CAAD Case 180/2014-T: IRS General Anti-Avoidance Clause (GAAR) – Tax Ruling 2015

ARBITRAL DECISION

The arbitrators, Judge José Poças Falcão (president), Professor Doctor Rui Duarte Morais (member) and Doctor Jorge Carita (member), who constitute the Arbitral Tribunal by appointment of the parties [articles 6º-2/b), 10º-2/g) and 11º-2, of the RJAT] and, as regards the president, by agreement of the arbitrator members communicated to CAAD on 23-4-2014, resolve as follows:

I - REPORT

A – SGPS, S.A., legal entity no. …, with registered office at Rua... Lisbon, within the jurisdiction of the Lisbon Tax Office – (the "Applicant") came, pursuant to article 2.º, no. 1 letter a), article 3.º, no. 1, article 6.º, no. 2, letter b) and article 10º, no. 1, letter a) of Decree-Law no. 10/2011, of 20 January and of articles 1.º and 2.º of Regulation no. 112-A/2011, of 22 March, to request the constitution of an Arbitral Tribunal and to formulate a request for a ruling having as its object the tax assessments outlined below and whose payment, in the portions relating to Personal Income Tax (IRS), the applicant made on 19 December 2013 pursuant to the exceptional regime for regularization of tax debts approved by Decree-Law no. 151-A/2013, of 31 October (as evidenced by copy thereof attached under the designation of Docs. 4 to 6):

[Content includes table references and document references which are indicated by "..." in the original]

The applicant requests:

A) The annulment of the Assessments, on grounds of illegality, in the total amount of € 1,958,601.87, with the other consequences resulting from such annulment;

B) The reimbursement of the portion of the Assessments paid by the Applicant, in the amount of € 1,826,411.68;

C) The payment of compensatory interest, pursuant to article 43.º, no. 1, of the General Tax Law (LGT), calculated on the amount referred to in the previous letter.

It alleges, in substance and in summary:

a) The Assessments were issued as a consequence of an external inspection action covering the tax years 2010, 2011 and 2012 of the Applicant and have as their sole and exclusive basis the application of the general anti-abuse clause ("GAAC") established in article 38.º, no. 2, of the General Tax Law ("LGT") and

b) The application of the GAAC in the present situation completely lacks foundation, because not a single one of the various cumulative prerequisites on whose verification such application depends is met, leaving the Applicant with no option but to demonstrate precisely the illegality of the assessments that embody such understanding, as a result of an erroneous understanding of the facts and an incorrect interpretation of the law.

It attached documents and a legal opinion prepared by Professor Doctor Gustavo Courinha.

In its response, the Tax and Customs Authority reaffirmed, in summary, the grounds on which it based the decision to apply the general anti-abuse clause, alleging in particular that the reimbursement of the supplementary contributions from shareholders B and C "(...) was carried out with the sole purpose of requalifying dividends through the reimbursement of supplementary contributions (...)", not being in question adjustments to transfer prices nor the declaration of ineffectiveness of the creation of SGPS by means of the GAAC, but solely the aforementioned reimbursement.

It further alleged:

• the absence of proof that the creation of SGPS was due to a necessity to protect the main shareholders (C) and (B), preventing distortions of control and corporate governance of Group D by means of alliances with minority shareholders and/or future investors or disruptions in corporate stability;

• that the shareholder agreements provided for in article 17º of the Commercial Companies Code or recourse to the regime of exchange of social participations provided for in article 73º of the Corporate Income Tax Code (CIRC) would serve this alleged purpose of the main shareholders;

• that the creation of the applicant was artificial, although its establishment does not suffer from ineffectiveness;

• that the applicant's argument does not generally pass the so-called business purpose test;

• that the artificiality of the establishment of SGPS, the revaluation of shares, the financing of SGPS and the purchase and sale of participations in E, SGPS, are the set of acts that lead to the ineffectiveness of the reimbursement act for tax purposes, which act should be characterized as a distribution of dividends.

It requested, in conclusion, that the action be judged entirely unfounded.

The Arbitral Tribunal was duly constituted on 19-5-2014 and is competent.

The parties have legal standing and capacity and are legitimate (articles 4.º and 10.º, no. 2, of the same instrument and article 1.º of Regulation no. 112-A/2011, of 22 March).

The proceedings are free from nullities.

The meeting of the Tribunal with the parties provided for in article 18º of the RJAT was held, both parties having waived final oral or written arguments.

It is appropriate to assess and decide on the merits of the request.

II GROUNDS

PROVEN FACTS

a) The applicant was established on 15-12-2009, with share capital, fully subscribed and paid in cash, of € 50,000 represented by 50,000 shares with a nominal value of 1 (one) euro each, being 25,000 belonging to C (C), 24,700 belonging to B (B), 100 belonging to F, 100 belonging to G and 100 belonging to H.

b) On 18-12-2009, the then shareholders of the applicant F, G and H sold to also shareholder C the 300 shares that globally belonged to them at the price corresponding to their nominal value: 300.00 (three hundred euros).

c) On this same date (18-12-2009) B and C sold to the applicant part of the shares they held in the capital of I, SGPS (a company that had begun its activity in 2006), with the applicant (the applicant) coming to hold 77.5% of the share capital of E, SGPS.

d) The aforementioned majority shareholders of I SGPS, B sells 20,625 shares and C sells 18,125 shares to A, for a total of 38,750 shares, with a nominal value of € 193,750.00, corresponding to 77.50% of I SGPS (pursuant to the contract for the purchase and sale of shares of E to A, contained in the administrative file).

e) In the case of shareholder B, the 20,625 shares had a price of 7,837,500 (seven million, eight hundred and thirty-seven thousand five hundred euros [cf. second clause of the contract for the purchase and sale of shares] and

f) ... in the case of shareholder C, the 18,125 shares had a price of € 6,887,500 (six million, eight hundred and eighty-seven thousand five hundred euros [cf. second clause of the contract for the purchase and sale of shares].

g) Being the unit nominal value of the shares € 5.00, these were sold at the value of € 380.00/each.

h) The society of official auditors J issued a favorable opinion regarding the completion of the sales mentioned in d) to g) and, claiming to do so based on a valuation report made by "L, Lda.", based on the method of multiples or relative valuation, concluded for a value ranging between € 940.00 to € 1,480.00 per share, also noting that in a contract for the purchase and sale of shares of I, SGPS, concluded on 18-12-2009, the value fixed per share had been € 400.00 [Cf. annex IX of the administrative file]

i) For payment of the price, the applicant was financed by the acquirers through a loan granted to it by its partners, B and C, in the form of supplementary contributions, subject to the regime of supplementary contributions, reimbursable pursuant to article 210º of the Commercial Companies Code [unanimous resolution of the applicant of 24-3-2010];

j) The applicant has already reimbursed part of the financing granted by its partners [€ 7,937,324.13], with the amount of € 6,787,675.87 remaining to be reimbursed [Cf. administrative file, "central information", page 7/25]

k) By concentrating 77.5% of the capital of E SGPS within the sphere of the Applicant, C and B ensured a shareholder position in I sufficiently solid to comfortably manage any subsequent adjustments of the same capital, without risk of loss of control for either of them individually considered,

l) And, from that moment on, it became possible to allow M to strengthen its position in the share capital of E SGPS to 10% without C and B, individually, running the risk of the other allying with M and with it dominating certain aspects of the life of E SGPS,

m) The holding of 50% of the Applicant – in itself a blocking position against the very control of the Applicant by the other partner – allowed each of the co-founders to maintain "the reins" of E SGPS, which the situation prior to the establishment of the Applicant naturally did not allow, eliminating the risks of corporate instability.

