CAAD Case 171/2017-T: IRC Tax Assessment Illegality – Internal Inspection Procedure and RETGS Group Taxation Regime

ARBITRAL DECISION

I – REPORT

On 13 March 2017, A..., S.A., NIPC..., with registered office at ..., ..., filed a petition for the constitution of an arbitral tribunal, under the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the act of additional assessment of Corporate Income Tax (IRC) and compensatory interest No. 2015..., relating to the tax year 2011, in the amount of €1,038,380.18 and of the decision dismissing the administrative reclamation filed against the aforementioned assessment, with the legal consequences thereof.

To substantiate its petition, the Claimant alleges, in summary:

• The illegality of the assessment act due to failure to notify the decision on the cessation of the Special Regime for Group Taxation (RETGS);

• The illegality of the internal inspection procedure due to:

  • Failure to deliver the service order;
  • Territorial and material incompetence of the inspection services;

• The illegality of the assessment act due to violation of paragraph c) of Article 69(4) of the Corporate Income Tax Code (CIRC) applicable.

The Claimant further alleges, in the alternative:

• The illegality of the assessment act due to:

  • Violation of the principle of specialization of tax years;
  • Violation of Article 8(9) of the CIRC;
  • Violation of Article 69(8) of the CIRC;

• The illegality of the decision dismissing the administrative reclamation, due to lack of substantiation (Article 77 of the General Tax Law – LGT) and omission of an essential formality as a consequence of violation of Article 60(1), paragraph a) of the LGT;

• The illegality of the assessment act due to disregard of tax benefits to which the Claimant considers itself entitled.

On 14-03-2017, the petition for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

The Claimant proceeded to appoint an arbitrator, having designated His Excellency Prof. Dr. Tomás Castro Tavares, pursuant to Article 11(2) of the RJAT. Pursuant to Article 11(3) of the same article, the Respondent designated as arbitrator His Excellency Professor Dr. Américo Brás Carlos.

The arbitrators appointed by the parties were nominated and accepted their respective duties. Pursuant to Article 6(2), paragraph b) of the RJAT and Article 5 of the Regulations on Selection and Appointment of Arbitrators in Tax Matters, the undersigned Rapporteur was designated by His Excellency the President of the Deontological Council of CAAD to preside over this Arbitral Tribunal, and within the applicable period also accepted the duty.

On 24-05-2017, the parties were notified of the appointment of the arbitrators, and expressed no wish to object to any of them.

In conformity with the provisions of Article 11(1), paragraph c) of the RJAT, the collective Arbitral Tribunal was constituted on 08-06-2017.

On 12-07-2017, the Respondent, duly notified for that purpose, filed its reply, defending itself by way of exception and by way of objection.

On 31-10-2017, the meeting referred to in Article 18 of the RJAT was held, where witnesses presented by the Claimant were examined.

Following subsequent procedural proceedings, including the submission of written arguments by the parties, pronouncing on the evidence produced and reiterating and developing their respective legal positions, and three extensions of the period referred to in Article 21(1) of the RJAT, pursuant to Article 21(2) of the same article, justified by the suspensions of periods provided for in Article 17-A, also of the RJAT, and by the complexity of the procedural proceedings verified, by an order dated 04-04-2018, it was indicated that the final decision would be notified by the end of the aforementioned period referred to in Article 21 of the RJAT, extended as stated.

The Arbitral Tribunal is materially competent and is properly constituted, pursuant to Articles 2(1), paragraph a), 5 and 6(1) of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Regulation No. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

Thus, there is no obstacle to the examination of the case.

Everything having been considered, the following is rendered:

II. DECISION

A. FACTS

A.1. Facts Established as Proven

• The Claimant is, and was in 2011, a joint-stock company whose main activity consists of remodelling works, earth movement, underground and surface works, within the scope of mining operations, soil drilling, development of underground galleries, provision of mining engineering services among other services related to the extractive industry, and is registered with CAE No. 009900.

• The Claimant was established in February 2009, with share capital fully held by "B... SGPS, S.A.".

• The Claimant develops its activity and has, since the date of its establishment, its registered office in ..., municipality of ..., district of ..., an area comprised within C....

• In the tax year 2011, the Claimant was, by the aforementioned "B... SGPS, S.A." integrated into a group of companies constituted as follows:

  • "B… SGPS, S.A." (currently "D... Holding SGPS, SA"), NIF ... – parent company;
  • "E... S.A." (formerly "F..., S.A.), NIF ... – subsidiary companies;
  • A..., S.A. (Claimant), NIF... – subsidiary company.

• "E... S.A." was engaged in mining operations, developing its activity in the mining complex of ..., which it operated under a concession contract granted by the Portuguese State on 10 January 1992, which was subject to an amendment on 12 May 2006.

• The aforementioned mining operation consisted of the extraction, crushing and flotation of polymetallic ores in the mines belonging to the mining complex of ..., resulting in the production of copper and zinc concentrates.

• The extractive activities of "E... S.A." were suspended in early 1993, and "E... S.A." initiated in mid-2006 a project for rehabilitation of the productive capacity of the mines of ..., the subject of an investment contract with the Portuguese State, to which an investment of €76,000,000.00 by 2008 was associated.

• In a communiqué of the Council of Ministers of 11 May 2006, the Portuguese Government stated that "the valorization and exploitation of endogenous resources, … the contribution to the increase of the gross value of production and national export of mineral resources and… the reduction of regional asymmetries with induction of per capita income in the region and the… creation of 100 jobs and the maintenance of a significant number of indirect jobs…".

• "E... S.A." resumed mining operations in May 2008.

• "E... S.A." began to accumulate high losses and decided, in the third quarter of 2008, to suspend mining operations in the mines of ....

• In this context, the "G..." group, of Canadian origin, which held all of the share capital of "E... S.A.", decided to sell all of the share capital of "E... S.A.".

• This transaction was supported by the Portuguese Government, as the Portuguese State recognized it to be a special case of high economic interest and with relevant consequences for the national economy and, above all, for the geographical area where the activity of "E... S.A." was located.

• Negotiations for the acquisition of "E... S.A." took place between November and December 2008.

• On 05-12-2008 the parties agreed on the structuring principles of the transaction and defined the agreement for the purchase of shares comprising the share capital of "E... S.A.".

• In the first days of December 2008, the Portuguese Government made wide national disclosure of the fact, which was the subject of various news published in all media outlets and various public statements made by members of the Government at that time, such as the Minister of Economy, the Secretary of State for Economy, the Secretary of State for Tax Affairs, the Director General of Taxes, the Director of IRC, among other entities.

• On 23-12-2008, a contract designated "Share Purchase Agreement" was signed between "B... SA" and "H..., Ltd", which had as its object the sale of shares representing 99.8336% of the share capital of "E... S.A.".

