IRC Deductibility of Expenses & Unit-Linked Insurance: CAAD Arbitration 160/2017-T

ARBITRAL DECISION

The arbitrators Counsellor Jorge Lopes de Sousa (arbitrator-president), Dr. António Pragal Colaço and Dr. Maria Isabel Guerreiro (arbitrator members), appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 30-05-2017, agree as follows:

1. Report

A…, S.A., NIPC…, with registered office at Avenida … n.º…, in Lisbon, (hereinafter referred to as the "Claimant"), has, pursuant to the provisions of articles 2.º, number 1 letter a), 5.º, number 3 letter a), 5.º, number 2 letter a) and 10.º, number 1, letter a), all of Decree-Law n.º 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters (hereinafter "RJAT"), presented a request for the constitution of an Arbitral Tribunal for the examination of the legality and partial annulment of the Corporate Income Tax assessment n.º 2016…, relating to the fiscal year 2013, and of the subsequent Account Settlement Statement n.º 2016…, "for error on matters of fact and law and defect of illegality due to violation of article 51.º of the Corporate Income Tax Code, in the part referring to investments in 'unit-linked'", with reimbursement of the amount paid plus compensatory interest, as well as payment by the Tax and Customs Authority of the costs of the arbitral proceedings.

The Tax and Customs Authority is the Respondent.

The request for constitution of the arbitral tribunal was accepted by the President of the Administrative Arbitration Centre and automatically notified to the Tax and Customs Authority on 20-03-2017.

Pursuant to the provisions of letter a) of number 2 of article 6.º and letter b) of number 1 of article 11.º of the RJAT, in the wording introduced by article 228.º of Law n.º 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories hereto, who communicated acceptance of the appointment within the applicable time period.

On 05-05-2017 the parties were duly notified of this appointment and neither manifested the will to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11.º number 1 letters a) and b) of the RJAT and articles 6.º and 7.º of the Deontological Code.

Thus, in conformity with the provision of letter c) of number 1 of article 11.º of the RJAT, in the wording introduced by article 228.º of Law n.º 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 30-05-2017.

The Tax and Customs Authority presented its defence, arguing that the petition should be dismissed and that, should this not be the case, the arbitral decision be notified to the Public Prosecutor.

By order of 27-07-2017 an oral hearing was waived and it was decided that the proceedings would continue with written submissions.

The parties presented their submissions.

The arbitral tribunal was regularly constituted, according to the provisions of articles 2.º, number 1, letter a), and 10.º, number 1, of Decree-Law n.º 10/2011, of 20 January, and is competent.

The parties are duly represented, have legal personality and capacity, are legitimate parties and are properly represented (articles 4.º and 10.º, number 2, of the same statute and article 1.º of Ordinance n.º 112-A/2011, of 22 March).

The proceedings are free of nullities.

2. Factual Matters

2.1. Established Facts

Based on the elements contained in the file and in the administrative proceedings attached to the record, the following facts are considered established:

• The Claimant [1] has as its corporate purpose the activity of direct insurance and reinsurance in the "life" branch, with production and commercialization of life branch insurance products;

• Among said products, the Claimant commercializes capitalization insurance to its clients, also denominated "unit-linked";

• In the course of its activity, the Claimant earned, during the fiscal year 2013, income from shares and units of participation - in investment funds - which it held and which form an integral part of its financial investments, relating to the commercialization of "unit-linked" insurance;

• The Claimant deducted from the net result, for purposes of determining taxable profit, distributed profits relating to such income received, in accordance with the mechanism for eliminating the double economic taxation provided for in article 51.º of the Corporate Income Tax Code ("CIRC"), in the wording in force in 2013;

• In compliance with Service Order n.º OI2015…, of 17-11-2015, a tax inspection action was carried out on the Claimant, relating to the fiscal year 2013, by the Tax Inspection Services of the Large Taxpayers Unit ("UGC");

• In the inspection procedure, the UGC notified the Claimant of the Tax Inspection Report, pursuant to which various technical corrections were proposed in the matter of taxable income of Corporate Income Tax for the fiscal year 2013, whose total value amounted to € 1,037,693.06;

• The UGC decided to make, among others, a correction in the amount of € 469,739.44 relating to the deduction effected regarding the elimination of the double economic taxation of distributed profits relating to the income from securities allocated to "unit-linked" portfolios;

• In the Tax Inspection Report, a copy of which is attached as document n.º 1 with the request for arbitral pronouncement, the contents of which are incorporated herein, the following is stated, in the "conclusive summary", regarding the correction at issue:

From the conclusive summary:

"The legislator, when referring in number 1 of article 51.º of the Corporate Income Tax Code to 'income included in the taxable base' intends to mean 'income that alter/that affect the taxable base', for only thus will the heading of article 51.º of the Corporate Income Tax Code - 'Elimination of double economic taxation of distributed profits' - make sense.

Indeed, as clearly appears, both from the heading of subsection IX of the Corporate Income Tax Code, and from the heading of article 51.º itself of that legal instrument, its rules aim at the elimination of double economic taxation, which presupposes that, in its absence, there would be double taxation of distributed profits. Thus, article 51.º of the Corporate Income Tax Code functions as the legal mechanism through which an attempt is made to prevent such distributed profits from being (even if, at the limit, only potentially) again subject to taxation in the sphere of the entity that earns them, thus avoiding, and at the limit, situations of taxation in 'cascade'.

Now, considering that the taxable base corresponds to the reality to be taxed, it is verified, on one hand, that in commercial companies, pursuant to the Corporate Income Tax Code, it will correspond to profit and, on the other hand, that the income generated by "unit linked" portfolios are not intended for the insurance companies that hold and manage them, but rather for the policyholders, who will be the recipients of such profits (should they arise).

The insurance companies receive the income from these products to subsequently deliver them to the respective policyholders, that is, these profits will affect the taxable base of the policyholders and not that of the insurance company.'"

And, aiming at the elimination of the double economic taxation of distributed profits, to which article 51.º of the Corporate Income Tax Code refers, to reduce or eliminate the fiscal cost that, in its absence, would fall (even if, at the limit, only potentially) on a given Taxpayer (in this case the Insurance Company), it is easily concluded that no fiscal cost results from the non-application of the provisions of article 51.º of the Corporate Income Tax Code to these income in the sphere of the insurance company, given that such income are never effectively (or even potentially) taxed in its (Insurance Company) sphere. By non-existence of such income in the taxable base, there is non-existence of income included in the taxable profit - taxation being, without doubt, limited to zero - and therefore, the income in question cannot benefit from the elimination of the (non-existent) double economic taxation of distributed profits provided for in article 51.º of the Corporate Income Tax Code.

The profit of the insurance company and the management fee it receives, and that one indeed affects its taxable base, but that one, however, cannot benefit from article 51.º of the Corporate Income Tax Code for not being 'distributed profits' as required by number 1 of the same article.

Thus, it is manifest that the fact that the Tax Authority considers that unit linked products do not confer the right to deduction of article 51.º of the Corporate Income Tax Code does not entail any prejudice, fiscal cost, double taxation, or additional cost for the insurance company that commercializes them. The contrary, that is, accepting that it would improperly benefit from said deduction, regarding income that do not alter its accounting result, its taxable base, is what would constitute not only an unfounded and illegitimate situation, but absolutely incompatible both with the economic substance of the facts and with the objectives pursued by the legislator in the institution of the regime in question.

Let us examine annex 7 (2 pages), through a merely illustrative case, regarding the impact that such income would have on the taxable matter of the insurance company if it improperly enjoyed the deduction here under analysis.

