CAAD Case 180/2018-T: Deductibility of Interest and Financial Charges on Intra-Group Loans Under IRC Article 23

ARBITRAL DECISION (consult complete version in PDF)

The arbitrators Judge José Poças Falcão (arbitrator-president), Professor Doctor Jónatas Machado and Dr. José Ramos Alexandre (arbitrator-members), designated by the Deontological Council of the Centre for Administrative Arbitration to form the present Arbitral Court, constituted on 21.06.2018, agree as follows:

I. REPORT

1. A..., Unipersonal Company, Limited Liability Company, (hereinafter Applicant or A...), holder of NIPC..., with tax domicile at Av. ... no.... ..., filed a request for arbitral ruling, under the terms of articles 2.º, no. 1, al. a) and 10.º of Decree-Law no. 10/2011, of 20 January, with subsequent amendments (Legal Framework for Administrative and Tax Arbitration), against the additional IRC assessment for fiscal year 2013, with no. 2017..., the assessment of compensatory interest no. 2017... and the respective account reconciliation statement no. 2017..., pursuant to which tax payable was determined in the amount of €2,001,603.86 (two million, one thousand, six hundred and three euros and eighty-six cents).

2. In accordance with articles 5.º, no. 3, al. a), 6.º, no. 2, al. a) and 11.º, no. 1, al. a) of RJAT, the Deontological Council of this Centre for Administrative Arbitration (CAAD) designated as arbitrators of the collective arbitral court Judge José Poças Falcão, as arbitrator-president, Professor Doctor Jónatas Machado and Dr. José Ramos Alexandre as arbitrator-members, who accepted the appointment on 01.06.2018.

3. The parties were duly notified of this designation, to which they did not object in accordance with the combined terms of articles 11.º, no. 1, paragraphs b) and c) and 8.º of RJAT and 6.º and 7.º of the Deontological Code of CAAD.

4. By virtue of the provision in paragraph c) of no. 1 and no. 8 of article 11.º of RJAT, as per communication from the President of the Deontological Council of CAAD, the Arbitral Court was constituted on 21.06.2018.

5. In the request for arbitral ruling (hereinafter initial petition or IP), the Applicant petitioned for the annulment of the correction to the taxable income of IRC for 2013, in the amount of €2,317,003.61, on the grounds that such correction incurs a defect of violation of law, due to errors in legal and factual assumptions, expressed in the erroneous application of article 23º of CIRC; the annulment of the IRC assessment and compensatory interest and the account reconciliation statement mentioned above, relating to the year/fiscal year 2013, on the grounds of a defect of violation of law; the reimbursement of the amounts paid by the applicant, plus compensatory interest, calculated at the legal rate until full and complete payment.

6. The AT (Tax Authority), under the terms of article 17.º of RJAT, presented a response on 17.09.2018, requesting at the end the following:

"...the present request for arbitral ruling should be judged without merit, the disputed tax assessment act being maintained in the legal order and the requested entity being absolved accordingly from the requests, all with the due and legal consequences."

1.1. Description of Facts

1. A... was incorporated by public deed on 29.05.2000, commencing activities (in tax terms) on 19.06.2000, having as its object the lease, operation and management of the Commercial Centre designated as B... (B...). A... has the legal form of a limited liability company (unipersonal), with share capital of 5,000.00€.

2. On the date of constitution of A..., it was held by the sole partner C... (currently D..., with head office in Germany. On 31.07.2007, A... became held by company E... (sole partner), with head office in Luxembourg. At the date to which the facts of the inspection procedure refer (2013), the company's capital was held 100% by company E.... In July 2015 this company changed its corporate name to F....

3. E... is held by G..., a common management company, configuring an "umbrella structure" designed to manage different sets of assets and liabilities, in the interest of its co-owners. Both D... and G... were held 100% by company D..., with head office in Germany, managing funds H..., an open real estate fund, and I..., intended for institutional investors, independent funds from each other, according to the following structure:

4. From G..., a fund management company, investments are organized in a group with the following structure: G... holds 100% of J..., which in turn holds 100% of E... and K.... E... holds 100% of A..., which in turn holds 70% of L..., with the remaining 30% held by K..., which also holds 100% of M..., which in turn holds 100% of N.... O... was a group company held 100% by P..., within the structure referenced in consulted documentation:

5. On 01.11.2002 – as schematized above – A..., which, according to the permanent certificate, had as its corporate purpose "the purchase and sale of the real property of the commercial centre designated as B..., as well as the lease, operation and management of B..., as well as any other acts or transactions directly related to the aforementioned activity", leased B... from L... (L...), whose corporate purpose consisted of "the purchase and sale of real property, as well as the simple or mere administration of its own property maintained for enjoyment and intended for B..., specifically including its lease, as well as any other acts or transactions directly related to the aforementioned activity";

6. The share capital of L... on the date of incorporation, 29-05-2000, was 10,000,000.00€, with 9,999,995.00€ (99.99995%) held by limited partner C... and 5.00€ (0.00005%) held by general partner A.... This was held by D... (D...) which, on 31.10.2007, sold all of A... and L... to investment fund I..., whose managing entity was G....

7. On that same date, by group decision, A... acquired 70% of the share capital of L... from D... (former C...). Thus, after the division and transfer of the quota of partner C... (later D...), the holding of 3,000,000.00€ (30%) passed to limited partner K... (limited liability), with head office in Luxembourg, and 7,000,000.00€ (70%) remained in the holding of general partner A... (unlimited liability), based in ..., held, as seen above, by E..., which, together with K..., was held by J....

8. To finance its acquisition of 70% of the capital of L..., in the amount of approximately 175.3 million euros, A..., on 25 and 31.10.2017, resorted to three financing operations from three companies in the Group to which it belongs. The first loan was obtained from E... (parent company), holding 100% of A..., in the amount of approximately 96.8 million euros, with a fixed annual interest rate of 7.25%, calculated daily on a 360 days/year basis, for a period of 10 years and maturity on 31 October 2017, with E... and A... agreeing in 2013 to a reduction of interest rate to 0.5% per annum, with effect from 01.01.2013 until the agreement reaches maturity. Interest is due quarterly;

9. The second financing was obtained from M... (held 100% by K...) in the amount of 42.6 million euros, for a period of 10 years. Until the end of the 1st semester of 2009, a variable interest rate was stipulated based on the 6-month Euribor rate plus a spread of 0.15%. From the 2nd semester of 2009 onwards, the interest rate became fixed, with the parties agreeing that the interest rate would be determined based on the 8-year swap rate, as of 01.07.2009 published by Bloomberg, which was 3.40%, plus a spread of 1.6%, that is, a rate of 5% per annum. As in the previous case, interest was calculated daily on a 360 days/year basis and payment was due monthly.