• The signing of the aforementioned agreement was attended by various members of the Government then in office, in a visit by them to the facilities of "E...".

• The payment of the symbolic price took place on 23-12-2008.

• Pursuant to clause 6 of the "Share Purchase Agreement", the contract was subject to the verification of certain conditions.

• From clause 7.1 of the aforementioned contract, it appears that between the date of its signature and the date of closing thereof, the selling party was obliged to ensure that "E... S.A." conducted its activity in accordance with the fulfillment of the conditions established in clause 6 of the same contract, pursuant to Article 272 of the Civil Code.

• From clause 7.3 of the contract it appears that the purchasing party would appoint a representative to immediately monitor the management and current business of "E... S.A.", in order to verify compliance with the conditions stipulated in the aforementioned clause 6.

• In clause 2.2 of that same contract, the possibility was established that the acquisition of shares could be carried out indirectly, through a subsidiary of "B... SGPS SA".

• On 05-02-2009, an agreement denominated "Conditions Precedent Statement" was executed between "B... SGPS SA" and "H..., Ltd", where the said parties confirmed that the conditions of the "Share Purchase Agreement" contract signed on 23-12-2008 had been fulfilled.

• In point 4 of this agreement it is stated, among other things, the following:

"I'M hereby confirms to H… that, as per clause 2.2. of the SPA and clause 2.2 of the Loan Purchase Agreement entered into between the parties on 23 December 2008, the shares will be purchased by … fully owned subsidiary "B…– SGPS, SA"".

• On 29 January 2009, the Competition Authority issued a pronouncement that the operation had no impact on competition.

• Also on 29 January 2009, the shareholder "H...", participated in the General Meeting of "E..." and in the deliberations taken there.

• By resolution of the Securities Market Commission, dated 5 February 2009, the request for loss of status as a public company filed by resolution of the aforementioned General Meeting was approved.

• In 2011, a new investment contract was signed that included an additional investment of €100,000,000.00 between 2009 and 2014.

• Such investments were aimed at, among other things, the preparation of the mines, adjacent equipment and various support and supply infrastructures (energy, water, communications and transport).

• On 31-02-2011, "B... SGPS, SA" exercised the option for taxation under the RETGS through the delivery of the declaration of changes with tax effects from 2011, inclusive.

• The tax year 2011 was the first tax year of taxation under IRC for this group of companies in accordance with the RETGS.

• The Claimant, in the tax year 2011, self-assessed IRC as a subsidiary company included in a group of companies taxed under the RETGS.

• The Claimant submitted annual income tax return forms Model 22 for IRC, relating to the tax years 2009 and 2010, declaring the inland location tax regime.

• In the individual income tax return submitted by the Claimant, relating to the tax year 2011, the amount of €19,933.82 was declared as special payments on account.

• The Claimant has organized accounting and is audited by an independent Official Auditor, and has never been subjected to indirect methods of determining taxable income.

• The Claimant has a regularized tax situation and has never had overdue wages.

• The Claimant does not result from any division.

• In the tax year 2011, the Claimant did not mark box 5, which corresponds to the field "rate reduction" as it was being taxed under the RETGS.

• On 3-11-2013, a contract was signed between the Claimant and the Portuguese State, whereby a contractual tax benefit in the amount of €1,524,615.53 was granted to the Claimant, with a period of validity starting on 1 November 2009 and ending on 31 December 2020.

• The Claimant was established in 2009, with high rates of employee hiring.

• In the tax year 2010, the Claimant hired, through an indefinite-term employment contract, 1 employee aged not more than 35 years.

• In the tax year 2010, the Claimant did not record any dismissals of employees with indefinite-term contracts and aged not more than 35 years.

• In the tax year 2011, the Claimant hired, through an indefinite-term employment contract, 22 workers aged not more than 35 years.

• In the tax year 2011, the Claimant did not record any dismissals of employees with indefinite-term contracts and aged not more than 35 years.

• The Claimant did not benefit from any of the tax benefits in relation to workers considered eligible for tax benefit for net job creation.

• By order dated 11-11-2015, the Finance Directorate of ... extended the inspection competence of the Finance Directorate of ... in relation to the Claimant, in the following terms:

"Given the information, opinion and order forwarded under cover of the aforementioned official letter, I consider the request for extension of the inspection procedure justified regarding the following taxpayers with NIF ... and ... with registered office in the area of this district, given the interest in validating the inspection acts already practiced within the scope of the analysis of the economic group to which they belong, by the Finance Directorate of ..., and the coherence of the entirety of future inspection acts on the companies that comprise it, whereby I authorize the extension of competence, pursuant to Article 17 of the RCPITA, for the appropriate inspection action on the aforementioned parties".

• On 12-11-2015, the tax inspection services of the Finance Directorate of ... issued the service order No. OI2015..., relating to an internal inspection procedure of partial scope, focusing on IRC and the tax year 2011 of the Claimant, stating the following:

"Within the scope of this inspection action, focusing on the tax year 2011, on the company A..., S.A. (hereinafter referred to simply as I... S.A.), NIF..., and given what was found in the inspection action on the company "B..., S.A.", the cessation of application of the special regime for taxation of groups of companies was proposed, as shown in the facts and grounds set forth in this report, in the determination of taxable income under IRC. (…) This action respects compliance with the service order No. OI2015..., relating to the tax year 2011, issued by the tax inspection services, of the Finance Directorate of ..., under the extension of competence authorized by the Finance Director of ..., pursuant to Article 17 of the RCPITA, which is found in annex No. 1. The action began on 12 November 2015, communicated to the taxpayer through official letter No.... ."

• On 16-11-2015, the Finance Directorate of ... communicated to the Claimant that on 12-11-2015 the internal analysis had been initiated, based on the service order No. OI 2015....

• The service order No. OI2015... was not notified to the Claimant either before or after the inspection procedure.

• Within the scope of the inspection action, the tax inspection services of the Finance Directorate of ... made the following characterization of the Claimant:

"(…) In terms of IRC, it is a taxpayer pursuant to Article 2(1), paragraph a) of the CIRC, framed in the general regime in accordance with Article 3(1), paragraph a) of the same code. In the tax years 2009 to 2010, company I... SA presented the annual income tax return, under the general IRC taxation regime. In 2011, the company, by option, applied the special regime for taxation of groups of companies (RETGS), defined in Article 69 of the Corporate Income Tax Code, being a subsidiary company in a group constituted by B... SGPS SA (NIF...) as the parent company, by itself and by E... SA (NIF: ...), another subsidiary company)

II.3.2 – Administrators/TOC/ROC

According to the data available in the AT registry, in the tax year under analysis the taxpayer identified the following inter-taxpayer relationships:

• Chairman of the Board of Directors: J... – NIF ... replaced by
• K... – NIF..., appointed on 14/6/2011.
• TOC: L... – NIF ...
• ROC: M... LDA – NIF ...

