Fair Value Measurement in IRC: CAAD Ruling on 50% Deduction of Losses from Financial Instruments (Case 155/2017-T)

Arbitral Decision

The arbitrators Fernanda Maçãs (presiding arbitrator), Leonardo Marques dos Santos and Carlos Alberto Monteiro da Silva, appointed by the Deontological Council of the Center for Administrative Arbitration to form the Arbitral Tribunal, agree as follows:

Report

Society A… SGPS, S.A. (hereinafter referred to as "Claimant"), with the tax identification number…, with registered office at Rua …, no…, …, … …-…, Cascais, filed on 03-03-2017, in accordance with the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011 of 20 January, i.e., the Legal Regime for Arbitration in Tax Matters ("RJAT"), a request for constitution of a collective arbitral tribunal, in which the Tax and Customs Authority is the Respondent.

The claim that is the object of the request for arbitral decision consists of the assessment of the legality of the rejection of the gracious complaint issued by dispatch on 12 December 2016, and, consequently (and in final or ultimate terms), the self-assessment acts regarding Corporate Income Tax (IRC) for the tax years 2013 and 2014, insofar as they correspond to the non-recognition for tax purposes in those same years of half (50%) of the expenses and negative patrimonial variations relating to financial instruments resulting from the fiscal (and accounting) measurement at fair value or, alternatively, insofar as the tax recognition in 2013 and 2014 as income of 50% of the reversal of losses occurring in those years with respect to those same financial instruments is undue.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 13-03-2017.

3.1. The Claimant did not appoint an arbitrator, therefore, under the provision of subparagraph (a) of paragraph 2 of Article 6 and subparagraph (b) of paragraph 1 of Article 11 of the RJAT, the President of the Deontological Council appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the prescribed period.

3.2. On 27-04-2017, the parties were notified of the appointment of the arbitrators and raised no objection.

3.3. In accordance with what is provided in subparagraph (c) of paragraph 11 of the RJAT, the collective arbitral tribunal was constituted on 15-05-2017.

3.4. In these terms, the Arbitral Tribunal is regularly constituted to assess and decide the subject matter of the proceedings.

Grounds for the Request for Arbitral Decision

To support the request for arbitral decision, the Claimant alleges, in summary, the following:

The position taken by the TA to the effect that paragraph 3 of Article 45 of the CIRC, in the wording in force until 2013, also applies to expenses resulting from measurement at fair value and, therefore, these are only recognized at 50% (half) for IRC purposes, suffers from problems as to the assumptions and purposes of the potentially relevant norms to regulate this situation, as to the letter of the law, as to the unsustainable arbitrary results generated by this interpretation and also regarding the manifest unconstitutionality of paragraph 3 of Article 45 of the CIRC in the interpretation intended by the TA.

The Claimant understands that the TA's interpretation of applying paragraph 3 of Article 45 of the CIRC to the tax year 2014 also suffers from defects, since this norm was repealed by Law no. 2/2014, of 16 January.

First, regarding the assumptions and purposes of the norm contained in paragraph 3 of Article 45 (previously before 2010, Article 42) of the CIRC, these are diametrically opposed to those of the norm contained in subparagraph (a) of paragraph 9 of Article 18 of the CIRC.

The first norm aims to address typical problems of the realization system, while the second intends precisely to subtract the expenses and income it regulates from that system, subjecting them to the opposite system of measurement at fair value (supported by the high reliability and independence from the taxpayer's will of the value used for that measurement).

This understanding results not only from the text of the norm itself, but is also confirmed by the Reports relating to the State Budget Laws that saw paragraph 3 of Article 45 of the CIRC (then Article 42) emerge and develop, targeting the same expenses determined in the context of the realization system ("losses") and intended to combat the abuses facilitated by the same.

Thus, paragraph 3 of Article 45 of the CIRC was born (2003) and acquired its definitive configuration (2006) entirely within the absolute reign, within the framework of the CIRC, of the realization system (as regards the equity components in question), unlike subparagraph (a) of paragraph 9 of Article 18 of the CIRC, which was only born in 2010 and precisely subtracts the realities it addresses from the realization system.

If we look at it, even from a somewhat different perspective (the "balance of the system," adopted by Tomás Cantista Tavares), the purpose of paragraph 3 of Article 45 of the CIRC (previously, 42) is exhausted in the coverage of realities (capital losses) that operate in the realization system and ends up not denying the essentially anti-abuse character of the redrafting alteration (on which the TA relies in this concrete case) of paragraph 3 of Article 45 of the CIRC (then, Article 42) carried out by the State Budget Law for 2006.

Thus, if we look at the letter of subparagraph (a) of paragraph 9 of Article 18 and paragraph 3 of Article 45, both of the CIRC, in no way does this force the TA to mix, as it has mixed, the system (rule) of realization and the norms that govern it and apply to it, with the system (which constitutes the exception) diametrically opposed and supported by opposite assumptions, of measurement at fair value, applying to the latter norms (paragraph 3 of Article 45 of the CIRC) that were born with and for the first system, and that are only understood in light of the problems generated by the application of the first system (whether problems of abuse of the system, or, in the thesis of Tomás Cantista Tavares, problems of "system balance").

It is, therefore, unequivocal that this legal text that embodies an exception to the principle of realization uses its own language ("adjustments resulting from the application of fair value"), the same is to say, adjustment to the value of the asset due to variations in its quotation), which has nothing to do with the language used by the system-rule of realization.

None of these realities to which paragraph 3 of Article 45 of the CIRC refers can, technically speaking, mean adjustments resulting from fair value; and if we think about the temporal element of the formation of this norm (between 2003 and 2006) it is impossible, by way of any modernizing interpretation, to say that in its spirit would fit adjustments resulting from fair value (a reality that was only created in 2010) that would advise that its letter be "interpreted" in that accordance. In fact, the new tax reality of the CIRC of the recognition of adjustments resulting from fair value, born in 2010, constitutes a creation ex novo, namely as regards the equity components in question, which, by definition, could not have been in the mind of the legislator (of 2003 and 2006) responsible for paragraph 3 of Article 45 of the CIRC.

In the regulation of this new tax reality of adjustments resulting from fair value, the tax consideration of the same is in no way abandoned, partially at least; on the contrary, it is affirmed, without restrictions, their tax relevance.

Being the new tax rule of adjustments resulting from fair value a special rule relative to the general rule of realization, which is justified precisely by the specialty (difference) of the situations it addresses, only with very good and valid reasons (which the TA is incapable of presenting) can one consider applying to these special situations typical rules, and which respond to typical concerns, of the realization system.

Nothing in the letter of paragraph 3 of Article 45 of the CIRC, especially when contrasted with the letter of subparagraph (a) of paragraph 9 of Article 18 of the CIRC, allows one to conclude that the first (integral part of the general regime) would apply to the new tax reality created by the second (special regime, for special situations). In particular, paragraph 9 of Article 18 of the CIRC makes no reference to paragraph 3 of Article 45 of the CIRC, nor does this norm make any reference to negative adjustments resulting from fair value in equity instruments.

In sum, given the present framework, there are no discernible arguments, in light of the literal element of paragraph 9 of Article 18 and paragraph 3 of Article 45, both of the CIRC, that could justify the limitation to 50% of the deductibility of the expense resulting from the application of the fair value method through results, contrary to what is maintained by the TA.

By way of example, let us see the transmutation of the principle of contributory capacity and the taxation of real income into the principle of randomness when applied to the new tax reality of subparagraph (a) of paragraph 9 of Article 18 of the CIRC, the provision contained in its paragraph 3 of Article 45.

See the absurd results to which the intended application (by the TA, and by two arbitral decisions, unique exceptions to many others that do not accept the TA's claim) of paragraph 3 of Article 45 of the CIRC, to the new tax reality of adjustments resulting from the application of fair value provided for in subparagraph (a) of paragraph 9 of Article 18 of the CIRC will lead.

First case: if a taxpayer in year N has an adjustment resulting from fair value negative (determination of an expense) due to unfavorable evolution of the quotation, e.g. of 200, and in the following year the quotation recovers and consequently has an adjustment resulting from fair value positive (determination of an income) of equal amount, the fair value of that asset will not have moved from the place over the two years combined, that is, the taxpayer will not have become richer or poorer with that asset.

