to what has been set out above, is further evidence of the poor reliability of the Claimant's accounting documentation.

From the credit assignment contract, it follows, on the other hand, clearly, that this served to satisfy a pre-existing debt of shareholder D… to the Claimant.

Indeed, in the wording of the contract (dated 12 January 2011) which implies the assignment of credits in the amount of €1,400,555.98 (an amount relevant to any company in the context of Portuguese business), it is expressly recognized that this debt exists and that with this credit assignment it is intended to extinguish part of the same.

In this regard, pay attention to the Third Clause of the said credit assignment contract, according to which "the consideration for this credit assignment is satisfied by A… to the First Party through the extinction of credits that A… holds against the First Party in an amount equivalent to the assigned credit".

Furthermore, it is also to be noted that, although the Claimant invokes that such clause came to be amended (with it now providing that "the credits subject to this contract shall be assigned at a price equal to their respective nominal value"), it does so in a vague and imprecise manner, referring it to 1 October of a year that is unknown.

It is further to be noted that the generically invoked amendment does not represent an argument capable of demonstrating that on the date of the credit assignment (be this made on what title it may), there was no debt of Mr. D… to the former.

Indeed, from the amendment to the contract which the Claimant invokes, it is only stated that the credits are assigned at their nominal value. If that information may be relevant, for example, in a future scenario of alienation of the credits (namely to know what the fiscal cost of them is in the sphere of the entity disposing of them), from it there does not result the proof which is made clear that shareholder D… did not have a debtor position towards the Claimant.

It is to be noted, furthermore, that here too the accounting of the Claimant does not go in line with the facts.

It is also necessary to assess the value of another document attached to the case file, corresponding to a Debt Assumption Contract, executed on 28 May 2013, in which it is established that the debt that shareholder D… has towards the Claimant, in the amount of €3,054,887, is assumed by E… SGPS., becoming, in consideration, E… SGPS, with a credit against the shareholder, in an equal amount.

Once again, the Claimant comes to say that the said Debt Assumption Contract is (like all documents relevant to the purposes of the present analysis) tainted by errors, so here too the presumption provided in paragraph 1 of the aforementioned Article 75 of the General Tax Law does not apply, given what is provided in its paragraph 2.

Arguing that shareholder D… is not a debtor of any amount to the Claimant, it argues that the Debt Assumption Contract has no purpose, joining to the proceeding, in the inspection phase, a new contract that revokes the former.

In this new contract, it is established that the debt, in the amount of 3,054,887, is, after all, that of the Claimant to E… SGPS, with it being further provided that the latter assigns the credit it has against the Claimant to shareholder D…

It is important to note that this new contract was signed already after the commencement of the tax inspection action previously referred to, as well as that it is left without knowing the effective origin of the debt in question.

On the other hand, if the argument invoked by the Claimant were considered admissible, that first contract would make no real sense, and there would be no understanding (nor does the Claimant seek to explain) the reason which led to its drafting.

It is further to be noted that, apart from what the Claimant invokes regarding this document being a strange occurrence, the same has no relevance to the present discussion, since, apart from not allowing for the establishment of material truth, it occurred on a date subsequent to the period in question – the years 2011 and 2012.

An error all the more surprising since it constitutes an argument which the Claimant invokes regarding several documents of relevance in this action – arguing that they are all tainted by errors, oversights and defects.

Indeed, in light of the arguments adduced by the Claimant, one cannot but note the existence of recurring errors at the level of the documentation which the latter invokes, as well as the fact that it sustains its position on amendments which it makes to the initial versions of such documents.

Thus, all the relevant documentary elements are found, according to the Claimant, to be tainted either by terminological errors (as is the case with the minutes of the general assembly relating to the conversion of shareholder advances into ancillary contributions or the credit assignment contract) or by oversights (as is the situation of the Claimant's accounting).

In truth, the position sustained by the Claimant is rich in uncertainties, inconsistencies, incongruities and errors.

It is also to be noted that, recognizing terminological errors and oversights in the documents it attaches, the Claimant also did not seek to bring other relevant elements of proof capable of, without margin for doubt, displacing the presumption of Article 6, paragraph 4 of the IRS Code.

It is also necessary to assess the argument of the Claimant when it invokes that at issue is a loan contract.

According to what the Claimant argues, in the initial petition, "…those refunds of shareholder advances would constitute loans on the part of the Claimant to its shareholder, loans which would have been reimbursed via the Debt Assumption Contract executed on 28 May 2013 (…) Thus, the Claimant does not understand what the TA defends (…) 'as for the disregard of the loan, the same was disregarded not for the non-existence of a formal contract, but rather for the fact that no authenticated private document or public deed was ever exhibited denoting its existence (…)' indeed, the TA gives implicit primacy to form (…) at the expense of substance (…) First of all, and as is well known, in tax law the principle of the prevalence of substance over form prevails, a principle which is expressly set out in Article 11, paragraph 3 of the General Tax Law (…), it would not be the fact that the loan did not comply with the legally prescribed form – in particular the execution of a public deed – that would lead to its disregard for tax purposes (…) Thus, if the TA's thesis were to prevail regarding the fact that Mr. D… was a debtor of the Claimant, then the amounts that the latter made available to him were done so as loans, and the distribution or advance of profits cannot be presumed, in terms of paragraph 4 of Article 6 of the IRS Code. All the more so as, if the TA's scenario were to prevail, the debt would have been satisfied in 2013".