Thus, as a result of the characteristics of the "unit linked" product and its "mechanics", there is no double taxation to be eliminated since, in light of what was described above (in summary, the value recorded as income having as its reflection a value recorded as an expense), the insurance company never comes to be taxed (even potentially) with respect to income from shares (the dividends), thus it being manifest that such dividends, notwithstanding being distributed profits by an entity with a shareholding to its shareholder, effectively do not affect the net result of the insurance company and are not, conclusively, correct or proper to claim that they are "included in the taxable base" thereof (Insurance Company).

And lest it be said that the requirement prescribed by law (article 51.º of the Corporate Income Tax Code) does not take into account the fact of whether or not, in each case, there exists double taxation of that same income, inasmuch as, were it otherwise, the mechanism of article 51.º of the Corporate Income Tax Code would be dependent on the determination of the tax ultimately payable and on the very existence of positive net result of the entity that earns such income.

It is important to note that, considering the heading of the article "Elimination of double economic taxation of distributed profits", the expression "income included in the taxable base" expressly inserted in number 1 of article 51.º of the Corporate Income Tax Code, and the objectives pursued by the legislator through the institution of the regime in question, notwithstanding there not having to exist, in each concrete case, double taxation "of that" same income [because, for example, the entity earning such dividends has negative fiscal result in that fiscal year or because, even though having positive fiscal result in the fiscal year, it can deduct fiscal losses (which it may have) from prior fiscal years pursuant to article 52.º of the Corporate Income Tax Code], it results, nevertheless, from the regime of "Elimination of double economic taxation of distributed profits", and from the ends pursued by the legislator, that such income must be "included" in the taxable base intending thereby to mean that such income must "alter/affect" the result of the insurance company, that which, in compliance with what is provided in article 17.º of the Corporate Income Tax Code, is transposed to table 07 of Form 22 of Corporate Income Tax, that is, the taxable base (from which, bearing in mind the rules provided in the Corporate Income Tax Code, the taxable profit or loss is determined for tax purposes), this being the only interpretation compatible with the heading of the article "Elimination of double economic taxation of distributed profits" and with the ends pursued by the legislator.

Indeed, although article 51.º of the Corporate Income Tax Code does not take into account the fact of whether or not, in each case, and in a given fiscal year, there exists double taxation of "certain" income, the objective of article 51.º of the Corporate Income Tax Code is to prevent that, "that same certain income", could be (doubly) taxed or "potentially" taxed. That is, it seeks to prevent that "that" income could influence the fiscal result of the insurance company so that, in that, or in future fiscal years, notably, by force of the effects of the application of article 52.º of the Corporate Income Tax Code (Deduction of fiscal losses), such income could come to be (again) taxed. But this does not allow or enable, in any way, that a certain entity could, in whatever manner or based on whatever grounds or products, cease to include/affect its result, its taxable base, with such dividends and, yet, improperly, seek to deduce from such accounting result (already itself purged of such dividends), for purposes of determining fiscal result, and under an alleged "possible" interpretation of article 51.º of the Corporate Income Tax Code, the amount corresponding to the dividends earned, given that this would constitute a double deduction of the amount of dividends (the first deduction being the annulment of the dividends effected in accounting, through the accounting entry - of an amount equal to the dividends entered in an account of expenses or losses, and the second deduction – improperly - through a purported "possible" application of article 51.º of the Corporate Income Tax Code).

The procedure of the Taxpayer thus constitutes a manifest violation of article 51.º of the Corporate Income Tax Code in that, with this procedure, the insurance company not only would not influence but would see its result (already purged of distributed profits, through the accounting entry) be again purged of a "distributed profit" (which no longer was there), which would mean that, with this conduct, not only would the "distributed profits" (earned by the insurance company) not be taxed but the very result of the insurance company (already after being purged of the amount of such dividends, through the accounting entry), was again reduced by an amount corresponding to the value of such profits. This situation, as all must agree, would constitute an absurd result, and an unbearable incoherence of the Portuguese tax system, which could never result either from the letter or the spirit of the regime instituted by article 51.º of the Corporate Income Tax Code, and which, moreover, would constitute a manifest violation of the principle of tax equity with respect to profits distributed to insurance companies as a result of the application of their ("own") investments (in which investment responsibility is not that of the policyholder but of the insurance company itself), in which case, obviously, the result of the insurance company is susceptible to being purged of distributed profits under article 51.º of the Corporate Income Tax Code but in which the accounting result that, under article 17.º of the Corporate Income Tax Code, is transferred to table 07 of the Corporate Income Tax Form, obviously, is not (through any accounting entry) purged of the value of such dividends.

Effectively, even though the Insurance Company may be the actual holder of the shares, the fact is that the income obtained from such shares, being allocated to operations in which the investment risk is borne by the policyholder, on one hand, are not in the Chart of Accounts 07 allocated to technical provisions/technical reserves and, on the other hand, similarly to what already occurred in the Chart of Accounts 94, in substance do not alter either the accounting result or the fiscal result of the Insurance Company and, not altering the taxable base of the Insurance Company, such income are not taxed, or potentially taxed, in the sphere of the Insurance Company, whereby it cannot benefit from the provisions of article 51.º of the Corporate Income Tax Code (which aims, concretely and objectively, at the elimination of the double economic taxation of distributed profits).

Thus, the calculation of the deduction relating to the elimination of double economic taxation, provided for in article 51.º of the Corporate Income Tax Code, was recalculated, which constituted an increase in the taxable matter of Corporate Income Tax, in the amount of € 469,739.44, based on the grounds referred to above, determined as shown in annex 4 (14 pages).

It is important to note that this correction is directly related to and conditioned by the correction to the taxable profit in favor of the Taxpayer in the amount of (€ 69,217.29) effected in section III.1.1.1. of this document.

• By virtue of the corrections made in the inspection proceedings, the Claimant was notified of assessment n.º 2016 … with the amount of tax due of € 3,556,489.79 (document n.º 2 attached with the request for arbitral pronouncement, the contents of which are incorporated herein);

• The Claimant was likewise notified of the account settlement statement n.º 2016 … which determined a final amount due of € 923,008.21, with the payment deadline on 07-12-2016 (document n.º 3).

• The Claimant effected payment of said assessment on 06-12-2016 (document n.º 4 attached with the request for arbitral pronouncement, the contents of which are incorporated herein);

• The "unit-linked" capitalization insurance commercialized by the Claimant consist of a life insurance policy, expressed in units of account, whose return or appreciation is indexed to the appreciation of an underlying asset chosen by the Claimant;

• The "unit-linked" insurance commercialized by the Claimant correspond to contracts through which it undertakes to pay a certain benefit on the date of the relevant event (end of term, redemption or death of the policyholder);

• In the "unit-linked" insurance commercialized by the Claimant, the value of the benefit is by nature indexed to the value of the set of assets underlying the product;

• In the said insurance, the policyholder pays the insurance premium, and on said premium, the insurance company makes correspond a certain number of units of account;

• In the said insurance, the Claimant acquires the financial assets to which the units of account are indexed;

• In the said insurance, the value of each unit of account is determined by the division of the fund's assets by the number of units of account issued;

• In the said insurance, all assets are acquired directly by the insurance company, which is the owner of the portfolios of securities to which the "unit-linked" products are associated, being its responsibility to manage said assets;

• The financial assets acquired by the Claimant were accounted for by it in its assets and were recorded in its name;

• The Claimant received, in the fiscal year 2013, the income arising from the financial assets of which it is the holder;

• During the term of the said contracts, the policyholders do not receive interest nor are they holders of any shares or other securities, having the right to receive income at the end of the contract based on the appreciation corresponding to their unit of account (net of any commissions);

• The value of the units of account is obtained by the division of the value of the set of assets at a given moment by the number of units of account contractually attributed, deducting the charges provided for in favor of the insurance company;

• The value of the insurance company's liability to the counterparty varies throughout the contract, depending on the variation in the value of the assets indexed to the units of account.