n) The Authority carried out an external inspection action on the applicant with a view to applying the general anti-abuse clause (GAAC) relating to the periods (tax years) of 2010, 2011 and 2012, authorized by Service Orders no. OI2012… (of general scope with respect to the tax years 2010 and 2011, respectively) and OI2013… (of partial scope, with respect to the tax year 2012).

o) The tax inspection report of the Lisbon Tax Office Directorate of 4 November 2013 [Doc. 7 and annexes, attached with the request for arbitral ruling] formed the basis of the concurring decision of the Chief of Division of the Lisbon Tax Office Directorate, by delegation from the Deputy Director of Finances, dated 8 November 2013 and of which the applicant was notified.

p) The facts described in that report as having been ascertained supported the following Personal Income Tax withholding assessments, with interest included: € 328,209.57 relating to the year 2010; € 726,946.45, relating to the year 2011 and € 903,445.85, relating to the year 2012 [Docs. 1 to 3].

q) These assessments were paid, without interest, on 19-12-2013 pursuant to the exceptional regime for regularization of tax debts approved by Decree-Law no. 151-A/2013, of 31-10.

r) In that inspection, the Authority considered the following facts to be ascertained:

· After a capital increase was implemented on 13/12/2006 which was accomplished through new contributions in cash and the admission of a new shareholder, N S.A, now I SGPS, SA (established on 17/05/2006), had a share capital of € 250,000.00 (two hundred and fifty thousand euros), represented by 50,000 shares, with a nominal value of € 5.00 (five euros), as per the permanent certificate attached in the administrative file.

· On 13/12/2007, its corporate structure was changed, becoming configured as I SGPS, SA, a participations management company.

· In 2009, before the sale of shares dated 18/12/2009, participation in share capital was distributed as follows:

[Table with shareholders B, C, M, O, P, Q, F showing number of shares, values and percentages]

· The A, which was established on 15/12/2009, with initial share capital of 50,000 shares, with nominal value of € 1.00 (as per its Permanent Certificate and also Articles of Association of anonymous company and SGPS, contained in the administrative file) and presented the following shareholder structure:

[Table with shareholders B, C, G, H, F showing number of shares, values and percentages]

· Three days later, on 18/12/2009, there is a sale of shares by the three minority shareholders, with the result that the company came to be owned by only two shareholders, that is C and B.

· Being that the sale mentioned in the previous point was made in favor of B, with the result that it came to hold 25,000 shares, corresponding to € 25,000.00 and a percentage of 50% (pursuant to the contract for the purchase and sale of shares, contained in the administrative file)

· Also on that same day (18/12/2009), the aforementioned majority shareholders of I SGPS, B sells 20,625 shares and C sells 18,125 shares to A, for a total of 38,750 shares, with a nominal value of € 193,750.00, corresponding to 77.50% of I SGPS (pursuant to the contract for the purchase and sale of shares of E to A, contained in the administrative file).

· In the case of shareholder B, the 20,625 shares had a price of 7,837,500 (seven million, eight hundred and thirty-seven thousand five hundred euros [cf. second clause of the contract for the purchase and sale of shares] and

· ... in the case of shareholder C, the 18,125 shares had a price of € 6,887,500 (six million, eight hundred and eighty-seven thousand five hundred euros [cf. second clause of the contract for the purchase and sale of shares].

· Being the unit nominal value of the shares € 5.00, these were sold at the value of € 380.00/each.

· A request was made by A to the society of official auditors, J, for an opinion on the said transaction and its respective price, which gave as valid and as it were ratified the value of € 380 per share sold, even referring to the fact that the unit value was within an interval between € 940.00 and € 1,480.00.

· The society of official auditors mentioned acted in the capacity of Sole Auditor of the company A itself.

· As the date of payment of the price of the shares, the contracting parties stipulated its completion "(…) by 31 January 2010 (…)" (cf. second clause of the said contracts).

· After completion of that transaction I SGPS had the following composition:

[Table with shareholders A SGPS SA, B, C, M, O, P, Q, F showing number of shares, values and percentages]

· For A to be able to carry out this purchase of shares, at a value so significant, far exceeding its share capital and without having recourse to any bank loan, it did so exclusively through a loan from its two shareholders, B and C.

· This loan from the shareholders took the form of supplementary contributions and results from the unanimous resolution of A, dated 24/03/2010.

· However, on 31/01/2010, the respective accounting entry had already been made.

s) The main subsidiary of E SGPS, I, S.A. ("I"), launched in July 2009 the Fund R ("Fund R"), which still today constitutes the fund of largest scope under its management.

t) In October 2009, Dr. M ("M"), shareholder of E SGPS since July 2007, reiterated to C and B the intention to double his participation in the company, which at the time amounted to 5% of the share capital.

u) The relevance of the individual position of B and C results, in particular, from the management regulations of the first fund managed by I, the Fund S ("Fund S") which…

v) ...in article 22º provided (Cf. doc. 10, attached with the request for arbitral ruling):

w) [Content regarding voting/consent provisions]

The personal and joint activity (and the consensus that this implied) of the co-founding shareholders was thus so essential that its absence could not only lead to the replacement of I as management company but, in extreme situations, to a possible resolution for dissolution of the Funds by the respective investors.

x) For payment of the price, the applicant was financed by the acquirers through a loan granted to it by its partners, B and C, in the form of supplementary contributions, subject to the regime of supplementary contributions, reimbursable pursuant to article 210º of the Commercial Companies Code [unanimous resolution of the applicant of 24-3-2010];

y) The applicant has already reimbursed part of the financing granted by its partners [€ 7,937,324.13], with the amount of € 6,787,675.87 remaining to be reimbursed [Cf. administrative file, "central information", page 7/25]

z) By concentrating 77.5% of the capital of E within the sphere of the Applicant, C and B ensured a shareholder position in I sufficiently solid to comfortably manage any subsequent adjustments of the same capital, without risk of loss of control for either of them individually considered,

aa) And, from that moment on, it became possible to allow M to strengthen its position in the share capital of E to 10% without C and B, individually, running the risk of the other allying with M and with it dominating certain aspects of the life of E,

bb) The holding of 50% of the Applicant – in itself a blocking position against the very control of the Applicant by the other partner – allowed each of the co-founders to maintain "the reins" of E, which the situation prior to the establishment of the Applicant naturally did not allow, eliminating the risks of corporate instability.

GROUNDS AND ASSESSMENT OF PROVEN FACTS

The Tribunal founded its conviction regarding the factual framework described by critically analyzing the documents incorporated in the proceedings by both parties [including the administrative file containing the report of the inspection of the applicant carried out by the Tax Inspection Services and which supported the application of the GAAC and consequent Personal Income Tax withholding assessment and compensatory interest (Docs. 1 to 3, attached with the request for arbitral ruling)], in conjunction with the circumstance that no controversy was raised between the parties regarding their factuality.

On the other hand, the Tribunal also considered, for proof of the facts mentioned in k) to m), w), z), aa) and bb), their consideration in light of the rules of experience (notorious facts – cf. article 412º-1 of the Code of Civil Procedure).