The argument which the Claimant here expounds reveals itself to be incongruous and incompatible with that which it previously sustained in the same pleading.

Indeed, the Claimant refers that the alleged loans "would have been reimbursed via the Debt Assumption Contract executed on 28 May 2013 (…)".

But had not such Debt Assumption Contract been revoked? Is it not, in truth, juridically possible to sustain, at the same time, the revocation and non-revocation of the same contract.

On the other hand, the Claimant also did not allege facts susceptible to allowing one to conclude regarding the execution of loan contracts with the shareholder, which prevents the tribunal from concluding in the sense of such execution.

The decision in the sense of non-execution of that type of contract is not, therefore, based on mere non-observance of form. In tax law, the principle of substance over form truly prevails, so that "if doubt persists regarding the meaning of the applicable tax incidence rules, regard must be had to the economic substance of the tax facts".

Now, what occurs in the present case is the absence of allegation of facts that substantively can be made to correspond to the category of a loan contract.

By virtue of the incongruencies and serious errors of which the narrative of the Claimant suffers, the latter did not succeed in designing an alternative solution which would allow the displacement of the presumption arising from the aforementioned Article 6, paragraph 4 of the IRS Code.

In truth, called upon to counter the presumption, the Claimant failed to do so, providing only a multitude of inconsistent elements, and therefore, unusable for the defense of its thesis.

Being able to rely on credible elements of proof, such as are, for example, certified financial statements, it opted not to do so, placing itself, thus, at the mercy of such presumption.

Considering the economic substance of the facts and that the financial flows in question do not comply with refunds of shareholder advances, nor with loans, they must juridically be considered advances on account of profits.

In parallel, it is also to be said that one does not understand why the Claimant brought into play the tax principles of specificity of tax law and contributory capacity.

Indeed, IRS, namely the provisions governing the assessment through withholding at source, are legally protected in the respective code, and it falls to the paying entity, when it has organized accounting, to make them.

On the other hand, the principle of contributory capacity is not put into question, since shareholder D… had, in fact, an increase in his net worth through an income arising from an advance of profits of a company of which he is the holder of corporate interests.

Consequently, such income, if it exists, is taxed in general terms, there being no place for any violation of constitutional principles, as the Claimant claims.

Finally, and as regards the observations of the Claimant on the value of corporate resolutions, everything that has been set out throughout the present Arbitration Award is reiterated.

In truth, and regardless of the value that is attributed to those resolutions, the truth is that in the accounting of the Claimant, the conversion of (non-existent) shareholder advances of shareholder D… into ancillary contributions was reflected, albeit incorrectly. From that point on, the Claimant should have triggered the reversal of those errors, materializing it. And if it did, it did not succeed in proving it, for all that was previously said.

By virtue of all that has been set out, it is to be concluded that the argument expended by the Claimant is not such as to rebut the presumption that the financial flows (referred to above), operated in 2011 and 2012, for the benefit of shareholder D…, correspond to an advance of profits, since it does not appear sufficient, such argument, to convince the tribunal that (contrary to what the Claimant invokes) what was at issue was the refund of shareholder advances.

For this reason, this tribunal pronounces, in the sense that the additional IRS assessments made by the Respondent do not suffer from any illegality, considering totally inadmissible the request for annulment of the assessments that are the object of the present action, which consequently implies the rejection of the other requests formulated, in particular that for the lifting of the guarantee and for compensation for the guarantee provided by the Claimant, as well as that for the refund of the tax paid, plus compensatory interest.

VI. DECISION

In these terms, this Collective Arbitral Tribunal decides:

- to judge inadmissible the requests formulated by the Claimant, maintaining in the legal order the assessment acts impugned; and

- to condemn the Claimant in the costs of the proceedings.

VII. VALUE OF THE PROCEEDINGS

The value of the proceedings is fixed at €291,512.16, in terms of Article 97-A, paragraph 1, subparagraph a), of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of paragraph 1 of Article 29 of the RJAT and of paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings ("RCPAT").

VIII. COSTS

In accordance with the provision of Article 22, paragraph 4, of the RJAT, the value of the arbitration fee is fixed at €5,202 in terms of Table I of the aforementioned Regulation, to be borne by the Claimant, given the total rejection of the request.

Let notification be made.

Lisbon, 18 January 2017.

The Arbitrators,

Fernanda Maçãs – Presiding Arbitrator

Sérgio Santos Pereira – Adjunct Arbitrator

Vera Figueiredo – Adjunct Arbitrator