10. The third loan agreement was concluded on 25.10.2007 with O... AG, an international bank operating in the commercial real estate and public finance sectors, in the amount of 35.8 million euros for a period of 10 years. In a logic of cross-collateral, a real property already held by a group company, L..., was presented as collateral – more specifically the extension of the assignment of receivables with security scope arising from Utilization Contracts relating to Properties A..., constituted by letter of 29.06.2001 and extended on 19.10.2007 – and agreement was reached on the payment of an interest rate corresponding to the Euro swap rate at seven years plus a spread of 50 basis points (0.5%). In 2013 the loan accrued interest at the rate of 5.078%. Interest is calculated daily on a 360 days/year basis, with payment due quarterly.

11. Of the three entities granting the loan, M... and E... SARL depend 100% on fund I... and managing company G... (G...) and bank O... also belongs to the group of P..., as does Q.... Furthermore, L... had contracted a loan in the amount of 135,175,000.00 € for the construction/acquisition of the real property of B....

12. A... is directly responsible for the daily management of B..., developing the promotion and marketing of stores and the strategic promotion of B..., being responsible for the acquisition and conclusion of "store utilization agreements" with customers, generally brands that own chains of stores nationally and internationally, but also individual users. A... invoices and receives rents from customers – including a fixed amount, a variable amount and a contribution to operating expenses and costs – and then pays L... the rents for the use of the real property of B...;

13. From 2007 onwards, A... bears high financial charges, recorded in its financial statements under interest expense, resulting from financing obtained for the purchase of approximately 70% of the equity interest in L..., with the result that its tax results changed from quite significant taxable profit in 2007, the year in which financial charges referred to only approximately 2 months, to a situation of tax loss, due to the financial weight of interest, a situation attenuated in 2013, with the reduction that occurred in the interest rate relating to the loan obtained from E...;

14. On 31.12.2013, A... held a 70% interest in L..., acquired on 31.10.2007, this being a company of mere property administration covered by the transparent entity regime, under article 6º of CIRC, and imputing to its partners the taxable income it determines annually, that is, 70% of its taxable income is imputed to A... and 30% to K....

15. During fiscal year 2013, the monthly rent for the 35 autonomous fractions leased in B... was 830,000.00€, while for R... the rent was 40,000.00€. In that year, the expense account "626111 – Rents A..." recorded the amount of 9,960,000.00€ in rents for B..., and in account "626112 – Rents..." the amount of 480,000.00€, relating to rents for R.... The value of rents then paid by A... to L... for the lease of B... thus totaled the amount of 10,440,000.00€.

16. In fiscal year 2013, the interest supported by A... with the financing loans for acquisition of the interest in the capital of L... stood at the value of 4,496,936.21€, with the Management Report noting that these expenses, essentially relating to interest on bank loans with group companies, and impairment losses in the amount of 8,298,133.41€, relating to the interest in L..., contributed significantly to the total expenses in the year and consequently to the loss of A... incurred in the year, with the result that it absorbed the taxable income imputed to it by L... under the transparent entity regime.

17. Having conducted a prior analysis of the elements available in the AT computer system and having detected risk situations, an external partial scope inspection was opened for fiscal year 2013, under service order OI2017..., dated 15.03.2017, targeting A.... Corrections were then proposed in the amount of €4,639,205.24, corresponding to financial charges with loans obtained for acquisition of the financial interest, itemized as follows:

681291-Stamp Duty Supported - Loan Interest 73,726.92 €

681292-Stamp Duty Supported - Banking Commissions 47,079.75 €

6911-Financing Interest obtained 1,843,172.95 €

691391-Other Interest – M... Lda 2,162,817.63 €

691392-Other Interest – E... 490,945.63 €

688804- Financing fees 21,462.36 €

Total 4,639,205.24 €

1. Since as a result of the corrections made to the "financial charges" item, it came to have zero value, it was understood that there was no place for the application of article 67º of CIRC, and therefore the annulment of the amount added in field 748 of Q07 of form 22 of IRC 2013 was proposed, in the amount of €1,476,780.60. Following the corrections made to previous years, the taxpayer was left with no value to report losses to the following years. Accordingly, the amount of €5,187,876.09, relating to the deduction of tax losses, was disregarded in the determination of the taxable income for the year under analysis. Having not exercised its right to a hearing, the Applicant (A...) was determined to proceed with the processing of the correction document (DC) in a manner appropriate for the assessment and collection of the tax quantified therein, in the amount of determined tax payable in the amount of €2,001,603.86 (two million, one thousand, six hundred and three euros and eighty-six cents).

1.2. Parties' Allegations

1. To substantiate its position, A..., relying on the CAAD arbitral decisions in Cases no. 614/2015 and no. 680/2016, centers the arguments in the IP and final allegations on the economic rationality of the acquisition of 70% of the capital through the use of financing and the deductibility of the respective charges, highlighting the following arguments:

1. The acquisition of 70% by A... of the equity interest of L... had as its sole objective to increase profit and thus give rise to taxable profit, meeting the test for application of article 23º of CIRC, as regards the tax deduction of expenses related to such acquisition;

2. The granting of financing was dependent on it being allocated to A..., because it is the company that released higher levels of cash flow, real property and operating profits and was therefore in a better position to provide collateral;

3. The Applicant obtained bank financing, which was guaranteed not only by the operating profits resulting from the operation of B... (uncontrolled variable) but also by the pledge of the equity interest corresponding to 70% of the capital of A... Comandita (controlled variable, but subject to fluctuations in the value of the interest, which is directly related to variations in the market value of the real property owned by L...);

4. The need to align the financing with the assets given as security (whether the properties themselves or equity interests in companies) resulted from requirements arising from the negotiation of financing with the bank, which wanted to ensure that the financing was recorded in the company that released higher levels of cash-flow and was therefore in a better position to meet the financial obligations inherent to the liability;

5. This was not an operation conducted between companies of the same group, nor an operation designed to generate deductible expenses, being led by different investment funds, and conducted at market prices – in accordance with the interests and legitimate expectations of investors of the two different investment funds involved, with investment fund management companies belonging to Group D... intervening in the operation because those funds could not act on their own;

6. Investment fund H... could not, by itself, proceed with the sale of the commercial complex B..., and therefore needed the intervention of its managing company - D… - to effect the sale. D... always acted in the interest of the fund's investors (and not, for example, in the interest of Q...);