What was merely potential, the devaluation of 200, would have been reversed by a revaluation of 200 in the following year, with which the taxpayer would not have moved, potentially that it was, from the place.

And yet, if paragraph 3 of Article 45 of the CIRC were applied to these adjustments, as the TA intends, we would have that only 100 (50%) of the 200 of negative adjustment would be taken into the formation of its taxable profit, in contrast with the full contribution of the positive adjustment to the formation of that same profit, so that everything would happen as if (fictitiously) the taxpayer had enriched by 100 (200 positive minus 50% of 200 negative), had had a profit of 100 with that asset, for IRC taxation purposes.

There being no reason to treat unfairly that negative adjustment fiscally without correlatively doing the same with the positive adjustment, this consequence or final result only has one possible qualification: arbitrary disregard of an element (50% of the negative adjustment) in the computation of profit to be subject to IRC taxation.

In fact, if paragraph 3 of Article 45 of the CIRC is applicable to fair value expenses (with the fiscal refusal of half thereof), once the recovery of the devaluations such as those that occurred in 2012, 2013 and 2014 with the Claimant's participation in C…, is not applied the same recipe (here the fair value income is already accepted in full), the Claimant will be taxed, without any discernible reason, as if it had had a patrimonial increase that it did not have.

Or see yet another example, now giving a plane that directly invokes the principle of equality: two taxpayers who invested in two distinct listed companies, and who, to simplify the comparison, paid the same acquisition price for their respective investments and sold at the same time and for the same price their respective investments.

One (alpha) benefited from a continuous and smooth rise in the quotation, obtained a gain of 200 and is taxed on that gain. The other (Beta), because it had oscillations of negative quotation in the intermediate time in the amount of 1,000, from which it then recovered and even exceeded by 200, despite in the final accounts having had exactly the same gain of 200, will be much more heavily taxed once all annual quota recoveries have been taxed at 100% (in a total of 1,200 annual valuations), but the falls annually that preceded them (in a total of 1,000) only counted at 50%, i.e., in 500, for the formation of taxable profit.

Result? Alpha suffers a taxation on income related to that asset in the amount of 50 (200x25%), with an effective IRC rate of 25%, corresponding to the nominal rate (the rate with which the legislator intends to burden income). Beta, who earned exactly the same with his asset (200), suffers a taxation of 175 [(1,200-500) x 25%], corresponding to 87.5% of his gain (effective IRC rate of 87.5%). This is because his aggregate profit for IRC purposes with respect to this asset was (fictitiously) of 700, and not the 200 that he actually obtained.

From this reality result results, in terms of effective taxation, taxation of non-existent profits (created from nothing, profits for IRC purposes), and generates, further, results totally arbitrary, which treat unequally taxpayers with identical economic results by the simple fact that there have been more, or fewer, oscillations, in the quotation, in the period between the acquisition of the asset and the realization (definitive fixing) of the gain (or loss) in the sale.

As correctly concluded in the decision issued by the arbitral collective in case no. 108/2013-T, "the non-application of the norm of Article 45/3 of the CIRC to expenses, (…) leads to a coherence of taxation whatever the time at which the alienation of the financial instrument takes place."

Which means that "it seems clear that such results, merely random and without any substantial justification that sustains them, could not have been intended by a reasonable legislator."

Regarding the alterations to the realization regime made by Law no. 2/2014, of 16 January, the Claimant understands that if, as the TA says, paragraph 3 of Article 45 of the CIRC had really intended to apply to the new (born in 2010) tax reality of adjustments resulting from the application of fair value, the alteration occurring in 2014 in the old and distinct tax reality of the realization system as regards capital gains and losses would in no way have interfered with the continuity of the existence of that article, although now applied to a more restricted reality.

And yet, the article disappeared completely, was repealed by the aforementioned law, in yet another revelation of the legislator's thinking: that article was a component part of the realization regime, applied only within the operation of the realization system, from which, when this was altered in terms that made that article essentially redundant, the latter automatically disappeared from the tax system.

And if, as the TA intends, because paragraph 3 of Article 45 presumably also applies to adjustments resulting from the application of fair value, its elimination had consequently meant an alteration also of the tax regime of adjustments resulting from the application of fair value, it would have been imperative that a transitional regime had been established, at the risk of generating new absurdities and unjustifiable inequalities of treatment, as will be illustrated below.

Now, the arbitrariness that commands taxation in the examples above appears clear, resulting from the same basic injustice, fruit of mere "luck" or "misfortune" in the cadence of the oscillations of the quotation of the holdings held. Paraphrasing again the arbitral decision issued in case no. 108/2013-T, "it seems clear that such results, merely random and without any substantial justification that sustains them, could not have been intended by a reasonable legislator."

Thus, in summary, the Claimant considers that it has been reasonably demonstrated that, whether from the point of view of the spirit of the law, namely the spirit, purposes and concerns that animate the set of rules that constitute the realization system, on one side, and the spirit, purposes and concerns (which are others, being absent those that afflict the realization system) of the special and distinct regime of "adjustments resulting from fair value" whether from the point of view of the letter of the law, whether from the point of view of the history of the law and what can be deduced therefrom of the legislator's thinking, paragraph 3 of Article 45 of the CIRC applies exclusively to the tax realities governed by the realization system, not applying to the new tax reality, born in 2010, of "adjustments resulting from fair value."

The Claimant further invokes that for those who, like the TA, understand that the norm contained in paragraph 3 of Article 45 of the CIRC would also apply to the negative adjustments resulting from fair value provided for in subparagraph (a) of paragraph 9 of Article 18 of the CIRC, then that norm which imposes the disregard of 50% of the loss, in such interpretation of its scope of application, will suffer from unconstitutionality by violation of Articles 2 (democratic rule of law, with the inherent principles of proportionality, equality and prohibition of arbitrariness), 13 (principle of equality), paragraphs 2 and 3 of Article 18 (principle of proportionality), subparagraph (f) of Article 81 (freedom of business management, which has as its counterpart a State that promotes neutrality as opposed to creating distortions) and paragraph 2 of Article 104 (principle of taxation, fundamentally, of real income and, in combination with the principle of equality, principle of contributory capacity), of the Constitution of the Portuguese Republic ("CRP").

Now, in sum, the manner in which the interpretation of paragraph 3 of Article 45 of the CIRC, in the sense that it would also apply to the negative adjustments resulting from fair value provided for in subparagraph (a) of paragraph 9 of Article 18 of the CIRC, systematically generates, at the whim of the purest randomness (that inherent to the different and possible patterns A, B, C, D, E, F, etc., of stock market evolution of the quotation of each share), inequalities, arbitrariness, taxation of profit that does not exist and failure of coherence or any rational sense.

That being said, the Claimant further understands it necessary to analyze the implication for the tax year 2014 of the repeal of paragraph 3 of Article 45 of the CIRC by Law no. 2/2014, of 16 January. It is the Claimant's understanding that the part of the adjustment resulting from the application of fair value (paragraph 9 of Article 18 of the CIRC) that the law mandates to be assigned to the tax year 2014 (paragraphs 1 and 5 of Article 5 of Decree-Law no. 159/2009, of 13 July), can no longer be governed for tax purposes by the norm invoked by the TA (paragraph 3 of Article 45 of the CIRC), for the simple reason that this restriction on tax deduction ceased to be in force effective from 2014 inclusive (see its repeal by Law no. 2/2014, of 16 January).

Now, in summary, the tax recognition, and not the accounting recognition, should be taken into account. And for the purposes of applying/succession of law in time, what is at issue here is a succession of tax regimes (elimination of the restriction on tax deduction contained in paragraph 3 of Article 45 of the CIRC, effective from 2014 inclusive), and not a succession of accounting regimes.

From which the incontestable conclusion, that as far as tax deduction, or not, in 2014 is concerned, the tax legislation in 2014 applies. And this, it is unequivocal, however paragraph 3 of Article 45 of the CIRC would have been interpreted, ceased in 2014 to accommodate the restriction on tax deduction that the TA still intends to avail itself of, by virtue, precisely, of the repeal of that article of the CIRC (which was in force, therefore, only until 31-12-2013).