• The Claimant organized its accounting in the fiscal year 2013 in accordance with the Chart of Accounts for Insurance Companies (PCES07), contained in Regulatory Standard n.º 4/2007-R, of 27 April, with amendments introduced by Regulatory Standard n.º 20/2007-R, of 31 December;

• The Claimant records as income of the fiscal year the income arising from its shareholdings associated with unit linked products, namely those corresponding to distributed profits;

• Such income are inseparably associated by the Claimant with a corresponding recording of an accounting expense, constituting provisions that safeguard the future obligation to pay to the policyholder the amount corresponding to the appreciation/depreciation of the assets to which the units of account are indexed;

• On 07-03-2017, the Claimant presented the request for arbitral pronouncement that gave rise to the present proceedings.

2.2. Unproven Facts

There are no facts relevant to the decision of the case that have not been proven.

2.3. Basis for the Establishment of the Factual Matters

The established facts are based on the documents attached by the Claimant with the request for arbitral pronouncement and on the administrative file.

There is no disagreement between the parties regarding the factual matters relevant to the decision of the case.

3. Matters of Law

3.1 Essential Applicable Norms

3.1.1. Corporate Income Tax Code

Article 51.º of the Corporate Income Tax Code, in the wording in force in 2013, establishes the following, insofar as relevant:

Article 51.º

Elimination of double economic taxation of distributed profits

1 – In determining the taxable profit of commercial or civil companies in commercial form, cooperatives and public enterprises, with registered office or effective management in Portuguese territory, are deducted the income, included in the taxable base, corresponding to distributed profits, provided that the following requirements are met:

a) The company distributing the profits has its registered office or effective management in the same territory and is subject to and not exempt from Corporate Income Tax or is subject to the tax referred to in article 7.º;

b) The beneficiary entity is not covered by the transparent taxation regime provided for in article 6.º;

c) The beneficiary entity directly holds a participation in the capital of the company distributing the profits not less than 10% and this has remained in its ownership, uninterruptedly, during the year preceding the date of distribution of the profits or, if held for a shorter period, provided that the participation is maintained for the time necessary to complete that period.

2 – The provisions of the preceding number are applicable, regardless of the percentage of participation and the period in which it has remained in its ownership, to the income from social participations in which technical provisions of insurance companies and insurance mutuals have been applied and, as well as, to the income of the following companies:

a) Regional development companies;

b) Investment companies;

c) Financial brokerage companies.

(...)

In the wording of the Corporate Income Tax Code introduced by Law n.º 2/2014, of 16 January, to these numbers 1 and 2 there came to correspond numbers 1 and 6 of the same article, with the following wordings:

1 - Profits and reserves distributed to Corporate Income Tax taxpayers with registered office or effective management in Portuguese territory do not compete for the determination of taxable profit, provided that the following requirements are cumulatively met:

a) The taxpayer directly holds or directly and indirectly, pursuant to number 6 of article 69.º, a participation not less than 5% of the share capital or voting rights of the entity distributing the profits or reserves;

b) The participation referred to in the preceding number has been held, uninterruptedly, during the 24 months preceding the distribution or, if held for a shorter period, is maintained for the time necessary to complete that period;

c) The taxpayer is not covered by the transparent taxation regime provided for in article 6.º;

d) The entity distributing the profits or reserves is subject to and not exempt from Corporate Income Tax, the tax referred to in article 7.º, a tax referred to in article 2.º of Directive n.º 2011/96/EU, of the Council, of 30 November, or a tax of identical or similar nature to Corporate Income Tax and the legal rate applicable to the entity is not less than 60% of the Corporate Income Tax rate provided for in number 1 of article 87.º;

e) The entity distributing the profits or reserves does not have residence or domicile in a country, territory or region subject to a clearly more favorable tax regime contained in a list approved by ordinance of the Government member responsible for the area of finance.

6 - The provisions of numbers 1 and 2 are applicable, regardless of the percentage of participation and the period in which it has remained in its ownership, to the income from social participations in which technical provisions of insurance companies and insurance mutuals have been applied and, as well as, to the income of the following companies:

a) Regional development companies;

b) Investment companies;

c) Financial brokerage companies.

Law n.º 7-A/2016, of 30 March, gave the following wordings to these numbers of article 51.º:

1 - Profits and reserves distributed to Corporate Income Tax taxpayers with registered office or effective management in Portuguese territory do not compete for the determination of taxable profit, provided that the following requirements are cumulatively met:

a) The taxpayer directly holds or directly and indirectly, pursuant to number 6 of article 69.º, a participation not less than 10% of the share capital or voting rights of the entity distributing the profits or reserves;

b) The participation referred to in the preceding number has been held, uninterruptedly, during the year preceding the distribution or, if held for a shorter period, is maintained for the time necessary to complete that period;

c) The taxpayer is not covered by the transparent taxation regime provided for in article 6.º;

d) The entity distributing the profits or reserves is subject to and not exempt from Corporate Income Tax, the tax referred to in article 7.º, a tax referred to in article 2.º of Directive n.º 2011/96/EU, of the Council, of 30 November, or a tax of identical or similar nature to Corporate Income Tax and the legal rate applicable to the entity is not less than 60% of the Corporate Income Tax rate provided for in number 1 of article 87.º;

e) The entity distributing the profits or reserves does not have residence or domicile in a country, territory or region subject to a clearly more favorable tax regime contained in a list approved by ordinance of the Government member responsible for the area of finance.

6 - The provisions of numbers 1 and 2 are applicable, regardless of the percentage of participation and the period in which it has remained in its ownership, to that part of the income from social participations which, being allocated to technical provisions of insurance companies and insurance mutuals, are not, directly or indirectly, attributable to policyholders and, as well as, to the income of the following companies:

a) Regional development companies;

b) Investment companies;

c) Financial brokerage companies.

Article 135.º of said Law n.º 7-A/2016, of 30 March, attributed "interpretive nature" to the wording given to number 6 of article 51.º of the Corporate Income Tax Code.

3.1.2. Decree-Law n.º 94-B/98, of 17 April, republished by Decree-Law n.º 8-A/2002, of 11 January

Articles 70.º and 75.º of Decree-Law n.º 94-B/98, of 17 April, republished by Decree-Law n.º 8-A/2002, of 11 January, establish the following:

Article 70.º

Types of technical provisions

1 - Without prejudice to the provisions of the following number, the technical provisions to be constituted and maintained by insurance companies are:

a) Provision for unearned premiums;

b) Provision for outstanding risks;

c) Provision for claims;

d) Provision for participation in results;

e) Provision for life insurance and life operations;

f) Provision for aging;

g) Provision for loss experience deviations.

2 - Other technical provisions may be created by ordinance of the Minister of Finance, on the proposal of the Insurance Institute of Portugal.

Article 75.º

Provision for life insurance and life operations

1 - The provision for life insurance and life operations must represent the value of the insurance company's liabilities net of the policyholder's liabilities, with respect to all life branch insurance and operations, comprising:

a) Mathematical provision;

b) Provision for life insurance and operations where the investment risk is borne by the policyholder;

c) Provision for interest rate commitments;

d) Portfolio stabilization provision.

