Process: 19/2014-T

Date: June 19, 2014

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 19/2014-T) addresses whether Corporate Income Tax (IRC) can be levied on an immobilization commission arising from a promise contract for share purchase between group companies that was never completed. Company B, SGPS, S.A. entered into a promise contract on 9-12-2002 to purchase shares from C SGPS, paying €277,230,000 upfront. The contract stipulated that if the final purchase agreement was not executed by the deadline (extended to 31-12-2004), C SGPS would refund the amount plus an immobilization commission calculated at Euribor plus 0.75% spread. The promise contract was terminated on 31-10-2009 due to objective impossibility. The Tax Authority assessed IRC on the immobilization commission for the 2009 tax period, resulting in a payment of €987,710.65. The claimant challenged this assessment through CAAD arbitration, arguing that the commission right never matured because the contract was extinguished before the 31-12-2009 deadline when the commission would become due. The claimant's key argument follows an Aristotelian syllogism: the immobilization commission was only payable if the contract remained unexecuted upon reaching 31-12-2009; since the contract terminated on 31-10-2009, the condition for commission payment never materialized. Therefore, IRC cannot be assessed on income that never accrued. The claimant also expanded the claim to seek compensation for undue guarantee provided under Article 53 of the General Tax Law (LGT) after initiating arbitration. The arbitral tribunal, constituted under Decree-Law 10/2011 (RJAT), comprised three arbitrators appointed by CAAD's Deontological Council, with the Tax Authority filing a response arguing for inadmissibility of the arbitration request.

Full Decision

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. Paulo Lourenço and Dr. José Vieira dos Reis, appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 07-03-2014, agree as follows:

  1. Report

The company A, SGPS, S.A., NIPC ..., in its capacity as the incorporating company of B, SGPS, S.A., NIPC ..., filed a request for constitution of a collective arbitral tribunal, in accordance with the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as RJAT), in which the TAX AUTHORITY AND CUSTOMS AUTHORITY is the Respondent.

The Claimant seeks the annulment of the Corporate Income Tax (IRC) assessment no. 2013 ..., of 28-08-2013, relating to the taxation period of 2009 and the respective account reconciliation statement, which determined an amount payable of € 987,710.65.

The request for constitution of the arbitral tribunal was filed on 07-01-2014, was accepted by the President of CAAD and was notified to the Tax Authority and Customs Authority on 08-01-2014.

In accordance with the provisions of paragraph (a) of section 2 of article 6 and paragraph (b) of section 1 of article 11 of the RJAT, the Deontological Council appointed as arbitrators of the collective arbitral tribunal Counselor Jorge Lopes de Sousa, Dr. Paulo Lourenço and Dr. José Vieira dos Reis, who communicated their acceptance of the appointment within the applicable deadline.

On 20-02-2014 the parties were notified of this appointment, having expressed no intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, section 1, paragraphs (a) and (b), of the RJAT and articles 6 and 7 of the Code of Ethics.

Thus, in compliance with the provision of paragraph (c) of section 1 of article 11 of the RJAT, the collective tribunal was constituted on 07-03-2014.

The Tax Authority and Customs Authority filed a response, arguing for the inadmissibility of the arbitration request.

At the meeting provided for in article 18 of the RJAT, the Claimant waived the examination of the witness indicated and it was agreed that the proceedings would continue with successive written submissions.

The Parties filed submissions.

In the submissions, the Claimant expanded the request, filing a claim for compensation for undue guarantee provided after the presentation of the arbitration request and presented the following conclusions:

A. Having the Claimant, at a date after the presentation of the arbitration request, provided a guarantee to suspend the execution underlying the assessment at issue, the expansion of the subject matter of this action is requested, also petitioning for compensation for undue guarantee, in accordance with article 53 of the LGT.

B. The Response of the Tax Authority served to clarify the arguments of the tax administration… and also served to make the illegality of the assessment more evident.

C. In fact, the argument of the Tax Authority is flawed in that it violates an Aristotelian syllogism, which can be described as follows:

1st B only has the right to receive the refund of the price it paid if, and only if, upon reaching 31-12-2009, the final contract has not yet been executed;

2nd The immobilization commission is only due if B has the right to receive the refund of the price it paid;

3rd Therefore, the immobilization commission is only due if, and only if, upon reaching 31-12-2009, the final contract has not yet been executed.

D. Since the Promise Contract was extinguished by objective impossibility on 31-10-2009, it is indisputable that the right to the immobilization commission did not mature.

E. Thus, IRC cannot be assessed on a right that never matured, and the assessment at issue must be annulled.

The Tax Authority and Customs Authority concluded its submissions arguing that the arbitration request should be judged inadmissible as not proven and that it be absolved of all claims.

The Arbitral Tribunal was regularly constituted and is competent.

