CAAD Arbitration on IRC and RFAI Investment Tax Credit: Group Taxation Dispute 191/2016-T

ARBITRAL DECISION

1. Report

A…, S.A. (hereinafter referred to as "A…" or Applicant), legal entity no…, with registered office at …, P.O. Box …, in …, came, under article 2º no 1, paragraph a) and articles 10º and following of the Legal Framework for Tax Arbitration, provided for in Decree-Law no 10/2011, of 20 January, as amended by article 228º of Law no 66-B/2012, of 31 December (hereinafter abbreviated "RJAT") and articles 1º and 2º of Order no 112-A/2011, of 22 March, to submit a request for arbitral pronouncement on the legality of the assessment act for Corporate Income Tax (IRC) no 2015…, relating to the financial year 2012.

The Tax and Customs Authority is the Respondent.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority (AT) on 11-04-2016.

The Applicant did not appoint an arbitrator, therefore, under the terms provided for in paragraph a) of no 2 of article 6º and paragraph b) of no 1 of article 11º of the RJAT, the President of the Deontological Council of CAAD designated the undersigned arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 25-05-2016, the parties were duly notified of this appointment and did not manifest any intention to refuse the designation of the arbitrators, in accordance with the combined terms of article 11º, no 1, paragraphs a) and b), of the RJAT and articles 6º and 7º of the Deontological Code.

Thus, in accordance with the provision of paragraph c) of no 1 of article 11º of the RJAT, the Arbitral Tribunal was constituted on 14-06-2016.

Duly notified, the Tax and Customs Authority submitted a response in which it defended the lack of merit of the request, defending itself solely by means of a counter-argument.

On 14-10-2016, the meeting referred to in article 18º of the RJAT took place, at which time witness testimony was heard.

The date of 13 December was set for the delivery of the final decision.

The parties submitted written submissions, commenting on the evidence produced, reiterating and developing their respective legal positions.

The Applicant requests that partial illegality of the IRC assessment no 2015 … relating to the financial year 2012 be declared and the corresponding compensatory interest in the amount of € 5,943,157.66 be annulled in that part and restitution of this amount already paid by the Applicant, increased by indemnificatory interest at the legal rate, alleging, in summary:

a) The Applicant, in its capacity as the parent company of Tax Group B…, a group subject to the special taxation regime for groups of companies, was the recipient of the additional IRC assessment relating to 2012.

b) The additional assessment resulted from 3 corrections to the calculation of the tax which, when added together, amount to € 6,522,927.95 and which are divided as follows:

• € 5,620,824.79, relating to the tax credit for investment resulting from the Fiscal Support Regime for Investment (RFAI) of prior financial years (2009, 2010 and 2011);

• € 16,714.16, relating to the tax credit for investment resulting from RFAI in the financial year 2012;

• € 885,389.00, relating to the application of article 92º of the Corporate Income Tax Code (CIRC).

c) In the present request for pronouncement, only the first two corrections which total € 5,637,538.95 are at issue (the amount of € 885,389.00 is excluded), as well as the respective compensatory interest in the amount of € 305,618.71, everything totaling € 5,943,157.66.

d) In relation to RFAI of prior financial years (2009, 2010 and 2011), the CAAD has already issued in proceeding 400/2015-T, on 10 December 2015, an arbitral decision that recognized and legitimized these tax credits.

e) The arbitral tribunal stated then that, in relation to those financial years of the Applicant, not only does this RFAI tax benefit exist but was also properly carried forward to 2012 in the part that could not have been deducted from the collection previously.

f) For which reason the correction determined and consequent additional assessment in the financial year 2012 relating to the carry-forward and deduction of RFAI from 2009, 2010 and 2011 is null by violation of res judicata under article 161º, no 2, paragraph i) of the Code of Administrative Procedure (CPA), applicable pursuant to article 2º, paragraph d) of the Code of Tax Procedure and Process (CPPT).

g) In any case, from the text of no 2 of article 2º of RFAI the requirement used by AT - the exercise, as the principal activity, of activity in the energy sector - cannot be derived to deny the classification of the investment made by the Applicant under RFAI.

h) RFAI applies to an IRC taxpayer that exercises, as a principal activity, one of the activities listed in article 2º, no 1, paragraph a) (subjective requirement) and that makes investments in the assets also listed in RFAI (objective requirement or actual scope of the incentive), being able to benefit from the tax incentive for investment in IRC (provided that additionally some "administrative" conditions provided for in no 3 of article 2º are met), these and his investments.

i) Among the activities listed in that provision, there is activity in the manufacturing industry sector.

j) Now manufacturing industry is section C of the CAE [Classification of Economic Activities], where it includes, among others, Division 17, precisely the code of A….

k) Using the exact words of the legal text, the Applicant is precisely an "IRC taxpayer that exercises, as a principal activity, an activity (…) in the sectors (…) of manufacturing (…) industry (cfr. article 2º, no 1, paragraph a) of RFAI).

l) The criterion delimiting the scope of personal application of RFAI is directed at the entity (it is required that it exercise as principal activity in one of the named sectors) and not at activity A or B, among those pursued by the company, in other words, it is not the activity in itself that is or ceases to be eligible for purposes of RFAI, but rather the taxpayer when in him certain characteristics are met: to dedicate oneself as a principal activity to one of the activities listed in RFAI.