2 - Without prejudice to the provisions of article 81.º, mathematical provision corresponds to the estimated actuarial value of the insurance company's commitments, including profit participations already distributed and after deduction of the actuarial value of future premiums.

3 - The calculation of this provision is made based on recognized actuarial methods.

4 - The provision for life insurance and operations where the investment risk is borne by the policyholder shall be determined based on the allocated assets or the indices or assets that have been set as reference to determine the value of the insured amounts.

5 - Whenever in the insurance and operations referred to in the preceding number there are risks that are not actually assumed by the policyholder, the respective mathematical provision shall be constituted for such risks and, if applicable, the provision for interest rate commitments.

6 - The mathematical provision referred to in the preceding number shall be constituted, in particular, to cover mortality risks, administrative expenses, guaranteed benefits on the maturity date or guaranteed redemption values.

7 - The provision for interest rate commitments must be constituted with respect to all life branch insurance and operations in which there is an interest rate guarantee, whenever one of the situations provided for in numbers 7 and 8 of article 82.º is verified.

8 - The portfolio stabilization provision must be constituted with respect to group insurance contracts, annually renewable, guaranteeing as main coverage the death risk, with a view to meeting the aggravation of the risk inherent to the progression of the average age of the insured group, whenever those are priced on the basis of a single rate, which, by contractual commitment, must be maintained for a certain period.

9 - The provision referred to in the preceding number is also constituted with respect to complementary risks under identical circumstances.

3.1.3. Chart of Accounts for Insurance Companies (PCES)

The Claimant is subject to the Chart of Accounts for Insurance Companies (PCES), approved by Regulatory Standard n.º 4/2007-R, of 27 April, with amendments introduced by Regulatory Standard n.º 20/2007-R, of 31 December.

Pursuant to the PCES, distributed profits and appreciations, and depreciations respecting the investments to which unit-linked products in which the investment risk is borne by the policyholder are indexed must be accounted for in accounts of Income and Gains or Expenses and Losses (in this case, in the accounts "74 Investment income"; "75 Gains on investments" and "65 Losses on investments"), which must be compensated by corresponding entries recorded in accounts of Expenses and Losses or Income and Gains (in this case, in the accounts "67 Losses and expenses on financial liabilities" and "77 Income and gains on financial liabilities".

The PCES does not contain any norm that determines that with respect to unit-linked contracts only the "commission" of the insurance company shall be recorded and not the totality of the income derived from social participations associated with investment funds.

The PCES includes "Technical Provisions" in Class 3, including therein, as to life insurance contracts in which the investment risk is borne by the policyholder, only "additional technical provisions that may eventually be constituted to cover mortality risks, administrative expenses or other expenses (such as, for example, guaranteed benefits on the maturity date or guaranteed redemption values)" (30. Technical provisions of direct life insurance; 30.0 Mathematical provision).

3.2. Questions to Be Resolved

The Tax and Customs Authority made a correction to the taxable profit of the Claimant for the fiscal year 2013, on the understanding that, in summary, the income derived from the holding of social participations and in investment funds, in the context of "unit-linked" type contracts, are not covered by the regime for elimination of double taxation provided for in number 1 of article 51.º of the Corporate Income Tax Code, also applicable in the cases provided for in its number 2 (in the wordings in force in 2013), because such income, by force of the prudential norms governing the activity of insurance companies, necessarily have correspondence in the establishment of provisions of equal amount, to safeguard the responsibilities assumed with the policyholder in such contracts.

With these presuppositions, the Tax and Customs Authority understood that such referred income do not increase the taxable matter of the insurance company, are not "included in the taxable base", for purposes of those numbers 1 and 2 of article 51.º.

The Claimant understands that these norms are applicable, because, in summary, these are income that must be accounted for as investment income, which remain in its ownership, only at the end of the contract passing to the ownership of the policyholder.

Beyond this controversy, account must be taken of the effects that on the matter may or may not have the "interpretive norm" that Law n.º 7-A/2016, of 30 March, created, regarding this article 51.º.

Furthermore, the question is raised of the framing of the situation of the case in number 2 of article 51.º of the Corporate Income Tax Code in the wording in force in 2013.

And, were this number 2 not applicable, the question is raised of the non-verification of the requirement of letter c) of number 1 of article 51.º of the Corporate Income Tax Code.

3.3. Question of Whether Income Corresponding to Distributed Profits Received by Insurance Companies Connected with Assets Held within the Scope of Unit-Linked Contracts are "Included in the Taxable Base", for Purposes of Article 51.º, Number 1, of the Corporate Income Tax Code, in the Wording in Force in 2013

This question was competently examined in arbitral jurisprudence by the decisions of 01-09-2014, rendered in case n.º 65/2014-T, and of 20-01-2016, rendered in case n.º 268/2015-T, in the wake of the position assumed by SALDANHA SANCHES and JOÃO TABORDA GAMA in the opinion attached to the request for arbitral pronouncement as document n.º 8 and in an article published in the journal Fiscalidade, year 2008, n.º 33, pages 25 to 69.

It is stated in the decision rendered in case n.º 268/2015-T:

"The matter in question was subject to a detailed and pertinent study authored by Saldanha Sanches and João Taborda da Gama, published in the journal Fiscalidade, in the year 2008, already cited in the Arbitral Decision rendered in CAAD case nº 65/2015-T which will be followed closely.

After analyzing the economic and legal framework of the type of contracts in question ('unit linked' insurance) in terms coinciding, broadly, with those already briefly pointed out, these authors conclude, pointing out a characteristic of such contracts, essential for understanding the matter at issue, which is the circumstance that the insurance company 'does not deliver the units of account, which have no existence or value outside of this relationship. It delivers that to which it is obligated and that to which the insured has a right – the value of the units of account, which constitutes the object of this legal relationship, that is, the amount in which its obligation to perform consists.'

That is: the primary/principal obligation of the insurance company within the framework of 'unit-linked' contracts is a single, pecuniary obligation to deliver an amount calculated based on the value that, at the moment of the event that extinguishes the contract, the unit of account has.

Thus, only at that moment, at the end of the contract, is there income (emphasized) of the beneficiary, paid by the insurance company. Until then, it must be underscored, the patrimony of the insurance company's counterparty remains unchanged, untouched. The variations in the value of the unit of account, which had correspondence in the mandatory provisioning carried out by the insurance company, have no effect on the patrimony of the insurance company's counterparty. They do not give rise, in summary, to any income of the holder of the 'unit linked' product.

In the words of the same authors, '(…) insurance companies are not financial intermediaries, nor do they act on behalf of the insured (they are not agents, brokers, representatives or commission merchants). They act on their own account in markets. Units of account are not units of participation in funds, titles of any other kind that belong to clients. They are mere national calculation units (…)'

To understand that this is so, furthermore, it suffices to note, right away, that in case of insolvency of the insurance company, without the respective contracts having matured, the counterparties in unit linked contracts will have no direct right either to the assets acquired by the insurance company as a function of "their" contract, or to the income that by those has been generated and distributed to the insurance company. In such a case (insurance company insolvency), the counterparties in unit linked contracts will have to present themselves as creditors of the insurance company, being paid in accordance with applicable concourse rules, from the totality of that company's patrimony, to the extent that is their share, and not as a function of the contract they entered into or their supposed 'participation' of the assets accounted for as allocated to that contract.