The parties have legal personality and capacity and are legitimate (articles 4 and 10, section 2, of the same statute and article 1 of Ordinance no. 112-A/2011, of 22 March).

The Tax Authority and Customs Authority raised a preliminary objection regarding the lack of power of attorney of the Claimant's Attorney, but it was subsequently filed with ratification of the proceedings.

The proceedings do not suffer from defects.

  1. Statement of Facts

2.1. Established Facts

The following facts are considered established:

a) The company B, SGPS, S.A. ("B") was incorporated on 29.07.1988 (its corporate name was changed in 1992), having as its sole business purpose the management of equity interests in other companies as an indirect form of conducting economic activities, being registered with CAE 064202;

b) Between 01-01-2009 and 31-10-2009 the entirety of B's share capital was held by the company C ("C SGPS") (Inspection Report attached to the arbitration request as document no. 1, whose contents are considered reproduced);

c) On 9-12-2002, a promise contract for the purchase and sale of shares (hereinafter "Promise Contract") was executed between companies C SGPS and B, pursuant to which B promised to purchase 10,000,000 shares representing the share capital of company A, SGPS, S.A ("A") and respective supplementary amounts, held by C SGPS, which promised to sell the said shares and respective supplementary amounts, such contract constituting annex 6 to the Inspection Report, whose contents are considered reproduced, in which is stated, among other things, the following:

  1. Subject Matter

By this contract, B promises to purchase from C, and C promises to sell or designate a third party to sell, by 31 December 2003, the Shares and the Supplementary Amounts, free from any liens or charges.

  1. Price

2.1. The purchase and sale of the Shares shall be carried out at the global price of € 277,230,000 (two hundred and seventy-seven million two hundred and thirty thousand euros), corresponding to the unit value of € 27,723 (twenty-seven euros and twenty-three cents) per share, which amount is hereby delivered by B to C, and in relation to which C hereby gives full receipt.

2.2 The Supplementary Amounts shall be paid on the date of execution of the final contract.

2.3. In the event that the final contract is not executed by the end of the period referred to in the preceding clause, C is hereby obligated to proceed with the refund to B of the entire amount delivered in accordance with section 1 above within five business days following the end of the aforementioned period, the present promise contract becoming void.

2.4. As an immobilization commission, to the amount referred to in the preceding number shall be added the sum resulting from the application of the annual rate equivalent to Euribor at one year, in effect on the first business day following the end of the period provided for in clause 1 above, increased by a spread of 0.75% (zero point seventy-five percent), during the period from the date of this contract to the date of payment of the amount referred to in the preceding number.

d) On 9-12-2003, the Promise Contract was subject to a first amendment, which extended the deadline for execution of the final contract to 31-12-2004, as stated in pages 1 and 2 of document no. 2 attached with the arbitration request, whose contents are considered reproduced, which contains, among other things, the following:

  1. Subject Matter

By this contract, B promises to purchase from C, and C promises to sell, or designate a third party to sell, by 31 December 2004, the Shares and the Supplementary Amounts, free from any liens or charges.

  1. Immobilization Commission

2.1. By virtue of this extension, and in compliance with the provision of clause 2.4 of the contract, C shall deliver to B the global sum of € 8,739,444.73 (eight million seven hundred and thirty-nine thousand four hundred and forty-four euros and seventy-three cents) as an immobilization commission, which shall be paid as follows:

a) € 4,600,000 (four million six hundred thousand euros) on the present date;

b) € 4,139,444.73 (four million one hundred and thirty-nine thousand four hundred and forty-four euros and seventy-three cents), within 10 business days from the present date.

2.2. By this, B declares to have received the sum referred to in paragraph (a) of the preceding number, and in relation to which hereby gives full receipt.

In all other respects, the remaining clauses of the Contract remain unchanged.

e) On 15-12-2004, the parties to the said Promise Contract agreed to modify it, giving it the wording set forth in annex 7 to the Inspection Report, whose contents are considered reproduced, which contains, among other things, the following:

  1. Subject Matter

1.1. By this, the Parties agree to reduce the number of shares subject to the purchase and sale, so that in the preamble (a) of the Contract, where it reads "10,000,000 (ten million) shares" it should read "8,500,000 (eight million five hundred thousand) shares".

1.2. As a consequence of the provision in the preceding number, all references made in the Contract and in the Amendment to the "Shares" shall refer to the number of securities indicated in the preceding number.

  1. Deadline

By this, the Parties agree to extend the deadline for the execution of the purchase and sale of the Shares, so that in the first clause of the Contract, in the wording given to it by the Amendment, where it reads "by 31 December 2004" it should read "by 31 December 2005".

  1. Immobilization Commission

3.1. By virtue of the extension referred to in the preceding number, and in compliance with the provision of clause 2.4 of the Contract, C hereby delivers to B the global sum of € 8,631,371.23 (eight million six hundred and thirty-one thousand three hundred and seventy-one euros and twenty-three cents) as an immobilization commission.