m) In any case, in the exercise of the activity of pulp and paper production, which is that of A… and its respective group, the integration of energy production activities is an economic and environmental inevitability.

n) It being artificial to attempt to separate investments, as AT did in the unit that manufactures pulp or paper from the unit that provides on-site energy, namely thermal, or that simply extends the use of the raw material by valorizing energetically the enormous waste generated in the extraction of cellulose for the production of pulp and, ultimately, paper production.

o) Thus, investments in energy equipment carried out by Portucel, in 2009, 2010, 2011 and 2012, are inseparable from the activity of pulp and paper production.

p) In summary, not only is the only elective requirement provided for in no 1 of article 2º of RFAI (the rule applied by AT to make the correction here being discussed) met (the Applicant dedicates itself as principal activity to the manufacturing industry sector), but also, additionally, the destination of the investment here in question was an activity that, even if pursued in an unintegrated manner from a manufacturing industry – which was not the case -, would be from a sector (the energy sector) listed in the RFAI in effect in the financial years of the realization of the investment here in question (between 2009 and 2012).

q) Equally in this respect, CAAD has already held in the proceeding referred to above, in a decision adjudged entirely favorable to the Applicant regarding RFAI for 2009, 2010 and 2011 that "lacks legal support and suffers from the defect of violation of law the conclusion, in which the Tax and Customs Authority based the impugned assessment, that the investment is not eligible because it was made in an activity different from the principal activity of the Applicant (decision of 10 December 2015 rendered in proceeding no 400/2015).

r) From 2012 onwards, so that there is no doubt whatsoever, the Applicant began to expressly include in its corporate purpose that this "consists of the production and marketing of cellulose pulps and paper and their derivatives and related products and in the production and marketing of electrical energy and thermal energy.

s) And, for that reason, not even does that purely formalistic argument invoked by AT persist, that energy production is not the principal activity of the Applicant, in relation to the financial year 2012.

t) The assessment act in question must, therefore, be declared partially illegal and partially annulled, since it suffers from the defect of violation of law and, consequently, by violating the principle of legality.

For its part, the Respondent came in response to allege, in summary:

a) Now, in 2009, 2010, 2011 and 2012, the Applicant made investments in energy production units situated in its industrial complexes.

b) By application of RFAI it calculated a tax credit in IRC, based on the investment in energy production equipment.

c) AT disregarded the right to the tax credit, by understanding that it would be necessary for A… to formally exercise activity in the energy sector, verifying that it did not exercise as a principal activity the activity benefited by the investments.

d) Even verifying in the concrete situation that the exercise of such activity is not even carried out by A… since this, although having maintained ownership of the investments, had contracted the cession of their operation to a 100% subsidiary.

e) In fact, on 1 January 2009, A… and C…, S.A. (C…) celebrated a contract for temporary cession of operation of the installations intended for the production of electrical and thermal energy, intended to "enable C…, in accordance with its corporate purpose, the production and marketing of electrical and thermal energy";

f) On 08.09.2011, A… requested binding information concerning the creation and maintenance of jobs associated with investments it considered relevant for purposes of RFAI and the possibility of transfer of responsibility for holding investments and maintenance of jobs in case operational contributions of assets were effected under the regime of tax neutrality.

g) The Tax Information Services (SIT) corrected the tax benefit deducted pursuant to paragraph b) of no 2 of article 90º of the CIRC, in the Group Model 22 Income Statement, with the grounds stated in point III – 2. of the Tax Inspection Report (RIT) relating to company A… (attached as doc. no 4 of the PI), namely:

• With respect to the correction to the RFAI tax benefit for 2012, of € 16,714.16, it is stated that "A… requested from the IRC Directorate of Services (DSIRC) a request for binding information no … regarding any contingencies in the application of RFAI to investments related to the biomass plant related to energy production in the context of a situation of economic group restructuring and the separation of this activity to another company. (…). From the conclusions reached in that Binding Information, the following stands out:

" a) Given that the first condition for an IRC taxpayer to be able to benefit from the incentive in question is, first and foremost, the exercise, as principal activity, of an activity that is integrated in one of the sectors listed in paragraphs a) and b) of no 1 of article 2º of the decree that created RFAI 2009, it is necessary to conclude that the Applicant, not exercising any activity that is integrated in the energy sector, cannot benefit from the incentive regarding the investment in the thermal power plant powered by biomass."

h) Being mentioned in the RIT (cfr. point IX.2.2, page 12/15): "A… contests the correction proposed in point III-2.1.2 of this inspection report and in point III.2.2 of the inspection report to company A… SA (…) arguing that:

a) "AT grounds the correction in the position taken by DSIRC in the response to the request for binding information …" considering that A… "… because it does not exercise as principal activity an activity in the energy sector, cannot benefit from RFAI, regarding the investment in the thermal power plant powered by biomass".

i) It appears from the response to the request for binding information, namely the following:

"The applicant develops the following activities (…) Principal activity: Pulp production (…) Secondary activity: Production of paper and cardboard (except corrugated) (…) Now, if the first condition for an IRC taxpayer to be able to benefit from the incentive in question is, first and foremost, the exercise, as principal activity, of an activity that is integrated in one of the sectors listed in paragraphs a) and b) of no 1 of article 2º of the decree that created RFAI 2009, it is necessary to conclude that the applicant, not exercising any activity that is integrated in the energy sector, cannot benefit from the incentive regarding the investment in the thermal power plant powered by biomass. Moreover, according to the additional information attached to the request for binding information, "the placing of electrical energy on the National Electrical Network is limited to companies specifically licensed for this purpose, such as the electrical energy generating units held by A…, S.A. are being operated by the company in the group C…, S.A. (the …), company to which the license for operating generating units was granted. Therefore, if the operator of the energy generating units is C…, we cannot even say that the applicant develops an activity within the energy sector (in this case, the production and distribution of energy). Therefore, only the investment that the taxpayer made within the scope of the activity that it exercises as principal activity, that is, in its pulp production business segment can benefit from RFAI ... (…) Manufacturing Industries). (…) »

j) We see, therefore, that the Applicant here, in the exercise of the right to a hearing in the tax inspection procedure, recognized that the correction is based on the response to the request for binding information.

k) Simply, negligently or deliberately, it makes a very truncated reading of this response.

l) The Applicant does not refer in the initial petition to the cession of operation to a third party of the investment assets to whose activity they were devoted.

m) The reason why the investment in question should be disregarded is not so much that A… exercises the activity as principal or secondary, but rather such disregard derives from the finding that A… is not even exercising the activity of energy production and distribution.

n) Further noting the services that such activity was not included in its respective corporate purpose and was even prohibited by law to the Applicant here;

o) Therefore, it was verified that the investment assets in question were not devoted to the operation of the company, and therefore not eligible for purposes of RFAI.

p) The Applicant alleges that it will have made investments in the course of the years 2009 to 2012 relevant for purposes of the attribution of the benefit provided under the activity of electrical and thermal energy production (steam), instrumental in relation to the activity of pulp and paper production.

q) However, it should also be noted that, as stated in point IX.2.2 3) of the RIT - "at the time of the conduct of inspections for the periods 2009, 2010 and 2011, the indications transmitted by group B…, as indicated in paragraph 14 of the Right to Hearing, was that the investment was made for electrical energy production;"

r) Therefore, it must be taken as proven the fact that the investment assets in question were not devoted to the operation of the company Applicant but of company C…, S.A.

s) Even if the raw materials – wood waste and black liquor – were supplied to C…, S.A. by the Applicant as well as ceded the workers and equipment used, under the contract for temporary cession of operation, such circumstance – if proven - is not in itself sufficient to consider that the operation of the energy producing units is carried out directly by the Applicant.

t) Even if the capital of C…, S.A. is held in its entirety by the Applicant and even if both are integrated in the perimeter of the group for purposes of the application of the Special Taxation Regime for Groups of Companies (RETGS), such circumstance is equally irrelevant, as it does not imply that they cease to be treated, for tax purposes, as autonomous IRC taxpayers.

u) That said, it is legitimate to conclude that, although the Applicant had made and financed the investments and was the owner of the equipment of the energy producing units, in fact, for purposes of RFAI, such investments are not qualifiable as "relevant investments" (no 2 of article 2º) because the requirement of their devotion to the operation of the company is not met, which is to say, that eligible investments were not made in an activity exercised by the taxpayer investor.

v) Now, the law expressly establishes that investment assets must be devoted to the activity of the company, it being presumed that they are devoted to the activity of the company that comes to invoke the right to the benefit.

w) With respect to the fact that the Applicant considers investments in energy equipment carried out by A…, in 2009, 2010, 2011 and 2012, inseparable from the activity of pulp and paper production, it will always be said that, from the physical, technical and economic point of view, investments devoted to energy production certainly present autonomy in relation to the units of pulp and paper production, since the Applicant even considered the possibility, in the request for binding information that it submitted to DSIRC, in 2011, of proceeding to separate these productive units to C…, which shows that the separation that AT made is not artificial.

x) The interpretation of RFAI made by AT flows linearly from the letter and spirit of the law.

y) Therefore, the arbitral request should be dismissed, for lack of merit.

The Arbitral Tribunal is materially competent and was regularly constituted.

The Parties have legal personality and legal capacity, are legitimate and are legally represented (articles 4º and 10º, no 2, of the same statute and article 1º of Order no 112-A / 2011, of 22 March).

The proceeding does not suffer from nullities.

The Applicant invokes the exception of res judicata, alleging, in brief, that the question it raises, with reference to the impugned act, is decided, with final authority, by the arbitral tribunal award rendered in proceeding no 400/2015, of 10 December 2015.

The Applicant invokes res judicata with some hesitation (it writes: "strictly speaking"), and it is understandable that it does so.

For it is perplexing that it should request the constitution of the arbitral tribunal so that it… not pronounce on the question posed, because it is prevented by force of res judicata, which precludes a second pronouncement!

Thus, the legitimacy of the Applicant or, at least, its interest in acting, would be debatable.

But the truth is that the question must be raised on another level.