It should be noted that the Tribunal could have chosen, in line with other arbitral decisions handed down by Tribunals constituted within the framework of CAAD [cf. for example, arbitral decisions in cases nos. 47/2013 ("It is not proven that the corporate transformation was motivated by questions related to management, size, or corporate image"), 62/2014 ("It was not proven that the Applicants opted for the sale of their participations to …. with the purpose of obtaining tax advantages, in particular at the level of Personal Income Tax") and 267/2013 ("It was not proven that the Applicants opted for the sale of their participations to …… S.A. with the purpose of obtaining tax advantages, in particular at the level of Personal Income Tax"), to consider it not proven that the applicant carried out the acts and legal transactions listed above with the sole or main intent of obtaining tax advantages, in particular at the level of Personal Income Tax.

Given that this matter was on the borderline between "facts" and "conclusions" it was decided in this case to address the question in the legal grounds of the decision (cf. below).

II GROUNDS (continued)

THE LAW

1- Article 38.º, no. 2, of the General Tax Law establishes a general anti-abuse clause, pursuant to which "acts or legal transactions are ineffective within the tax context which are essentially or mainly directed, through artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, in whole or in part, without the use of such means, with taxation then being effected in accordance with the norms applicable in their absence and the aforementioned tax advantages not being produced"

In the case at hand, the Tax Authority decided to apply the general anti-abuse clause considering that, for purposes of Personal Income Tax, "(…) the artificiality of the establishment of SGPS, the revaluation of shares, the financing of SGPS and the purchase and sale of participations in E, SGPS, are the set of acts that lead to the ineffectiveness of the reimbursement act for tax purposes, with this act being characterized as a distribution of dividends (…)".

2- Let us analyze each of these questions.

However, first it must be noted that the GAAC is an exceptional norm [absolutely exceptional].

The exceptional nature of this norm results both from the fact that it allows taxation to be carried out by application of rules other than the general norms that the law provides for the transaction(s) actually undertaken, and, more importantly, because it constitutes a departure from the principle of legal certainty, in its dimension of predictability of applicable tax law, which is a fundamental principle of tax law.

Certainty and predictability imply that taxpayers can rely on the typicality of the type of tax, that they can be sure that, once they carry out the transactions that the incidence norm provides for, they will be taxed in accordance with its stipulation.

The GAAC will only be applicable in cases in which it must be considered that the value of legal certainty is not put in question, the idea of confidence in the legal norm inherent in the idea of Rule of Law, because the taxpayer objectively should know that the act or transaction that he undertook, under the circumstances in which it occurred, cannot be framed in the legal provision because it is not coherent with the "spirit of the law", even though formally it may find "support" in the literal element of the norm.

However, unlike what happens with norms with identical intent that we find in other branches of the legal order, such as the institute of abuse of right or the principle of good faith, the GAAC is not an open general clause that permits the interpreter to set aside the legal solution (taxation) that flows from the applicable norm (the incidence norm whose hypothesis the facts meet) by invoking considerations of substantive justice or coherence of the tax legal system.

The GAAC is also itself a typical norm – as it could not fail to be, given that it is a norm that directly affects the rules of tax incidence – which can only be applied when, indubitably, all and each of the prerequisites provided therein are verified.

This means that the interpreter must abstain from any judgments about, in particular, whether the fiscal economy achieved is or is not "justified" or "acceptable", whether the concrete situation offends or not a supposed horizontal equality among taxpayers.

The interpreter, the judge, has only the duty to verify whether or not, in the concrete case, indubitably, each of the prerequisites for application of the GAAC is present.

And such analysis, such interpretation, must be conducted in a restrictive manner, as the rules of legal hermeneutics require regarding exceptional norms.

The interpreter is completely forbidden from giving the GAAC a scope of application broader than that which flows from the legal text itself, even if under the pretext of achieving substantive justice in the concrete case.

It could be said that, thus, the effectiveness of the GAAC in combating forms of tax avoidance that could reasonably be considered abusive is greatly reduced. This may be the reality, but it follows unquestionably from the exceptional nature of the norm and what that nature imposes on the interpreter, on the judge.

2 – The Elements of the GAAC

It is accepted in doctrine and case law that the applicability of the GAAC presupposes the verification of four prerequisites (or elements): means element; result element; intellectual element; normative element.

a) Means Element

"This element corresponds to the path chosen by the taxpayer to obtain the desired fiscal gain or advantage, i.e., the act(s) or legal transactions whose structure is determined as a function of a given fiscal result" (Gustavo Courinha, The General Anti-Abuse Clause in Tax Law, 2009, page 165)

"It is, in conclusion, from the level of incoherence between the form or structure chosen and the fiscal factual economic purpose of the taxpayer, between the end for which this concretely adopted form is intended and the cause that is proper to it" (ibidem, page 166) that the verification of this element will be ascertained.

Being in question a sequence of pre-ordered legal transactions (step by step doctrine) "it is important to note, however, that in the case of a structure of such a nature it is this that should possess the anomalous character required by the current wording of the G.A.A.C, even though the acts or transactions that compose it may be, in themselves, typical or ordinary" (ibidem, page 168).

In the concrete case, we verify that the legal transactions that led to the realization of capital gains not subject to taxation (as we shall see below, this is the crux of the matter, it is because of these transactions that the "fiscal advantage" in question was realized, being the subsequent legal transactions irrelevant in terms of application of the GAAC) were the establishment of A and the acquisition by this company of shares that were previously held by its partners C and B.

One cannot detect any "anomalous character" in each of these legal transactions: being the end pursued the creation of a company having as its object the holding of shares, the corporate form chosen, SGPS, is the proper one; intending the company to acquire the necessary shares for the realization of its corporate purpose, the form chosen (purchase and sale) is the correct one, because this is the proper typical legal form that the law provides for the acquisition for a fee, inter-vivos, of property and rights. The sequence of transactions is also "normal": one would not understand the establishment of the company without the subsequent acquisition of the shares in question.

However, the absence of "anomalous legal transactions", or of an "anomalous sequence of legal transactions", is not sufficient, in our view, to exclude the possible application of the GAAC.

It is still necessary to ascertain whether the set of transactions undertaken is not, in itself, artificial, was not merely a façade that changed nothing substantial regarding the previous reality, which we will analyze in the following points.

For now, it is still important to note that, where different typical legal paths exist for the realization of a given economic result, the taxpayer is not obliged to choose the path that, for itself, would be more onerous.

The assertion that the same economic result could be obtained, for example, through an exchange of shares or through the execution of a shareholder agreement between the majority shareholders of I (C and B) is irrelevant in terms of the applicability of the GAAC.

It is further added that, in the concrete case, the exchange of shares would not allow the objective of creating "a [single] majority vote" in I to be achieved and a shareholder agreement concluded by the majority shareholders (C and B) would not similarly ensure such purpose, given its purely binding efficacy, that is, its inoponibility to the minority shareholder of this company.

b) Result Element

"In this result element, it is only important to demonstrate that the subject achieved, through its acts, the verification of a certain fiscal advantage and the equivalence of economic effects with those of the normal taxed act" (Gustavo Courinha, cited, page 176).