3.2. By this, B declares to have received the amount referred to in the preceding number, and in relation to which hereby gives full receipt.

3.3. By virtue of the reduction in the number of shares subject to the Contract, C refunds to B the sum of € 41,584,500 (forty-one million five hundred and eighty-four thousand five hundred euros), corresponding to the price of the shares that are no longer subject to the promise of purchase and sale and which had already been delivered by B to C.

In all other respects, the remaining clauses of the Contract remain unchanged.

f) On 28-12-2005, the parties to the said Promise Contract agreed to modify it, extending, among other things, the deadline for execution of the purchase and sale contract to 31-12-2006, and giving it the wording set forth in pages 6 and 7 of document no. 2, attached with the arbitration request, whose contents are considered reproduced;

g) On 28-12-2006, the parties to the said Promise Contract agreed to modify it, extending, among other things, the deadline for execution of the purchase and sale contract to 31-12-2007, giving it the wording set forth in pages 8 and 9 of document no. 2, attached with the arbitration request, whose contents are considered reproduced;

h) On 28-12-2007, the parties to the said Promise Contract agreed to modify it, extending, among other things, the deadline for execution of the purchase and sale contract to 31-12-2008 and giving it the wording set forth in pages 10 and 11 of document no. 2, attached with the arbitration request, whose contents are considered reproduced;

i) On 29-12-2008, the parties to the said Promise Contract agreed to modify it, extending, among other things, the deadline for execution of the purchase and sale contract to 31-12-2009 and giving it the wording set forth in pages 10 and 11 of document no. 2, attached with the arbitration request, whose contents are considered reproduced, which contains, among other things, the following:

  1. Subject Matter

By this contract and in accordance with the terms and conditions expressed therein, B promises to purchase from C, and C promises to sell, or designate a third party to sell, by 31 December 2009, the Shares and the Supplementary Amounts, free from any liens or charges.

  1. Immobilization Commission

2.1. By virtue of this extension and in compliance with the provision of clause 2.4 of the Contract, C hereby delivers to B the global sum of € 9,343,344.08 (nine million three hundred and forty-three thousand three hundred and forty-four euros and eight cents) as an immobilization commission.

2.2. By this, B declares to have received the amount referred to in the preceding number and in relation to which hereby gives full receipt.

In all other respects, the remaining clauses of the Contract remain unchanged.

j) In all years, following the fact that the final contract was not executed on the scheduled date, with the respective postponement occurring, B received the "immobilization commission" established in clause 2.4 of the Promise Contract, having subjected this amount to IRC, as stated in pages 10 and 11 of the Inspection Report.

k) The Claimant understood that B's right to the "immobilization commission" only arose, in each year, on the last day of the deadline established for execution of the promised contract and, for this reason, B only recorded the profit from the "immobilization commission" in its accounts at the end of each year (articles 26 and 27 of the arbitration request and document no. 3 attached thereto, whose contents are considered reproduced);

l) In B's accounts, there was always, naturally, the credit against C SGPS, in the amount of € 235,645,500.00, corresponding to the latter's obligation to sell the shares subject to the Promise Contract or, alternatively, to refund the price paid by B, in this same amount (annex 4 of the Inspection Report, whose contents are considered reproduced);

m) On 31-10-2009, B and D, SGPS, LDA were incorporated by merger into company A (pages 5 and 6 of the Inspection Report);

n) Following service order OI ..., of 31.05.2011, the Claimant was subject to a partial tax inspection action, in the area of IRC and IS relating to the taxation period of 2009, intended to analyze the structure of costs and revenues revealed in the 2009 profit and loss statement;

o) The Claimant was notified of the draft inspection report, having exercised, on 12.07.2013, the right to be heard (annex 11 of the Inspection Report attached to the arbitration request as document no. 1, whose contents are considered reproduced);

p) By Official Letter no. ..., of 09.08.2013, the Claimant was notified of the Final Tax Inspection Report (document no. 1 attached with the arbitration request, whose contents are considered reproduced), which states, among other things, the following:

III. 2.1 As regards IRC

III.2.1.1 Revenue declared in the 2009 fiscal year

(...)

III. 2.1.3. Value of omitted revenue

It has been stated and is now reaffirmed that the taxpayer, except in the year 2009, always reported financial revenues in the various profit and loss statements presented. The circumstances, the reasons that led to the consideration of financial revenues in the various years remained the same until 31 October of the year 2009, and therefore in this year too it should have recognized values in revenues - Financial Gains. In previous years the taxpayer always considered financial gains as relating to a commission due for the immobilization of value evidenced in the account other debtors - C SGPS, SA, arising from a payment established in a promise contract for the purchase and sale of shares in company "A, SGPS. SA.