As to legitimacy, it results from the Applicant, an IRC taxpayer, being the subject of an assessment act. The interest in acting arises, first of all, from this act reflecting on its patrimonial sphere (the Administration, with the act consolidated, would not fail to legitimately execute it), it being its interest that it does not become res judicata.

In any case, the exception of res judicata is of official knowledge, so it is important to decide it – article 577º, paragraph i) and 578º of the Code of Civil Procedure (CPC), applicable pursuant to article 2º, paragraph e) of the CPPT.

Res judicata presupposes, pursuant to article 580º, no 1 of the CPC, the repetition of a cause after the first cause has been decided by a judgment that no longer admits ordinary appeal, the intention being thereby to prevent it from being rendered by the courts, in the future, a new decision on the legal situation already defined, binding them to accept and apply the definition that has become final when the same question is submitted to them, thereby providing for the principle of certainty and security of law, as well as the prestige of the administration of justice.

As Professor Alberto dos Reis writes, on page 86 of Volume III of the Annotated Code of Civil Procedure, "The exception of res judicata consists in the allegation that the action proposed is already decided by a judgment with final authority. In other words, it consists in the allegation that the cause is the repetition of another prior, already resolved by a judgment that has become final".

Now, the object of the judgment invoked by the Applicant was a distinct tax act from that whose appreciation it now submits to the tribunal.

From this it can be concluded from the outset that the cause is not the repetition of another already decided.

All that happens is that the procedural subjects are the same in this and in proceeding no 400/2015-T of CAAD.

But, however similar the claim and the cause of action may be, there is no identity between them.

Let us see what the award of the STA [Supreme Administrative Court] of 7.12.2011, rendered in proceeding no 0419/11, tells us: "res judicata [material] essentially aims at the immutability of the final decision and the irrepeatability of the judgment contained in the judgment. As Manuel de Andrade taught, res judicata prevents "that in a new proceeding the judge can validly rule differently on the right, situation or concrete legal position defined by a prior decision, and therefore, fail to recognize in whole or in part the goods recognized and protected by it" (cfr. Elementary Notions of Civil Procedure, page 317).

Therefore, faced with the filing of a new action on the same question, the judge must refuse to render a new autonomous decision, under penalty of inefficacy of the new decision. (…) It is "within the precise limits and terms in which judgment is rendered" that the scope of res judicata is determined, subjective and objective limits which, by remission from no 1 of article 671º, are defined in articles 497º and 498º of the CPC. The objective limits of res judicata are defined by reference to the object of the proceeding. As prescribed in these articles, it is necessary that there exist the "repetition of a cause" after the "first cause has been decided by a judgment that no longer admits ordinary appeal", in which "the court is placed in the alternative of contradicting or reproducing a prior decision", which happens "when an action identical to another is proposed as to the subjects, the claim and the cause of action". Therefore, the object of the proceeding and the objective scope of res judicata are identified through the claim and the cause of action. But the principal role is played by the claimant's claim, which is identified as the legal effect sought (no 2 of article 498º of the CPC), that is, the remedy requested of the court (immediate claim) and the material legal position to be protected by that means (mediate claim). The cause of action merely serves to individualize the subjective position that the claimant intends to effectuate with the remedy requested. As Antunes Varela states "the order by which, understandably, the law enumerates the three identities characteristic of res judicata (the identity of the claim, before the identity of the cause of action) shows that it is on the claimant's claim, in the light of the fact invoked as its foundation, that res judicata is formed" (cfr. Manual of Civil Procedure, page 712)".

In the proceeding of annulment of tax acts or any other administrative acts, the object of the proceeding is defined by reference to an invalid act: the immediate claim will correspond to the elimination of the act in question from the legal order; the cause of action will correspond to the specific causes of invalidity of the concrete act invoked.

Thus, the object of the tribunal's pronouncement is the impugned act, whose legality is assessed and which is declared null, or is annulled, or is maintained in the legal order. The tribunal's pronouncement powers do not go beyond that, even though jurisprudence has come to understand that they extend to the condemnation of the Administration to restore the situation that would have existed if the illegality had not been committed, which is a mere corollary of the declaration of nullity or annulment, corresponding to an obligation already provided for in law and thus imposing itself, on the Administration without need of such express condemnation.

It is true that the conception according to which administrative contentious proceedings are exhausted in a proceeding against an act is today abandoned, replaced by a more subjectivist conception.

But this subjectivization is not absolute, we have not passed from an objective to a subjective contentious, rather means were created so that individuals can obtain, not only the declaration of illegality of administrative acts, but also the definition of the content of the legal relationship of which they are passive subjects.

That is, in the concrete case of the impugning of an assessment act, it is the essential element of the proceeding: it is against it that the challenger reacts and it is on it, and only on it, that the effects of the judgment are projected.

In other words, the protection afforded by this procedural means consists, only, in the elimination of the act offensive to the subjective right. And the act, in annualized taxes, as is the case, has its effects limited to a concrete financial year, not extending to the following ones.

The courts do not protect, by this means, directly and globally, the substantive legal position, the underlying material legal relationship. They do so only to the extent that the impugned act wrongly defined or disrespected it, thereby injuring the legally protected rights and interests of the challenger.