Subsidiarily, the Claimant also petitions solely out of caution in legal representation that if the main request is not granted (100% tax deduction of expenses resulting from the measurement of the assets in question at fair value), then subsidiarily it requests that the partial recovery of value occurring in 2013 and 2014 with respect to the assets here in question (measured for tax purposes at fair value), be fiscally irrelevant in the same measure, that is, 50%, insofar as the devaluation is also taken to be fiscally irrelevant.

In fact, in this hypothetical scenario of partial (50%) irrelevance of expenses resulting from measurement at fair value, that is, partial irrelevance of devaluations, the gains that represent recovery of those devaluations (as is the case in the concrete case) should also not be relevant, symmetrically, in the same measure (50%).

It is exactly the same fiscal principle that, without needing to be written in stone, has always been applied (including the TA) with provisions: insofar as they are not tax deductible, the reversal (recovery) thereof is not afterward subject to taxation either.

Regarding indemnity interest, the Claimant understands that with the illegality of the (self-)assessment for 2014 in the part here petitioned declared, the Claimant is entitled not only to the respective refund, but also, under Article 43 of the General Tax Law ("LGT"), to indemnity interest, calculated on:

in the case of the main request: € 55,081.78, counted, until the integral refund of this amount, from the end of the date for the corresponding spontaneous refund of the tax, that is, from 1 September 2015 (Article 104, paragraph 6, of the CIRC);

in the case of the subsidiary request: € 7,831.03, counted, until the integral refund of this amount, from the end of the date for the corresponding spontaneous refund of the tax, that is, from 1 September 2015 (Article 104, paragraph 6, of the CIRC).

This is because the right to payment of indemnity interest corresponds to the materialization of a right with constitutional basis, provided for in Article 22 of the CRP, where it is established that "the State and other public entities are civilly liable, in joint and several form with the holders of their offices, officials or agents, for actions or omissions carried out in the exercise of their functions and because of that exercise, resulting in the violation of rights, freedoms and guarantees or damage to others."

In these terms, Article 43 of the LGT, in recognizing the right to indemnity interest, merely materializes some cases in which taxpayers are entitled to be indemnified by acts of the TA, without prejudice to a more generic pre-existing indemnification right.

That is, Article 43 of the LGT, in recognizing the right to indemnity interest, does not come to recognize a new right as a consequence of an act of the TA, but rather comes to establish a specific form of materialization of the indemnification right constitutionally guaranteed (cf. generic administrative guidance [Circular Notice no. 60,052, of 03-10-2006, of the Tax Justice Services of the TA] where the TA itself came to recognize that the constitution of the right to indemnity interest in favor of the taxpayer under Article 43 of the LGT is due in the following cases: "1.3. In all situations referred to in 1.1. (Interest motivated by error attributable to the services) and 1.2. (Interest motivated by delay attributable to the services), the payment of the corresponding indemnity interest does not depend on a request by the taxpayer, and must be satisfied ex officio by the Services, once the respective legal conditions are met".)

Thus, in these circumstances – error attributable to the Services – the right to indemnification for the damages resulting from the payment of tax in excess in the amount referred to above should be recognized to the Claimant (cf. Article 43 of the LGT).

The Claimant concludes in the present arbitral request in the following sense: "From the above, in summary, it results that both the rejection of the gracious complaint better identified above, and the self-assessments of IRC for the tax years 2013 and 2014, suffer from a material defect of violation of law, and should:

Be declared the illegality and annul the rejection of the gracious complaint insofar as it refused the annulment of the illegal parts, in the terms discussed here, of the self-assessments of IRC for the tax years 2013 and 2014, thereby violating the principle of legality;

Be declared the partial illegality of these self-assessments for the tax years 2013 and 2014 (and consequently be annulled), in the parts corresponding to the amount of € 798,286.70 of taxable base in excess in each one (in a total of € 1,596,573.40), and as well as with respect to the reflected tax on this excess taxable base determined and paid with respect to the tax year 2014, which amounts to € 55,081.78;

Consequently, be the right to refund recognized for the amount of € 55,081.78 with respect to the tax year 2014, and as well, the right to indemnity interest for the payment of tax unduly assessed/paid, counted, until integral refund, from 1 September 2015;

Or, subsidiarily:

Be declared the partial illegality of these self-assessments for the tax years 2013 and 2014 (and consequently be annulled), in the parts corresponding to the amounts of taxable base in excess of € 278,408.56 in 2013, and of € 113,493.15 in 2014, and as well as with respect to the reflected tax on this excess taxable base that with respect to the tax year 2014 amounts to € 7,831.03;

And be the right to refund recognized for the amount of € 7,831.03 and, as well, the right to indemnity interest for the payment of tax unduly assessed/paid, counted on this amount from 1 September 2015."

Response of the Tax and Customs Authority

5.1. By way of opposition

Regarding the assumptions and purposes of subparagraph (a) of paragraph 9 of Article 18 of the CIRC, and contrary to what is invoked by the Claimant, by force of what is mentioned in paragraph 9 of Article 18 of the CIRC, the adjustments that occur by application of fair value contribute to the formation of taxable profit, whenever they respect financial instruments recognized at fair value through results, (i) have a price formed in a regulated market and, (ii) the taxpayer does not hold, directly or indirectly, a capital participation exceeding 5% of the respective share capital.

This maintaining the principle of realization, which determines that tax relevance only occurs at the moment of alienation, when the conditions mentioned in the previous point are not met.

In fact, despite the option to adopt the fair value model, the legislator understood the need to create transitional mechanisms that would protect against the impact that the alteration in the measurement system would have on the equity of companies. However, it should be clarified that, both the temporal assignment regime associated with the adoption of fair value as a measurement criterion did not emerge, in the context of IRC, with the creation of subparagraph (a) of paragraph 9 of Article 18, whereby in no way can this norm be considered as an innovation that saw the light of day for the first time in 2010 only (cf. Article 58 of the arbitral request).

See, in this regard, that the norm of subparagraph (a) of paragraph 9 of Article 18 of the CIRC has as a precedent subparagraph (a) of paragraph 2 of Article 57 of Law no. 53-A/2006, of 29 December, which established transitional norms for entities subject to supervision by the Bank of Portugal obliged to prepare their individual accounts in accordance with the adjusted accounting norms (NCA).

Two years later, a norm with identical wording was created – subparagraph (a) of paragraph 2 of Article 2 of Decree-Law no. 237/2008, of 15 December, a diploma that implemented the legislative authorization granted by Article 51 of Law no. 67-A/2007, of 31 December – to establish a transitional regime for adapting the rules for determining taxable profit under IRC to the new accounting regulation applicable to the insurance sector resulting from the adoption of International Financial Reporting Standards (IFRS).

Since the introduction, in the CIRC, of a regime for financial derivative instruments – Article 68-B added by Article 2 of Decree-Law no. 257-B/96, of 31 December – a similar periodization rule has been admitted for income and expenses resulting from the application of market value (which corresponds in this context to what is now referred to as fair value) to financial derivative instruments when operations carried out on stock exchanges were in progress at the close of a tax year.

On the other hand, the qualification of the normative of subparagraph (a) of paragraph 9 of Article 18 of the CIRC as an "exceptional norm" seems out of place, since, for those types of assets with quotation in a regulated market, the CIRC does not contemplate a general rule and a special rule of temporal allocation for income and expenses. Paragraph 9 of Article 18 is the only rule applicable to the realities foreseen therein, and can thus, at most, be considered as a particular regime of temporal allocation of income/gains and expenses/losses that results from measurement by the criterion of fair value.

Likewise, it completely lacks meaning the attempt to defend that subparagraph (a) of paragraph 9 of Article 18 and paragraph 3 of Article 45, both of the CIRC mutually exclude each other (cf. Article 62 of the arbitral request). In fact, if the legislator did not establish any difference between operations performed in regulated markets or in non-regulated markets, with what legitimacy could the TA construct an interpretation of paragraph 3 of Article 45 of the CIRC that excluded from its scope, the losses, as well as other losses and negative patrimonial variations determined in operations with equity capital instruments, performed in regulated markets.