7. In 2007, markets – still in the pre-economic crisis phase – were buoyant, there was availability of money, and banks were offering money at low and competitive values, with very high reinvestment rates, so the use of credit was also a matter of financial management. Having a given company with businesses with profitability higher than interest rates would be a way to optimize capital if the company financed itself - for example, if the company has a business with profitability of 7, 8, 9% and the bank charges 3, 4% interest, the resulting leverage makes financing a rational choice;

8. Since the sale of the commercial complex B... would be conducted using credit and the assets capable of constituting collateral (the real property, the pledge of shares and the pledge of rents paid by shopkeepers) were located in Portugal, recourse to financing was only possible through Portuguese resident companies, that is, essential conditions to obtain financing were that it be as close as possible to the asset and the source of income (release of cash-flow necessary to meet financial obligations);

9. L... already had financing guaranteed with a property mortgage, so only the Applicant was in a position to contract such financing, as it could provide additional collateral: the pledge of L... shares and the operating profits resulting from the operation of B...;

10. The acquisition of 70% of L... objectively enhances the achievement of profit by A... in that: (i) there is imputation of taxable income of L... to A..., which is subject to taxation at the latter entity; (ii) both in 2007 and 2013, if a sale of the equity interest in L... were to occur, any gains would be subject to taxation, without being able to benefit from any exemption regime under IRC; (iii) if the sale of the real property by L... were to occur, the respective gains would necessarily be integrated into the taxable profit of the company to be imputed to A...;

11. The fact that the Applicant is paying a rent to L... and the latter is in turn imputing 70% of its taxable income to the Applicant (by application of the transparent entity regime, to which it was always subject, by legal requirement and not by choice), was not the reason for the acquisition of the said equity interest of B... Comandita, which moreover did not confer any advantage on it;

12. In a scenario in which the Applicant had acquired the property of the real property with the respective mortgage loan (instead of having acquired the said equity interest) and thus did not have to pay rent for the use of the real property, nor would there be income imputation due to transparent entity taxation, the result would be practically the same as the current one, as all income generated by the operation of the commercial centre remained at the level of the Applicant, but would not be taxed due to the charges this company would have to bear with financing for acquisition of the property and its associated financial liability;

13. The correction carried out by AT, with exclusive legal basis in art.º 23º of CIRC, is illegal as it violates the same, since in the context of the indispensability of costs, it is indisputable that the said acquisition of 70% of the capital constitutes a management decision of the Applicant;

14. There was no duplication of financial charges, since the financing obtained by the Applicant (175.2 million euros) was for payment of the price of 70% of the equity interest in L... (175.3 million euros), which already reflected the value of the debt of that company;

15. The two existing loans were obtained by two different legal entities and for the acquisition of different assets: the Applicant bought the equity interests of L... and the latter bought a real property;

16. The fact that the Applicant was in a tax loss position until 2010 is not derived from any tax planning developed, but from a combination of various factors related to the economic-financial crisis (which began in 2008 and had particular impact on the real estate market) and the amount of financing and respective charges which, in an initial phase, was necessary to contract to pay the price of 70% of the equity interest of L...;

17. Only in 2008, 2009 and 2010 (initial phase following the purchase) was the company in a tax loss position, with the Applicant being in a taxable profit situation from 2011 and the following years, particularly 2013, discussed here, which has been increasing;

18. The increase in taxable profit of the Applicant refutes the idea that the acquisition of 70% of the equity interest of L... had no economic motivation, because if that were the case, the Applicant could easily, if it wished, remain in tax loss so as not to pay tax, which in reality did not happen;

19. From the total value of financing (175.2 million euros), 139.4 million euros related to financing from the sole partner and another controlled entity, with only 35.8 million euros relating to bank debt, which demonstrates the commitment of the former in the business regarding the acquisition of 70% of the equity interest of L...;

20. The purchase of 70% of the share capital of L... by the Applicant cannot be analyzed, in isolation, as a mere acquisition of a "group company", but as part of a transaction (transfer of the commercial complex B...) occurring between investment funds with different types of investors, asset portfolios and risk profiles;

21. In 2007, with the granting of the request for maintenance of tax losses filed by the Applicant under article 47.º of the IRC Code (at the date of the facts) - case no. .../07 -, AT, having had access to the facts and documentation involving not only the transfer of the Applicant itself but also the transfer of 70% of the capital of B... Comandita (indeed these two operations are part of the same agreement), at no moment questioned the economic interest of the operation, having recognized the economic rationality of the operation, with no change in circumstances, so the Applicant relied on AT's agreement, in accordance with the principle of legal certainty and protection of trust that would be violated if it altered its position;

22. Having the request for maintenance of tax losses been granted by the Tax Authority, it appears that the Tax Authority's action constitutes a venire contra factum proprium that violates the principle of justice and good faith to which it is bound under article 55.º of LGT.

23. The Tax Authority's action created in the mind of the Applicant a (quite) reasonable and legitimate confidence, in that it could reasonably assume that the position taken reflected, at the time, the Tax Authority's legal understanding regarding all cases that deserved similar treatment;

1. In a divergent sense, AT sustains the legality of the additional IRC assessment for fiscal year 2013, the assessment of compensatory interest and the respective account reconciliation statement, as contained in the case files of the present litigation, arguing in the following terms:

1. A... finds itself in a situation of special relationships of capital, direct and indirect, with E..., L... (L...), M... – Commercial Centre Management, Unipersonal Company, Limited Liability Company, and O... – Portuguese Branch".

2. A... and L... are held indirectly 100% by fund I... and depend on this and on its managing company, G..., which is part of a larger group, Q..., which dominates 100% the companies held by its participant G... (G...), with Q... being a company resident in Germany and also holding 100% of D... (D...);

3. The reasons that determined the allocation to A... of the equity interest in L... are the result of a decision-making process, imputed to the investors of fund I..., ultimately falling to its managing company, G..., which deemed it advantageous to charge A... with acquiring part of B..., including 70% of the capital of L..., through the use of financing;

4. It falls to the managing entities to decide on the investments they make on behalf of the real estate investment funds whose management they ensure, so that, even if they represent autonomous investment funds, the terms of the implementation of investments are the responsibility of and are imputable to the managing companies, which, in this case, unquestionably belong to the same group;

5. The decision to acquire, by A..., the equity interest of €6,999,995.00 of the capital of L... was made by the group of companies, involving companies already belonging to the group, within a group strategy and using financing obtained from group entities, not even corresponding to the corporate scope of A..., which does not include the acquisition of equity interests;

6. In the transfer pricing dossier (Fiscal year 2011), the group admits there was a strategy outlined by it to acquire such interest, having this been proven in the context of Arbitral Case no. 690/16 T, relating to fiscal year 2011, in which AT obtained a favorable judgment;