For the record of this information, concrete identification of this fact in the year 2008, reference is made to page 7 of the Financial Statements - Year 2008, already constituted as annex 3 of this information, which reports the following: "The amount relating to the year 2008, of 9,343.344,08€ relates to an immobilization commission of the amount of 235,645.500€... ". Reference is also made to annex no. 4, already constituted as an annex in this information, to evidence the value accounted for in the year 2007, as Financial Gains. Indeed, as regards the case in question, the attached document states: " The amount relating to the year 2007 of 13,227,983.53 € relates basically to a commission of 13,226,520.09€ received for the immobilization of the amount of 235,645.500€... "..

The said Promise Contract for the Purchase and Sale of Shares executed between C, NIPC ...and B (SGPS), SA, NIPC ..., was executed on 9 December 2002.

Under the terms of this contract C, NIPC ...promised to sell to B (SGPS). SA, NIPC ... a batch of 10,000,000 (ten million) shares representing the share capital of A, SGPS, SA, at the price of € 277,230,000.00, which amount had already been delivered by B to C.

The contract established 31 December 2003 as the deadline for the purchase and sale, and stated in its point 2.4 the following:" As an immobilization commission, to the amount referred to in the preceding number shall be added the sum resulting from the application of the annual rate equivalent to Euribor at one year, in effect on the first business day following the end of the period provided for in clause 1 above, increased by a spread of 0.75% (zero point seventy-five percent), during the period from the date of this contract to the date of payment of the amount referred to in the preceding number".

This contract was subject to an amendment and modification on 15 December 2004, in which the reduction of the shares subject to purchase and sale was agreed and consequently the value previously established was reduced. As a result of this amendment, the number of shares of 10,000,000 was reduced to 8,500,000, B having received for the reduction the value of € 41,584,500.00, as stated in sections 1.1 and 3.3 of the Contract Modification and Amendment, annex 7.

As a result of this modification, C - Company for the Management of Equity Interests, SA, NIPC ...became the debtor of B in the amount of € 235,645,500.00 = (277,230,000.00 (amount delivered under the contract) - 41,584,500.00 (amount received under the Modification and Amendment contract), which amount was maintained in subsequent years.

The Modification and Amendment Contract kept the remaining clauses unchanged, which means it kept the clause that states: "As an immobilization commission, to the amount referred to in the preceding number shall be added the sum resulting from the application of the annual rate equivalent to Euribor at one year, in effect on the first business day following the end of the period provided for in clause 1 above, increased by a spread of 0.75% (zero point seventy-five percent), during the period from the date of this contract to the date of payment of the amount referred to in the preceding number".

If one considers the content of this clause, the percentage resulting from it is exactly equal as determined by the taxpayer, 3.775%, used for purposes of determining the interest rates it bore, however it is always stated that the rate 3.775% results from the first Euribor rate as of 2 January 2009, 3.025%, increased by a spread of 0.75%, (see annex 5, 1 page).

Attached to this information are copies of the Promise Contract for the Purchase and Sale of Shares, annex 6 (3 pages) and copy of the Modification and Amendment, annex 7, 3 (pages).

It has also been stated that B was incorporated into A, SGPS, SA, that is, the promise contract did not produce the effect for which it was executed. In fact, its principal and sole shareholder C - Company for the Management of Equity Interests, SA. NIPC ..., did not proceed as had been established - It did not sell the shares of A, SGPS, SA, at the agreed value.

Since the promise contract for Purchase and Sale of Shares was not fulfilled, amounts were owed in the year 2009 as immobilization commission, as provided for in section 2.4, already transcribed in this information.

In all months of the year 2009 (1 January to 31 October), the value accounted for in the account other debtors remained unchanged - it always had the value of € 235,645,500.00, as stated in account 268410023 - Other debtors C SGPS, SA, see analytical balance sheet, annex 8 of 2 pages.

The value as immobilization commission totals € 7,511,854.88, and results from the following calculations:

The value of € 7,511,854.88 is considered income in accordance with paragraph (c) of section 1 of article 20 of the Corporate Income Tax Code and consequently must form part of the determination of taxable profit in accordance with article 17 of the Corporate Income Tax Code.

From the correction now proposed results an alteration to the fiscal result declared by the taxpayer in the income statement Form 22 of fiscal loss of € 4,218,699.03, to taxable profit in the amount of € 3,293,155.85, as calculated below:

q) On 04.09.2013, the Tax Administration issued the notification of the IRC assessment no. 2013 ..., relating to the taxation period of 2009, and the respective account reconciliation statement, in which an amount payable of € 987,710.65 is determined with a payment deadline of 09-10-2013 (document no. 4 attached with the arbitration request, whose contents are considered reproduced);

r) On 07-01-2014, the Claimant filed the request for constitution of the arbitral tribunal that gave rise to the present proceedings.

