CAAD Case 196/2013-T: Capital Gains Tax & Anti-Abuse Clause in IRS Ruling

Decision

The arbitrators, Dr. Alexandra Coelho Martins (arbitrator president), Dr. José Rodrigo de Castro and Prof. Doctor Miguel Patrício (arbitrators members), designated by the Deontological Council of the Administrative Arbitration Centre ("CAAD"), in accordance with the provisions of article 6, no. 2, paragraph a) of Decree-law no. 10/2011, of 20 January (hereinafter "RJAT"), to form the Arbitral Court, constituted on 8 October 2013, agree as follows:

REPORT

A…, hereinafter Claimant, taxpayer no. …, with domicile at Rua …, in Lisbon, requested the constitution of an Arbitral Court and submitted a request for an arbitral pronouncement, under the provisions of articles 2, no. 1, paragraph a) and 10 of the RJAT, for examination of the illegality of the income tax (IRS) assessment acts and the inherent compensatory interest under nos. 2013 …, respectively, referring to the year 2009, in the total amount of € 151,354.19.

In summary, the Claimant alleged as follows:

• The shares transferred were held for a period exceeding 12 months and, as such, the capital gains obtained from their disposal were excluded from IRS taxation, under article 10, no. 2, paragraph a) of the Income Tax Code, in the wording in force at the date of the facts;

• The application of the anti-abuse rule contained in article 38, no. 2 of the General Tax Law ("LGT") is illegal, as the indispensable requirements for the application of the General Anti-Abuse Clause (hereinafter also referred to as "GAAC") are not met, first and foremost because no act or transaction of a fraudulent nature was concluded by the Claimant, being [the Claimant] free to decide whether it intended to dispose of its equity interest in the form of quotas or shares, with the choice of shares not representing any abuse of legal forms or unlawful conduct;

• The transformation to the legal form of a joint-stock company was appropriate to the intended result, which was to dispose of the equity interest;

• It would not have been possible for the Claimant to dispose of its equity interest if it had not previously transformed the limited partnership into a joint-stock company;

• The transfer of the equity interest was carried out between entities with no relationship between them;

• The transformed company – Pharmacy …, S.A. – only changed its legal form back to a limited partnership on 30 June 2011, that is, more than 2 years after the disposal of the equity interest by the Claimant;

• The non-taxation in IRS of the capital gains obtained by the Claimant constitutes a mere result of the legitimate option to dispose of its equity interest in the form of shares;

• There is no normative-systematic disapproval concerning the fiscal regime applicable to the transfer of equity interests on the part of the Claimant;

• The Tax and Customs Authority seeks, retroactively, to eliminate the exclusion from taxation of capital gains obtained by the Claimant, sustaining that there is an alleged gap in the Law that should be filled through the application of the GAAC.

The Claimant concludes for the merit of the action, requesting the declaration of illegality of the IRS assessments and compensatory interest, the restitution of the amount paid in the sum of € 151,354.19 and the indemnification of the Claimant for all damages suffered including the respective indemnity interest.

With the petition, the Claimant attached 16 documents, and did not call witnesses.

The Tax and Customs Authority filed a response and sustains, by way of objection, that:

• The temporary transformation of the legal nature of "Pharmacy …, Lda." from a limited partnership to a joint-stock company aimed, as its principal objective, to benefit the Claimant from the exclusion from taxation that applied to capital gains from the disposal of shares held for more than 12 months;

• Once that benefit was obtained, after a short time, the company transformed itself back into a limited partnership, which constitutes a predetermined conduct of tax avoidance contrary to the tax legal order, through an artificial scheme;

• Such transformation and restoration of the original corporate form was only due to the objective of not paying taxes, for which reason the GAAC provided for in article 38, no. 2 of the LGT is applicable, without prejudice to the fact that the act of transformation of the company is, in itself, a valid, effective and lawful act;

• No reason – economic, financial or commercial – is identified that would have made the transformation of the company necessary because it has always been a small enterprise, with regular and stable activity, it not being by chance that it returned to the old form;

• Thus, the four elements for the application of the GAAC are met: the means element (artificial scheme), the result element (suppression of the tax burden), the intellectual element (motivation exclusively fiscal) and the normative element (normative-systematic disapproval of the advantage obtained);

• It was necessary to reconstruct the tax situation that would have existed had the abusive scheme not occurred, in order to tax the Claimant in accordance with its actual contributory capacity, in safeguarding the pursuit of fair distribution of the tax burden and in meeting the financial needs of the State.