7. The fact that group management companies are involved does not exclude, therefore, action in accordance with a group logic, as evidenced by the arrangement and organization of financing conducted with group entities for the acquisition by A... of the equity interest valued at €6,999,995.00 in L...;

8. One cannot speak of independence between two investment funds that are managed by companies dominated 100% by the same company at the head of the group;

9. The loan obtained by A... from E... was concluded by group decision and granted between two companies in a 100% dependent relationship, being substantially a loan granted by an entity to itself, with a 0% default risk, notwithstanding having a higher interest rate by comparison with existing ones;

10. These are acquisitions and financing operations that occur "within" the group itself, reason why they deserve special attention, to avert any situations of tax planning, which distorts normal relationships between taxpayers and equality of treatment;

11. The contraction of the loan by A... generated a debt between creditors and debtor belonging to the same group, with no clear understanding of what self-interest of the Applicant could have justified the acquisition of 70% of the equity interest of L...;

12. The acquisition of the 70% equity interest of L... added nothing to the business volume of A..., with this being observed to have suffered minimal fluctuations over these last 7 years, both positive and negative;

13. With the operation of acquisition by A... of 70% of the capital of L..., nothing changed in the structure of the complex in B..., with both companies continuing to conduct the same activity within the framework of pre-existing commercial relationships, with L... continuing to exploit in a passive manner (bare walls) the real property and maintaining a lease agreement with A..., while the latter continues to manage B... (and R...) through the conclusion of store utilization agreements;

14. From the perspective of A... and its interest in generating revenues in its legal sphere, AT does not discern economic advantage in the acquisition of 70% of L... in 2007, as such company already belonged to the group, bearing in mind that the mere possibility that future gains from the application of such capital might occur does not by itself determine that the financial charges underlying them can fit within the concept of tax expenses;

15. It was not clear why one changed from a fund regulated by German law to a Luxembourg fund with few investors as A... itself admits, with nothing known about who these investors were, what they invested and whether or which dividends they obtained from the operation;

16. The alleged choice of A... to contract the loan due to the need to align the financing with the assets given as collateral by requirements arising from negotiation of financing with the bank is not sufficient justification for the loans obtained in that only in the case of the loan of €35,800,000.00 made with bank O... – Portuguese Branch was collateral provided, unlike what happened in the case of loans in the amounts of €96,844,069.52, obtained from sole partner E..., and €42,663,800.00 conducted with M..., in which no special collateral was provided;

17. The pledge of the equity interests in L..., both the equity interest valued at €3,000,000 of limited partner K..., and the equity interest of €7,000,000 of the Applicant, general partner, in favor of S... – Portuguese Branch (formerly O...) only materialized on 26.2.2013 to guarantee the amount of €25,000,000.00;

18. The principal motivations that presided over the decision of acquisition made by A... were, on the one hand, reasons of a financial nature [i.e., the placement of financing at the source of income (the real property)] that made it possible to meet the respective charges and guarantee financial responsibilities, along with the evident tax advantage provided by the reduction of the respective taxable profit at the expense of the deduction of financial charges, as evidenced from the values determined;

19. Since the determination of the taxable income of L... is contributed to by rents paid by A..., the value of the same is partially annulled, due to the expenses that the taxpayer records as payment of those same rents;

20. The financing operations in question compromise the profitability levels of A..., having resulted in a lack of liquidity, expressed in the inability to pay all interest due in fiscal year 2013;

21. Notwithstanding L... imputing to it 70% of its taxable income (influenced by the financial charges it bears relating to the loan for construction of the real property whose operation constitutes its sole activity), by application of the transparent entity regime, this is absorbed by the losses A... determines in its activity, concluding thus that the financing has the purpose of avoiding taxation in national territory through "drainage" of results underlying the payment of interest;

22. Given that L... also obtained loans and that it is covered by the transparent entity regime, and that as such it imputes 70% of results to A..., this gives rise to a "duplication" of charges within company A..., subverting the principles underlying that regime, namely fiscal neutrality and the combat of tax evasion;

23. The circumstance that the investee company – L... – is covered by the transparent entity regime – leads to treating the situation of A... as if it had acquired 70% of the property of the real property with the loans obtained, with the result that, in its sphere, two deductions converge for financial charges: the one made by itself and the one made by L...;

24. Cannot be given weight to the artificial construction made by the applicant based on a supposed valuation of the property at market prices (an issue not addressed before AT in the inspection procedure), in that an analysis of the data determined allows confirming that A... and L... bear high financial charges with the loans obtained;

25. The singular element that characterizes this situation and that propitius the duplication of charges is related to the cumulation, in A..., by virtue of the position of lessee and partner of the lessor company covered by the transparent entity regime, of high and disproportionate financial charges with two loans obtained for the acquisition of the same real property;

26. The fact that L... is covered by the transparent entity regime introduces a differentiating factor of the greatest relevance, because it assumes the lifting of the corporate veil of L..., visualizing only the figure of its respective partners, with the assumption that the activity conducted by the transparent entity is, for IRC purposes, conducted directly by its partners;

27. By virtue of transparent entity taxation, the integration, into the taxable profit of A..., of 70% of the taxable income imputed by L..., has the effect that 70% of the charges recorded by the latter, as depreciations of the real property of B..., interest and other charges inherent, as well as 70% of revenues from rents, come to be assumed as expenses and revenues of A... itself, with its taxable profit being influenced by the dual deduction of financial charges, originating differently, it is true, but which, from the perspective of economic reality, have in common the fact that they relate directly and indirectly to the same asset – the real property of B...;

28. The expense recorded by the applicant arising from the loans obtained for the acquisition of 70% of the equity interest of B... Comandita, first and foremost, does not withstand a judgment testing its necessity, appropriateness, normality or connection to a profitable business;

29. The requirement of indispensability of a cost must be interpreted as an indeterminate concept requiring case-by-case examination, as a result of an analysis from a business economic perspective, in the perception of a relationship of economic causality between the assumption of a cost and its realization in the interest of the company, having regard to the corporate purpose of the commercial entity in question;

30. A... has as its corporate purpose "the lease, operation and management of B... Including acquisition of any property or rights, moveable or immoveable, as necessary for those purposes", so the acquisition of an equity interest escapes the corporate scope of the same and no clear understanding can be made of any interest of the applicant, but only possibly of the group with special relationships in which it is inserted, in the holding and management of that equity interest;

31. From the granting of the request for maintenance of tax losses filed by the Applicant under article 47.º of the IRC Code (at the date of the facts) - case no. .../07 - one cannot draw the conclusion, incorrect, that AT already validated all the assumptions, for all and any tax purposes, of the operation in question;

32. The criterion of indispensability of costs, a requirement for application of article 23.º of CIRC, is not met, with the result that its deductibility is compromised for tax purposes, because one does not discern the economic interest of the operation underlying it;

1. By order of 24.09.2018, the holding of the meeting referred to in art. 18.º of RJAT – for examination of witnesses – was considered unnecessary and dispensed with, with the respective request being denied under articles 16º-c) and e) of RJAT and 130º of CPC, applicable under article 29º of RJAT, because it was not foreseeable that there would be essential contested facts capable of witness proof and the parties differing only on legal framework and/or conclusions. The Arbitral Court, in its order of 24.09.2018, set the deadline for issuance of the arbitral decision as 15.11.2018.