It is true that this normative, like others scattered throughout the CIRC, has underlying the purpose of mitigating the effects of base erosion practices that also fall, currently, within the objectives of tax policy, but the legislator in giving it a comprehensive and generic wording, opted not to include, in its provision, any consideration of particular circumstances of the concrete operations that originate the losses, as well as other losses and negative patrimonial variations.

That is, the Respondent cannot consent, therefore, that the interpreter arrogates to itself the right to subtract from its scope any losses or other losses or negative patrimonial variations, depending on the manner and place of realization of the concrete operations that gave rise to them.

See further that although it is undeniable that underlying the wording given to paragraph 3 of Article 45 of the CIRC were considerations and concerns related to the prevention of evasive practices, whose scope has evolved in the direction of its broadening, so as not to exclude operations and situations that, equally involving equity components or other components of equity, could produce the same effects of those initially contemplated, as is indeed recognized in Article 66 of the arbitral request, the importance given by the Claimant (e.g., in Articles 63 et seq. of the arbitral request) to the historical evolution of the provision in question, since its creation by Law no. 32-B/2002, of 30 December, denotes a poorly attentive and, above all, decontextualized reading of the normative of paragraph 3 of Article 45 of the CIRC, which adheres to questions of semantics around "costs," "losses," "expenses," which inevitably could only lead to a reductive interpretation of the scope of the norm.

See that, first, it is not true that it emerged in a time when exclusively what mattered, on the tax level, was the rule of realization, since the transitional normatatives created for banking and insurance companies, as well as the provisions that establish the general rules applicable to financial derivative instruments already opened the possibility of the periodization of income or gains and expenses or losses in operations performed on stock exchanges taking into account market value.

Second, the interpretation of the scope of application of a norm does not become crystallized by the legal framework in force at the date of its creation, since the successive evolution of the wording of paragraph 3 of Article 45 of the CIRC reveals with all clarity, on the one hand, the legislator's concern for its improvement based on the experience acquired, proceeding with its broadening expressly, by means of the inclusion of new realities, and, on the other, as was the case, the extension also denotes the reflection of alterations made in other norms, both on the accounting level and in tax legislation, which determined alterations to the concepts or to the forms of determination of the elements that integrate the normative provision.

It should further be noted that with respect to paragraph 3 of Article 45 of the CIRC and regardless of the doctrinal position adopted regarding the nature of the norm, it is indisputable that the legislator intended to cover various situations in its legal formulation.

Now, the concept of "losses" inherent in paragraph 3 of Article 45 of the CIRC has an open formulation, within the scope of which all types of losses relating to equity components fit, including potential losses and from which it results that the legislator, in establishing the broad concept of losses, did not intend to exclude any losses relating to equity components that are reflected in the accounts, not having expressly set aside the potential losses resulting from the application of fair value to financial instruments, whether recorded in expense and loss accounts or in equity accounts.

Thus, the Respondent concludes that on this first point, from the provisions in analysis it results very clearly that there is no contradiction between subparagraph (a) of paragraph 9 of Article 18 and paragraph 3 of Article 45, both of the CIRC.

Regarding the scope of application of paragraph 3 of Article 45 of the CIRC and of subparagraph (a) of paragraph 9 of Article 18 of the CIRC: see that in virtue of the adoption for the first time of the accounting norms foreseen in the SNC, Group B… SGPS determined a negative patrimonial variation associated with the measurement of the participation held in C… in accordance with fair value, having considered for tax purposes, in only 50% the negative patrimonial variation resulting from the transition to the new accounting reference regarding the recognition of fair value (deferred over five tax periods).

Thus, in view of what is provided in paragraph 1 of Article 5 of Decree-Law no. 159/2009, of 13 July, the deductible value of the negative adjustments in each of the five years corresponds to half of 1/5 of the total value determined, since its provision is subsumed to the regime of that normative of the CIRC (i.e., to paragraph 3 of Article 45 of the CIRC).

Now, we see, therefore, that the Claimant carried out the self-assessment of IRC for the tax years 2013 and 2014, respectively, in accordance with the understanding that flows directly from the Law, and that better reflects its ratio and the will of the legislator, and should therefore be maintained the decision of rejection of the gracious complaint presented, at the risk of there occurring a non-observance of the norm contained in the final part of paragraph 3 of Article 45 of the CIRC.

Therefore, it results from the reading of paragraph 3 of Article 45 of the CIRC that what contributes to the formation of taxable profit in only half of its value will be exactly, without prejudice to the previous caveat (and the exception opportunely adduced), the losses or negative patrimonial variations in question.

The financial participations here in question fit, therefore, into subparagraph (a) of paragraph 9 of Article 18 of the CIRC (above transcribed), with the alterations of their fair value contributing to the formation of taxable profit, as expenses, by force of what is also provided in subparagraph (i) of paragraph 1 of Article 23 of the CIRC, similarly to what occurs at the accounting level.

The Respondent thus understands that despite the wording of the Arbitral Request conveying the idea that in paragraph 9 of Article 18 of the CIRC the tax treatment of positive or negative adjustments resulting from the application of fair value to equity capital instruments with price formed in a regulated market is defined, such interpretation cannot but be qualified as an error of analysis, inasmuch as the purpose of this article is contained, solely, in the definition of the criteria of temporal allocation of the positive and negative components of taxable profit, giving effect to the principle of specialization of tax years, with Articles 20 et seq. being responsible for the determination of the applicable rules in the determination of taxable profit.

Thus, the income/gains and expenses/losses to which subparagraph (a) of paragraph 9 of Article 18 of the CIRC refers inevitably have to be confronted with the treatment that is given to them by the provisions of Articles 20, 23 and 45, respectively, of the same Code.

Moreover, the semantic question constructed around the dichotomy between the term "losses" used in paragraph 3 of Article 45, and the term "expenses" used in Article 23 and in subparagraph (a) of paragraph 9 of Article 18 of the CIRC is also considered to be totally irrelevant (v. excerpt transcribed in Article 116 of the arbitral request, from the arbitral decision issued in case no. 108/2013-T), being certain that the term [Expenses] used, both in the heading given to Article 23, within the context of the alterations introduced by Decree-Law no. 159/2009, of 13 July, as in the wording of subparagraph (i) of paragraph 1 of that provision [Expenses resulting from the application of fair value in financial instruments], must necessarily be understood in a broad sense, i.e., covering, in substance, the expenses properly so-called and the losses.

This despite the fact that, as the Claimant affirms, each of those terms has its own significance. However, that dichotomy between "expenses" and "losses" can only be qualified as a terminological imprecision of the legislator without consequences at the level of the interpretation of those precepts. And, indeed, it could not be otherwise, having regard to paragraph 1 of Article 17 of the CIRC, since, in the Chart of Accounts of the System of Accounting Normalization (SNC), account 661, where negative adjustments resulting from the use of fair value are recorded, has always been denominated Losses from reductions in fair value in financial instruments, having that imprecision been corrected by Law no. 2/2014, of 16 January, with the substitution, in those precepts, of "expenses" by "losses".

Given the foregoing, the Respondent concludes that the legislator made a clear choice with respect to the losses verified in the equity components provided for in subparagraph (a) of paragraph 9 of Article 18 of the CIRC, which consisted in the attribution of tax relevance, regardless of their actual realization, materializing such choice, as far as this matter is concerned, in a clear departure from the principle of realization.

And it should further be said that, as to the fact that the subsumption to the partial deduction regime provided in paragraph 3 of Article 45 of the expenses/losses determined in accordance with and under the conditions referred to in subparagraph (a) of paragraph 9 of Article 18 of the CIRC, is not accompanied by a symmetric treatment for the income/gains, and the potential injustice that may result therefrom, in truth, there is no legal provision that allows for the consideration of only half its value in the calculation of taxable profit.

And if the legislator, neither before nor after 2010, introduced any provision establishing a symmetric solution for the income/gains and expenses/losses resulting from the application of fair value, in accordance with and under the conditions to which subparagraph (a) of paragraph 9 of Article 18 of the CIRC refers, nor can the interpreter, whether the TA or the taxpayer, substitute itself in that task. Therefore, whether accounting or tax-wise, the adjustments resulting from the application of fair value are considered gains from increases in fair value, or losses from reduction in fair value (as is reflected, respectively, in what was then subparagraph (f) of paragraph 1 of Article 20 of the CIRC and in what was then subparagraph (i) [now subparagraph (j)] of Article 23 of the same diploma.)