Declarative Obligations under IRC

The company submitted the simplified business information (IES) and the annual income tax return Model 22, individual and group.

II.3.4. – Other information

• Tax Enforcement Proceedings

Through consultation of the AT computer system (Sefweb – Debtor Management), it was verified that, in the name of the taxpayer, there are no tax enforcement proceedings to date".

• By official letter dated 19-11-2015, received on 25-11-2015, the Claimant was notified of the Draft Inspection Report, prepared by the Finance Directorate of....

• The Draft Inspection Report contained the order of the Finance Directorate of ... dated 11-11-2015, extending territorial inspection competence.

• From the final tax inspection report prepared by the Finance Directorate of ... the following is stated:

"(…) given what was found in the inspection action on the company B... SGPS SA, the cessation of application of the special regime for taxation of groups of companies was proposed, as shown in the facts and grounds set forth in this report, in the determination of taxable income under IRC. (…)"

• The terms in which the extension of competence was granted are contained in Annex 1 to the Tax Inspection Report, of the aforementioned Finance Director.

• The Tax Inspection Report was the subject of an order of agreement with the Opinion of the Team Leader and the Division Head, both of the Finance Directorate of ..., with the latter determining that, for "purposes of decision and notification of the final report" it be forwarded to the Finance Directorate of....

• On 11-12-2015, an order was issued by the Finance Director of ..., with the following tenor:

"Seen.

I sanction and agree with the inspection action report, with the correction proposals, with its grounds and correction criteria which were the subject of notification for hearing pursuant to Article 60 of the LGT and Article 60 of the RCPIT.

This company was included in a group of companies taxed in 2011 by the Special Regime for Group Taxation (RETGS), with "B... SGPS, S A" with NIPC:... being the parent company.

From the grounds contained in the report, it follows that in 2011 the conditions for applying RETGS to the group are not met, whereby its application to the parent company and the other companies in the group perimeter ceased, with all of them now being taxed under the general IRC regime.

As a consequence, A... SA is taxed autonomously under the general IRC regime, having as its basis the taxable income reported by the company individually.

Notify the taxpayer of the decision and the final report, pursuant to Article 62 of the RCPITA."

• The conclusions of the tax inspection report were, fundamentally, as follows:

  • The subsidiary company "E... S.A." generated individual tax losses in the previous tax years 2008, 2009 and 2010;
  • The shares comprising the share capital of "E... S.A." had been acquired by "B..., SA" only in February 2009, whereby on 01-01-2011 the legal minimum holding period of 2 years had not yet been completed;
  • Therefore, "E... S.A." should not have been included in the RETGS, whereby the RETGS should cease from 01-01-2011 with respect to all companies in the tax group, to be taxed under the general IRC regime;
  • The Claimant should be taxed individually, in the tax year 2011, according to its individual income tax return, submitted together with the group return.

• After completion of the inspection procedure, the Tax Authority determined the end of the application of RETGS, as a consequence of non-compliance with the legal requirements for its benefit, and consequent taxation under the general IRC regime.

• From the inspection report, a correction to the individual taxable income of the Claimant in 2011 resulted, in the amount of €3,834,204.49.

• The tax inspection report states that "Against the present notification and its substantiation no administrative reclamation or objection shall be lodged".

• The Claimant was notified of the additional IRC assessment No. 2015..., as well as the assessment of compensatory interest, relating to the tax year 2011, with a payment deadline of 15-02-2016.

• The Claimant filed an administrative reclamation (No. ...2016...) with the Finance Service of ... directed to the Finance Director of....

• The administrative reclamation was referred by the Finance Service to the Finance Directorate of ..., as the competent entity to issue the decision.

• In points 76 to 132 of the administrative reclamation, the Claimant alleged that the contract for purchase and sale of shares in "E...S.A." was legally concluded on 23-12-2008 and produced its respective legal effects on that same date, invoking the following grounds:

  • That contract is consensual in nature, with ownership being transferred by agreement between the parties;
  • The suspensive conditions to whose fulfillment the parties subordinated the contract were actually fulfilled, with their respective legal effects retroacting to the date of conclusion of that contract, namely 23-12-2008.

• In points 134 to 150, the Claimant alleged that, even if the cessation of RETGS were admitted, that cessation would not extend to all companies in the tax group, but only to the company that does not meet the legal requirements for its inclusion in RETGS.

• On 06-12-2016, the order dismissing the administrative reclamation was issued by the Finance Director of....

• In the order dismissing the administrative reclamation, issued by the Director of the Finance Directorate of ..., the following is stated:

"Considering that the legal requirements for applying the claimed taxation regime are not met, as comprehensively demonstrated in the inspection report produced by the Finance Directorate of ... which is hereby fully reproduced and ratified, nor are the allegations produced in its administrative reclamation considered consistent, as is sustained in the information below, which I sanction and equally ratify, I hereby dismiss the present administrative reclamation".

• The decision dismissing the administrative reclamation considered that the tax benefits invoked by the Claimant in the administrative reclamation were invoked out of time because "the assessment contested does not result from a Model 22 declaration voluntarily submitted within the legal deadline, but rather from an official assessment".

• In the decision dismissing the administrative reclamation, the Finance Directorate of ... reiterated that the Claimant could lodge an administrative reclamation or object against the tax assessment.

• The decision dismissing the administrative reclamation was notified to the Claimant through official letter No. ... of 07-12-2016, by registered letter with acknowledgment of receipt.

• In the administrative reclamation procedure, the Claimant was not afforded the opportunity to exercise its right to a hearing before the dismissal of the administrative reclamation.

• The Claimant provided security to suspend the tax enforcement proceedings.

• The establishment and maintenance of such security entailed expenses, namely regarding stamp tax and financial commissions.

• In December 2016, the Claimant paid the debt arising from the assessment under the "PERES" – exceptional regime for regularization of tax debts.

• As a result, the Tax Authority cancelled the security that had been provided.

A.2. Facts Established as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Substantiation of the Proven and Not Proven Facts

With respect to the facts, the Tribunal need not pronounce on all that was alleged by the parties; rather, it has the duty to select the facts that are relevant to the decision and distinguish the proven from the not proven matter (see Article 123(2) of the Code of Tax Procedure and Process (CPPT) and Article 607(3) of the Code of Civil Procedure, applicable ex vi Article 29(1), paragraphs a) and e), of the RJAT).