2. Having considered the positions of the parties expressed in the requests submitted on 8-10-2018 and 19-10-2018, the Arbitral Court, on 26.10.2018, issued an atypical order deciding a) to potentially use, for the purpose of this proceeding, after hearing it, the testimonial evidence produced in cases nos. 614/2015-T and 690/2016-T (article 421º of CPC); b) to alter the dies a quo of the deadline for submission of written final arguments as determined in the prior order so that that deadline begins with notification of the present order to the parties; c) to extend, for two months, under article 21º-2 of RJAT, the deadline provided for in article 21º-1 of RJAT, considering such extension justified, particularly by procedural incidents relating to the production and/or use of testimonial evidence and d) to reschedule the deadline for final decision to 21-1-2019.

3. Having the parties submitted final arguments, they reiterated essentially the arguments expended respectively in the Initial Petition and in the defense, although the Applicant raised the preliminary issue of the extraprocessual value of evidence and the res judicata of arbitral decisions issued in cases nos. 614/2015-T (final) 680/2016-T (factuality materially transitioning to res judicata).

II. CASE MANAGEMENT

1. The Arbitral Court is regularly constituted (articles 5.º, nos. 1 and 3, al. a), 6.º, no. 2, al. a) and 11.º of RJAT) and is materially competent (articles 2.º, no. 1, paragraph a) of RJAT).

2. The parties enjoy legal personality and capacity and are duly represented.

3. There are no alleged, or known ex officio, exceptions to be appreciated and decided.

It is true that the Applicant in its final arguments attempted to demonstrate the binding of the Court to the facts proven in arbitral cases nos. 614/2015-T and 680/2016-T, under the threat that, if this did not occur, there would be violation of res judicata.

It will be said preliminarily that it is without merit.

In fact, and moreover, the authority of res judicata does not verify itself regarding the matter of fact proven in another proceeding, or, stated differently, the factual grounds of a decision do not assume, when separated from the judgment of which they are presupposition, the value of res judicata (Cf., e.g., Decisions of the Court of Appeal of Porto of 6-6-2016, in Case no. 1226/15.8T8PNF.P1 and of the Court of Appeal of Coimbra of 121-10-2016, in Case no. 2560/10.9TBPBL.C1).

Relevant also to this end the consideration made in the Decision of the Supreme Court of Justice of 5-5-2005, in Case no. 05B691: "(...) The principle of extraprocessual efficacy of evidence, enshrined in art. 522º, no. 1, of the Code of Civil Procedure [current article 421º of NCPC], means that evidence produced (statements and expert determinations) in one proceeding may be used against the same person in another proceeding, to substantiate a new claim, whether by the person who requested the evidence or by a different person, but based on the same fact.

(...) What cannot be done is confuse the extraprocessual value of evidence produced (which may always be subject to appreciation in another proceeding) with the facts that in the first were taken as established, as these factual grounds do not acquire value of res judicata when separated from the respective judicial decision.(...) To transpose the facts proven in one action to another would constitute, purely and simply, conferring on the decision regarding factual matters a value of res judicata which it does not have, or granting to the principle of extraprocessual efficacy of evidence an amplitude which it manifestly does not possess (...)".

1. The proceeding does not suffer from defects nor were exceptions invoked, allowing proceedings to continue to the decision on the merits of the case.

III. SUBSTANTIATION

3.1. Issue to be Decided

1. The issue to be decided in the present arbitral proceeding consists essentially of ascertaining the verification of the requirement of comprovedly indispensable charges borne by A... with the credit obtained for the acquisition of 70% of the capital of L... for the realization of income subject to tax or for the maintenance of the income-producing source established by no. 1 of art. 23.º of CIRC (in the wording applicable at the time of the facts) regarding fiscal year 2013.

3.2. Decision on Matters of Fact and its Substantiation

1. Regarding factual matters, the Court does not have to rule on everything alleged by the parties, being its role to select the facts that matter for the decision and discriminate between proven and unproven matters (cf. art.º 123.º, no. 2 of CPPT and article 607.º, no. 3 of CPC, applicable under article 29.º, no. 1, paragraphs a) and e) of RJAT).

2. The pertinent facts for the judgment of the cause are chosen and determined in function of their legal relevance, which is established having regard to the various plausible solutions of the questions that are the object of the dispute (see 596.º, no. 1, of CPC, under article 29.º, no. 1, paragraph e) of RJAT).

3. The Court's conviction regarding the facts taken as proven results from the documents and the Administrative Proceeding attached to the case file, respectively, by A..., in its capacity as Applicant, and by AT, in the position of Respondent, in accordance with what is specified in the evidentiary points listed below. Testimony evidence produced in cases nos. 614/2015-T and 690/2016-T was also considered under the order of 26-10-2018 and mentioned in the substantiation of those decisions.

4. Having examined the allegations contained in the procedural documents submitted and the evidence produced in the case file, the Court finds proven, with relevance for the decision of the cause, the following facts:

1. A... was incorporated by public deed on 29.05.2000, commencing activities (in tax terms) on 19.06.2000, having as its object the lease, operation and management of B.... (Document 4,5);

2. A... has the legal form of a limited liability company (unipersonal), with share capital of 5,000.00€. (Document 4,5);

3. On the date of constitution of A..., it was held by the sole partner C... (currently D..., with head office in Germany. (Document 4,5)

4. On 31.07.2007, A... became held by company E... (sole partner), with head office in Luxembourg. (Document 4,5)

5. At the date to which the facts of the inspection procedure refer (2013), the capital of company A... was held 100% by company E... (Document 4,5);

6. In July 2015, E... changed its corporate name to F.... (Document 4,5)

7. E... is held by G..., a common management company, configuring an "umbrella structure" designed to manage different sets of assets and liabilities, in the interest of its co-owners (Document 4,5)

8. From G..., a fund management company, investments are organized in a group with the following structure: G... holds 100% of J..., which in turn holds 100% of E... and K.... E... holds 100% of A..., which in turn holds 70% of L..., with the remaining 30% held by K..., which also holds 100% of M..., which in turn holds 100% of N.... O... was a group company held 100% by P....(Document 4,5)