Continuing their analysis, the cited authors point out some other characteristics of the contractual regime in question, worthy of special note in the perspective we are concerned with. Thus, '(…) from a practical standpoint, it is not to be excluded, also, that, if not prohibited by the contracts, insurance companies may not even hold the indexing assets or may not sell them at the moment the contract with clients ceases (…)', adding that '(…) the insurance company's obligation on the event is always that of delivering certain values, even if it does not acquire any assets, acquires fewer or different ones, or does not sell them (…)', demonstrating in this manner '(…) that unit-linked imply two types of legal relationship, different in almost all their elements.'

It is thus clear, it is thought, that, both in legal and in economic terms, there is no relationship between the subjects generating the income owed by the financial applications made by the insurance company, and the client of this holding that product.

In this framework, the authors have no doubts that the insured '(…) do not buy, do not sell, do not participate in losses, do not receive dividends. The subject, here, is the Insurance Company. The commercial obligations and rights are hers. Consequently, the active and passive tax obligations are hers', whereby 'the income that it comes to obtain by being the holder of shares and units of participation are gains subject to tax. Specifically, to Corporate Income Tax', further stating that 'when we affirm that they are gains subject to tax, we want, of course, to affirm that they are gains included in the taxable base, that is, subject to the overall tax regime and not only to part of the regime. Thus, the entire regime of article 22.º of the Basic Tax Law and the entire regime of Corporate Income Tax – including the mechanisms for elimination of double economic taxation of article 51.º of the respective Code - are applicable to them.'

As the cited authors further recall '(…) for the Corporate Income Tax Code, at the moment of defining the tax base, there is no doubt that a profit distributed to the taxpayer is included in its taxable base, just as the income arising from the sale of merchandise, provision of a service or rental of real property.' In this manner, the only full application in these situations will be article 46.º of the Corporate Income Tax Code (current 51º).

'If the insurance company could not exempt itself from the tax burdens that the fund or commercial companies bore, it would have to pass on such burden to the compensation to be paid to the insured, who would thus suffer double taxation: first, in the investment fund or in the legal entity and, later, at the moment when it would be taxed in Personal Income Tax by the compensation it would receive', which 'would annul the tax benefit that the legislator sought to grant to savings'.

As the work followed here states 'the law structures a system that has its mainstay in the fiscal neutrality of the insurance company that creates and manages unit linked products, providing that it, like any legal entity, will go on exempting itself from a series of tax burdens collected in advance (withholdings at source and taxation of distributed profits), for the reason that downstream all such income will be taxed in the sphere of the individual insured.'

Effectively, 'provisions, by retaining profits that would otherwise be distributed, will result in the liberation of funds that will be invested in certain assets, with greater or lesser risk, with greater or lesser return. The question of greater or lesser risk of the insurance is a question distinct from the manner more or less secure in which the investment can be made that will allow future payment of the benefits of that insurance, which are always due regardless of the concrete investment policy of the insurance company', since 'if the insurance company makes a provision of 100, it can at the same time invest those 100 in a time deposit, in bonds, in shares or in any other assets whatsoever.'

Finally, let it also be said that article 50.º of the Corporate Income Tax Code, in the wording that resulted from Decree-Law n.º 159/2009, of 13/07, came in some way to clarify that, in the perspective of the legislator, income resulting from assets 'allocated to contracts in which the insurance risk is borne by the policyholder' compete for the taxable profit of the insurance company.

Hereby, by all that has been so set forth, it is understood that the position adopted in the said arbitral decisions is the adequate interpretation, in the face of the normative framework in force in 2013."

The analysis reproduced here is considered correct, whereby the position of the Tax and Customs Authority that the income corresponding to distributed profits to the Claimant are not "included in the taxable base", for purposes of Corporate Income Tax, has no legal basis, a position that contradicts the accounting rules referred to in section 3.1.3. and, consequently, article 17.º of the Corporate Income Tax Code.

This argument is strengthened by the argument contained in the Opinion of Professor Doctor CASALTA NABAIS, attached by the Claimant with its submissions, from which the following conclusions stand out:

– "unit linked insurance are, from whatever point of view one departs from to view them, life branch insurance like any other life branch insurance, being therefore, totally arbitrary to consider them subject to different tax treatment from other life branch insurance without a clear and very express norm to that effect";

– "that unit linked insurance constitute life branch insurance like any other, as proven by the characteristics that such insurance involve, as they constitute life branch insurance namely both from the legal point of view as from the perspective of financial theory";

– "that they are life branch insurance from the legal point of view, results, right away, from the legislation that has them as its subject, such as the statute that frames insurance and reinsurance activities, Decree-Law nº 2/2009, which distinguishes between 'life branch insurance' and 'life branch operations', integrating unit linked insurance in the former";

– "a qualification that is reaffirmed in article 156º, when it attributes special regulatory powers regarding such insurance, inasmuch as, in addition to the supervision that falls to the Insurance and Pension Fund Authority, provision is also made for supervision by the Securities Commission";

– "qualification confirmed in the regulation carried out both by the Securities Commission and by the Insurance and Pension Fund Authority. Which is particularly visible in the information made available by the Insurance and Pension Fund Authority to potential investors, namely in the Insurance Guide and Pension Funds, in which it clarifies the difference between life insurance and capitalization operations", in which "it states that insurance associated with investment funds are life insurance of variable capital in which the value to be received by the beneficiary depends, in whole or in part, on a reference value constituted by one or more units of participation";

– "also the European Court of Justice, in its judgment of 2 March 2012, Case C-166/11, underscores that, for European Union law, insurance linked to investment funds integrate life branch insurance, stating that '...the so-called "unit linked" or "linked to investment funds" contracts are current in insurance law', 'which follows from the fact that the legislator of the European Union has considered that this type of contract falls within the life insurance branch, as explicitly appears from Annex I, point III, of the Life Insurance Directive, read in conjunction with article 2.º, number 1, letter a), of this Directive'";

– "ideas these that are nothing more than a consequence of the substance of unit linked insurance, as it presents itself to us in financial theory, since these insurances, also from the financial perspective constitute true life branch insurance", "which is demonstrated by the financial logic on which insurance associated with investment funds are based, which is revealed both in the relationship between the two variables that characterize the financial assets to which the insurance can be associated, that is, between risk and return, as in the necessity of portfolio diversification as a factor for reducing risk";

– "being all life branch insurance, whether life insurance tout court or insurance linked to investment funds, there is no legitimacy to proceed to any distinction regarding the technical provisions of insurance companies, depending on whether the same relate to the former or to the latter";

– "thus the argument of the Tax Administration that the double taxation elimination regime would not apply does not proceed, inasmuch as the insurance company records provisions that would annul benefits accounted for by them";

– "in that there is no annulment of benefits inasmuch as, taking into account the function of technical provisions, these by retaining profits that would otherwise be distributed, will allow the liberation of funds for investment in certain assets with greater or lesser risk, with greater or lesser return";

– "if the insurance company could not exempt itself from the tax burdens that the fund or the insurance companies bore, it would end up having to pass on such burden to the compensation to be paid to the insured, which would thus suffer double taxation: first, in the investment fund or in the insurance company and, later, at the moment when it would be taxed in Personal Income Tax by the compensation received".

– "the treatment conferred by the new wording to insurance associated with investment funds is far from being entirely acceptable from the point of view of constitutional principles that govern the taxation of business income" and "seems to conflict with the principles of tax equality based on tax capacity, fiscal neutrality and taxation of companies on their actual income";

– "the discrimination of unit linked insurance relates to the elimination of double economic taxation of insurance companies with respect to income from social participations allocated to technical provisions, affecting the principle of fiscal neutrality, and not to a tax benefit that could be used as a function of the objectives pursued".