In this way, the facts relevant to the judgment of the case are chosen and delimited according to their legal relevance, which is established in view of the various plausible solutions to the legal question(s) (see former Article 511(1) of the Civil Procedure Code, corresponding to current Article 596, applicable ex vi Article 29(1), paragraph e), of the RJAT).

Thus, having regard to the positions assumed by the parties, in light of Article 110(7) of the CPPT, the documentary and testimonial evidence and the administrative procedures attached to the file, the facts listed above were considered proven, with relevance to the decision, taking into account that, as written in the Decision of the South Administrative Court (TCA-Sul) of 26-06-2014, rendered in case 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not contested".

In concrete, the fact stated as proven in point 18 resulted from testimonial evidence produced, where it was clearly stated that the price of €1 was paid with a coin, on the day of signature of the "Share Purchase Agreement".

Nor were considered proven or not proven allegations made by the parties, presented as facts, consisting of strictly conclusive statements, incapable of proof and whose truthfulness must be assessed in relation to the concrete facts of fact above consolidated.

B. LAW

a. On Matters of Exception

The Respondent begins by, on the basis of exception, raising the question of "material incompetence of CAAD to recognize the existence of a tax benefit and the unsuitability of the procedural means", considering that "we are faced with evident material incompetence of the Tribunal for the examination of the part of the petition for arbitral pronouncement above identified, submitted on an alternative basis, which constitutes a dilatory exception that prevents knowledge of that petition and leading to the dismissal of the instance as to the pretension in question".

As the Respondent itself clarifies, the exception in question relates to the alternative petition formulated by the Claimant, that "(...) annulling the Tax Authority the application of RETGS, it is of the most elementary justice the application of the inland location tax regime, to the extent that it is a tax benefit of direct and automatic application, whose right cannot be denied by the Tax Authority".

As will be seen below, the Tribunal shall not examine such question, as it is rendered moot by what will be decided hereinafter.

In this manner, the examination of the exception argued with respect thereto is equally rendered moot, for which reason the latter shall also not be examined.

b. On the Merits of the Case

i. On the Failure to Notify the Decision on the Cessation of RETGS

The Claimant begins by asserting that "the Finance Directorate of .../Tax Authority should have previously notified the taxpayer of that same tax act, immediately harmful to the interests and interests of the Claimant and the other companies in the tax group in question".

The Claimant considers, in short, that "By not having been previously notified of that administrative decision on cessation of RETGS in relation to the 3 companies in the group, in particular in relation to the Claimant, accompanied by the respective means and periods of reaction at the disposal of the taxpayers involved (in particular the Claimant), (...) the Finance Directorate of .../Tax Authority indelibly prejudiced the rights and defense guarantees of the taxpayers involved, in particular the Claimant.", and that "the notification of the administrative decision on cessation of RETGS, in an autonomous manner, was a condition of its legal effectiveness, as follows from Articles 36(1) of the CPPT, 77(6) of the LGT and 268(3) of the CRP".

The Claimant concludes, therefore, that "By this not being the case, the aforementioned legal norms were violated, with the consequent legal ineffectiveness, in particular in relation to the Claimant, of the administrative decision on cessation of RETGS (...) And as the legal effectiveness of that administrative decision is causal to the additional assessment here contested – that is, this assessment is a consequent act of that one – the additional IRC and compensatory interest assessment here contested is voidable, pursuant to Article 163 of the Administrative Code (CPA)".

With all due respect, it is submitted that the Claimant's position is not well-founded.

Indeed, first and foremost, the Claimant operates from a fundamental error, which is that the decision on cessation of RETGS was not notified to it, which is not considered to be the case, not least because the same is implicit in the assessment act contested, as follows from its substantiation, and was properly understood by the Claimant, of which the entire Initial Request provides proper account.

Furthermore, the Claimant also operates from the premise that the decision to revoke the RETGS should be the subject of autonomous and prior notification in relation to the assessment, without substantiating, in legal norms, such understanding.

In any event, acceptance of the position advocated by the Claimant would always leave unresolved the question of knowing with what advance, in relation to the assessment act, the act in question should be notified, with evident disturbances to the level of regulation of the tax inspection procedure and the regime of expiration of the right to assess, without any benefits ensuing for the rights and guarantees of taxpayers.

Thus, given that no provision in the legal system precludes that notification in question from being made concomitantly with the assessment act, no illegality shall occur from the circumstance that the decision to revoke the RETGS is given (expressly or implicitly) and notified with the assessment act, being that, in any case, this is a normal procedure at the most diverse levels (particularly common in VAT, where changes to the classification of taxpayers, or other corrections, are normally concomitant with the issuance of the assessment act), without any prejudice ensuing for the taxpayer's position.

In any event, also in this case, although the Claimant alleges it, no prejudice is demonstrated for the latter, who, in this forum, has and exercises all the faculties of defense in the matter that are incumbent upon it.

As written in case 168/2015-T of the CAAD, which is now, with due deference, transcribed:

"when there is no independently challengeable act prior to an assessment act concerning its prerequisites, any illegality previously committed may be 'invoked in the challenge to the final decision' (latter part of Article 54 of the CPPT), whereby all questions relating to the legality of assessment acts may be examined in tax courts in proceedings for judicial challenge, as follows from paragraph a) of Article 97(1) and Article 99 of the same Code.

In truth, in tax courts, even when, having been practiced assessment acts, a situation arises where it might be more useful for the taxpayer to use the action for recognition of a right or legitimate interest (as it would enable, in addition to the examination of the legality of acts, the definition for the future of the taxpayer's rights), the use of the action instead of judicial challenge is a mere faculty, as follows from the text of Article 145(3) of the CPPT itself, by stating that 'actions may only be brought whenever that procedural means is the most adequate to ensure full, effective and actual protection of the right or legally protected interest'. That is, what is provided in this norm is limitation on the use of the action and not limitation on the use of the judicial challenge proceedings.

Indeed, it is manifest that the proceedings for judicial challenge include the possibility of recognition of rights in tax matters, such as the right to annulment or declaration of nullity of assessments, the right to indemnificatory interest and the right to indemnification for undue security, whereby the fact that recognition of rights is at issue does not constitute an obstacle to the use of the proceedings for judicial challenge.

Thus, as the Tax and Customs Authority asserts, given that the arbitral tax proceedings were created as an alternative to the proceedings for judicial challenge, it must be concluded that there is no obstacle to the legality of the assessment acts at issue in this proceedings being examined by this Arbitral Tribunal, as in tax courts such legality could be examined in proceedings for judicial challenge."

Finally, and with respect to the norms invoked, in this matter, by the Claimant, it is noted that they relate to the requirements for notification and the necessity of its fulfillment for the effectiveness of tax acts.