9. On 01.11.2002, A..., which, according to the permanent certificate, had as its corporate purpose "the purchase and sale of the real property of the commercial centre designated as B..., as well as the lease, operation and management of B..., as well as any other acts or transactions directly related to the aforementioned activity" (Document 4,5);

10. On 01.11.2002, A... leased B... from L... (L...), whose corporate purpose consisted of "the purchase and sale of real property, as well as the simple or mere administration of its own property maintained for enjoyment and intended for B..., specifically including its lease, as well as any other acts or transactions directly related to the aforementioned activity"; (Document 4,5)

11. The share capital of L... on the date of incorporation, 29.05.2000, was 10,000,000.00€, with 9,999,995.00€ (99.99995%) held by limited partner C... and 5.00€ (0.00005%) held by general partner A.... This was held by D... (D...) which, on 31.10.2007, sold all of A... and L... to investment fund I..., whose managing entity was G.... (Document 4,5)

12. On 31.10.2007, by group decision, A... acquired 70% of the capital of L... from D... (former C...). Thus, after the division and transfer of the quota of partner C... (later D...), the holding of 3,000,000.00€ (30%) passed to limited partner K... (limited liability), with head office in Luxembourg, and 7,000,000.00€ (70%) came to be in the holding of general partner A... (unlimited liability), based in ..., held by E..., which, together with K..., was held by J.... (Document 4,5,9)

13. On 31.10.2007, A... obtained a loan from E... (parent company), holding 100% of A..., in the amount of approximately 96.8 million euros, with a fixed annual interest rate of 7.25%, calculated daily on a 360 days/year basis, for a period of 10 years and maturity on 31.10.2017, with E... and A... agreeing in 2013 to a reduction of the interest rate to 0.5% per annum, with effect from 01.01.2013 until the agreement reaches maturity. Interest is due quarterly; (Document 4,5)

14. On 31.10.2007, A... obtained a loan from M... Unipessoal (held 100% by K...) in the amount of 42.6 million euros, for a period of 10 years. Until the end of the 1st semester of 2009, a variable interest rate was stipulated based on the 6-month Euribor rate plus a spread of 0.15%. From the 2nd semester of 2009 onwards, the interest rate became fixed, with the parties agreeing that the interest rate would be determined based on the 8-year swap rate, as of 01.07.2009 published by Bloomberg, which was 3.40%, plus a spread of 1.6%, that is, a rate of 5% per annum. As in the previous case, interest was calculated daily on a 360 days/year basis and payment was due monthly (Document 4,5)

15. On the date of 25.10.2007, A... obtained, from O... AG, an international bank operating in the commercial real estate and public finance sectors, a loan in the amount of 35.8 million euros for a period of 10 years, with maturity in October 2017, with agreement being reached on the payment of an interest rate corresponding to the Euro swap rate at seven years plus a spread of 50 basis points (0.5%). In 2013, the loan accrued interest at the rate of 5.078%. Interest is calculated daily on a 360 days/year basis, with payment due quarterly (Document 4,5)

16. In a logic of cross-collateral, a real property already held by a group company, L..., was presented as collateral – more specifically the extension of the assignment of receivables with security scope arising from utilization agreements relating to Properties B..., constituted by letter of 29.06.2001 and extended on 19.10.2007.

17. Of the three entities granting the loan, M... and E... depend 100% on fund I... and managing company G... (G...) and bank O... also belongs to the group of P..., as does Q...; (Document 4, 5)

18. L... had obtained a loan in the amount of 135,175,000.00 € for the construction/acquisition of the real property of B.... (Document 4, 5)

19. A... is directly responsible for the daily management of B..., developing the promotion and marketing of stores and the strategic promotion of the commercial centre, being responsible for the acquisition and conclusion of "store utilization agreements" with customers, generally brands that own chains of stores nationally and internationally, but also individual users. A... invoices and receives rents from customers – including a fixed amount, a variable amount and a contribution to operating expenses and costs – and then pays L... the rents for the use of the real property of B...; (Document 4,5)

20. From 2007 onwards, A... bears high financial charges, recorded in its financial statements under interest expense, resulting from financing obtained for the purchase of approximately 70% of the equity interest in L..., with the result that its tax results changed from quite significant taxable profit in 2007, the year in which financial charges referred to only approximately 2 months, to a situation of tax loss, due to the financial weight of interest, a situation attenuated in 2013, with the reduction that occurred in the interest rate relating to the loan obtained from E...; (Document 4.5)

21. On 31.12.2013, A... held a 70% interest in L..., acquired on 31.10.2007, this being a company of mere property administration covered by the transparent entity regime, under article 6.º of CIRC, and imputing to its partners the taxable income it determines annually, that is, 70% of its taxable income is imputed to A... and 30% to K.... (Document 4,5)

22. During fiscal year 2013, the monthly rent for the 35 autonomous fractions leased in B... was 830,000.00€, while for R... the rent was 40,000.00€. In that year, the expense account "626111 – Rents B..." recorded the amount of 9,960,000.00€ in rents for B..., and in account "626112 – Rents..." the amount of 480,000.00€, relating to rents for R.... In that year, the value of rents paid by A... to L... for the lease of B... thus totaled the amount of 10,440,000.00€. (Document 4,5)

23. In fiscal year 2013, the interest supported by A... with the financing loans for acquisition of the equity interest in the capital of L... stood at the value of 4,496,936.21€, with the Management Report noting that these expenses, essentially relating to interest on bank loans with group companies, and impairment losses in the amount of 8,298,133.41€, relating to the interest in L..., contributed significantly to the total expenses in the year and consequently to the loss of A... incurred in the year, with the result that it absorbed the taxable income imputed to it by L... under the transparent entity regime. (Document 4,5)

24. Having conducted a prior analysis of the elements available in the AT computer system and having detected risk situations, an external partial scope inspection was opened for fiscal year 2013, service order OI2017..., targeting A.... Corrections were then proposed in the amount of €4,639,205.24, corresponding to financial charges with loans obtained for acquisition of the financial interest. (Document 4,5)

25. Since, as a result of the corrections made to the "financial charges" item, it came to have zero value, there is no place for the application of article 67.º of CIRC, and therefore the annulment of the amount added in field 748 of Q07 of form 22 of IRC 2013 was proposed, in the amount of €1,476,780.60. (Documents 4,5)

26. Following the corrections made to previous years, the taxpayer was left with no value to report losses to the following years. Accordingly, the amount of €5,187,876.09, relating to the deduction of tax losses, was disregarded in the determination of the taxable income for the year under analysis. Having not exercised its right to a hearing, A... was determined to proceed with the processing of the correction document (DC) in a manner appropriate for the assessment and collection of the tax quantified therein (Documents 4,5)

1. No facts are identified as unproven with relevance for the outcome of the concrete case.

3.3. On the Law

1. Under article 23.º, no.1, paragraph c) of CIRC, in the version in force at the time of the facts, expenses are considered those that are comprovedly indispensable for the realization of income subject to tax or for the maintenance of the income-producing source, namely of a financial nature, such as interest on foreign capital applied in the exploitation. This is particularly demanding wording, in that the deductibility of expenses presupposes the comprovedly indispensable nature of the same, being clearly distinct from the simple requirement of normality and necessity of expenses for the company's operation. In fact, the mentioned wording is different from that contained in the current version of article no. 23, no. 1 of CIRC, which states that for the determination of taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or guarantee income subject to IRC are deductible.