In the concrete case, it is proven that, by realizing a capital gain of very high value, the partners of the Applicant obtained a significant fiscal advantage, which they would not achieve if they had refrained from undertaking the aforementioned legal transactions and thus remained partners of I in an individual capacity, receiving in that capacity the dividends that I would come to distribute.

c) Intellectual Element

This is undoubtedly the most characteristic prerequisite of the GAAC.

"The manifestation of fraud in law is revealed in the taxpayer's intention to obtain primarily a fiscal advantage, directing towards this end the transactions or acts that he undertakes. The non-fiscal purpose which, in turn, should guide the action of any subject (…) is here replaced, in its normal preponderance, by a fiscal purpose, ending up secondarized" (ibidem, page 179)

In the concrete case, we have, as proven facts, the fiscal advantage – which is, recall, very significant – and the legal-economic consequences of the transactions undertaken, the substantial alteration that such transactions implied at the level of shareholder control of I, as well as the fact that the existence of permanent consensus between C and B was an essential condition for the company to continue as administrator of "Fund S".

It is extremely difficult to weigh the "relative weight" of each of the motivations present, because, first of all, they do not both translate into "monetary savings" that can be directly compared.

The non-fiscal importance of the transactions in question is evident from the assessment of facts previously made.

We can thus affirm that the transactions undertaken allowed to achieve a result of relevant interest for the pursuit of normal activity of I: to ensure unitary control of this company, through the existence of a single majority vote (that of A), preventing the risk of occasional alliances of shareholders C or B with the minority shareholder.

The importance of the existence of a majority vote, of a single shareholder controlling a company, cannot be minimized.

Common experience shows that many companies have serious problems, which can even render the continuation of their activity impossible, due to the existence of disagreements between majority shareholders and/or the realization of occasional alliances of one or some of them with minority shareholders, thus imposing their will on the other majority shareholder(s).

And do not argue that there are no indications that this could come to happen in I, given the good relations existing between the majority shareholders, C and B. Good business strategy consists in preventing potential risks and not in waiting for problems to happen and only then seeking to find solutions.

Being objectively impossible to assess the relative importance of the two interests present (fiscal and non-fiscal) (despite recognition of how much the amount of fiscal advantage obtained can impress), the doubt would necessarily have to benefit the taxpayer in a context – as is the case in these proceedings – in which the burden of proof of the facts alleged for application of the general anti-abuse clause falls on the Tax and Customs Authority (article 74.º, no. 1, of the LGT. [cf. articles 414º of the Code of Civil Procedure, 346º of the Civil Code, 100º of the Tax Procedure Code and 29º-1/c) of the RJAT. Defending, in essence, this approach, cf. also in arbitral case law, the CAAD rulings nos. 62/2014-T, of 1-9-2014 and 267/2013-T, pages 34 and 23, respectively (Collective rulings presided over by Mr. Counselor Jorge Lopes de Sousa).

Hence, in this framework, the result would be, in the case, the absence of proof regarding the exclusivity or preponderance of fiscal interest in the practice of the succession of acts that also led to an effective and significant fiscal saving.

However and despite this, in the concrete case, the weight that should be attributed to the intellectual element necessarily results in being greatly devalued in the assessment of interests that must be made here, as a result of what shall be said below regarding the normative element.

d) Normative Element

"It can be said, bearing in mind the existence (and requirement) of this element, that the GAAC is not, after all, a mere expedient for obtaining fiscal revenue at any cost, based on the fact that the taxpayer obtains a fiscal advantage [underlining ours]. The fiscal disregard of such acts or transactions will only occur when, cumulating all the aforementioned requirements, it is demonstrated that the fiscal effect obtained (always bearing in mind identically obtained effects) merits a judgment of reprobation by Law" (ibidem, page 189).

We will begin by highlighting the following: one question, which has already been addressed, is that of the fiscal motivation of the transaction or transactions undertaken; another, different, is, presupposing that the transactions undertaken are not anomalous or artificial, to know "of the contrariety of the result to Law". It is only of this latter question that we shall now take care.

What is at issue in this point is the fact that a sale of shares, generating capital gains (which, economically, correspond, in addition to other factors, to the realization [receipt] of dividends accumulated in the company and of dividends that the seller would expect to obtain, in the future, had he maintained the status of shareholder) was, at the time, not subject to Personal Income Tax, when certain prerequisites were met, while the distribution of dividends was (and was) subject to taxation under this tax, as income from capital.

Now, it is unequivocal that this different fiscal treatment of different legal forms of obtaining income that are, to a large extent, economically equivalent [that is, the privileged fiscal treatment of the sale of shares] corresponded, while such regime was in force, to a deliberate option of the legislator.

Citing Mr. Prof. Gustavo Courinha, in the opinion attached to the proceedings (Doc. 9), "it seems evident that the GAAC cannot prevent the options of taxpayers who, faced with the choice between dividends (distributable or merely potential) choose, even if for fiscal reasons, the obtaining of capital gains.

In fact, the application of the GAAC in this context would result in the disregard of the very option of the tax legislator who, deliberately and for more than twenty years, precisely promoted that legal formula, maximizing to the fullest the fiscal advantage associated with capital gains through its pure and simple non-taxation (…), in total contrast with the taxation of the respective dividends".

This understanding is accepted in doctrine and in the arbitral case law of CAAD, with already numerous rulings issued on this subject, which, with one single exception, go in the direction that we advocate.

Decisions that concluded, in summary, that it is absolutely legitimate for the taxpayer to choose to organize its legal transactions in a way as to realize untaxed capital gains (for example, by transforming a limited liability company into a corporation and subsequently selling, with gain, the shares thus obtained), even when the sole motivation for the change in corporate form has been of a fiscal nature (cf., for example, Arbitral Rulings, CAAD nos. 123/2012, of 9/05/2013, 124/2012, of 06/06/2013, 138/2012, of 12/07/2013 and 139/2013, of 19/12/2013, the latter subscribed by the President of this arbitral college).

4- In summary:

• It constitutes legitimate tax planning, in the face of the GAAC, for taxpayers to undertake legal transactions that have as their result the realization of capital gains not subject [at the time] to Personal Income Tax, even when the undertaking of such transactions has as its motivation the sole or main fiscal economy thus achieved.

• The legal transactions undertaken by taxpayers with such purpose will only be subject to censure, under the GAAC, when they are a mere "façade", originate only a mere legal-formal alteration of the previous situation, which, in essence, remained unchanged. This does not occur in the case sub judice since the establishment of A and subsequent acquisition by it of shares previously held by B and C caused profound substantial alterations at the level of the shareholder control structure of I.

• The means, intellectual and normative elements are not therefore present in the concrete case, whose verification, cumulatively with the result element (which did occur), is a necessary condition for fulfillment of the typicality of the GAAC.

4- With what we have just concluded, one could consider the grounds of this ruling terminated in its essential part, as from it there results prejudiced the assessment of the other grounds invoked by the Authority to sustain the assessments now put in question.

In any case, since an "exhaustive" grounds (that is, which covers the different questions raised) will always better contribute to the total clarification of the motivation that led to the arbitral ruling, the following will be added:

a) The sale price of the shares

From the grounds of the impugned assessment results the conclusion, by the Authority, that the shares in question were sold at an abnormally high price, in order to create, for C and B, a gain of greater value [capital gain], not taxed.