Therefore, as the legislator made no alteration to the norm in question, it becomes evident that the objective pursued was, rather, to apply the limitation on tax deductibility to a broader universe of losses, and not only to those resulting from the onerous transmission of equity components, for which reason it extended the application of the precept ("as well as") to "other losses or negative patrimonial variations relating to equity components or other components of equity, namely supplementary contributions."

As for the arbitral decision issued in Case no. 108/2013-T, indeed, if in the first part of paragraph 3 of Article 45 of the CIRC, the wording clearly encompasses the negative difference between gains (capital gains) and losses (capital losses) resulting from an onerous transmission of equity components, therefore "of a voluntary action of the taxpayer" (in the expression used in the arbitral decision issued in case no. 108/2013-T) in the second part, the reference to other losses or negative patrimonial variations relating to equity components is made without specifying what operations can originate them.

For this reason, the conclusion drawn in that arbitral decision is based on a partial and outdated interpretation of paragraph 3 of Article 45 of the CIRC, because it focuses only on the first part of the text of the norm and seeks to frame the norm in the context of anti-abuse measures of a specific character whose application would be dependent on a case-by-case assessment of the abusive character of each concrete operation.

As to the problem of the alteration by Law no. 2/2014, of 16 January (reform of the CIRC): The Respondent understands that the Claimant is also without right (cf. Articles 150 et seq. of the arbitral request), this is because the mentioned Law no. 2/2014, of 16 January, did not merely repeal Article 45, paragraph 3 of the CIRC because it had become useless by virtue of that article being applicable "only in the operation of the realization system."

In fact, this argument has underlying a rather reductive perspective of the alterations made by Law no. 2/2014, of 16 January, to the CIRC, since the same, among other measures, proceeded with a comprehensive reform of the regime of capital gains and losses, determined in equity components and other equity instruments, it not being possible to extract from the mere repeal of a precept, the consequences that the Claimant draws in Point iv of the arbitral request.

With the reform of the IRC, approved by Law no. 2/2014, of 16 January, Article 45 in question was repealed and replaced by Article 23-A, that is, losses relating to equity components became fully deductible, by express choice of the legislator (who understood it should be thus after 1 January 2014, since that reform applies, under the terms of Article 14 of Law no. 2/2014, of 16 January, "to tax periods beginning, or to tax events occurring on or after 1 January 2014"). Thus, it is an innovative law and not an interpretive law.

The provision contained in Article 45, paragraph 3, of the CIRC defines the regime applicable with a generic character regarding the deduction of negative differences between realized capital gains, as well as other losses and negative patrimonial variations relating to equity components, from it being removed only the cases in which the law established a particular treatment, namely in paragraphs 3, 4 and 5 of Article 23 of the CIRC and in paragraph 2 of Article 32 of the EBF.

Now, subparagraph (a) of paragraph 9 of Article 18 aims solely to establish a rule of temporal allocation of income/gains and expenses/losses resulting from the application of fair value to equity capital instruments that contribute to the formation of taxable profit, in materialization of the principle of specialization of tax years or of accrual, not thereby establishing the regime applicable regarding the deductibility of those expenses/losses (therefore, the deduction of the expenses/losses resulting from the application of fair value to equity capital instruments, under the terms of subparagraph (a) of paragraph 9 of Article 18, is governed by what is provided in subparagraph (i) of paragraph 1 of Article 23 and in paragraph 3 of Article 45 of the CIRC, that is, they are only deductible in half of their value).

The Claimant also alleges the existence of unconstitutionalities, placing in question the legitimacy of the interpretation given to the norm that has been the object of the present analysis, for considering it to be non-compliant with the constitutional principles of taxation by real income, of contributory capacity, of Democratic Rule of Law, of equality, of proportionality, of freedom of business management, namely provided for in Articles 2, 13, paragraphs 2 and 3 of Article 18, subparagraph (f) of Article 81 and paragraph 2 of Article 104 of the CRP.

The Respondent understands that this is not true, inasmuch as, although the rules of temporal allocation of income/gains and expenses/losses resulting from the application of fair value to financial instruments already had accommodation in the IRC in specific situations, it was especially with the introduction of the SNC that profound alterations were made to the CIRC, now coming to be contemplated in subparagraph (i) of paragraph 1 of Article 23 the aforementioned "expenses resulting from the application of fair value in financial instruments," which thus came to have broader tax relevance, by force of this normative in combination with what is provided in subparagraph (a) of paragraph 9 of Article 18 of the CIRC, while simultaneously the wording of paragraph 3 of Article 45 was maintained, existing at the date of such alterations.

Whereby, the Tax and Customs Authority, in interpreting paragraph 3 of Article 45 of the CIRC according to the terms of the binding information provided and of the decision on the gracious complaint which is the object of the present proceedings, did so in observance of what is provided in Article 9 of the Civil Code, applicable by force of paragraph 1 of Article 11 of the LGT, according to which, if, on the one hand, it is true that interpretation should not limit itself to the letter of the law, and should reconstruct the legislative thinking, taking into account notably the unity of the legal system as well as the specific conditions of the time in which it is applied, on the other hand, it is equally true that, in accordance with paragraph 2 of the mentioned legal provision, "However, the legislative thinking that does not have in the letter of the law a minimum of verbal correspondence, albeit imperfectly expressed, cannot be considered by the interpreter."

In conclusion, the Respondent understands that the interpretation given to paragraph 3 of Article 45 of the CIRC does not suffer from any unconstitutionality, the decision of the Gracious Complaint which is the object of the present proceedings appearing to be correct.

The Claimant further raised a set of decisions issued in arbitral proceedings, alleging that there is an almost unanimous understanding on this matter. However, it should be noted that, from the outset, there is no unanimity of arbitral decisions already issued on this matter, such as the example of the arbitral decision issued in case no. 25/2015-T which judged the arbitral request there deduced to be unfounded, considering there to be no defect in the interpretation defended by the TA equally propounded in the present proceedings, or the more recent ruling of the collective arbitral tribunal issued in case no. 90/2016-T.

But even if it were not so understood, not only do the decisions identified by the Claimant not pre-conform totally the present case, since the decisions of the tribunals only bind the concrete case about which the arbitral decision is issued, even if the situation in question were identical to that discussed there, which is not admitted. As also, by reference to paragraph 4 of Article 68-A of the LGT, also the position of the services of the Tax and Customs Authority deserves no censure, since, with due respect, arbitral decisions are not decisions issued by a court of superior hierarchy.

Regarding the Claimant's invocation of the alleged non-existence of a specific norm limiting tax deductibility in 2014, the Respondent understands that given the rules on the application of law in time (cf. Articles 12 of the LGT and 12 of the Civil Code), such legislative alteration does not lead to the conclusion defended by it, it not being foreseen how the repeal of paragraph 3 of Article 45 of the CIRC can influence this fact, totally formed and pre-determined in the past.

In fact, the loss resulting from the application of fair value to the social participations in C… was recognized on 31-12-2009, when the norm contained in paragraph 3 of Article 45 of the CIRC was in force. Consequently, in that manner, the amount of € 3,991,433.50 (50% of the value of the loss, by application of the said norm) was the "fiscally relevant value in terms of the CIRC" to which paragraph 1 of Article 5 of Decree-Law no. 159/2009, of 13 July (transitional regime) refers, and which determined the distribution of that "fiscally relevant value" over the tax years 2010 to 2014.

It should further be said, as was well understood in the decision on the gracious complaint, that the said legislative alteration is not such as to permit the deduction of the loss resulting from the application of fair value to the social participations already recognized on 31-12-2009, when the norm of paragraph 3 of Article 45 of the CIRC was in force.

It being further certain that the binding information mentioned in the complaint and in the arbitral request should be considered to have expired with respect to the tax year 2014, by alteration of the assumptions of law.