2. Despite the reference to comprovedly indispensable expenses contained in the version of article 23º, no. 1 of CIRC relevant in this case, the same has been understood by national jurisprudence, including CAAD jurisprudence, as referring to objective standards of business appropriateness and normality, emphasizing that the tax administration should not substitute itself for company management in making business decisions. Administrators have reasonable latitude in company management, and it may happen that they incur expenses that prove manifestly inadequate and useless for the realization of income subject to tax or for the maintenance of the income-producing source. Conversely, the mere possibility that certain expenses might eventually generate income in the future and prove appropriate for achieving business objectives does not by itself determine that the same can fit within the concept of tax expenses.

3. In any case, the reference to the indispensability of expenses points objectively to a closer relationship between the financial charges borne by the taxpayer and the realization of income or gains subject to tax. This means, evidently, and even within the framework of the current wording of article 23.º, no. º1 of CIRC, that the tax administration does not have to accept as deductible all and any charges borne by companies.

4. So it is, first and foremost, because, under article 103º, no. 1 of the Constitution, "[t]he tax system aims at meeting the financial needs of the State and other public entities and a fair distribution of income and wealth." In turn, article 104º, no. 2 of CRP provides that "[t]axation of companies fundamentally concerns its real income", a statement that, among other things, refers to the determination of taxable profit and income based on substantive criteria of economic reality, not contaminated by genuine assemblies or non-genuine legal-formal or accounting artifices. From this it follows that, although the objective of business accounting is to provide useful information to management, shareholders, creditors and other interested parties, the principal objective of the tax system consists in the equitable collection of resources for the realization of the political and social functions of the State, with the AT having the important function of protecting the public treasury and, concomitantly, preventing erosion of the tax base.

5. Furthermore, for a long time, the international institutions concerned with international taxation, such as the G20, the OECD or the European Union, have been alerting to the need for legal-tax operators to be attentive to certain operations especially apt to effect the transfer of profits and erosion of the tax base of States, creating serious distortions of an economic and social nature at national and international level or in the internal market of the European Union, with the detriment of some States and their respective taxpayers, applying anti-abuse rules (e.g. general anti-abuse clauses; interest deduction limits) or interpreting existing specific rules in conformity with anti-tax evasion objectives, that is, attaching more importance to the economic substance of transactions than to the legal form that serves as their cover. These considerations lead to the analysis of the transaction in question in light of international, European and constitutional objectives of protecting the tax base of States.

6. The three loans in question were obtained by a group entity (i.e. A...) from entities of the same group to acquire 70% of the share capital of another group company (i.e. L...) from company D... (former C...), also part of the group. These are, comprovedly, intragroup loans, namely, between related entities and to finance transactions between related companies, as the companies included in the transaction are held indirectly 100% by the same entity, with financing decisions being made within a group strategy. This form of financing integrates the taxonomy of typical aggressive tax planning strategies.

7. Although the investment funds are autonomous, it is verified that the investment decisions relating to them were made, in the present case, by managing companies belonging to the same group, headed by G..., a common management company, configuring an "umbrella structure" designed to manage different sets of assets and liabilities, in the interest of its co-owners, in dependence of Q....

8. At least four of the group companies directly or indirectly involved in the transaction are located in Luxembourg, a State of lower taxation, and the debtor in a State of higher taxation. This interposition of Luxembourg between Germany and Portugal by itself sets off anti-evasion alarms, as is overwhelmingly referenced in specialized doctrine. Recall that at the date to which the facts of the inspection procedure refer (2013), the capital of company A... was held 100% by company E....

9. It must be considered, furthermore, that the corporate purpose of A... consisted of "the purchase and sale of the real property of the commercial centre designated as B..., as well as the lease, operation and management of B..., as well as any other acts or transactions directly related to the aforementioned activity". Now, it will be difficult to discern any link of the acquisition of 70% of the capital of L... with its corporate purpose of A.... In fact, this does not have as statutory activity the purchase and sale of equity interests.

10. It is important to note, equally, that the fundamental economic and business reality of operation of the commercial centre is not substantially altered by the transactions in question. The management of B... continues to be carried out in the same way. A... continued to pay L... a rent for the operation B..., consisting of the exclusive activity of L... the cession of this space, which constitutes its only asset. In other words, L... continued to have as its sole activity the lease, to the acquiring company, of a real property of which it is the owner, with A... coming to pay rent for a real property of which (although indirectly) it is 70% owner. That is, the lease situation was not altered by virtue of the acquisition, nor would it be foreseeable that this would happen, given that operations between both companies were already linked and decided within the Group. No economic effects were therefore produced by these transactions.

11. It is not understood, therefore, the necessity and economic rationality of the transaction in question – beyond the tax gains it manifestly carries – from the perspective of the statutory activity of A... and its own and exclusive business interest. The operations of obtaining financing within the group did not produce any significant effect on the economic position of the intervening companies. In reality, no factually detectable operation with objective economic reality is discerned, but rather above all an assembly with a principal purpose of a fiscal nature.

12. The interpretation of tax rules and their application to the transactions in question cannot fail to consider the total lack of economic effects. So it is, in that, in accordance with the doctrine of the economic substance of transactions, courts should respect the tax treatment of a transaction claimed by a company a) if the same possesses a non-fiscal business purpose for conducting the transaction and b) if the transaction has significantly improved the economic position of the company.

13. These considerations take on special relevance, visibility and verification when one takes into account, in the analysis of the transactions in question, the interest rates practiced. These appear very high in relation to the default risk, which, given the special relationships between the companies in question, would be zero or very close to zero. As can be seen from the evidence, in the credit obtained from E..., holding 100% of A..., in the amount of approximately 96.8 million euros, a fixed annual interest rate of 7.25% had been established for a period of 10 years and maturity on 31.10.2017, with E... and A... agreeing in 2013 to a reduction of the interest rate to 0.5% per annum, with effect from 01.01.2013 until the agreement reaches maturity.