We will begin by noting that this question cannot be assessed by this arbitral tribunal within the framework of these proceedings, which has as [its sole] object the assessment of the legality of Personal Income Tax assessments made on the basis of the provisions of the GAAC.

Now, this norm (article 38.º, no. 2, of the LGT) is intended only to permit the requalification of fiscal abuse legal transactions and not to "correct" elements of a fiscally valid legal transaction, in particular the price that was declared in certain transactions.

For the correction of amounts declared by taxpayers that are considered not to correspond to reality, there are other legal instruments, in particular the transfer pricing regime, which would be applicable in the concrete situation given the special relationships existing between C and B (sellers of the shares) and company A (acquirer thereof).

It further is – still, though strictly unnecessary to mention it – that there is no proof that would allow concluding that the agreed price was higher than the real (market) value of the alienated shares: the only information in the proceedings relating to the value of such shares is an opinion of a society of official auditors, contracted by the now Applicant, which concludes, in summary, that the market value of the shares in question would be, even, higher than what was actually practiced in their alienation.

Finally, we will add, in mere obiter dictum, that it does not seem to make any sense the idea, ventured by the Authority, that the transaction should have been made at the nominal value of the shares, because, manifestly, such amount would have had no correspondence with the real value thereof at the date of the transaction.

Taxpayers have the fiscal obligation to practice market prices in their transactions, notably those realized between subjects linked by special relationships, as is the case, under penalty of the Authority being able to correct the agreed prices, even if real.

b) The form chosen for the financing of the acquisition of shares by A

The Authority also questions the form in which the acquisition by A of the shares previously held by C and B was financed, that is, the fact that these, in their capacity as sole shareholders of such company, made supplementary/accessory contributions of an amount corresponding to the price of such shares and that the supplementary/accessory contributions were carried out through the endorsement to the company of the checks received by them from it for payment of the price of the shares in question, that is, without there having been in these operations any real monetary flows.

First, we will say that it clearly results from the proven facts that the operation of acquisition of shares by A had to be financed with recourse to credit, since, having this company been established three days prior to such acquisition, its own resources would be, at most, the value of its respective share capital, manifestly insufficient.

Second, it is perfectly understandable that the option of financing by an external entity, in particular a banking entity – a hypothesis that probably would not have raised objections from the Authority – was set aside, first and foremost due to the costs that this would imply, in particular in terms of payment of interest. Such option would be, economically, the least advisable.

The option for the necessary credit to be ensured by the shareholders was obviously the most rational, both from the point of view of A, and of B and C, these as sole shareholders thereof.

Two hypotheses could then be placed: an agreement for payment in installments, scheduled according to the foreseeable distributions of dividends by A, in which case C and B would become creditors of the company as a result of the price of sale of the shares, or the realization by C and B of the necessary supplementary/accessory contributions (as occurred).

It is completely indifferent, both from the fiscal point of view and as to the possibility of the company, in the future, distributing dividends, whether C and B came to appear as creditors of A as sellers of the shares or as holders of accessory/supplementary contributions (as occurred).

It is, however, easy to understand the economic reason underlying the option taken: had payment in installments of the price due for the purchase of the shares been contracted, this obligation (the amount in debt) would come to appear, unquestionably, in the liabilities of A. Differently, supplementary/accessory contributions are, accountably, recognized as equity (and not as liabilities), as they do not configure a present (current) obligation of the company, first and foremost due to the restrictions imposed on the return of these contributions by the Commercial Companies Code.

Now, the accounting recognition of supplementary or accessory contributions as equity is, from a financial point of view, an aspect of extreme relevance for the analysis of the financial position and economic performance of a company, given that it affects the construction and interpretation of various fundamental financial ratios that use amounts of equity and/or liabilities to assess its financial condition.

In particular, the financial autonomy ratio (proportion of equity in total assets) is of fundamental nature, being a criterion for the assignment or exclusion of financing and public incentives, or even content of clauses of worsening of conditions (for example of spreads) or early repayment in credit contracts.

That is, the form chosen for the financing of this acquisition was economically the most correct, first and foremost because it did not result in any decapitalization of A (nor, obviously, of E), so it is not deserving of censure.

As for the question of the endorsement of the checks, such "formalism" was also objectively necessary, bearing in mind the provisions of article 212º, no. 2 of the CSC, which prevented C and B from carrying out the supplementary/accessory contributions in question through the extinction [by compensation] of the credit they held over A corresponding to the price of the alienated shares.

1. The request for payment of compensatory interest.

The applicant requests the reimbursement of the tax that it paid, in the amount of € 1,826,411.68, corresponding to the total of the assessments, without interest since it was exempted from payment thereof in light of Decree-Law no. 151-A/2013.

And it requests that the reimbursement be processed with compensatory interest, at the legal rate, pursuant to article 43.º of the LGT and 61.º of the Tax Procedure Code.

The applicant actually paid the aforementioned amount [Cf. q) of the list of proven facts].

In accordance with the provisions of letter b) of article 24.º of the RJAT, the arbitral decision on the merits of the claim which is not subject to appeal or challenge binds the tax administration from the end of the period provided for appeal or challenge, and this, in the exact terms of the merits of the arbitral decision in favor of the taxpayer and until the end of the period provided for spontaneous execution of decisions of tax judicial courts, must "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 the effect", which is in keeping with the provisions of article 100.º of the LGT [applicable by virtue of the provisions of letter a) of no. 1 of article 29.º of the RJAT] which establishes that "the Tax Administration is obliged, in case of total or partial merits of a 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 to the dispute, including the payment of compensatory interest, if applicable, from the end of the period of execution of the decision".

Although article 2.º, no. 1, letters a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of arbitral tribunals that operate within CAAD, not making reference to condemnatory decisions, it should be understood that the competences include the powers that in judicial challenge proceedings are attributed to tax courts, this being the interpretation that is in keeping with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as the first directive, that "the arbitral tax proceeding 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".

The judicial challenge proceeding, despite being essentially an annulment proceeding of tax acts, admits condemnation of the Tax Administration to the payment of compensatory interest, as may be inferred from article 43.º, no. 1, of the LGT, in which it is established that "compensatory interest is owed when it is determined, in a gracious claim or judicial challenge, that there was error attributable to services from which results payment of the tax debt in an amount higher than legally due" and from article 61.º, no. 4 of the Tax Procedure Code (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original wording), which states that "if the decision that recognized the right to compensatory interest is judicial, the period for payment is counted from the beginning of the period for spontaneous execution".

Thus, no. 5 of article 24.º of the RJAT in saying that "payment of interest, regardless of its nature, is owed, in the terms provided in the general tax law and in the Tax Procedure and Process Code" should be understood as allowing recognition of the right to compensatory interest in the arbitral proceeding.

In the case at hand, it is manifest that, as a consequence of the illegality of the tax assessment acts, there is grounds for reimbursement of the tax, by virtue of the aforementioned articles 24.º, no. 1, letter b), of the RJAT and 100.º of the LGT, since this is essential to "restore the situation that would exist if the tax act subject of the arbitral decision had not been practiced", in the part corresponding to the correction that was considered illegal.

As regards compensatory interest, it is also clear that the illegality of the act is attributable to the Tax and Customs Authority, which by its own initiative practiced it, as was seen, without legal support.

One is faced with a vice of violation of substantive law, embodied in error in the prerequisites of law, attributable to the Tax Administration.