2.2. Unestablished Facts

It was not established that the Claimant had provided a guarantee to suspend a tax execution intended to collect the amount assessed.

2.3. Rationale for the Statement of Facts

The established facts are based on the documents indicated for each of the points, whose correspondence to reality is not disputed.

As for the unestablished fact, the evidentiary assessment is based on the fact that no evidence was presented and nor was the tax execution alleged even identified.

  1. Legal Analysis

3.1. Subject Matter of the Dispute

On 9-12-2002, a promise contract for the purchase and sale of shares (hereinafter "Promise Contract") was executed between companies C SGPS and B, pursuant to which B promised to purchase 10,000,000 shares representing the share capital of company A, SGPS, S.A ("A") and respective supplementary amounts, held by C SGPS.

At the time of execution of the promise contract, the sum of € 277,230,000 was delivered to the promissory seller by the promissory buyer.

In the promise contract, it was agreed that, if the final contract were not executed by the end of the agreed deadline, which was 31-12-2003, C would be obligated to proceed with the refund to B of the entire amount delivered, within five business days following the end of the aforementioned period, the promise contract becoming void.

It was further agreed in clause 2.4 of the promise contract that, "as an immobilization commission", to the amount to be refunded would be added the sum resulting from the application of the annual rate equivalent to Euribor at one year, in effect on the first business day following the end of the period set for execution of the final contract, increased by a spread of 0.75%, during the period from the date of the promise contract to the date of refund of the amount to be refunded.

Before the agreed date for execution of the final contract, a new agreement was executed, extending the deadline for execution of the final contract to 31-12-2004. In this new agreement, it was agreed that "by virtue of the extension" and "in compliance with the provision of clause 2.4 of the contract", the promissory seller would pay an amount as "immobilization commission", with the remaining clauses of the promise contract remaining unchanged.

On 15-12-2004, a new agreement was executed, reducing the number of shares to be acquired and extending the deadline for execution of the final contract to 31-12-2005. It was further agreed that the promissory seller would refund the amount corresponding to the reduction in the number of shares and that "by virtue of the extension" and "in compliance with the provision of clause 2.4 of the contract", the promissory seller would pay an amount as "immobilization commission", with the remaining clauses of the promise contract remaining unchanged.

Subsequently, before the end of each year, until 2008, a new agreement was executed, delaying by one year the agreed date for execution of the final contract, with 31-12-2009 being the last agreed date.

The final contract was never executed because, on 31-10-2009, the promissory buyer was incorporated, by merger, into the Claimant, which could not acquire its own shares, in light of article 317 of the Commercial Companies Code.

In all years, following the fact that the final contract was not executed on the scheduled date, with the respective postponement occurring, B received the "immobilization commission" established in clause 2.4 of the Promise Contract, having subjected this amount to IRC.

The Claimant understood that B's right to the "immobilization commission" only arose, in each year, on the last day of the deadline established for execution of the promised contract and, for this reason, B only recorded the profit from the "immobilization commission" in its accounts at the end of each year.

For this reason, the Claimant did not record any revenue for the year 2009, in which, before the end of the year, the promise contract was extinguished by supervening impossibility.

The Tax Authority and Customs Authority understood that "since the promise contract for Purchase and Sale of Shares was not fulfilled, amounts were owed in the year 2009 as immobilization commission, as provided for in section 2.4." (page 12 of the Inspection Report) and calculated the value of the commission for the year 2009 as follows:

The value as immobilization commission totals € 7,511,854.88, and results from the following calculations:

The value of € 7,511,854.88 is considered income in accordance with paragraph (c) of section 1 of article 20 of the Corporate Income Tax Code and consequently must form part of the determination of taxable profit in accordance with article 17 of the Corporate Income Tax Code".

Thus, the divergence between the position of the Claimant and the understanding of the Tax Authority and Customs Authority stems from the interpretation of the contract, specifically regarding whether, based on it, any amount should be attributed to the Claimant as "Immobilization Commission" for the year 2009.

3.2. Interpretation of the Contract Regarding the "Immobilization Commission"

3.2.1. Initial Version of the Promise Contract

Through analysis of the initial promise contract, it is evident that there would be no payment of any amount as "Immobilization Commission" if the final contract were executed by the initially scheduled date, which was 31-12-2003.

In fact, clause 2.4 states that "as an immobilization commission, to the amount referred to in the preceding number shall be added the sum resulting from the application of the annual rate equivalent to Euribor at one year...", which shows that it is an addition to the amount provided for in clause 2.3.

This clause 2.3 established that "in the event that the final contract is not executed by the end of the period referred to in the preceding clause, C is hereby obligated to proceed with the refund to B of the entire amount delivered in accordance with section 1 above within five business days following the end of the aforementioned period, the present promise contract becoming void".