Now, if the Claimant considered that the notification suffered from some deficiency, in particular, as it states, by not having been "accompanied by the respective means and periods of reaction at the disposal of the taxpayers involved", it was incumbent upon it to make use of the provision in Article 37(1) of the CPPT, which it did not do.

In this manner, based on the above, the arbitral petition is dismissed on this part.

ii. On the Failure to Deliver the Service Order

The Claimant next alleges that it was notified of the commencement of the internal analysis after it had been initiated, in violation of Article 51(1) of the Regulations on Tax Inspection Procedures (RCPIT), which provides that:

"A copy of the service order or dispatch that determined the tax inspection procedure shall, at the commencement thereof, be delivered to the taxpayer or tax obligor, except in the situations provided for in Article 46(6)".

The Claimant concludes that "the additional IRC assessment, because consequent to an internal inspection procedure that was illegal, likewise suffers from the vice of violation of law, determining its nullity or annulment.", and that the notification of the service order "is fundamental because, if the inspection actually carried out is not in consonance with the respective service order, the taxpayer is legitimized to oppose the inspection acts".

With all due respect again, it is considered that the Claimant incurs in some confusion, in that, being the inspection procedure in question of an internal nature, it does not imply the performance of any inspection act outside the Tax Authority services, whereby no act is capable of being performed to which the taxpayer may object.

On the other hand, and even if this were not so, naturally the failure to notify the service order would have the same consequence as the performance of inspection acts that deviate from the notified service order. That is, and first and foremost, if, as the Claimant rightly states, with respect to inspection acts not covered by a service order the taxpayer may object thereto (not least because, in any case, as to such acts there is no notification of service order), not being notified the latter order, the taxpayer may object to all inspection acts.

In any event, as stated in the Decision of the TCA-Sul of 10-07-2012, rendered in case 05303/12:

"2. The internal inspection procedure aims at the formal and coherence analysis of documents from the taxpayer's records, as well as their cross-referencing with other collected elements;

1. In such internal inspections, there is no accreditation of officials for that purpose and no issuance of service order with a view to notification of the taxpayer, at the commencement of such procedure".

In these terms, it is considered that the arbitral petition should be dismissed on this part, finding no arguments advanced that any irregularity, injustice, inequality and/or bias, nor any negative discrimination against taxpayers in their relationship with the Tax Authority, occurs as the Claimant argues, nor finding any violation of Articles 55 and 59 of the LGT, 6 to 9 of the CPA and 266(2) of the CRP.

iii. On Territorial Competence for the Inspection Procedure

The Claimant continues, asserting that, given its registered office in the district of ..., "The Finance Directorate of ... and its respective Divisions did not have territorial competence to inspect the Claimant.", whereby "the internal analysis in question violated Article 16(1) c) of the RCPIT", which provides that:

"The following services of the Tax and Customs Authority are competent to practice tax inspection acts, pursuant to law: (...) c) The decentralized organizational units, with respect to taxpayers and other tax obligors with domicile or tax registered office in their territorial area".

For the Claimant, the "Order of the Finance Directorate of ... extended the territorial inspection competence of the Finance Directorate of ... to the district of ... – the territorial area of the inspection competence of the Finance Directorate of ..." but "the order extending competence referred to in Article 17 of the RCPIT, in the concrete case, should also have been issued by the Finance Directorate of...", since "the entity that ordered the inspection of the Claimant was the Finance Directorate of..., and not the Finance Directorate of ... – whereby it was incumbent upon the Finance Directorate of..., pursuant to Article 17 of the RCPIT, to order, in reasoned form, the extension of its territorial inspection competence to the territorial area that was not within its competence", whereby "the prescriptions regarding the organizational distribution of inspection competence referred to in Article 17 of the RCPIT were violated", and that "the additional IRC assessment here contested suffers from nullity or, at least, from a vice determining its annulment – as a consequent act of internal inspection procedure that violated the aforestated legal provisions".

The Claimant further adds, in this regard, that "the Finance Directorate of..., by 'abdicating' its territorial inspection competences, 'delegating' them illegally, without material competence to do so, to another decentralized inspection organ (the Finance Directorate of...), practiced an administrative act that is null, which produces no legal effects (...) Being certain, therefore, that null administrative acts are not capable of ratification/confirmation (see Articles 164(2) in contrario and 166(1) a), ex vi Article 164(1), all of the CPA)".

With all due respect again, it is believed that here too the Claimant becomes entangled in some confusion.

Indeed, one or the other: either the competence to issue the order extending the competence of the Finance Directorate of ... rested with the latter, or it rested with the Finance Directorate of....

In the latter case, there shall be no illegality, since the Finance Directorate of..., as the Claimant admits, practiced the said order extending competence.

In the former case, one cannot say that the Finance Directorate of ... "abdicated" competences it did not have, nor much less that the possibility of ratification/confirmation rested with the latter, since, not having competence to practice the act, it shall not necessarily have competence to ratify/confirm/remedy it.

Furthermore, in any event, the act of the Finance Directorate of..., does not incorporate any "renunciation of the holding or exercise of competence conferred" by law, being rather a case of "delegation of powers and similar figures legally provided for", as expressly provided in Article 36(2) of the applicable CPA.

In this sense, one may read in the Decision of the TCA-Sul of 19-08-2016, rendered in case 09765/16, that "Non-compliance with the rules for distribution of territorial competence of inspection services entails the sanction of mere voidability of the acts thus practiced (Article 163(1) of the CPA, ex vi Article 2 (d) of the CPPT)."

Setting aside, thus, the question of nullity argued by the Claimant, it is then necessary to verify whether the norms of territorial competence in question were violated or not.

Specifically, what is at issue is the norm of Article 17 of the RCPITA applicable, which provides that:

"Inspection acts may extend to territorial areas different from those provided for in the preceding article or be performed by another service, by reasoned decision of the entity that ordered them".

The situation sub judice is analogous to that decided in the aforementioned Decision of the TCA-Sul of 19-08-2016, rendered in case 09765/16, where one may further read:

"The question that arises consists of knowing whether the present action of the Tax Administration conforms to the rules for distribution of territorial competence and whether the eventual violation thereof gives rise to the nullity of the inspection act and of the consequent act of fixation of the taxable income at issue, as the appellant seeks.

From the provision of Article 16(1)(c) of the RCPIT it is extracted that the Finance Directorate competent for the instigation of the inspection procedure at issue was the Finance Directorate of ... and not the Finance Directorate of .... Whence it follows that the authorization for the performance of inspection acts by the Finance Directorate of ... granted by the Finance Directorate of ... cannot have the meaning of obfuscating the rules for distribution of territorial competence. The authorizing order in question is also not based on the norm of Article 17 of the RCPIT. The present normative allows that the service with competence to practice the inspection act, and after instigation of the inspection, enable another service to practice certain inspection acts, with the extension of the inspection to territorial areas diverse from those resulting from the natural allocation of territorial competence. In the case, what occurred was the practice by a territorially incompetent service of inspection acts based on an authorization order for the practice of the inspection issued by the territorially competent service – the Finance Directorate of ....