Thus, it is considered that the position adopted in the said arbitral decisions is the adequate interpretation, in the face of the normative framework in force in 2013.

The analysis reproduced here is considered correct, whereby the position of the Tax and Customs Authority lacks legal and factual support, and therefore the annulment requested has a foundation.

3.4. The Attribution of Interpretive Nature to the Wording of Article 51.º of the Corporate Income Tax Code Introduced by Law n.º 7-A/2016, of 30 March

The Tax and Customs Authority raises the question of the relevance of Law n.º 7-A/2016, of 30 March, for the resolution of the question at hand.

Article 135.º of this Law attributes interpretive nature to the new wording given to number 6 of article 51.º of the Corporate Income Tax Code, in which it is established that "the provisions of numbers 1 and 2 are applicable, regardless of the percentage of participation and the period in which this has remained in its ownership, to that part of the income from social participations which, being allocated to technical provisions of insurance companies and insurance mutuals, are not, directly or indirectly, attributable to policyholders, and, as well as, to the income of the following companies".

It is manifest, however, that in the earlier wording of number 6 of article 51.º of the Corporate Income Tax Code (which corresponds to number 2 in the wording in force in 2013) there was no reference whatsoever to the limitation of deduction "to that part of the income from social participations which, being allocated to technical provisions of insurance companies and insurance mutuals, are not, directly or indirectly, attributable to policyholders".

In fact, the earlier number 6 establishes that "the provisions of numbers 1 and 2 are applicable, regardless of the percentage of participation and the period in which this has remained in its ownership, to the income from social participations in which technical provisions of insurance companies and insurance mutuals have been applied".

Having to presume that the legislator knew how to express its thinking in adequate terms (article 9.º, number 3, of the Civil Code), it is obvious that the reference "to the income" could not be interpreted as intending to allude to "part of the income", namely the part respecting that technical provisions of insurance companies and insurance mutuals, are not, directly or indirectly, attributable to policyholders", since there was in the earlier wording no reference to a part of the income nor to policyholders.

Furthermore, in the wording of number 1 of article 51.º in force in 2013, there was already no longer even the reference to "income, included in the taxable base, corresponding to distributed profits" on which the Tax and Customs Authority based the interpretation effected in the Tax Inspection Report, instead referring, without any restriction, to "profits and reserves distributed to Corporate Income Tax taxpayers with registered office or effective management in Portuguese territory do not compete for the determination of taxable profit", which makes even more evident that there was in the wording of number 6 of article 51.º prior to Law n.º 7-A/2016 no textual element that, directly or indirectly, would allow to put forward a restrictive interpretation.

Article 13.º of the Civil Code is the only norm that defines the concept of interpretive law, establishing that "interpretive law integrates itself in the interpreted law, saving, however, the effects already produced by the performance of the obligation, by judgment become final, by settlement, even if not homologated, or by acts of analogous nature".

BAPTISTA MACHADO teaches on interpretive laws:

"Now the reason why interpretive law applies to facts and situations anterior to it resides fundamentally in that it, coming to consecrate and fix one of the possible interpretations of the old law with which the interested parties could and should count, is not susceptible to violate safe expectations and legitimately founded. We can consequently say that are of its nature interpretive those laws that, on points or questions in which the applicable legal rules are uncertain or their meaning controversial, come to consecrate a solution that the courts could have adopted. It is not necessary that the law comes to consecrate one of the prior jurisprudential currents or a strong prior jurisprudential current. All the more so since interpretive law often arises before such jurisprudential currents even come to be formed. But, if this is the case, and if meanwhile a uniform jurisprudential current has formed that made practically certain the meaning of the old norm, then the new law that comes to consecrate a different interpretation of the same norm can no longer be considered really interpretive (although it may be perhaps by determination of the legislator), but innovative.

For a new law to be really interpretive, two requirements are therefore necessary: that the solution of the prior law be controversial or at least uncertain; and that the solution defined by the new law be situated within the framework of the controversy and be such that the judge or the interpreter could reach it without exceeding the limits normally imposed on the interpretation and application of the law. If the judge or the interpreter, in the face of old texts, could not feel authorized to adopt the solution that the new law comes to consecrate, then this is decidedly innovative."

Law n.º 7-A/2016 does not overcome any of the requirements of this "Baptista Machado test", not least because the solution of prior law could not be considered controversial or uncertain, no decision of any court or position of doctrine of an independent entity being known that had adopted the thesis defended by the Tax and Customs Authority.

On the other hand, the solution defined by the new law is not situated within the framework of a hypothetical controversy, since one could not arrive at the new solution without exceeding the limits normally imposed on the interpretation and application of the law, namely the presumption that the legislator of numbers 2 and 6 of article 51.º, in the wordings in force until Law n.º 7-A/2016, knew how to express its thinking in adequate terms.

For this reason, article 135.º of Law n.º 7-A/2016, of 30 March, in attributing interpretive nature to the new wording given to number 6 of article 51.º of the Corporate Income Tax Code, is materially retroactive, being incompatible with the constitutional prohibition of harmful retroactivity of taxes, which appears in number 3 of article 103.º of the Constitution.

Indeed, even if it could be considered truly interpretive, the unconstitutionality could not be put aside in a situation in which the new solution was not that espoused by the Court, as the Constitutional Court understood in decision n.º 267/2017, of 31-05-2017, rendered in case n.º 466/16, in which it is concluded:

"It can, therefore, be said that, from the point of view of the Constitution, for a normative discipline auto-characterized as merely interpretive to be considered constitutive (of new law) and, as such, substantially retroactive, it suffices the verification that to the norm interpreted in its primitive version could have been imputed by the courts a sense that, following the interpretive norm, was necessarily excluded (cf. the decisions of the Federal Constitutional Court of 2.5.2012 and 17.12.2013, in BVerfGE 131, 20 [37-38] and 135, 1 [16-17], respectively). Indeed:

'The clarifying discipline is constitutive already in cases in which it aims to exclude the interpretation [of the pre-existing law] made by an ordinary court – even though not being a superior court – regarding past situations. The legislator confers on the retroactive law a constitutive efficacy, to the extent that it intends to clarify for the past, by way of a law with a univocal sense, a certain statement that gave rise, as to the applicable law, an apparently non-univocal understanding or, at least, a non-uniform application thereof. […] Decisive is that the legislator intends to correct or exclude a given interpretation [made by the courts].' (v. BVerfGE 135, 1 [18-19])

That is precisely the effect of article 135.º of the Budget Law 2016, in characterizing as "interpretive law" number 21 added by article 133.º to article 88.º of the Corporate Income Tax Code. In fact, and as well noted in the decision now appealed, that which represented a certain jurisprudential understanding (...) –, is no longer admissible in the light of said number 21. Hence it is unequivocal the substantially retroactive character of that precept, understood as interpretive law.

Given the burdensome content for taxpayers of the new legal solution – since it tends to aggravate the amount due by title of Corporate Income Tax –, the claim that it applies to fiscal years prior to that of the beginning of its force shows itself flagrantly incompatible with the constitutional prohibition of retroactive taxes (cf. article 103.º, number 3, of the Constitution)."

By the foregoing, the innovative solution adopted in number 6 of article 51.º of the Corporate Income Tax Code, in the wording given by Law n.º 7-A/2016, of 30 March, cannot be applied to the fiscal year 2013.

3.5. Question of Framing within Number 2 of Article 51.º

Number 2 of article 51.º of the Corporate Income Tax Code establishes that "the provisions of the preceding number are applicable, regardless of the percentage of participation and the period in which this has remained in its ownership, to the income from social participations in which technical provisions of insurance companies and insurance mutuals have been applied and, as well as, to the income of the following companies: a) Regional development companies; b) Investment companies; c) Financial brokerage companies."