Consequently, the Applicant is entitled to compensatory interest, pursuant to article 43.º, no. 1, of the LGT and article 61.º of the Tax Procedure Code, calculated on the amount that it paid unduly (€ 1,826,411.68).

Thus, the Tax and Customs Authority must give execution to the present ruling, pursuant to article 24.º, no. 1, of the RJAT, reimbursing the applicant of such amount, with compensatory interest, at the legal supplementary rate of civil debts, pursuant to articles 35.º, no. 10, and 43.º, nos. 1 and 5, of the LGT, 61.º of the Tax Procedure Code, 559.º of the Civil Code and Regulation no. 291/2003, of 8 April (or diploma or instruments that succeed it).

Compensatory interest is owed from the date of payment (19-12-2013) to that of processing of the credit note, in which it is included (article 61.º, no. 5 of the Tax Procedure Code).

III DECISION

In accordance with the above, the members of this Arbitral Tribunal resolve as follows:

To uphold the claims for declaration of illegality and annulment of the Personal Income Tax assessments nos. 2013 …, 2013 … and 2013 … (Docs. 1 to 3, attached by the applicant) and

To uphold the claim for compensatory interest, condemning the Tax and Customs Authority to reimburse the applicant of the tax paid, in the amount of 1,826,411.68 with compensatory interest at the legal supplementary rate of civil debts, pursuant to articles 35.º, no. 10, and 43.º, nos. 1 and 5, of the LGT, 61.º of the Tax Procedure Code, 559.º of the Civil Code and Regulation no. 291/2003, of 8 April (or diploma or instruments that succeed it), from the date of payment (19-12-2013) to that of processing of the credit note, in which it is included (article 61.º, no. 5 of the Tax Procedure Code).

Value of the Proceedings

In accordance with the provisions of article 315.º, no. 2 of the Code of Civil Procedure and 97.º-A, no. 1, letter a) of the Tax Procedure Code and 3.º, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is set at € 1,958,601.87.

Costs

Having the Tribunal not been constituted pursuant to the terms provided for in no. 1 and in letter a) of no. 2 of article 6º of the RJAT, there is no place for the fixation of the amount of costs and its allocation among the parties (Cf. article 22º-4 of the RJAT)

Lisbon and CAAD, 3 December 2014

The Arbitral Tribunal in Collective Session

José Poças Falcão
(president arbitrator)

Rui Duarte Morais
(member arbitrator)

Jorge Carita with dissenting opinion
(member arbitrator)

DISSENTING OPINION

I disagree with the prevailing position, for the following reasons:

1. Given the thesis defended by the Authority, what was in question in the proceedings was whether or not the legal prerequisites for the application of the general anti-abuse clause would be met.

In accordance with article 38.º, no. 2 of the General Tax Law (LGT), its application presupposes the occurrence of the following elements, regardless of the doctrinal position on the subject:

· the acts or legal transactions are essentially or mainly directed to the reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of fiscal advantages;

· the reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose results from artificial or fraudulent means and with abuse of legal forms or that the fiscal advantages would not be achieved, in whole or in part, without the use of such means.

From the application of the GAAC results the ineffectiveness, within the tax context, of acts or legal transactions, these remaining valid in the civil context.

1. In the case of the proceedings, what the Authority intends to be ineffective is the realization of a capital gain with the sale of shares (not subject to taxation at the date of the facts), instead of a distribution to the shareholders of accumulated dividends.

Without more, it appears evident that the alienation of shares, generating untaxed capital gains, occurred, if not "essentially", at least "mainly", in accordance with what is required by the norm in question, that is, with a view to obtaining fiscal advantages.

Although the Applicant alleges that it was not fiscal reasons that determined its establishment, as well as the acquisition by this company of shares that were previously held by its shareholders C and B, the truth is that the facts, objectively considered, do not reveal this.

In fact, the practice of the various legal transactions that led to the realization of capital gains not subject to taxation demonstrates that the only advantage that was real, concrete and indisputable was the fiscal gain obtained by the shareholders of the Applicant, which was responsible for payment by tax substitution, as the entity obliged to withholding at source.

1. In summary, the following set of operations was carried out:

· Establishment of the Applicant;

· Purchase by the Applicant of shares in E, SGPS, SA ("E");

· Supplementary contributions from shareholders C and B for the purchase of the said shares;

· Distribution of dividends from E to the Applicant;

· Reimbursement of supplementary contributions to shareholders C and B.

Distinguishing the object of the proceedings, we should not go beyond what results clearly from the law:

(i) the capital gains resulting from the alienation of 77.50% of the share capital of E to the Applicant were at the date excluded from taxation (letter a), no. 2 of article 10.º of the Personal Income Tax Code),

(ii) the distribution of profits from E to the Applicant, also excluded from taxation (no. 1 of article 32.º of the Corporate Income Tax Code and letter h) of no. 1 of article 97.º of the Corporate Income Tax Code), in contrast with the

(iii) operation of distribution of dividends from E directly to shareholders B and C, which would result in taxation for Personal Income Tax purposes, category E, by virtue of withholding at source at a final rate, with the rate of 21.5% for 2010 and 2011 and 25% for 2012 (article 71.º, no. 1 letter c) of the Personal Income Tax Code).

It thus results from this amalgamation of operations a fiscal gain immediate and concrete of practically two million euros.

Thus, it is surprising that this gain was not reflected and intended, before the complex sequence of operations carried out.

Having assessed the fiscal advantage, let us determine whether it was the exclusive or main reason that determined the action of the taxpayer.

1. As Gustavo Lopes Courinha states "it is not enough to result from the analysis of the acts or legal transactions in question the obtaining of a fiscally advantageous result and an equivalent non-fiscal result". It is equally necessary that "the choices and forms adopted by the taxpayer be fiscally directed (tax driven), and that the latter (fiscal result) prevail over the former (non-fiscal result)."

Thus, it is necessary to demonstrate that among all the reasons that determined the undertaking of the act or legal transaction whose effectiveness is questioned, the fiscal advantage sought assumes itself as priority, so that one can affirm that this was the reason for its realization.

It should be noted that "proof of this subjective option for certain acts or operations constitutes a probatio diabólica, due to the near impossibility of proving, beyond a judgment of probability, the will of the taxpayer, precisely what the taxpayer hides or dissimulates, and without which the means used or result obtained are not censured." Hence "in the impossibility of obtaining irrefutable proof – the confession of the taxpayer himself – the Authority is obliged to resort to indicative and presumptive elements, in a context of reasonableness and normality, extracting, with reasonable certainty, the will of the subject from the acts undertaken. In this process, the Authority may take into consideration any element capable of indicating the will of the taxpayer and supporting its conclusion."

Furthermore, "in characterizing the objectives of acts or contracts, it is not the psychological motivation of the parties – very difficult to determine – but the anomalous or otherwise character for the purposes intended by the parties of the legal forms used that should be considered. (…) It is not necessary for the application of the norm the inquiry into the personal motives of the parties, the demonstration of the purposes of the transaction being sufficient in accordance with the interpretation of its clauses, but obviously the application of the norm of number 2 [of article 38 of the LGT] of the present article necessarily depends on a judgment of fact regarding the actual will of the subjects who are taxpayers, as manifested in the documents of the act or contract."