For this reason the ordinary law – article 100º of the General Tax Law (LGT) and 24º no 4 of the RJAT - merely limits itself to, when courts annul an assessment act, preventing the Administration from repeating it with the same content, under penalty of violation of res judicata, but does not prevent it from, apart from that, freely redefining the content of the same material legal relationship, based on other facts or on another legal framework.

The subjective protection is left to other procedural means, among which stands out the action for recognition of a right, a complementary means which the Government did not entrust to the arbitral courts, although it had sufficient credentials to do so – cfr. paragraph a) of no 4 of article 124º of law no 3-B/2010, of 28 April.

For the foregoing, there is, on the question to be decided, no res judicata that prevents the pronouncement requested by the Applicant.

Thus, there is no obstacle to the examination of the merits of the cause.

II. DECISION

1. Findings of Fact

1.1. Facts Established as Proven

The following facts are considered proven:

a) The Applicant A…, S.A. is the parent company of group B…, subject to the RETGS (doc. 17 joined to the administrative proceeding).

b) The Applicant was the recipient, in that capacity, of the additional IRC assessment no 2015…, relating to 2012, dated 17.12.2015, whose partial illegality it invokes (doc. 1 joined to the arbitral request).

c) The said additional assessment resulted from an internal tax inspection procedure relating to the period 2012, whose Tax Inspection Report is joined to these proceedings and is given as fully reproduced (doc. 4 joined to the arbitral request).

d) In the use of the main raw material used in the manufacture of pulp and paper, namely wood, waste is generated with energy value for the production of the necessary energy (biomass). (testimony of witness D… and doc. 5 joined to the arbitral request).

e) The processes of pulp and paper production and thermal and subsequently electrical energy are inseparable for technical, economic and environmental reasons (testimony of witness D…).

f) The production of energy using waste resulting from the Applicant's activity of pulp and paper production was, until 2012, carried out by the company in the group C…, SA, with which the Applicant celebrated a contract for temporary cession of operation.

g) This contract for temporary cession of operation existing between the Applicant and C… was never referred to by AT during the tax inspection procedure (testimony of witness E…), nor does the Tax Inspection Report make any direct reference to it (doc. 4 joined by the Applicant with the arbitral request).

h) The Applicant, from 2012 onwards, began to produce energy using said waste.

i) In 2012, the Applicant amended its articles of association (annex 6 of 17.04.2012 of the commercial certificate joined to the file) with respect to the corporate purpose, the same now being defined in the following terms:

"1 - The corporate purpose consists of the production and marketing of cellulose pulps and paper and their derivatives and related products and the production and marketing of electrical energy and thermal energy; 2 - The company may, ancillarly, operate services and carry out civil and commercial operations, industrial and financial operations related, directly or indirectly, in whole or in part, to its corporate purpose or that may be likely to facilitate or favor its realization; 3 - In the pursuit of its corporate purpose, the company may, by deliberation of the board of administration, participate in the capital of other companies, whether constituted or to be constituted, whatever their corporate purpose, and even if governed by special laws, as well as associate itself, in any other form, with any individual or collective entities, namely to form complementary business associations, consortiums and joint ventures or other form of exercise of economic activity."

j) The Applicant made on 15.02.2016 the payment of the amount of the additional assessment in dispute, as per doc. 3 joined to the file.

k) The request for constitution of an Arbitral Tribunal was filed on 28-03-2016.

1.2. Facts Established as Not Proven

Of those alleged, relevant for the decision, none was left unproven.

1.3. Grounds for the Findings of Fact

With respect to the findings of fact the Tribunal does not have to pronounce on everything that was alleged by the parties, rather it has the duty to select the facts that matter for the decision and discriminate the proven matter from the not proven matter (cfr. article 123º, no 2, of the CPPT and article 607º, no 3 of the CPC, applicable pursuant to article 29º, no 1, paragraphs a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the cause are chosen and delineated in function of their legal relevance, which is established in attention to the various plausible solutions of the question(s) of law (cfr. prior article 511º, no 1, of the CPC, corresponding to the present article 596º, applicable pursuant to article 29º, no 1, paragraph e), of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of article 110º/7 of the CPPT, the documentary evidence, the PA joined to the file and the testimony of the witnesses called by the Applicant, D… and E…, the facts listed above were considered proven, with relevance for the decision, taking into account that, as stated in the Award of the TCA-South of 26-06-2014, rendered in proceeding 07148/131, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not impugned".

1. On the Law

The essential question to be decided and raised by the commercial company A…, S.A., parent company of a group of companies, encompassed in the "Special Taxation Regime for Groups of Companies", in its request for arbitral pronouncement is the following:

• Partial illegality of the additional assessment act no 2015…, of 3/6/2012, relating to IRC for the financial year 2012, regarding corrections made by AT, which total the amount of € 5,637,538.95, plus compensatory interest in the amount of € 305,618.71, everything totaling € 5,943,157.66.

The Applicant invoked in its Model 22 declaration for 2012 the right to tax credit under no 2 of article 90º of the CIRC, in the amount of € 5,637,538.95, the amount of € 5,620,824.79 being related to the tax credit for investment resulting from the Fiscal Support Regime for Investment (RFAI) of prior financial years (2009, 2010 and 2011) and the amount of € 16,714.16, related to the tax credit for investment resulting from RFAI in the financial year 2012.