The Tax and Customs Authority contends that "not being, in the situation sub judice - nor being able to be, pursuant to the current PCES (which is applicable herein) -, the investments (and the consequent) income from social participations of operations in which the investment risk is borne by the policyholder applied or accounted for in technical provisions, number 2 of article 51.º of the Corporate Income Tax Code is not applicable".

The Tax and Customs Authority bases itself on the fact that class 3 of the PCES07, designated "Class 3 - Technical Provisions" states that therein are gathered "all technical provisions constituted, in accordance with the regulations in force, to meet the commitments arising from insurance contracts" and "none, observe further, intended to meet financial risks, arising from investment contracts, such as unit linked products, in which the investment risk is borne by the policyholder".

The Tax and Customs Authority affirms that "it was, thus, established, in the new (and current PCES), in a "list" exhaustive and exhaustive, all the technical provisions that the legislator understood should exist, not being found therein, because the legislator thus understood (and, in substance, that is what makes sense), technical provision relating to unit linked products" and that "already in "Class 4 - other assets and liabilities", in a third-party account, account "45 - other financial liabilities", is found the subaccount "45.0 Financial liabilities of the deposit component of insurance contracts and of insurance and investment operation contracts".

The Tax and Customs Authority further states that "operations in which the investment risk is borne by the policyholder - Unit Linked - passed, thus, since 2008, to be reflected in the mentioned class 4 and, more specifically, in this subaccount 45.0" and that "the new PCES came, thus, to introduce an improvement in the previously in force chart of accounts, better reflecting the substance of the underlying reality and contributing to achieve and transmit the true and appropriate image of the patrimony, financial situation and results of the insurance company".

For this reason, the Tax and Customs Authority concludes that "not being the investments (and the consequent) income from social participations of operations in which the investment risk is borne by the policyholder applied or accounted for in technical provisions, cannot, pursuant to the law, number 2 of article 51.º of the Corporate Income Tax Code be applicable", "it being completely irrelevant, further emphasized, that the statute regulating the conditions for access to and exercise of insurance and reinsurance activity - Decree-Law n.º 8-A/2002, of 11.01, which republished Decree-Law n.º 94-B/98 - maintains the reference to the requirement to constitute technical provisions, due to lack of updating".

The Tax and Customs Authority further states that "unit-linked product contracts are not insurance contracts, in light of the definitions of IFRS 4, and that the accounting reclassification already reflects this reality, whereby attempting to go back to the past to force their inclusion in number 2 of article 51.º of the Corporate Income Tax Code is unsustainable and devoid of legal support".

This position of the Tax and Customs Authority has no legal support, not least because, as is demonstrated in the cited Opinion of Professor Doctor CASALTA NABAIS, "unit linked insurance are, from whatever point of view one departs from to view them, life branch insurance like any other life branch insurance".

On the other hand, the thesis of the Tax and Customs Authority that Decree-Law n.º 8-A/2002, of 11 January, which republished Decree-Law n.º 94-B/98, of 17 April, is "completely irrelevant", in maintaining the reference to the requirement to constitute technical provisions, due to lack of updating, is inadmissible in a democratic State of Law, based on the rule of law (articles 2.º and 3.º of the Constitution).

In fact, the principle of hierarchy of norms, enunciated in number 5 of article 112.º of the Constitution, which establishes that "no law may create other categories of legislative acts or confer on acts of another nature the power to, with external efficacy, interpret, integrate, modify, suspend or revoke any of its precepts", constitutes an insurmountable obstacle to any of the norms issued in the exercise of legislative power, such as those of Decree-Law n.º 8-A/2002, being considered modified, suspended or revoked by statutes of regulatory nature, such as those that approved, and amended the PCES.

Thus, as the Claimant argues, it "continues bound, pursuant to the terms and conditions provided, in particular, in articles 70.º and 75.º of the statute, to constitute and maintain diverse technical provisions, in which are included provisions for life insurance and life operations in which the risk is borne by the policyholder, based on the calculation methods expressly provided for in article 81.º of the same statute".

Furthermore, as was already emphasized in the arbitral decision rendered in case n.º 65/2014-T, number 2 of article 51.º of the Corporate Income Tax Code, in the wording in force in 2013, "does not refer to 'technical provisions', but to 'technical reserves', not equating in any way – as the Tax Authority does in its response – both expressions", whereby "the legal expression should be understood as of broader scope than the strict concept that the Tax Authority sustains itself, encompassing, beyond this, all those situations in which, prudentially, the insurance company is required that, in some manner, reserve gains. This understanding, furthermore, is, in this case, corroborated by the due reading of the norm in question, which in its letters, includes, in particular, investment companies", in letter b), in the wording in force in 2013.

Thus, as the Claimant argues, "notwithstanding the accounting reclassification carried out with the PCES07, all these values, in compliance with the legal provisions above referred to, were mandatorily accounted for by the Claimant as of the date of the facts and continue to be currently accounted for in an account of class 4 (Other assets and liabilities), on the basis of the same criteria and on the basis of the same calculation method used for the registration in accounts of Class 3, in the context of the PCES94".

To this is added that, as is also referred to in the arbitral decision rendered in case n.º 65/2014-T, "if the product in question, as recurrently and very properly points out the Tax Authority, is not, an insurance stricto sensu, but an investment contract (...), it would always have to be understood that the same fits within said referred letter of the same norm, equating, for these purposes, the Claimant to an investment company, not least because it commercializes, in a legal manner, authorized and supervised, investment contracts". "In fact, the manner of functioning of that type of company (investment companies) would be, precisely, that which the Tax Authority sustains as being incapable of founding the application of the norm in question. In fact, such companies, will make investments on account of their clients, receiving the corresponding returns, which, pursuant to the investment contract, will be directed to those, the economic income of the companies in question being, corresponding to the commissions they charge. Just as occurs with insurance companies, in unit linked contracts!"

Indeed, even if the insurance companies are not legally considered as investment companies even when they function as such, being perfectly equitable, in terms of economic substance, the situation of insurance companies in unit-linked contracts and that of investment companies, for purposes of elimination of double economic taxation, it would always be the case to frame them in number 2 of article 51.º of the Corporate Income Tax Code, since, by force of the provisions of number 3 of article 11.º of the General Tax Law, "persisting doubt about the meaning of the norms of incidence to apply, account must be taken of the economic substance of the tax facts", as imposed by the constitutional principle of equality in the distribution of public burdens.

By the foregoing, it is concluded that the regime of article 51.º, number 1, of the Corporate Income Tax Code, is applicable to the Claimant, by referral of number 2, as to the fiscal year 2013, insofar as it relates to the income received corresponding to distributed profits.

3.6. Question of Prejudiced Consideration

By the foregoing, the correction effected by the Tax and Customs Authority is tainted with the defect of violation of law, since it finds no support in numbers 1 and 2 of article 51.º of the Corporate Income Tax Code, in the wording in force in 2013.

This defect justifies the annulment of the assessment effected on the basis of this correction, pursuant to article 163.º, number 1, of the Code of Administrative Procedure subsidiarily applicable pursuant to the provisions of article 2.º, letter c), of the General Tax Law.

Being to judge the request for arbitral pronouncement as well-founded on the basis of the application of number 2 of article 51.º of the Corporate Income Tax Code, becomes prejudiced, for being useless (article 130.º of the Code of Civil Procedure), the consideration of the question of the verification of the requirements of letter c) of number 1 of the same article, since the application of number 2 does not depend on "the percentage of participation and the period in which this has remained in its ownership".