As clearly results from the text of this clause, the duty to refund the amount referred to herein was conditional on the final contract not being executed by the end of the period provided for in the preceding clause, which ended on 31-12-2003, in accordance with clause 1.

Thus, it is to be concluded that, in light of the initial wording, no payment was foreseen as "immobilization commission" before the moment of potential verification of the condition, that is, the right to this would only arise in the legal sphere of the Claimant on 31-12-2003, if the condition was met.

3.2.2. Modifications to the Promise Contract Agreed on 09-12-2003

In the first amendment to the promise contract, executed on 09-12-2003, its terms were modified, in particular regarding the obligation to pay "immobilization commission".

In fact, although the condition had not yet been met, as the deadline only ended on 31-12-2003, the parties agreed to an extension until 31-12-2004 and, by virtue of this extension and "in compliance with the provision of clause 2.4 of the contract", they agreed to the immediate payment of the sum of € 4,600,000 and, within 10 business days, of the sum of € 4,139,444.73.

Obviously, the payment of these sums "in compliance with the provision of clause 2.4" (that is, as "immobilization commission") is not based on the initial promise contract, as the condition provided for therein was not met, nor could it be known at that moment, on 09-12-2003, what the Euribor rate at one year would be, effective on the first business day following 31-12-2003.

Thus, this payment of sums as "immobilization commission" has as its legal basis only the new contract executed on that date of 09-12-2003, and has as its justification the extension of the deadline, as results from the very terms of clause 2.1, which states "By virtue of this extension, and in compliance with the provision of clause 2.4 of the contract, C shall deliver to B the global sum of € 8,739,444.73...".

It remains to interpret the final phrase of this new contract stating that "in all other respects the remaining clauses of the Contract remain unchanged".

Having been executed this new contract on 09-12-2003 and being compensated, by the payment of the sums agreed therein, for the harm that resulted to B from the deprivation of the sum paid at the initial moment of execution of the promise contract, the remaining clauses remain unchanged, but reported to the moment of execution of this new contract.

In fact, the agreement to pay the sums being effected "by virtue of this extension, and in compliance with the provision of clause 2.4 of the contract", it is to be concluded with certainty that, for the past, nothing more was to be paid in compliance with this clause. And therefore, the "immobilization commission" that might have to be paid in the future would have as its initial moment the date of this new agreement regarding its payment.

Thus, following the modifications made in this new contract of 09-12-2003, clauses 2.3 and 2.4 of the initial version remained unchanged, except for the date set for the end of the deadline for execution of the contract, which became 31-12-2004, and the date of the contract itself, which constitutes the initial moment of the "immobilization commission", which became the date of 09-12-2003 and not the date of the initial promise contract.

But, with the initial clauses remaining unchanged in the remainder, the payment of immobilization commission for this extension period remained, as initially, conditional upon the final contract not being executed by that date of 31-12-2004.

That is, similarly to what occurred under the initial contract, also following this modification of the contract, the right to "immobilization commission" would only exist if the condition to which it was subordinated was met, which was that on 31-12-2004 the condition was verified, which was non-execution of the final contract. And, also based on this agreement, the sum relating to the immobilization commission would increase the sum to be refunded, as the promise contract would become void, in accordance with the final part of clause 2.3.

3.2.3. Modifications to the Promise Contract Made on 15-12-2004, 28-12-2005, 28-12-2006 and 28-12-2007

The later modifications to the contract, made on 15-12-2004, 28-12-2005, 28-12-2006 and 28-12-2007, are substantially identical to that made on 09-12-2003, regarding the point of interest here, relating to the "immobilization commission" [1].

In fact, on each of these dates, a new agreement was executed, pursuant to which the sum to be paid was fixed by virtue of the extension and "in compliance with the provision of clause 2.4 of the Contract", and it is to be understood that the initial moment of the period for which "immobilization commission" would be owed became the date of each of the new agreements.

Also for the reasons referred to regarding the first extension, in all these cases it is to be understood that the right to receive the sum relating to "immobilization commission" was conditional upon the final contract not being executed by the date set for such in each of these new agreements.

3.2.4. Modification to the Promise Contract Made on 29-12-2008

The modification made on 29-12-2008, which is treated separately because it is the one that directly bears on the resolution of the question of whether in 2009 "immobilization commission" was due, was, in this respect, substantially identical to the earlier modifications.

With this final modification, the deadline for execution of the final contract became 31-12-2009 and the payment of the immobilization commission became conditional upon the final contract not being executed by that date, only being due as an addition to the amount to be refunded relating to the payment of the shares initially made [2].

3.2.5. Conclusion

As results from the interpretation made of the promise contract and its modifications, there was only occasion for payment of the sum provided as "immobilization commission" (together with the refund of the sum paid relating to the shares) if by the deadline set for execution of the final contract this was not executed.