The Inspection considered that A…, SA improperly deducted these amounts from the IRC collection because, as stated in the RIT, with respect to RFAI of periods prior to 2012, it deducted "the amount that corresponds to part of the tax credits that it improperly calculated between 2009 and 2011, on non-qualified investments and corrected by the inspection in the periods 2010 and 2011" and, with respect to the investment made in 2012, considered "improperly as a relevant investment the additions of Tangible Fixed Assets related to the ancillary activity of energy production when under the terms of RFAI/2009 only investment for the main activity is the object of incentive".

With respect to RFAI of prior financial years (2009, 2010 and 2011), the question is no longer new. In fact, as was stated above, the CAAD has already issued, in proceeding 400/2015-T, on 10 December 2015, an arbitral decision that recognized and legitimized these tax credits: the arbitral tribunal stated then that, in relation to those financial years of the Applicant, not only does this RFAI tax benefit exist but was also properly carried forward to 2012 in the part that could not have been deducted from the collection previously.

Therefore, with respect to RFAI of financial years prior to 2012, we will limit ourselves to referring to the grounds expounded in the said award.

It is important, however, to begin by describing the legal framework of the tax facts at issue in the case in question.

The Fiscal Support Regime for Investment constitutes a tax benefit for investment in tangible fixed assets and intangible fixed assets, and was approved by Law no 10/2009, of 10 March, and successively extended by State Budgets for 2010 (Law no 3-B/2010, of 28 April), for 2011 (Law no 55-A/2010, of 31 December) and for 2012 (Law no 64-B/2011, of 30 December).

In nos 2 to 6 of article 2º, the scope of application of the regime is defined at the level of the type of eligible and non-eligible investments and of the conditions required for IRC taxpayers to benefit from the tax incentive in question, with article 3º no 1 enshrining the method of calculation of the tax benefit.

In accordance with article 3º of RFAI, this tax benefit consists of a "deduction from IRC collection", the deduction being made "up to the concurrent 25% of the same". When the deduction "cannot be made in full due to insufficiency of collection, the amount still not deducted may be deducted, on the same terms, in the assessments of the four following financial years."

The establishment of various limits to the deduction from collection of the amounts invested flows from the very nature of the benefit in question, which have to do with the amounts invested and the region where the investments are made, a situation that can lead to the fact that the entirety of them cannot be deducted from the collection of the year in which they were made, in this case, the possibility of their carry-forward being allowed.

First of all, it is important to note that RFAI approved by article 13º of Law no 10/2009, of 10 March, extended successively until 2013, determines in no 1 of article 2º, under the heading "scope of application and definitions" the following:

«1- RFAI 2009 applies to IRC taxpayers that exercise, as a principal activity, an activity:

a) In the agricultural, agro-industrial, energy and tourism sectors and also in extractive or manufacturing industry, with the exception of the steel, shipbuilding and synthetic fibers sectors, as defined in article 2º of Regulation (EC) no 800/2008, of the Commission, of 6 August;

b) (…) 2- For purposes of this regime, the following are considered relevant investments provided that they are devoted to the operation of the company».

Now, pursuant to the aforementioned award, and we proceed to quote, "first of all, it should be noted that the Applicant is clearly encompassed in the textual provision of no 1 of this article 2º, since it is an IRC taxpayer that exercises, as a principal activity, an activity in the manufacturing industry.

On the other hand, in no 2, which defines eligible investments, no restriction is made to those that are connected with the principal activity of eligible companies, so that, by this means, neither can textual support be found to conclude that only investments connected with the principal activity of the companies indicated in no 1 are eligible.

The rules that create tax benefits have the nature of exceptional rules, as flows from the express tenor of article 2º, no 1, of the Statute of Tax Benefits (EBF), and therefore must be interpreted in their precise terms, without expansions or restrictions, so as to encompass all the cases literally provided for therein and only those, as is settled jurisprudence. ([1])

The need for consistent textual support for the interpretation of exceptional rules is emphasized in the case of rules included in the reserve of legislative competence of the Assembly of the Republic, as is the case with those providing for tax benefits [articles 103º, no 2, and 165º, no 1, paragraph i), of the CRP]. What is reduced to the fact that it would be incompatible with the Constitution, by violation of the principles of the reserve of law and the reserve of law, the addition by the Administration of requirements for the granting of tax benefits not expressly required by the rules that provide for them and that are not determined with the certainty demanded by the principle of trust that would be implicit therein.

In the case in question, apart from there being no textual support for the disregard of the tax benefit in cases where a company can be encompassed in the provision of no 1 of article 2º of RFAI, there is no reason to detect an additional implicit requirement, at least in cases where the economic sector in which investment is made in a secondary activity, since the application of the tax benefit in this area is in tune with the legislative intention to "promote productive business investment" and, in this case, to promote energy independence and efficiency, as well as environmental sustainability, revealed in the Report of the Bill no 247/X that gave rise to Law no 10/2009. ([2])

Thus, it is to be concluded that companies encompassed in the provision of no 1 of article 2º of RFAI that make investments in activities that are not their principal activity can benefit from the tax benefit, at least when they are made in a secondary activity that is also provided for in this rule.