Whence it follows the occurrence of a vice of violation of law, by offense to the rules for distribution of territorial competence between the decentralized organs of the Tax and Customs Authority – Article 16(1)(c) of the RCPIT.

The question that arises consists of knowing what desvalue corresponds to the vice detected and whether the same shall have been remedied by the intervention of the organ competent to practice the inspection act, upon issuing an order of agreement in the final inspection report, the Director of the Finance Directorate of ....

Non-compliance with the rules for distribution of territorial competence of inspection services entails the sanction of mere voidability of the acts thus practiced (Article 163(1) of the CPA, ex vi Article 2(d) of the CPPT). Which means that the vice from which the inspection acts suffer may be remedied through the practice by the competent organ of the act of ratification of the previously practiced acts. The ratification-remedy of the inspection acts in issue occurred, in the case examined, through the confirmation by the Finance Directorate of ... of the inspection report drawn up by the Finance Directorate of ... (Article 164(1) of the CPA), through the issuance of the order of agreement of the Finance Director of ... with the final inspection report – letter Z) of the evidentiary record."

In the case, and as follows from the proven facts, on 11-12-2015 the order by the Finance Director of ... was issued as stated in point 57 of such facts, being, therefore, a situation of direct application of the above-cited judgment, reinforced in the measure that in the present case a tax inspection procedure of an internal scope is at issue.

No grounds are discerned for the Claimant's allegation of being "manifestly unacceptable, unnecessary, inadequate and disproportionate (in violation of Articles 55 of the LGT, 7 and 8 of the CPA and 266(2) of the CRP)." due to "having been illegally under the dual territorial inspection authority of the Finance Directorate of ... and the Finance Directorate of...", not least because, contrary to what the Claimant alleges, the inspection acts of the Finance Directorate of..., in casu, are not "intrusive and restrictive, abusive and disproportionate acts in relation to the ends sought to be achieved", because, among other things, an internal inspection procedure was at issue, which by definition does not involve the performance of intrusive acts.

In this manner, and based on the above, the arbitral petition should be dismissed on this part.

iv. On the Fulfillment of Article 69(4)(c) of the CIRC

As follows from the proven facts, the factual grounds of the corrections operated by the Tax Authority, and contested by the Claimant, is rooted in the circumstance that, according to it, the acquisition of the equity interest in E... by "B... SGPS, S.A." did not occur before 1 January 2009.

From this it resulted, further in the understanding of the Tax Authority, the violation of Article 69(4)(c) of the applicable CIRC, whereby, applying Article 69(8) of that same article, the Tax Authority proceeded with the disregard of the tax group to which the Claimant belonged, and with respect to which the aforementioned "B... SGPS, S.A.", as parent company, manifested, in the tax year 2011, the desire to see it taxed under the terms of the Special Regime for Group Taxation (RETGS).

For the Claimant, however, "given the provisions of Articles 232 and 408(1) of the Civil Code, that contract is considered legally concluded on 23.12.2008 - the date on which it immediately produced its respective legal effects, in particular the legal effects transferring ownership of the shares.", since "as follows from Article 276 of the Civil Code (Retroactivity of the condition), 'The effects of the fulfillment of the condition retroact to the date of conclusion of the transaction, unless, by the will of the parties or by the nature of the act, they are to be referred to another moment'" and that "the will of the parties to subject this contract for purchase and sale of shares to the legal regime of the Civil Code (CC) is patent in clause 7.1 of that same contract".

Thus, the Claimant considers "even if the contractual conditions, according to the Tax Authority alleges, occurred only in February 2009, their respective legal effects retroacted to the date of execution of the contract for purchase and sale in which those same conditions were stipulated, 23.12.2008 – by mandate of the law to which the parties intended to subject that juridical transaction: Article 276 of the CC.", all of which, for the Claimant, "means, in short, that B... was and is the owner of the shares of E... (99.8336%) since 23.12.2008.".

Always for the Claimant, "the conditions established in the contract for purchase and sale of shares should be interpreted and applied, in their respective legal-tax effects, according to the corresponding legal-civil regime, in particular in accordance with the aforementioned Article 276 of the CC.".

The Claimant further adds, with respect to the circumstance that the contract executed on 21-12-2008 was not executed by "B... SGPS, S.A.", that "only a juridical substitution of subjectivity in the position of buyer in the contract for acquisition of shares executed on 23.12.2008 occurred, with the immediate consent/agreement of the selling party – without that contending with the date of acquisition of the shares.".

As facts of special relevance contained in the proven facts with respect to this question, the following is established:

• Negotiations for the acquisition of "E... S.A." took place between November and December 2008;

• On 05-12-2008 the parties agreed on the structuring principles of the transaction and defined the agreement for the purchase of shares comprising the share capital of "E... S.A.";

• On 23-12-2008 a contract designated "Share Purchase Agreement" was signed between "B... SGPS SA" and "H..., Ltd", which had as its object the sale of shares representing 99.8336% of the share capital of "E... S.A.";

• The payment of the symbolic price took place on 23-12-2008;

• Pursuant to clause 6 of the "Share Purchase Agreement", the contract was subject to the verification of certain conditions;

• From clause 7.1 of the aforementioned contract, it appears that between the date of its signature and the date of closing thereof, the selling party was obliged to ensure that "E... S.A." conducted its activity in accordance with the fulfillment of the conditions established in clause 6 of the same contract, pursuant to Article 272 of the Civil Code;

• From clause 7.3 of the contract it appears that the purchasing party would appoint a representative to immediately monitor the management and current business of "E... S.A.", in order to verify compliance with the conditions stipulated in the aforementioned clause 6;

• In clause 2.2 of that same contract, the possibility was established that the acquisition of shares could be carried out indirectly, through a subsidiary of "B... SGPS SA";

• On 05-02-2009, an agreement denominated "Conditions Precedent Statement" was executed between "B... SGPS SA" and "H..., Ltd", where the said parties confirmed that the conditions of the "Share Purchase Agreement" contract signed on 23-12-2008 had been fulfilled.

• In point 4 of this agreement it is stated, among other things, the following:

"I'M hereby confirms to H… that, as per clause 2.2. of the SPA and clause 2.2 of the Loan Purchase Agreement entered into between the parties on 23 December 2008, the shares will be purchased by … fully owned subsidiary "B…– SGPS, SA"".

• On 29 January 2009, the Competition Authority issued a pronouncement that the operation had no impact on competition.