Therefore, in the year 2009, if the final contract were to be executed by 31-12-2009, no sum was to be paid as "immobilization commission" (and no sum was to be refunded).

With the incorporation of B into the Claimant, their reciprocal obligations were extinguished, by merger of assets, (article 868 of the Civil Code), including those dependent on a suspensive condition. [3]

And therefore, the condition to which was subordinated the existence of a credit of B against the Claimant as "immobilization commission" not being met, the revenue that could have been obtained if the condition had been met never came to exist in its legal sphere.

In fact, neither in the initial contract nor in the versions resulting from the later agreements that modified it, including the one in force in 2009, is there any basis for affirming the existence of a right of B to payment of any sum as "immobilization commission" before the agreed dates for execution of the final contract or that a right to any sum proportional to the days that elapsed from the date of each of the agreements executed was accruing.

And, as is concluded from the various agreements regarding modification of the initial contract, there was occasion for various payments of sums as immobilization commission only because these agreements were executed, which specifically provided for payments in determined amounts, outside what was agreed in the initial contract.

But, regarding the last version, resulting from what was agreed on 29-12-2008, there was, for the future, no agreement regarding payment of immobilization commission in conditions different from those provided for in the contract, and therefore it was only to be paid after 31-12-2009, if the condition to which its payment was subordinated was met.

Thus, if it is true that, as emphasized by the Tax Authority and Customs Authority, the "immobilization commission" was to be paid from the date of the contract (or its modifications) and the date of refund of the sum paid for payment of the shares, it is equally true that this refund and the respective immobilization commission, absent a new agreement in a different sense (as occurred in previous years), would only take place if the condition of non-execution of the final contract by 31-12-2009 was met.

Therefore, the condition not having been met and the obligations arising from the promise contract having been extinguished, by merger of assets, B obtained no revenue in the year 2009 as "immobilization commission" nor did the right to obtain it become consolidated in its legal sphere.

Thus, the tax-relevant fact that was the basis for the correction to the taxable income of the Claimant did not exist, and the assessment action based thereon is vitiated by a defect of violation of the error in the factual basis, which justifies its annulment, in accordance with article 135 of the Administrative Procedure Code, applicable by virtue of the provision in article 2, paragraph (c), of the LGT [4]

This alone is sufficient to conclude that the assessment must be annulled, and therefore it becomes unnecessary and futile to address the other defects imputed by the Claimant to the assessment action, the declaration of whose illegality is requested.

  1. Compensation for Undue Guarantee

In its submissions the Claimant states that "on 22-01-2014, that is, after presentation of the arbitration request, the Claimant was served with the enforcement proceedings instituted for the debt underlying the assessment at issue" and that "to suspend this enforcement, the Claimant provided a guarantee, in accordance with section 5 of article 13 of the LAT, combined with section 1 of article 169 and section 4 of article 199 of the CPPT".

Based on this fact, the Claimant expanded the request, petitioning for compensation for undue guarantee, in accordance with article 53 of the LGT.

However, the Claimant did not present any document proving that it provided the guarantee it refers to, nor does it even identify the tax enforcement to which it alludes, nor does it indicate what it spent on the alleged provision.

Therefore, since the presuppositions on which this request is based are not proven, it must be dismissed.

  1. Decision

For these reasons, the Arbitral Tribunal agrees on:

a) Finding the arbitration request well-founded;

b) Annulling the IRC assessment no. 2013 ..., of 28-08-2013, relating to the taxation period of 2009 and the respective account reconciliation statement, which determined an amount payable of € 987,710.65.

  1. Value of the Case

In accordance with the provisions of article 315, section 2, of the CPC and article 97-A, section 1, paragraph (a), of the CPPT and article 3, section 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at € 987,710.65.

  1. Costs

In accordance with article 22, section 4, of the RJAT, the amount of costs is set at € 13,770.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax Authority and Customs Authority.

Lisbon, 19 June 2014

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Paulo Lourenço)

(José Vieira dos Reis)

[1] In the agreement executed on 15-12-2004, the number of shares subject to the promise contract was also reduced and the corresponding sum paid by the promissory buyer was refunded, but this modification is not relevant to the assessment of the question that is the subject of the present proceedings.

[2] Deducted from the amount paid on 15-12-2004, following the agreement regarding the reduction in the quantity of shares subject to the promise contract.

[3] The merger of companies is itself one of the examples of extinction of obligations by merger of assets, indicated by ANTUNES VARELA, Of Obligations in General, volume II, 7th edition, page 258.

[4] It should be noted that there is a manifest lapse by the Tax Authority in calculating the proportional value of the "immobilization commission" on the basis of 360 days per year, which, as is obvious, does not correspond to reality and whose use has no legal or contractual basis in this context of determination of the taxable base and not in the determination of interest on a bank loan.