As to the subsidiary request presented by the Claimant, it should be clarified that the fact that the subsumption to the partial deduction regime provided in paragraph 3 of Article 45 of the CIRC of the expenses/losses determined in accordance with and under the conditions referred to in subparagraph (a) of paragraph 9 of Article 18 of the CIRC, is not accompanied by a symmetric treatment for the income/gains, does not obliterate that there does not exist a legal provision that allows for the consideration of only half of its value in the calculation of taxable profit.

In fact, in view of all the foregoing, if the legislator understood not to create a solution symmetric to that applied to the expenses/losses resulting from the adoption of fair value to equity capital instruments, in accordance with and under the conditions referred to in subparagraph (a) of paragraph 9 of Article 18 of the CIRC for the income/gains, these must enter into the calculation of taxable profit, as provided for in subparagraph (f) of paragraph 1 of Article 20 of the CIRC, and the TA cannot, by force of the principle of legality, fill that omission. Note that the arbitral tribunals are obliged to decide according to the constituted Right (cf. ruling issued in case no. 90/2016-T: "there is a clear discrepancy in the treatment given to expenses and income resulting from the application of fair value, the former being accepted only at 50% of their value and the latter taxed in full. However, it is not for this Tribunal to assess the merit of the norms it applies. In fact, it is for it only to judge the case it has in hand based on what is emanated by the said norms").

Regarding the payment of indemnity interest by reference to the reflected tax determined by the Claimant with respect to the year 2014, the Respondent understands that indemnity interest is not due, especially because the act of assessment does not suffer from any defect that should dictate its annulment.

But, even if one could admit the Claimant's right to indemnity interest resulting from the eventual unfoundedness of the exception deduced and the foundedness of the action, never would the same be due because the requisites provided for in subparagraph (c) of paragraph 3 of Article 43 of the LGT are not met, this is because the TA decided within a period of less than one year, as results from the presupposition recorded in that legal norm (the Claimant presented the complaint of the self-assessment on 19-05-2016, the same having been decided by dispatch of 12-12-2016, that decision being notified to the Claimant on 14-12-2016).

In fact, being at issue the correction of error in the self-assessment of the taxpayer, which promotes its revision via gracious complaint under Article 131 of the Code of Tax Procedure and Process ("CPPT"), then the provision of paragraph 1 of Article 43 of the CPPT is not applicable, but rather the special norm contained in subparagraph (c) of paragraph 3 of Article 43 of the CIRC.

Whereby the conclusion can only be that the right to interest (paragraph 3 of Article 43 of the LGT), in a situation such as that which occurs in the proceedings, does not occur, and only what has already been paid should be restored to the taxpayer, translating itself per se already as a benefit for the taxpayer faced with the reality of its tax situation.

But even if it were not so understood: Given the requirement of the existence of error attributable to the services – which cannot be considered to be met given that one is dealing with a complaint of self-assessment – then, indemnity interest will only be due, only from the date of the decision rejecting the gracious complaint.

5.2. By way of exception

The Respondent understands that regarding the last part of the Claimant's request where it determines and petitions, with reference to 2014, the refund of the eventual tax corresponding to the corrections to the taxable matter that it intends to have recognized in its favor (increased by the corresponding indemnity interest), this constitutes a dilatory exception that obstructs the continuation of the proceedings.

The Respondent supports the understanding that the competence of the arbitral tribunals is, from the outset, circumscribed to the matters indicated in paragraph 1 of Article 2 of the RJAT, with the competence of these stemming not only from this legal provision but also from Ordinance no. 112-A/2011, of 22 March, by virtue of Article 4 of the RJAT.

Beyond the competence for direct assessment of the legality of requests of this type, the arbitral tribunals operating in the CAAD may assess acts of second or third degree that have as their object the assessment of the legality of acts of those types, namely acts that decide gracious complaints and hierarchical appeals, as results from the references of subparagraph (a) of paragraph 1 of Article 10 of the RJAT to paragraph 2 of Article 102 of the CPPT, which refers to the judicial challenge of gracious complaints, and to the "decision of the hierarchical appeal."

Now, it is manifest that there is no place in the scope of these competencies the assessment of the request for recognition of the right formulated by the Claimant, in the part where it determines and petitions, with reference to 2014, the refund of the eventual tax corresponding to the corrections to the taxable matter that it intends to have recognized in its favor (increased by the corresponding indemnity interest).

For there does not exist any legal support that permits that condemnations of a different nature from those resulting from the powers fixed in the RJAT be issued, even if they would constitute a consequence, at the level of execution of judgments, of the declaration of illegality of assessment acts.

As results from what is provided in Article 24 of the RJAT, the definition of the acts in which the execution of arbitral judgments should be concretized is, in the first instance, the responsibility of the TA, with the possibility of recourse to the tax tribunals to request coercively the execution, within the scope of the process for execution of judgments, provided for in Article 146 of the CPPT and Articles 173 et seq. of the Code of Procedure in the Administrative Courts.

It concludes thus that the incompetence on the merits of the Tribunal for assessment of the request identified above constitutes a dilatory exception that obstructs the continuation of the proceedings, leading to the dismissal of the instance as far as the claim in question is concerned, in accordance with what is provided in paragraph 2 of Article 576, and subparagraph (a) of Article 577 of the Code of Civil Procedure (CPC), applicable ex vi subparagraph (e) of paragraph 1 of Article 29 of the RJAT.

5.3. The TA concludes by petitioning that the dilatory exception invoked be judged to be founded, and the TA be accordingly dismissed, or if not so understood, that the present arbitral request be judged to be unfounded, as manifestly devoid of merit, with the legal consequences.

For there being no reasons that justified it, the tribunal dispensed with the holding of the first meeting provided for in Article 18 of the RJAT, which it did pursuant to the principles of the Tribunal's autonomy in the conduct of proceedings. The Tribunal designated 15-11-2017 as the deadline for issuing the arbitral decision, this being subsequently extended to 15-01-2018, given the fact that the six-month period for issuing the arbitral decision, as established in paragraph 1 of Article 21 of the RJAT, includes periods of judicial recess.

The Claimant, notified to this effect, responded to the incompetence exception raised by the TA, having requested its unfoundedness.

The Claimant and the Respondent presented allegations reiterating the arguments presented in the previous procedural documents.

Determination

9.1. The parties have judicial personality and capacity, appear to be legitimate and are regularly represented (Article 4 and paragraph 2 of Article 10 of the RJAT and Article 1 of Ordinance no. 112-A/2011, of 22 March).

9.2. Competence of the Tribunal

The Respondent raises, in its response, the incompetence of the arbitral tribunal as to subject matter.

It is incumbent to analyze and decide.

9.2.a. Exception of incompetence of the tribunal as to subject matter

As we have seen, in the initial petition, the Claimant formulates the following request: "It should be declared the illegality of the rejection of the gracious complaint better identified above and, as well, the partial illegality of the self-assessments of IRC of the B… Fiscal Group for the tax years 2013 and 2014, as far as concerns the amount in excess of € 798,286.70 of each of the respective taxable bases, in a total of € 1,596,573.40, with its consequent annulment in these parts, and as well as far as concerns the reflected tax in the amount of € 55,081.78 on the respective excess taxable base in the tax year 2014, in view of the manifest illegality of the assessments in these parts, with all legal consequences, namely the refund to the Claimant of this amount of tax (€ 55,081.78), increased by indemnity interest at the legal rate counted, until integral refund, from 1 September 2015. Alternatively, it should be declared the partial illegality of these self-assessments for the tax years 2013 and 2014 (and consequently be annulled), in the parts corresponding to the amounts of taxable base in excess of € 278,408.56 in 2013, and of € 113,493.15 in 2014, and as well as far as concerns the reflected tax in the amount of € 7,831.03 on this excess taxable base in the tax year 2014, with all legal consequences, namely the refund to the Claimant of this amount of tax (€ 7,831.03), increased by indemnity interest at the legal rate counted, until integral refund, from 1 September 2015."

The Respondent, in its defense, raised the incompetence of the Arbitral Tribunal, as to subject matter, in view of what is provided in paragraph 1 of Article 2, and Article 4 of the RJAT and in Ordinance no. 112-A/2011, of 22 March.