14. In the credit obtained from M... Unipessoal (held 100% by K...), in the amount of 42.6 million euros, for a period of 10 years, it was verified, as is accounted for in the evidence, that from the 2nd semester of 2009 onwards the rate would hover around 5% per annum. As in the previous case, interest was calculated daily on a 360 days/year basis and payment was due monthly. Regarding the loan of 35.8 million euros obtained from O... AG, for a period of 10 years, agreement was reached on an interest rate corresponding to the Euro swap rate at seven years plus a spread of 50 basis points. In 2013, the loan accrued interest at the rate of 5.078%. Interest is calculated daily on a 360 days/year basis, with payment due quarterly.

15. In fiscal year 2013, the interest supported by A... with the financing loans for acquisition of the equity interest in the capital of L... stood at the value of 4,496,936.21€, with the Management Report noting that these expenses, essentially relating to interest on bank loans with group companies, and impairment losses in the amount of 8,298,133.41€, relating to the equity interest in L..., contributed significantly to the total expenses in the year and consequently to the loss of A... incurred in the year, with the result that it absorbed the taxable income imputed to it by L... under the transparent entity regime.

16. It is observed, therefore, that by bearing high charges with the loans obtained, A... moved to a delicate economic situation, as evidenced by accumulated losses, negative equity, and lack of liquidity, such lack of liquidity being expressed in the inability to pay all interest due in the year under analysis.

17. This is a manifest situation of excessive interest, with strong impact on taxable profit, which the tax authority would hardly be able to provide legal cover for. It is important to note, to this end, that one cannot even speak of an alignment between the amount of financing granted and the guarantees provided, as an attempt at economic justification of the transaction, in that only with respect to the third loan was a real property already held by a group company, L..., presented as collateral, as is concretized in the evidence – more specifically the extension of the assignment of receivables with security scope arising from Utilization Contracts relating to Properties B..., constituted by letter of 29.06.2001 and extended on 19.10.2007 – differently from what happened in the case of loans in the amounts of €96,844,069.52, obtained from sole partner E..., and €42,663,800.00 obtained from M..., in which no special collateral was provided. That is, the tax advantage obtained with the inflation of interest due as a result of the credit operations conducted would always be manifestly disproportionate in relation to the relationship between financing and collateral.

18. There is a duplication of charges and deductions within the group favored by the transparent entity status of L..., taking into account that this had obtained a loan in the amount of 135,175,000.00 € for the construction/acquisition of the real property of B.... From this results a manifest inflation of interest due and potentially deductible, with the consequent reduction of taxable profit. All the more so given that it is certain that L... is fiscally transparent and that 70% of the respective taxable income is imputed to A..., all for the benefit of the other group companies, particularly of companies domiciled in Luxembourg, which obtain by way of the perception of interest what, having regard to the status socii, would be supposed to be obtained by way of dividends resulting from the objective profit achieved.

19. The analysis of the relevant facts allows one to conclude that neither the taxpayer nor the financial position of the group creditors underwent any significant economic alteration, nor did any other economic consequence result or was it reasonable to expect would result, other than the additional increase in interest to be paid on intragroup loans, certainly with a view to increasing deductions. Even if there is a commercial purpose in the transaction – which is not certain given the permanence of the underlying economic reality – the objective of reducing tax exposure, with the consequent reduction of the tax base, appears manifestly preponderant (principal purpose test).

20. It must be understood, in light of the foregoing, that the criterion of indispensability of expenses under article 23º of IRC is not considered to be met, in light of objective criteria of business normality and economic rationality and of corporate purpose. We are clearly facing a form of interest stripping, incidentally one of the typical forms of profit transfer and erosion of the tax base. The excessive interest generated and paid within the framework of the financing operations analyzed should be considered as disqualified interest. All the more so given that rules on deductible costs must be interpreted and applied in conformity with the anti-evasion objectives that govern the entire national, European and international legal order, and must be used to prevent erosion of the tax base.

21. A mounting of credit operations within a group to finance an acquisition of equity interests already belonging to the group can hardly be seen as an economic activity as such deserving of consideration by tax law. Legal-tax concepts must always be understood by reference to real economic effects, unless the law refers exclusively to legal form. In the interpretation and application of tax law, the principle of primacy of substance over form must be applied.

22. The AT has the important function of public interest of protecting the tax base of the State and preventing profit transfer. Such function cannot be understood as obligating an absolutely static and rigid posture – like the sedimentation of some "technocratic consensus" (Cass R. Sunstein). Rather, the AT must seek to achieve, in the interpretation and application of tax rules, a reasonable, fair and duly substantiated balance between the principle of legal certainty and protection of trust, on the one hand, and, on the other, the constitutional and European requirements of administrative-tax responsiveness in light of the updating and deepening of understanding and knowledge about tax problems, on a global scale, by force of the most recent theoretical, valuational and principial developments that, particularly in the last decade, have been occurring in the problem of tax evasion.

IV. DECISION

In light of the foregoing, the present Arbitral Court:

1. Agrees that the financing obtained by the Applicant (A...) for the purpose of acquiring the equity interest of €6,995,000 in the capital of L... (L...), as a result of a strategic decision of the Group, were not obtained in its specific business interest, there being no verification of a causal relationship, of economic substance, with the pursuit of its business activity, with the requirement of indispensability of expenses referred to in article 23.º of CIRC not being met for the deductibility of financial charges.

2. Agrees that the financial charges borne by the Applicant (A...) in the year 2013 in the amount of 4,639,205.24 €, with the loans contracted from Group entities for acquisition of an equity interest in the capital of L..., do not show themselves to be, under the terms of article 23.° of the IRC Code, comprovedly indispensable expenses for the realization of revenues or gains subject to tax or for the maintenance of the income-producing source of the Applicant, the correction to the taxable income of IRC 2013 resulting from the disqualification of the interest borne for purposes of determination of taxable profit being well-founded.

3. Judges the request for arbitral ruling to be without merit, the assessment with no. 2017..., the assessment of compensatory interest no. 2017... and the respective account reconciliation statement no. 2017..., being maintained, pursuant to which tax payable was determined in the amount of €2,001,603.86 (two million, one thousand, six hundred and three euros and eighty-six cents), for not suffering from the defects of violation of law attributed to them in the case file.

4. Judges the request for reimbursement of the amount paid and compensatory interest to be without merit.

5. Condemns the Applicant to the procedural costs.

V. VALUE OF PROCEEDING

Under the terms of article 97.º-A, no. 1, paragraph a) of CPPT, applicable under article 29.º, no. 1, paragraph a) of RJAT and article