Frequently Asked Questions

Automatically Created

What is the IRC tax treatment of an immobilization commission when a definitive share purchase agreement is not concluded between group companies?
The IRC tax treatment of an immobilization commission when a definitive share purchase agreement is not concluded between group companies depends on whether the right to receive the commission has matured under the contractual terms. In this case, the commission was contractually structured to become payable only if the promise contract remained unexecuted by the specified deadline (31-12-2009). The claimant argued that since the promise contract was extinguished due to objective impossibility on 31-10-2009, before the maturity date, the right to the immobilization commission never accrued. Under IRC principles, income should only be taxed when the right to receive it matures. Therefore, if the contractual conditions for the commission payment were never fulfilled due to early termination of the contract, the commission should not constitute taxable income for IRC purposes, and any assessment levied on such non-materialized income would be subject to annulment.
Can a SGPS holding company challenge an IRC tax assessment through CAAD arbitration proceedings?
Yes, a SGPS (Sociedade Gestora de Participações Sociais) holding company can challenge an IRC tax assessment through CAAD (Centro de Arbitragem Administrativa) arbitration proceedings under the Legal Framework for Arbitration in Tax Matters (RJAT - Decree-Law 10/2011). In this case, Company A, SGPS, S.A., acting as the incorporating company of B, SGPS, S.A., filed a request for constitution of a collective arbitral tribunal pursuant to articles 2 and 10 of the RJAT. The tribunal confirmed that it was regularly constituted and competent to hear the matter, and that the parties had legal personality, capacity, and legitimacy under article 4 and article 10, section 2 of the RJAT, as well as article 1 of Ordinance 112-A/2011. SGPS companies, as taxpayers subject to IRC, have full access to the CAAD arbitration system for challenging tax assessments, including those related to their investment management activities and group transactions.
What are the legal grounds for annulling IRC tax assessment no. 2013 related to the 2009 tax period?
The legal grounds for annulling IRC tax assessment no. 2013 related to the 2009 tax period center on the argument that the Tax Authority improperly assessed tax on income that never legally accrued. The claimant's primary argument is based on contractual interpretation and the accrual principle of taxation: (1) The immobilization commission was contractually conditional upon the promise contract remaining unexecuted until 31-12-2009; (2) The promise contract was extinguished by objective impossibility on 31-10-2009, before the condition could be fulfilled; (3) Therefore, the right to receive the commission never matured; (4) IRC cannot be assessed on income rights that have not accrued. The claimant presents this as an Aristotelian syllogism showing that the Tax Authority's assessment violates fundamental tax law principles by taxing non-existent income. Additionally, the illegality of the assessment is argued to have been made more evident by the Tax Authority's own response arguments, which allegedly contain logical flaws. The assessment is thus claimed to be contrary to the legal requirements for IRC taxation and subject to annulment.
Is a taxpayer entitled to compensation for an undue guarantee under Article 53 of the LGT in CAAD arbitration?
Yes, a taxpayer is entitled to compensation for an undue guarantee under Article 53 of the General Tax Law (LGT) in CAAD arbitration proceedings. In this case, after filing the initial arbitration request, the claimant provided a guarantee to suspend the execution proceedings related to the contested assessment. Subsequently, in its written submissions during the arbitration, the claimant expanded the request to include a claim for compensation for this undue guarantee pursuant to Article 53 LGT. This provision allows taxpayers to claim indemnification for guarantees provided to suspend tax execution when the underlying tax assessment is later determined to be illegal or undue. The CAAD arbitration framework permits such claims, and the tribunal's competence extends to ruling on compensation for undue guarantees when the guarantee was provided in connection with a tax assessment that is successfully challenged. The claimant's expansion of the arbitration request to include this compensation claim demonstrates that CAAD arbitration can address both the legality of the tax assessment itself and the consequential damages from guarantee requirements.
How does CAAD arbitration handle the expansion of claims for undue guarantee indemnification after the initial petition?
CAAD arbitration handles the expansion of claims for undue guarantee indemnification after the initial petition through the procedural framework established in the RJAT and standard arbitration procedures. In this case, the claimant initially filed the arbitration request seeking annulment of the IRC assessment. After the Tax Authority filed its response and during the written submissions phase following the meeting under Article 18 of the RJAT, the claimant formally expanded the subject matter of the action to include a claim for compensation for undue guarantee under Article 53 LGT. This expansion was permitted because: (1) the guarantee was provided after the arbitration request was filed, creating a new basis for relief; (2) the claim for undue guarantee is directly connected to and dependent upon the success of the primary claim for annulment of the assessment; (3) the procedural stage (written submissions) allowed for such expansion without prejudicing the Tax Authority's right to respond; and (4) judicial economy favors resolving all related claims in a single proceeding. The tribunal accepted this expansion as a proper amendment to the initial petition, allowing both the assessment's legality and compensation for the guarantee to be adjudicated together.