• Also on 29 January 2009, the shareholder "H...", participated in the General Meeting of "E..." and in the deliberations taken there;

• By resolution of the Securities Market Commission, dated 5 February 2009, the request for loss of status as a public company filed by resolution of the aforementioned General Meeting was approved.

At issue, as has been seen, is the verification, or not, of the 2-year period provided for in Article 69(4)(c) of the applicable CIRC, which provided that:

"The following may not be part of the group: companies that, at the commencement or during the application of the regime, find themselves in the following situations: (...)

c) Record tax losses in the three tax years prior to that of commencement of the regime, save, in the case of subsidiary companies, if the equity interest has already been held by the parent company for more than two years;"

With respect to this question, it should first be noted that the segment of the tax norm in interpretation refers to the holding of the equity interest for more than two years by the parent company.

It is this concept of holding that must be interpreted and applied, and not, unless otherwise advised, the concept of condition, or any other of a juridical-civil nature.

Thus, what is relevant is to determine whether the factual condition established allows one to conclude that "B... SGPS, S.A." came to hold the equity interest in E..., as the Claimant intends on this part, from 23-12-2008.

Always with due respect to other understandings, it is submitted that the answer to such question must be negative.

Indeed, it is considered that the legal provision of Article 69(4)(c) of the applicable CIRC has underlying the requirement that the acquirer of the equity interest shall, in factual and legal terms, have assumed the responsibilities and risk inherent to the holding of equity interests. That norm requires, in short, that there be an effective legal and practical holding.

Now, in the case, and given the factual data exposed, one cannot conclude that such occurred from 23-12-2008.

Indeed, it is established that the management of E... continued, until the execution of the contract dated 05-02-2009, to be assured by "H..., Ltd" (see clauses 7.1. and 7.3 of the "Share Purchase Agreement"), that the acquirer of the shares (the "B... SGPS, S.A.") was only appointed in 2009, and that only in that year were the shares delivered to the acquirer (see clause 8.2.1.ii of the "Share Purchase Agreement").

Furthermore, it is verified that in Clause 4 of the "Conditions Precedent Statement" it is stated, among other things that "the shares will be purchased by ... fully owned subsidiary "B...– SGPS, SA"", that is, that the shares shall (in the future) be acquired by "B... SGPS, S.A.", evidencing that, as of that date, such acquisition had not been consummated.

With respect to this matter, it is further noted that the position sustained by the Claimant, according to which an agreement for transmission of equity interests that defers to the future the production of effects of a contract, with the intention of making them retroact to the date of such agreement, foreseeing even the possibility that, in the interim, the intervening parties in the original agreement be substituted, is relevant to the computation of the 2-year period referred to in the norm of Article 69(4)(c) of the applicable CIRC, apart from opening the door wide to fraud and tax evasion, in terms that are not considered compatible with the presumption of a reasonable legislator enshrined in Article 9(3) of the Civil Code, results in a total emptying of the norm in question.

Indeed, given the understanding advocated by the Claimant, nothing would prevent, for example, two entities from executing a contract for alienation of equity interests of a deficit company, subject to condition, expressly subjecting it to the regime of Article 276 of the Civil Code, with a period of 2 years or more, and that, upon verification of the conditions (which could even be at the disposal of the parties themselves), consummate the transmission, in favor of a third party, who could immediately integrate the company thus acquired into its tax group, notwithstanding that the latter continued until then to be managed by the alienator, who also continued in the possession of the respective equity interests...

Unable to subscribe to such understanding, the arbitral petition should, on this part still, be dismissed, a conclusion to which shall not be barred by the jurisprudence and doctrine of a civil-law nature on which the Claimant relies, not least because, as already stated, the interpretation of any juridical-civil concept is not at issue, but the interpretation of the concept of "holding for more than two years" contained in the tax norm in question, and then because the aforesaid doctrine and jurisprudence refer essentially to the effects inter partes, as follows, among other things, from the citations of António Menezes Cordeiro ("In any case: once the transfer agreement is concluded, its effects inter partes unfold") and of Vaz Serra, Lobo Xavier, Osório de Castro and Carolina Santos ("the formalities provided for in the Securities Code are merely requirements of legitimation of the acquirer for the exercise of its corporate rights"), made by the Claimant itself.

Indeed, the judgment of the effects of the contracts at issue between the respective parties is not at stake in the case sub judice, but as regards the Tax Authority which was not a party to the same, on the one hand, and the legitimation of the acquirer in the exercise of corporate rights shall be a necessary condition for one to be able to speak of an effective holding of the equity interests, as presupposed, in the terms above stated, by the norm of Article 69(4)(c) of the art. 69 applicable, on the other.

Finally, nor is the circumstance, highlighted by the Claimant, that "the operation contemplated was clothed (...) with an unquestionable legitimacy, guaranteed by the commitment and patronage of the Government of the Portuguese Republic.", given relevance, since, for one thing, nothing evidences that such patronage included the relevance of the date of acquisition of E... for purposes of the norm in question, and that, even if it did not, such would be beyond the competence of the Government of the Portuguese Republic, given the concrete action of the latter that was established, whereby, at best, and being that the case, it would be incumbent on the Claimant to action through the appropriate channels that Government, demanding of it the responsibilities to which, eventually, it has defaulted.

v. On the Principle of Specialization of Tax Years

In the alternative, the Claimant also raises the question of the violation of the principle of specialization of tax years and of economic periodization, consigned in Article 18 of the CIRC, considering that, given the same, it shall be "unquestionable that the purchase and sale of shares in question is attributable to the tax year 2008 – and not to the tax year 2009.", for "as shown, the Tax Authority alleges, by 31.12.2008, the purchase and sale of shares and their respective positive and negative components of the tax results of the intervening parties, were already entirely known to both parties", since "having the taxpayer attributed to the Tax Authority the acquisition of the shares of E... to the tax year 2008, and the Tax Authority has not demonstrated any voluntary and/or intentional omissions on the part of the taxpayer, with a view to operating transfer of results between tax years, by force of the principles of economic periodization, unity of the legal system, specialization of tax years and justice, the shares of E... should be considered acquired, for tax purposes, in 2008.".

Once more with due respect, it is submitted that the position sustained by the Claimant is not founded in the facts established.

Thus, and first, as to the allegation that "by 31.12.2008, the purchase and sale of shares and their respective positive and negative components of the tax results of the intervening parties, were already entirely known to both parties", it is noted that, precisely, "B... SGPS, S.A." was not a party to the agreement executed on 23-12-2008, having only been appointed to the seller, as acquirer, on 05-02-2009.