Thus, the Applicant justifies its establishment and thereafter acquisition of shares in E, of which its shareholders C and B were previously holders (which led to the realization of capital gains not subject to taxation), if occurred, it was mainly, not the fiscal advantage that would result from the realization of the legal transactions, but protecting the main shareholders C and B in order to prevent distortions of control and corporate governance of group E, by means of alliances with minority shareholders and/or future investors or disruptions of corporate stability.

First of all, this argument does not present any significant advantage when compared with the fiscal advantage actually obtained.

Furthermore, as the Authority states, the aforementioned argument has no foundation, where the Applicant does not attach any probative element of the facts alleged by it.

Even from the perspective of the Applicant needing an instrument of corporate control that would guarantee a logic of consensual stability, the scheme architected by the Applicant did not bring, for it, any benefit. The association of both C as well as B with a third party could block any decision of the Applicant in the governance of E. That is: C and B act through the Applicant in the capital of E, through the set of share capital that they hold in the former. If C or B ally with a third minority shareholder of E they can block the decision of the Applicant and then condition the power of decision and the percentage indirectly that C or B hold in E. In fact, if the true motivation was to avoid the loss of control of E, why did one of the shareholders sell shares to minority shareholder M, thus strengthening its position (from 5% to 10%, which are currently owned by M SGPS) and increasing the risk of the latter allying with one of the co-founders and taking control of E? Therefore, it is wrong to say that it is to confer greater stability or even be an essential condition for the company to continue as administrator of fund S, as moreover the Authority points out, whether by direct or indirect means, it could constitute a blocking factor, even more serious, as it will condition the percentage of share capital both of C and B in the Applicant and in turn reflect itself in the capital of E. If both were holders of the percentage of share capital in E they would exercise the corresponding right in the governance of E freely and not through the Applicant.

In summary, we can bring to bear the reasoning set out in Arbitral Ruling CAAD no. 131/2014-T, despite the facts being obviously different, "from the strictly corporate perspective (…), the scheme concretely effectuated by the Applicants was notably contrary to the patrimonial interests at stake. Only the consideration of the personal interests of the Applicants, not only with respect to the fiscal gain, but equally to the transfer of accumulated or accumulating wealth in the companies to their personal spheres, without being by the normal path of distribution of profits, is that, in an objective motivational perspective, will explain the ideation and realization of all the operation where the act whose effectiveness the Authority intends, for tax purposes, to see suppressed is inserted."

That is why the action of the Authority is explained, when shareholders C and B were subjected to additional Personal Income Tax corrections required by tax substitution to the entity obliged to withholding at source, the Applicant.

The importance of the fiscal advantage, to the detriment of the non-fiscal purpose, as a result of the architected operations, is even more evident when we confront the other acts and transactions that also form part of the scheme created. The establishment of the Applicant and subsequently the acquisition of shares of company E did not bring any injection of capital, nor any economic or financial advantage for the Applicant. The Applicant did not have financial capacity to pay the price of the shares bought, obliging it to become indebted in € 14,725,000.00, financing itself through its shareholders C and B in the form of accessory contributions subject to the regime of supplementary contributions.

As moreover the Authority points out "Supplementary contributions aim to equip companies with financial means in order to overcome financial difficulties, more or less occasional, cash flow problems, insufficient working capital, or in order to give financial muscle for any business avoiding leverage from financial institutions, private equity or increases in capital. This when the company needs financing for some investment, whether to attract new markets, restructuring and business reorganization. What is not failing to be innovative is that the very reason for the Applicant does not aim to justify the creation of the structure, for the benefit of the company, respecting its legal personality. But rather, for protection of shareholders, not with a view to pursuing or practicing management acts aimed at the profit of the Applicant."

Furthermore, there are no concrete installations, employees and administrative material, only its administrator. Since the establishment of the Applicant, there is only one invoice that evidences provision of services to E itself, which concerns consultancy of an investment fund, that is, outside the scope of the Applicant's corporate purpose – management of social participations.

As was well decided in the Ruling of the Southern Administrative Court "[W]e are faced here with the so-called step by step transactions in which a complex factual situation is found, involving a succession of acts/transactions coordinated among themselves, although they may occur in different temporal moments and with the common objective of achieving a fiscal advantage. In the face of this kind of operations, the law enforcer should operate an integrated treatment visualizing them as a single transaction, tending towards a single and final result.".

Accordingly, there is no doubt that the set of operations architected in the direction of the realization of a capital gain obtained with the sale of shares (not subject to taxation at the date of the facts), instead of a distribution to shareholders of accumulated dividends, occurred, if not "essentially", at least "mainly" with a view to obtaining fiscal advantages.

It happens that, for the application of the anti-abuse clause to be legitimate, it becomes still indispensable that there was a use in a relevant manner of artificial or fraudulent means and abuse of legal forms.

1. As has been widely demonstrated, it is unequivocal that the motivation of the acts/legal transactions, at least "mainly", was the fiscal advantage – the non-taxation for Personal Income Tax purposes of the patrimonial increase (dividends) which the entire operation implied in the personal spheres of the shareholders, owed by the Applicant by tax substitution.

However, it is necessary to identify the non-conformity of the result obtained through the abusive act with the ratio legis, spirit or purpose of the law and the principles of the tax system.

Deferring respect to the opinion of the Applicant, it is considered that in the case an "action that, globally considered, is presented unequivocally directed to the obtaining of the (above) referred (and demonstrated) fiscal advantage, simultaneously with the anomalous, unusual, artificial, complex use of legal forms, even in a contradictory manner with the economic purposes sought by the taxpayer" is evidenced clearly.

The purposes presented by the Applicant, already extensively referred to, as having determined the realization of the set of operations where the act signaled by the Authority is integrated, are by themselves abundantly contradicted by the very reason for the Applicant, which does not aim to justify the creation of the structure, for the benefit of the company, respecting its legal personality, but rather for protection of shareholders, not with a view to pursuing or practicing management acts aimed at the profit of the Applicant.

For Lima Guerreiro, in Annotated General Tax Law, "the general anti-abuse clause seeks to combat, (…) in the name of justice and equality, the contradiction between the legal forms adopted by the parties and the economic purposes of contracts. (…) In exceptional cases where the economic purposes depart from those typical of the legal forms adopted, (…) it is justified that the legislator makes the anti-abuse clauses operate, making prevail over the certainty and security of legal-tax relations interests of a public nature which in this case are drawn of clearly superior relevance, because their violation would put in question the foundations of taxation in general". The author further states that the application of the clause presupposes action "against the essential purposes of the tax legal order" arguing that "the anti-abuse clause represents no offense to the principle of typicality. The constitutional guarantee of typicality must continue to be respected in relation to the act or legal transaction of equivalent economic result, whose frustration the author of the conduct sought to avoid".

Nowhere is it demonstrated that the advantages of the creation of the Applicant, so that there is corporate control "in a single voice", supersedes the risks associated with its non-control. It was never demonstrated by the Applicant the existence of disagreements among the majority shareholders as a way of feeling pressured to carry out a corporate reorganization: - there is not a single proof in that sense.

On the other hand, it is true that the more advantageous fiscal treatment of the realization of capital gains not subject to taxation, in contrast with the taxation of the respective dividends, was a deliberate option of the legislator and the taxpayer is not obliged to choose the path that would be more onerous for itself.