For the Respondent, and, in summary, even if such claim could eventually result from a hypothetical execution of judgments that would come to be carried out in case the arbitral decision issued were of foundedness of the request, the said request exceeds the competence of the Arbitral Tribunal.

Confronted with the raising of the exception of incompetence of the tribunal as to subject matter, the Claimant presented a response invoking, in summary, that it has in its favor hundreds of arbitral cases where hundreds of condemnations of the TA have been seen in the refund of the annulled tax (when this has been paid, naturally), whereby the issue is settled in the sense of competence. By way of example, the Claimant cites "two arbitral cases on this same issue of the tax treatment of fair value adjustments, relating to earlier fiscal years of A…, in which evidently the Arbitral Tribunal, having annulled a certain amount of tax, and noting that it had been paid, condemned in the petitioned refund (and in the payment of indemnity interest until such refund), without the TA having raised any question of competence in connection with this, or any other part, of the request: cases nos. 208/2015-T and 393/2016-T, joined as Docs. nos. 15 and 16 to the petition for constitution of Arbitral Tribunal."

For the Claimant, the understanding of the Respondent "(…) is absurd, and not only contrary to the principle of effective judicial protection, but also contrary to the principle of procedural economy (the efficient use of the scarce asset that is the administration of justice)."

The Claimant argues that the guidance of the Respondent Entity is unconstitutional, that is, "the norm contained in paragraph 1 of Article 2 of the RJAT in this interpretation of the TA, that it would prevent the Arbitral Tribunal from condemning the TA to the refund of a concrete amount of tax annulled, is unconstitutional, by violation of the principles of the democratic rule of law and of the principle of effective judicial protection (Articles 2, 20, paragraphs 1, 4 and 5, and 268, paragraph 4, of the Constitution)."

"The power to condemn in refund is a requirement of the constitutional principle of effective judicial protection, which is imposed in tax arbitration in the same way as it is imposed in judicial challenge. Who has powers/competence to annul tax, has necessarily competence/powers (or the protection would not be effective) to condemn in refund, even more (or a fortiori) than it has competence to condemn in the payment of indemnity interest."

The incompetence on the merits of the Tribunal for the assessment of the referenced request constitutes a dilatory exception that obstructs the continuation of proceedings, leading to the dismissal of the instance as to the claim in question, in accordance with what is provided in paragraph 2 of Article 576, and in subparagraph (a) of Article 577 of the CPC, applicable ex vi Article 29, paragraph 1, subparagraph (e), of the RJAT, whereby it is incumbent to assess, primarily, the dilatory exception raised by the Respondent.

Let us see:

In the legislative authorization on which the Government based itself for approving the RJAT, granted by Article 124 of Law no. 3-B/2010, of 28 April, it is proclaimed, as a primary directive of the institution of arbitration as an alternative form of judicial resolution of conflicts in tax matters, that "the tax arbitral process must constitute an alternative procedural means to the judicial challenge process and to the action for recognition of a right or legitimate interest in tax matters."

The judicial challenge process is a procedural means that has as its object an act in tax matters, aiming to assess its legality and to decide whether it should be annulled or whether its nullity or non-existence should be declared, as results from Article 124 of the CPPT.

By analyzing Articles 2 and 10 of the RJAT, it is verified that only issues of the legality of assessment acts or acts of determination of the taxable matter and acts of second degree that have as their object the assessment of the legality of acts of those types, acts whose assessment falls within the scope of judicial challenge processes, as results from subparagraphs (a) to (d) of paragraph 1 of Article 97 of the CPPT, were included in the competencies of the arbitral tribunals operating in the CAAD.

The legislator did not implement in the legislative authorization regarding the part in which it foresaw the extension of the competencies of the arbitral tribunals the issues that are assessed in tax tribunals through an action for recognition of a right or legitimate interest.

But, in harmony with the intention underlying the legislative authorization of creating an alternative means to the judicial challenge process, it should be understood that, as regards the requests for declaration of illegality of acts of the types referred to in its Article 2, the arbitral tribunals operating in the CAAD have the same competencies that the state tribunals have in the judicial challenge process, within the limits defined by the binding commitment made by the Tax and Customs Authority through Ordinance no. 112-A/2011, of 22 March, pursuant to paragraph 1 of Article 4 of the RJAT.

Although the judicial challenge process has as its primary object the declaration of nullity or non-existence or the annulment of acts of the types referred to, it has been peacefully understood that condemnations of the Tax and Customs Administration to pay indemnity interest and indemnification for undue guarantee can be issued in it.

In truth, despite there being no express norm to that effect, it has been peacefully understood in tax tribunals, since the entry into force of the codes of the 1958-1965 tax reform, that in the judicial challenge process one can combine a request for condemnation in the payment of indemnity interest with a request for annulment or for declaration of nullity or non-existence of the act, because in those codes it is referred that the right to indemnity interest arises when, in a gracious complaint or judicial process, the administration is convinced that there was an error of fact attributable to the services. This regime was, subsequently, generalized in the CPPT, which established in paragraph 1 of Article 24 that "there shall be a right to indemnity interest in favor of the taxpayer when, in a gracious complaint or judicial process, it is determined that there was error attributable to the services," then, in the LGT, in whose paragraph 1 of Article 43, it is established that "indemnity interest is due when it is determined, in a gracious complaint or judicial challenge, that there was error attributable to the services from which results 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 (to which corresponds paragraph 4 in the wording given by Law no. 55-A/2010, of 31 December), that "if the decision that recognized the right to indemnity interest is judicial, the period for payment is counted from the beginning of the period for its spontaneous execution."

Thus, similarly to what occurs with the tax tribunals in the judicial challenge process, this Arbitral Tribunal is competent to assess the requests for refund of the amount paid and for payment of indemnity interest.

It is also unequivocal that in the judicial challenge processes it is possible to assess requests for condemnation in the payment of indemnification for provision of undue guarantee, Article 171 of the CPPT, establishes that "indemnification in case of bank guarantee or equivalent unduly provided shall be requested in the process in which the legality of the exigible debt is disputed" and that "indemnification must be requested in the complaint, challenge or appeal or in case its grounds be supervenient within 30 days of its occurrence."

Thus, it is unequivocal that the judicial challenge process encompasses the possibility of condemnation in the payment of undue guarantee and it is even, in principle, the appropriate procedural means to formulate such a request, which is justified by evident reasons of procedural economy, since the right to indemnification for undue guarantee depends on what is decided about the legality or illegality of the assessment act.

The request for constitution of the arbitral tribunal has as its corollary that it will be in the arbitral process that the "legality of the exigible debt" will be discussed, whereby, as results from the express tenor of that paragraph 1 of the said Article 171 of the CPPT, "it is also the arbitral process that is the appropriate means to assess the request for indemnification for undue guarantee."

On the other hand, as the Tax and Customs Authority well refers, the competence to execute the judgments issued by the arbitral tribunals operating in the CAAD falls, in the first instance, to the Tax and Customs Authority itself, as results from the express tenor of paragraph 1 of Article 24 of the RJAT by saying that "the arbitral decision on the merits of the claim of which no appeal or challenge is available binds the tax administration from the end of the period provided for appeal or challenge, and this should..."

This separation constitutes a characteristic of merely annulment litigation such as that of the CPPT and, in the case of arbitral processes, finds special foundation in the fact that the Arbitral Tribunals have no competence to assess disputes that occur in the phase of execution of judgments (which happens, indeed, in relation to arbitral tribunals in general).

Thus, should there be disagreement between the Tax and Customs Authority and taxpayers over the manner of execution of judgments, the tax tribunals are competent for their assessment, since no competencies in processes for execution of judgments are attributed to the arbitral tribunals operating in the CAAD and the arbitral tribunals dissolve following the arbitral decision, as results from Article 23 of the RJAT.

This being so, within the limits fixed, the arbitral tribunals have competence to assess requests for refund of unduly paid tax.

It is settled jurisprudence that the arbitral tribunals have competence to assess requests for indemnity interest. Now, this assessment cannot but involve the request for refund of the unduly paid tax, given the inseparability of the same: the right to interest, if it exists, falls on the amount to be refunded.

Thus, when the amount to be refunded results clearly identified following the annulment of the tax act, we cannot but admit the competence of the tribunal for the request for refund, as it is still comprehended in the powers of annulment.