On the other hand, the Claimant did not demonstrate, in any manner, in the case file, that it "attributed to the tax authority the acquisition of the shares of E... to the tax year 2008", pointing, moreover, the available elements in the opposite direction, in particular with respect to the IES of E... and B..., which, as stated in the RIT (see p. 16), and was not contested by the Claimant, only report the acquisition in question in the year 2009, and not in the year 2008.

Thus, and based on the above, the arbitral petition should also be dismissed on this part.

vi. On the Taxable Event

Without further ado, the Claimant further alleged that "By force of Article 8(9) of the CIRC, the taxable event generating IRC is considered verified on 31.12.2011.", and that "on 31.12.2011 it is manifest that the shares of E... were already held by B... for more than 2 years – even if (...) one considers that the same were only acquired in February 2009".

Nor shall the Claimant be correct on this matter, since, as written in the Decision of the Supreme Administrative Court (STA) of 12-03-2014, rendered in case 0256/12:

"For the existence of a group of companies for tax purposes, it is necessary that a company, said to be dominant, hold, directly or indirectly, at least 90% of the capital of another or other companies said to be dominated, provided such participation confers more than 50% of the voting rights, for more than one year on the date when the regime is applied."

Given the above, the arbitral petition should also be dismissed on this part.

vii. On the Application of Article 69(8) of the CIRC

In the same sequence, the Claimant further alleges that "contrary to the understanding of the Finance Directorate of .../Tax Authority, cessation would not extend to all companies in the tax group, but only with respect to the company that allegedly would not meet the legal requirements for its inclusion in the RETGS, E.... That is, only E... would be excluded from the RETGS – and not also the Claimant and B..., who would be taxed under the RETGS in the tax years 2011, inclusive, and thereafter.", since "only and exclusively the companies whose legal-tax situation falls under any of the paragraphs a) to g) of that Article 69(4) of the CIRC are the ones that cannot be part of the group taxed under the RETGS. Without this meaning, therefore, that the RETGS ceases or lapses 'automatically' with respect to all companies in the group (in particular as to the Claimant) – as the Tax Authority erroneously understands.".

The Claimant further points out that "it is noted from the fact that Article 69(8) b) of the CIRC applies only when the RETGS shall have already commenced, that is, only when some of the circumstances provided for in the various paragraphs of Article 69(4) of the CIRC occur during the pendency of the validity of the RETGS." and that "in the concrete case, the only company that (...) would not meet the requirements for its inclusion in the RETGS, in the tax year 2011, was the subsidiary company E...: recorded tax losses in the 3 preceding tax years and its shares, on 01.01.2011, would be (...) held for less than 2 years (see Article 69(4) c) of the CIRC). Thus, with two other companies remaining (the B..., parent company, and the here Claimant, subsidiary company) that fully meet the requirements for their inclusion together in the RETGS, forming between themselves a fiscally taxed group. (...) Whereby there is no legal or other reason why the purported exclusion of E... from the RETGS should entail the cessation of that same special taxation regime also with respect to B... and the Claimant as to the tax year 2011.".

For the Respondent, "the cessation of the special regime in the case of non-compliance with the requirements, as occurs in casu, without the parent company having proceeded with its exclusion, as was its duty, follows linearly from the law", and "Thus, what the Claimant seeks is the case-by-case disapplication of the legally imposed sanction, a pretension which has no minimum legal support whatsoever.".

The Respondent further considers that "Article 69 determines taxatively that the special regime for taxation of groups of companies ceases its application when any of the situations provided for in Article 69(4) is verified and the respective company is not excluded from the group to which the regime is being or intends to be applied" and that "as this is a requirement that follows linearly from the law, it is not understood in what manner it would be expected that the Claimant would have configured a different interpretation on the part of the Tax Authority.", being that "the Administration cannot substitute itself for the legislator.".

The Respondent further adds that "The obligation to verify and prove compliance with the requirements, as dictated by Article 69(12) of the CIRC, rests within the sphere of the parent company.", concluding that "the legally prescribed sanction is the cessation of the application of the regime." and that "The law does not provide for any gradient, interval or abstract framework of sanction, within which an assessment of proportionality would fit for the determination of the concrete measure.".

Let us examine this.

As expressly follows from the RIT (see p. 10), the cessation of the application of the RETGS to all companies integrated in the group was determined by application of the provision in Article 69(8)(b), and in Article 69(9)(c), of the applicable CIRC, which provide that:

"8 - The special regime for taxation of groups of companies ceases its application when: (...)

b) Any of the situations provided for in Article 69(4) is verified and the respective company is not excluded from the group to which the regime is being or intends to be applied;

9 - The effects of the renunciation or cessation of this regime are reported: (...)

c) To the end of the tax period prior to that of the verification of the facts provided for in paragraphs a), b) and c) of Article 69(8)."

As follows from Article 69(1) of the applicable CIRC, in the economy of the norm in question, adherence to the RETGS is conditioned solely to the option in that sense, manifested by the parent company.

From the legal regime in question, no conditionalism, or burden, associated with such option follows, it is submitted, with the exception of the existence of a group of companies, as configured by Article 69(2). Thus, existing such a group, and the aforementioned option manifested by the parent company, the prerequisites for the application of the RETGS shall be met, that is, for the taxation of the group, according to the special regime rules fixed in law.

As written in the Decision of the STA of 12-03-2014, rendered in case 0256/12 (cited by the Tax Authority, with the date, by lapse, indicated as 03-12-2014), "one thing are the requirements for the existence of a group of companies and another is the determination of the companies that may integrate that group of companies, that is, of which companies are eligible for purposes of configuring the perimeter of the Group of Companies that makes the option for the RETGS.".

As stated, pursuant to legal terms, the only prerequisite (in the sense that its absence prevents the application of the regime) is the existence of a group of companies. Thus, verified such existence, and made, by the parent company, the option for taxation under the RETGS, the legal conditioning for the application of the latter shall be met.

The requirement for indication of the companies that integrate the group does not follow from law, being an requirement of the Tax Authority, which, being legitimate, given the interests of inspection and control that assist the Tax Authority, should not see its correctness considered as a sine qua non condition for the application of the regime in question, specifically, and for what is relevant to the case, in the sense that, existing effectively a group of companies (as legally defined), the option for the RETGS is invalid or ineffective, in the case of an erroneous or incomplete determination (for more or for less), by the parent company, of the perimeter of the group, when the option for taxation under the RETGS is manifested.

Such consequence, save better opinion, cannot be drawn, as the Tax Authority did, from Article 69(8) of the art. 69, because, first and foremost, the aforementioned Article 69(8) relates to the cessation of the regime, and only a legal situation that was validly constituted may cease.

Indeed, a legal situation that suffers from some vice upon its constitution does not come to be constituted, and, rigorously, in such