Which leads to the conclusion that the conclusion, in which the Tax and Customs Authority based the impugned assessment, lacks legal support and suffers from the defect of violation of law, that the investment is not eligible because it was made in an activity different from the principal activity of the Applicant.

It is certain, however, that it is inherent in the regime of article 2º of RFAI that investments are used in an activity of the eligible company itself, even if not the principal one.

In the case in question, there can be no doubt that the production of forest biomass and its use for the production of electrical energy is directly connected with the wood and pulp industry..., since this connection is expressly assumed in the Resolution of the Council of Ministers no 169/2005, of 24 October, when enumerating, among the measures to be adopted for "the production of electrical energy and the expansion of other direct uses in the form of heat or light from renewable energy sources", "the valorization of forest biomass, in a regime to be compatible with the wood and pulp industries......".

Furthermore, the production of electrical energy, under the terms of the contract celebrated with C…, S.A., cannot be considered an activity foreign to the Applicant, since:

– the Applicant maintained ownership of the installation intended for energy production;

– the installation is located within the Complex of … of which the Applicant is the owner (clause 1st of the Contract);

– the operation of the energy production equipment is carried out, as a rule, by workers of the Applicant, who were already assigned to the installation at the time the contract was celebrated (clause 3rd, no 1, of the Contract);

– the workers of the Applicant assigned to energy production continued to be remunerated by it, maintaining it over them disciplinary power, and being the same only functionally subject to the orders and guidance of C…, S.A. (clause 3rd, no 2, of the Contract);

– "all electrical and thermal energy produced at the installation will be intended primarily, to satisfy the needs of the Complex of … of A…, S.A. and accessorily to the sale to third parties, all in accordance with contracts that may come to be celebrated with the said purchasers" (clause 5th of the Contract);

– as consideration for the cession and provision of services, C…, S.A. makes payments to the Applicant;

– it was the Applicant that supplied the black liquor, the biomasses, the feed water to the boilers and the supplies, as is apparent from Clause 6º, no 1, paragraph b);

– the entity that nominally carries out the operation of the investments is held 100% by the Applicant.

In this context, it is unequivocal that there is an activity of energy production with use of biomass produced by the Applicant, which is carried out by workers of the Applicant, in its installations, with the use of equipment acquired with the investments in question, obtaining the Applicant economic benefit from such activity, through the payments provided for in the contract, which are consideration not only for the cession but also for the provision of services.

Thus, we are faced with an activity that, at least, with respect to the provision of remunerated services, is exercised directly by the Applicant, on the basis of the investments made, a reality that is not prejudiced by the fact that C…, S.A. pursues its own economic activity, by exploiting the same investments, through the provision of services that it acquires from the Applicant and, possibly, also with other means of its own.

On the other hand, the provision of services connected with the production of energy through biomass constitutes an ancillary activity that can be encompassed in the corporate purpose of the Applicant, which included, in 2010, "ancillarly operate services and carry out civil and commercial operations, industrial and financial operations related, directly or indirectly, in whole or in part, to its corporate purpose or that may be likely to facilitate or favor its realization" [paragraph b) of the matter of fact established]. In this case, it is evident that the provision of services intended for the production of electrical energy with the use of biomass cannot fail to be considered as being related "directly or indirectly, in whole or in part" to the principal corporate purpose of the Applicant, as is generically recognized in the said Resolution of the Council of Ministers no 169/2005 and results from documents nos 9 and 11 joined to the request for arbitral pronouncement.

Being so, we do not see how it can be concluded, in economic terms, that the Applicant does not exploit the investments, by using them by its workers, in its installations, to produce electrical energy primarily for itself, obtaining economic benefits from the exercise of such activity.

In addition to this reality being the "economic substance" that should be taken into account in cases of doubt about the interpretation of a rule of incidence (article 11º, no 3, of the LGT) ([3]), in the case in question the entity that legally assumes responsibility for the operation is held 100% by the Applicant and a tax benefit is at issue that applies to the collection, within the scope of taxation carried out under the special taxation regime for groups of companies, whereby it does not even appear that the legal reality resulting from nominal operation by C…, S.A. can merit treatment different from what is justified in the face of economic substance.

On the other hand, independently of whether the activity of provision of services to C…, S.A. carried out by the Applicant lacks some license or authorization that has not been obtained (which was not determined), it is certain that the hypothetical illegality of such provision of services did not constitute the ground of the position assumed by the Tax and Customs Authority when practicing the impugned act, whereby importance cannot be given to this hypothetical ground invoked afterwards.

Furthermore, neither do we see why the legislator, visibly concerned with encouraging the production of energy through renewable sources and encouraging investment, would intend to prevent a company from making investments in equipment and installations for the purpose of exploiting them through the provision of services to other commercial energy companies.