However, "[T]he illicit use, through artificial or fraudulent means, of the tax exclusion regime cannot fail to merit normative-systemic censure by the legal order. Article 38, no. 2 of the LGT establishes a general anti-abuse clause, to sanction abusive conduct, in the provision of which is included the act of transformation of a company for solely fiscal reasons."

That is, since the legislator expressly provided that an alienation of shares, generating capital gains, should not be subject to Personal Income Tax (at the date of the facts), whereas a distribution of dividends was and is subject to taxation of such tax, as income from capital, this does not mean that it wishes to reward those "more expeditious" who architect acts and legal transactions with the sole intention of escaping the taxation due with the alternative act or transaction.

Accordingly, it is concluded that the supposed economic purposes aimed at by the Applicant are, without a shadow of a doubt, contradictory with those concretely verified, insofar as, as we have already referred, it suffices that C or B joins a third shareholder of the Applicant to block decisions thereof in the governance of E. It is also certain that the Applicant does not possess any physical structure, own facilities or administrative equipment. Since its establishment (2009), it has only one invoice issued and this concerns consultancy, outside its corporate purpose, provided to E itself. As moreover the Authority points out, "the absence of objective indicators, such as expenses with personnel, fixed assets, or other equipment, demonstrate the non-existence of human and technical means with which the taxpayer can pursue its restricted corporate purpose."

Again we can bring to bear the reasoning set out in Arbitral Ruling CAAD no. 131/2014-T, despite the facts being obviously different, "the beneficiaries of these burdensome charges of the corporate group that was subjected to and resulted from the entire operation executed by the Applicant were precisely themselves, thus revealing, in the first place, the artificial and fraudulent character of their action, who, under the guise of a purported corporate interest, in an untoward manner, substantially increase their personal legal spheres, avoiding, in the manner described, that such increase be subject to the respective tax."

In fact, the Applicant's argument ends up having an opposite and contrary effect to the objectives it defined as being those at the basis of the creation of SGPS. The very legal forms instrumentalized in the operations carried out denote a disconnection between the form chosen and the economic-practical purpose of the Applicant.

1. Following the theory set out in the CAAD Ruling we have been following closely, "[A]s is known, companies, as legal persons, have long been understood as "collectivities of persons or patrimonial complexes organized with a view to a common or collective purpose to which the legal order attributes the quality of subjects of rights", being specifically understood as a "set of persons – two or more – who contribute property or services for the exercise of an economic activity directed to the obtaining of profits and their distribution among the shareholders.".

Still in the same ruling, it is referred to Prof. Carlos Alberto da Mota Pinto who clarifies that "[T]he existence of legal persons results from the existence of lasting human interests of a common or collective character. The attainment of these interests requires the concurrence of the means and activities of various persons or, at least, several persons are interested in it.", concluding that "[L]egal personality is thus a technical-legal mechanism justified by the idea of, with greater convenience and efficiency, organizing the realization of collective and lasting interests.". In sum, still in the words of the same Professor, "[T]he economic-social function of the institute of legal personality is tied to the realization of common or collective interests of a lasting character.".

Now, there exists none of the purposes referred to and, consequently caused by the action of the Applicant. That is, the final result of the set of operations architected and executed by the Applicant transposes the opposite of what is protected by the institute of legal personality in general, and of commercial companies in particular.

In reality, "[S]uch organization aims at nothing more – is what results from the established facts – than placing at the service of the personal interests of the Applicant the technical-legal mechanism of legal personality, instrumentalizing it, and contradicting frontally the very economic-social function of the institute of legal personality, by directing itself deliberately to the exclusive realization of the individual interests of the Applicant."

On the other hand, in accordance with what is referred to in the decision handed down in the arbitral process CAAD no. 267-2014-T "[(...) the mere plausibility and verisimilitude of that circumstance and aptitude is insufficient for proof of the existence of justifications of an economic-business nature, the mere mention of these justifications in the justifying report of the company transformation not being sufficient. Similarly, although some of the facts articulated by the Applicants may be considered verisimilar, their proof is not satisfied with that verisimilitude. The mere declaration in an article of a history of facts tending to demonstrate the existence of a justification without any probative support is insufficient. In the lesson of Pires de Sousa, verisimilitude corresponds to id quod plerumque accidit, that is, to a principle of normality, according to which "the facts are not found isolated, but related to each other, either by relations of cause and effect or by a logical and regular order". As Isabel Fonseca highlights, verisimilitude "places itself in what id quod plerumque accidit and the maxims of experience.", appearing prima facie and in the abstract in the conviction of the judge, so "[o]ne is not yet in the domain of proof, but only in the field of factual assertion, whose verisimilar existence corresponds to normality."

In fact, the mere declaration or construction of a story, by itself, is not sufficient to corroborate what is alleged by the Applicant, which in any case does not pass the common rules of experience and normality of corporate acts.

Accordingly, "not only are the purposes pointed out by the Applicants as being the basis for the non-taxation of capital gains and the promotion of fiscal advantage of groups of companies not reflected in the situation created by the Applicants, but the same are frontally contradicted, since, there being no material substratum of "company", much less of a corporate group, there is no intervention of investors or capital markets, nor the dynamization, organization or installation of any economic groups, since the entire corporate structure drawn and implemented was directed deliberately and even assumedly for a type of organization totally individual, in terms that it can even be questioned if the necessary prerequisites are not met in the concrete case for, even in the absence of the norm of article 38.2 of the LGT, recourse would be had to the mechanism of disregard of legal personality."

As Saldanha Sanches wrote well, "to companies, and only to companies, it is incumbent to choose the specific means by which they will carry out their transactions: necessary is that there exist, as motive for its choice, not a certain path of obtaining a fiscal saving against the express intention of the law, but rather what can be considered a legitimate commercial reason. The transaction must be capable of withstanding the business purpose test (…) [which] is nothing more than a legitimate commercial reason such as it can come to be demonstrated by the taxpayer, in particular in the case where it has adopted an unusual path."

Without wishing to develop the mentioned subject, it can still be said that disregard of legal personality is a manifestation of the principle of prohibition of abuse of right, enshrined in article 334.º of the Civil Code.

In this way, in the judgment as seen, and continuing to follow closely Arbitral Ruling CAAD no. 131/2014-T, the abuse of legal forms perpetrated by the shareholders of the Applicant in the operations carried out by it is evidenced, and in which is inserted the legal transaction whose ineffectiveness the Authority intends, resulting from the incoherence between the form or structure chosen and the final economic-practical purpose of the shareholders of the Applicant, which translates itself in the use of legal forms directed to the allocation of profits and subsequent reimbursement in the form of supplementary contributions, placing the vehicle used for such purpose – the creation of the Applicant – at the exclusive service of the shareholders, defunction

alizing it and removing it from its usual vocation, since grossly, from the date of its establishment there is not even a single operation framed in the corporate purpose.

In the reasoning of the aforementioned ruling, these circumstances, if we wish to frame them in the doctrinal position underlying the argument of the Applicant in the proceedings, demonstrate beyond any reasonable doubt a censurability of the legal order as a whole on the action of those, embodied in the set of operations where the realization of untaxed capital gains, which they would otherwise not achieve if they had refrained from undertaking the aforementioned acts and legal transactions and remained shareholders of E in an individual capacity, receiving in that capacity the dividends that E would come to distribute, "tying the hands, manifestly of the legal norms" [continues below in the original but was truncated]...