Differently are things in the cases in which there is divergence as to the amount to be refunded, and then the concretization of the same should be relegated to the phase of execution of judgment, as this belongs in fact to the sphere of the TA.

Nor is included in the competence of the arbitral tribunals the disputes that fall on the existence or not of the right to refund, as this is a request for recognition of rights.

In the case of the proceedings, the Claimant claims the refund of the amount of € 55,081.78, relating to the tax year 2014, as a result of the partial annulment of the self-assessment acts.

Thus, by what is stated above, the case of the proceedings should be considered excluded from the limitation that results from the scope of the judicial challenge process and the arbitral processes being restricted to the issues of the legality of the acts of the types referred to in Article 2, which are encompassed by the binding commitment made in Ordinance no. 112-A/2011, it being unable, namely, to define the terms in which the annulment judgments that may be issued must be executed.

It is, in consequence, judged that the exception of incompetence on the merits of the Arbitral Tribunal is unfounded.

9.2.b. It is concluded, in view of the foregoing, that the arbitral tribunal was regularly constituted and enjoys, moreover, competence, in face of what is provided in subparagraph (a) of paragraph 1 of Article 2 and paragraph 1 of Article 30 of Decree-Law no. 10/2011, of 20 January.

9.3. The proceedings are not affected by any nullities.

9.4. There are no other circumstances that obstruct the knowledge of the merits of the case.

Merit

III.1. Facts

Facts Established

With relevance for the assessment and decision of the issues raised, prior and on the merits, the following facts are taken as settled and proven:

The B… Group is subject to the Special Taxation Regime for Groups of Companies (RETGS), provided for in Articles 69 to 71 of the CIRC, which is engaged in the management of social participations in other companies, as an indirect form of exercise of economic activities (cf. gracious complaint joined to the Administrative Process - PA).

In the tax year 2005, the B… Group acquired 1,101,085 shares in C…, Ltd. (hereinafter, C…), formerly denominated D…, a company listed on the London Stock Exchange, with an acquisition cost of € 11,010,850.00, to which corresponded the acquisition by attribution without charge of 1,376,356 preference shares (C… preferred or …) in 2010 (cf. gracious complaint joined to PA, Article 15 of the Arbitral Request and Article 5 of the response presented by the TA).

The acquisition of the said shares gave the Claimant a participation representing less than 5% of the share capital of C… (cf. gracious complaint, Article 16 of the Arbitral Request, Article 6 of the response presented by the TA).

Until 31 December 2009, the social participations in question were measured in the Claimant's financial statements at acquisition cost, in accordance with the accounting principles defined in the Official Chart of Accounts (POC) (cf. gracious complaint, Article 17 of the Arbitral Request and Article 7 of the response presented by the TA).

Following the approval of the Accounting Normalization System (SNC), which came into force on 1 January 2010, the Claimant began to measure, in its financial statements, the social participations held in the capital of C… in accordance with Accounting and Financial Reporting Standard 27 (NCRF 27), which provides that equity capital instruments, namely social participations traded in a regulated market and representing less than 20% of the share capital of a given entity are measured at fair value through profit or loss (cf. gracious complaint, Articles 18, 19 and 20 of the Arbitral Request and Article 8 of the response presented by the TA).

Thus, by virtue of the adoption of the new accounting rules, the Claimant determined a negative patrimonial variation associated with the measurement of the participation held in C… in accordance with fair value, in the amount of € 7,982,866.25 (cf. gracious complaint, Article 26 of the Arbitral Request and Article 9 of the response presented by the TA).

On 22 January 2011, the Claimant made a Request for Binding Information with the aim of confirming the understanding of the Tax Authority (TA) regarding the tax treatment of that patrimonial variation, namely as far as concerns the limitation of deduction to 50% contained in paragraph 3 of Article 45 of the CIRC (cf. gracious complaint, Article 32 of the Arbitral Request and Article 10 of the response presented by the TA).

In response to the Request, the IRC Services Directorate informed that: "25. As we referred earlier, inasmuch as the legislator did not exclude from the scope of paragraph 3 of Article 45 of the CIRC the losses resulting from the measurement at fair value of equity capital instruments provided for in subparagraph (a) of paragraph 9 of Article 18 of the CIRC, there is no doubt that the same are only deductible in half of their value.

1. And because the legislator used the expression "losses," and not "the negative difference between gains and losses," it is concluded that these have to be treated separately from the gains, being that:

a) The gains, fitting into subparagraph (f) of paragraph 1 of Article 20 of the CIRC, contribute, in full, to the formation of the taxable profit relating to the period in which they occur (2010);

b) As to the losses, although they are considered deductible under subparagraph (i) of paragraph 1 of Article 23, their deductibility is subject to the limitation imposed by the final part of paragraph 3 of Article 45, both of the CIRC." (cf. points 25 and 26 of that information and PA).

The Claimant was notified of the response to the request for binding information on 21 April 2011 (cf. Article 32 of the Arbitral Request).

The Claimant considered, for tax purposes, in the self-assessments of IRC for 2013 and 2014, in only 50%, the negative patrimonial variation concerning the participation in C… resulting from the transition to the new accounting reference regarding the recognition of fair value (deferred over five tax periods), (cf. gracious complaint, Article 35 of the Arbitral Request and Article 12 of the response presented by the TA).

In fact, in the tax periods 2013 and 2014, the RETGS was applicable, in its individual statements the Claimant considered in field 705 of chart 07, as a title of negative patrimonial variation resulting from the transition to the new accounting reference regarding the recognition of fair value, the amount of € 798,286.70 (cf. gracious complaint, Article 35 of the Arbitral Request and Article 15 of the response presented by the TA).

And, as far as concerns the appreciation that occurred in 2013 and 2014 with the financial participation in C…, it would have been considered by the Claimant at 100% in the self-assessment of that tax year, in accordance with the framework confirmed by the TA in response to a new Request for Binding Information, dated September 2013 (cf. Article 36 of the Arbitral Request and Article 13 of the response presented by the TA).

In response to the second request for binding information, the TA sanctioned that "when income associated with gains in value is at issue and whose change in value must be recognized in results, as is the case in the concrete instance, these gains contribute to the formation of taxable profit in their entirety" (cf. PA and Article 40 of the Arbitral Request).

On 21-05-2014, the Claimant presented a gracious complaint of the self-assessment act of IRC relating to the tax period 2011 (cf. PA).

On 6 January 2015, notified, by means of Dispatch no…, of 2 January 2015, of the decision to reject the gracious complaint, by dispatch issued on 31 December 2014 by the Director of Finance Assistant of the Finance Directorate of Lisbon, the Claimant presented a request for constitution of the arbitral tribunal (case no. 208/2015-T), with a decision being issued on 25 September 2015, in the following sense: "to judge as founded the request for arbitral decision as to the claim for declaration of illegality of the dispatch rejecting the gracious complaint issued on 31 December 2014 by the Director of Finance Assistant of the Finance Directorate of Lisbon as to the partial illegality of the self-assessment of IRC (and consequent municipal tax on such) of the B… Fiscal Group for the tax year 2011, regarding the amount of € 242,123.28.

Annul the said dispatch rejecting the gracious complaint;

Annul the self-assessment, in the part concerning adjustments resulting from the application of fair value, relating to the amount of € 242,123.28 of IRC and consequent municipal tax;

Condemn the Tax and Customs Authority to pay to the Claimant the amount of € 242,123.28, increased by indemnity interest, counted from 22-09-2014, at the legal rate, until integral refund of the amount referred to." (Cf. PA). Already as to the negative effects on equity and losses resulting from measurement at fair value "can only contribute at 50% to the formation of taxable profit" (doc. no. 10).

More recently (on 16-05-2016) the Claimant presented a gracious complaint, with a view to raising the partial illegality of the self-assessment acts relating to the tax years 2013 and 2014, the same having been rejected by dispatch 12-12-2016, notified to the Claimant on 14-12-2016. (cf. PA and Articles 16 and 17 of the response presented by the TA).

From the decision to reject the gracious complaint, the Claimant deduced the present arbitral request, in the terms better already identified above, for which it refers.

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