4. Reimbursement of Amounts Paid and Compensatory Interest

The Claimant requests the reimbursement of the amount it improperly paid increased with compensatory interest.

As results from the foregoing, the request for arbitral pronouncement is well-founded, whereby it is to partially annul the assessment and subsequent account settlement statement, in the part relating to the correction in the amount of € 469,739.44 relating to the deduction effected corresponding to the elimination of double economic taxation of distributed profits that were received from securities allocated to unit linked portfolios.

With regard to compensatory interest, in harmony with the provisions of letter b) of article 24.º of the RJAT, the arbitral decision on the merit of the claim to which no appeal or challenge is allowed binds the Tax Administration as from the end of the period provided for the appeal or challenge, such administration being required, in the exact terms of the well-foundedness of the arbitral decision in favor of the taxpayer and until the end of the period provided for the voluntary execution of the sentences of the tax courts, to "restore the situation that would exist if the tax act subject of the arbitral decision had not been practiced, adopting the acts and operations necessary for that purpose", which is in harmony with what is prescribed in article 100.º of the General Tax Law [applicable by force of the provisions of letter a) of number 1 of article 29.º of the RJAT] which establishes that "the tax administration is obliged, in case of total or partial well-foundedness of claim, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation subject of the dispute, comprising the payment of compensatory interest, if applicable, as from the end of the period of execution of the decision".

Although article 2.º, number 1, letters a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral courts that function in the Administrative Arbitration Centre, making no reference to condemnatory decisions, it should be understood that the powers that, in judicial challenge proceedings, are attributed to the tax courts are comprised within its competencies, this being the interpretation that is in harmony with the meaning of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as a first directive, that "the tax arbitral process must constitute an alternative procedural means to judicial challenge proceedings and to the action for recognition of a right or legitimate interest in tax matters".

Judicial challenge proceedings, despite being essentially a process of annulment of tax acts, admits the condemnation of the Tax Administration in the payment of compensatory interest, as is inferred from article 43.º, number 1, of the General Tax Law, in which it is established that "compensatory interest is due when it is determined, in gracious complaint or judicial challenge, that there was error imputable to the services from which results payment of the tax debt in an amount greater than legally due" and from article 61.º, number 4 of the Code of Tax Procedure and Process (in the wording given by Law n.º 55-A/2010, of 31 December, to which corresponds number 2 in the initial wording), which establishes that "if the decision that recognized the right to compensatory interest is judicial, the period for payment counts from the beginning of the period of its voluntary execution".

Thus, number 5 of article 24.º of the RJAT, in saying that "the payment of interest, regardless of its nature, is due, pursuant to the provisions of the general tax law and the Code of Tax Procedure and Process", should be understood as permitting the recognition of the right to compensatory interest in arbitral proceedings.

In the case at hand, following the illegality of the assessment in the part relating to said correction in the amount of € 469,739.44 relating to the income from securities allocated to unit linked portfolios, there is place for reimbursement of the corresponding tax that was improperly paid, by force of the referred articles 24.º, number 1, letter b), of the RJAT and 100.º of the General Tax Law.

The substantive regime of the right to compensatory interest is regulated in article 43.º of the General Tax Law, which establishes, insofar as relevant, the following:

Article 43.º

Improper Payment of Tax Obligation

1 – Compensatory interest is due when it is determined, in gracious complaint or judicial challenge, that there was error imputable to the services from which results payment of the tax debt in an amount greater than legally due.

2 – It is also considered there to be error imputable to the services in cases in which, despite the assessment being made on the basis of the taxpayer's declaration, this has followed, in its completion, the generic guidance of the tax administration, duly published.

The illegality of the assessment is imputable to the Tax Administration, which issued it on its own initiative, whereby there occurred error imputable to the services, there being, consequently, a right to compensatory interest derived from its practice.

Compensatory interest is due, pursuant to articles 43.º, numbers 1 and 4, and 35.º, number 10, of the General Tax Law, 61.º, number 5, of the Code of Tax Procedure and Process, 559.º of the Civil Code and Ordinance n.º 291/2003, of 8 April, at the legal supplementary rate, and counted from the date on which payment was made (06-12-2016) until the date of processing of the respective credit note.

The amount to be reimbursed will be that of the tax improperly paid by title of Corporate Income Tax, state surtax and municipal surtax, corresponding to the legal elimination of the correction in the amount of € 469,739.44.

To the elimination of the correction in question, corresponds Corporate Income Tax of € 117,434.86, at the rate of 25%, and state surtax in the amount of € 23,486.97, at the rate of 5%, since it is a question of annulment of the correction of taxable profit on the part exceeding 7,500,000.00 (wording of article 87.º-A of the Corporate Income Tax Code introduced by Law n.º 66-B/2012, of 31 December), as well as municipal surtax, in the amount of € 7,046.09, at the rate of 1.5%.

It is, thus, to condemn the Tax and Customs Authority to reimburse to the Claimant the amount of € 147,967.92, increased with compensatory interest, without prejudice to the additional determination in execution of judgment of the amount of reimbursement and compensatory interest relating to the improper payment of municipal surtax.

5. Decision

For these reasons, the Arbitral Tribunal agrees in:

• To judge the request for arbitral pronouncement well-founded;

• To partially annul the additional Corporate Income Tax assessment relating to the fiscal year 2013 n.º 2016 … and subsequent account settlement statement n.º 2016…, in the part relating to the correction to the taxable matter in the amount of € 469,739.44;

• To condemn the Tax and Customs Authority to reimburse to the Claimant the amount of € 147,967.92, increased with compensatory interest.

6. Value of the Case

The Taxpayer indicated as value of the case the amount of the correction to the taxable matter that it seeks to have eliminated and there are not determined what consequences from the annulment of such correction may derive at the level of the assessment.

The Tax and Customs Authority disagrees with the value attributed to the case by the Taxpayer, but does not indicate any other, as required by number 1 of article 305.º of the Code of Civil Procedure, as a requirement for challenging the value of the case.

The value of the case when an assessment is challenged is the amount of the importance whose annulment is sought.

In the case at hand, the Claimant seeks the partial annulment of the additional Corporate Income Tax assessment relating to the fiscal year 2013, in the part relating to investments in Unit-Linked and corresponding compensatory interest.

The assessment in question includes Corporate Income Tax calculated on the basis of taxable profit, state surtax and municipal surtax, there being in the case no elements that permit determining the amount of any other tax that may derive from the annulment of the correction in question.

The value of Corporate Income Tax is 25% of the correction to which is added 5% of state surtax, since it is a question of annulment of taxable profit exceeding € 7,500,000.00 (wording of article 87.º-A of the Corporate Income Tax Code introduced by Law n.º 66-B/2012, of 31 December), as well as 1.5% of municipal surtax on the value of said correction.

Thus, the amount corresponding to the challenged correction is € 147,967.92, amount which is fixed as the value of the case.

7. Costs

Pursuant to article 22.º, number 4, of the RJAT, the amount of costs is fixed at € 3,060.00, pursuant to Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

8. Notification to the Public Prosecutor

Since there was refusal to apply the norm of article 135.º of Law n.º 7-A/2016, of 30 March, on the basis of unconstitutionality, notify this decision to the office of the Attorney General of the Republic.

Lisbon, 09-10-2017

The Arbitrators

(Jorge Lopes de Sousa)

(António Pragal Colaço)

(Maria Isabel Guerreiro)

[1] Previously B… S.A.