For this reason, in addition to the situation of the Applicant being literally encompassed in paragraph a) of no 1 of article 2º of RFAI, the only rule that the Tax and Customs Authority invoked as establishing legal obstacle to the claim of the Applicant, no reasons are seen that justify a restrictive interpretation, namely the inclusion of an additional requirement with the scope that the tax benefit cannot be enjoyed by companies that, having a principal activity of the type provided for therein, made investments in the sectors provided for therein within the scope of a secondary activity compatible with their corporate purpose.

On the other hand, neither is it seen that the interpretation that results from the literal tenor of article 2º, no 1, of RFAI is incompatible with the constitutional principles of equality or legality.

In truth, first of all, regarding the principle of legality, what would violate it would be the addition, by administrative means, of a requirement not expressly provided for nor detectable as implicit.

As for the principle of equality, the interpretation that results from the literal tenor is applicable to the generality of companies that find themselves in the situation described in that rule, and tax benefits, favoring those who benefit from them, have justification in the pursuit of the extra-fiscal purposes pursued with them, which, in the case in question, are evident and detailed explained in the report of Bill no 247/X, which gave rise to RFAI."

For even greater reason, the same argument applies to the investment made in 2012, adding that the position defended by AT is additionally prejudiced by virtue of, in early 2012, the corporate purpose of the Applicant having been broadened to also encompass the "production and marketing of electrical energy and thermal energy" as a principal activity, as per the commercial certificate joined to the file.

Whereupon it is concluded that the assessment act in question, in the part impugned in the present proceeding, suffers from the defect of violation of law, namely, of article 2º, no 1, of RFAI, which justifies its partial annulment, pursuant to article 163º, no 1, of the Code of Administrative Procedure.

The assessments of compensatory interest are based on the impugned assessment, whereby they also suffer from the same defect of violation of law, insofar as they are based on the part here annulled.

The request for arbitral pronouncement proceeding on the grounds pointed out, any consideration of other questions raised by the Applicant becomes moot.

The Applicant requests reimbursement of the amount paid and indemnificatory interest, having been proven that it paid the amount of € 5,637,538.95, plus compensatory interest in the amount of € 305,618.71, everything totaling € 5,943,157.66 (doc. 3).

Article 43º, no 1 of the LGT establishes that "indemnificatory interest is due when it is determined (…) that there was error attributable to the services from which results payment of tax debt in an amount superior to that legally due".

In the case in question, the error that affected the assessment is attributable to AT.

Therefore the Applicant is entitled to be reimbursed of the amount it paid (articles 100º of the LGT and 24º, no 1 of the RJAT) and indemnificatory interest from the date of payment of the amount, 15.02.2016, until reimbursement, at the legal interest rate, pursuant to articles 43º, nos 1 and 4, and 35º, no 10 of the LGT, 559º of the CC and Order no 291/2003 of 8 April.

1. Decision

In accordance with the foregoing, this Arbitral Tribunal decides:

a) To judge the request for arbitral pronouncement totally founded and, in consequence, to declare the assessment nos 2015…, relating to the year 2012, partially illegal, annulling it in the part relating to the corrections impugned, with all the legal tax consequences legally applicable.

b) To condemn AT to the restitution of the amount of € 5,943,157.66, plus indemnificatory interest at the legal rate, with the due legal consequences.

c) To condemn the Respondent in the payment of the costs of the proceeding.

1. Value of the Proceeding

The value of the proceeding is fixed at € 5,943,157.66, pursuant to articles 305º, no 2 of the CPC and 97º-A, no 1, a), of the CPPT, applicable by force of paragraphs a) and b) of no 1 of article 29º of the RJAT and of no 2 of article 3º of the Regulation of Costs in Tax Arbitration Proceedings.

1. Costs

The value of the arbitration fee to be borne by the Respondent is fixed at € 74,358.00, pursuant to articles 12º, no 2, and 22º, no 4, both of the RJAT, and 4º, no 4, of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached thereto.

Notify.

Lisbon, 12 December 2016

The Arbitrator President,

(José Baeta de Queiroz)

The Arbitrator Member,

(João Taborda da Gama)

The Arbitrator Member,

(Cristina Aragão Seia)

[1] In this sense, see the award of the Supreme Administrative Court of 15-11-2000, proceeding no 025446, published in the Bulletin of the Ministry of Justice no 501, pages 150-153, in which abundant jurisprudence of the Supreme Administrative Court and of the Supreme Court of Justice is cited. This Bulletin of the Ministry of Justice is available at http://www.gddc.pt/actividade-editorial/pdfs-publicacoes/BMJ501/501_Dir_Fiscal_a.pdf

[2] http://app.parlamento.pt/webutils/docs/doc.pdf?path=6148523063446f764c3246795a5868774d546f334e7a67774c336470626d6c7561574e7059585270646d467a4c316776644756346447397a4c334277624449304e793159587a45756347526d&fich=ppl247-X_1.pdf&Inline=true

[3] Rules of incidence, in the broad sense, are those that "define the plan of incidence, that is, the complex of requirements from whose combination results the birth of the tax obligation, as well as the elements of the same obligation". In this sense, rules of incidence are those that determine the active and passive subjects of the tax obligation, those that indicate what the taxable matter is, the rate and tax benefits (SOARES MARTINEZ, Tax Law, 7th edition, page 126, and NUNO SÁ GOMES, Manual of Tax Law, volume II, page 56).