The Tax and Customs Authority concludes that the action should be judged without merit.

The administrative process was attached to these proceedings, of which the Claimant was notified.

On 16 January 2014, the first meeting of the Collective Arbitral Court took place at the CAAD headquarters, in compliance with article 18 of the RJAT. As no exceptions were raised or identified, the parties were notified to submit written arguments and a date was set for the pronouncement of the decision.

The parties submitted written arguments, maintaining the positions previously stated.

On 25 March 2014 and on 6 June 2014, it was decided, with reasoning, to extend the deadline for the pronouncement of the arbitral decision by 2 months, pursuant to article 21, no. 2 of the RJAT.

PRELIMINARY MATTERS

The Court was regularly constituted and is competent ratione materiae, in accordance with article 2 of the RJAT.

The parties have legal personality and capacity, show themselves to be legitimate and are regularly represented (cf. articles 4 and 10, no. 2 of the RJAT and article 1 of Ministerial Order no. 112-A/2011, of 22 March).

No procedural irregularities were identified.

ISSUES TO BE DECIDED

The principal issue to be examined and decided concerns the assessment, in the present case, of whether the four cumulative requirements for the application of the anti-abuse regime contained in article 38, no. 2 of the LGT are met, embodied in (i) the artificial means, (ii) motivated exclusively by a fiscal purpose, (iii) reduction, elimination or deferment of tax, (iv) the result achieved being unintended by the legislator and, for that reason, object of normative-systematic disapproval.

Equally, it is important to assess the grounds and extent of the indemnity claim lodged by the Claimant.

REASONING

OF THE FACTS

Proven Facts

• On 14 August 2002, A…, here the Claimant, concluded a contract of a sole-proprietor limited partnership, the company adopting the name "Pharmacy … – Sole-Proprietor, Limited" – in accordance with the copy of the public deed executed at the Fifth Notarial Registry of Lisbon, attached with the arbitral request as Document 1, and with the Permanent Certificate contained in the administrative process ("AP") 2.

• The Claimant received an offer letter, dated 25 June 2008, subscribed by B…, for the acquisition of 100% of the capital of the company Pharmacy … – Sole-Proprietor, Limited, for the amount of 1,300,000 euros, adjustable depending on the assets and liabilities of the company – cf. copy of the acquisition offer attached with the arbitral request as Document 2 (also contained in AP4).

• It appears as a condition of the referred offer the "Legal Transformation of the Company into a Joint-Stock Company" – cf. copy of the acquisition offer attached with the arbitral request as Document 2 (also contained in AP4).

• On 22 July 2008, a promise to sell and purchase shares was concluded between the Claimant and B…, whose Recital E states: "(…) the promissory seller [now Claimant] and the promissory buyer agreed and conditioned the sale and purchase referred to in the previous paragraph to the legal transformation of the Company into a Joint-Stock Company, comprising that transformation the carrying out of an increase in capital of the company to the minimum legal amount necessary for the legal transformation of the company into a joint-stock company (…)" – cf. copy of the promise to sell and purchase shares attached with the arbitral request as Document 3.

• In accordance with Clause One, no. 1 of this promise to sell and purchase shares "(…) the promissory seller promises to sell to the promissory buyer, or to whomever it may designate, who in turn promises to acquire from it, free of any liens and encumbrances, the Shares of which the promissory seller will be the owner after the legal transformation of the Company into a Joint-Stock Company, transmitting with the acquisition of the shares all respective economic and social rights" for the price of 1,350,000 euros, in accordance with Clause Three – cf. copy of the promise to sell and purchase shares attached with the arbitral request as Document 3.

• On 26 February 2009, the increase in capital of Pharmacy … – Sole-Proprietor, Limited from 7,500 euros to 10,000 euros is registered in the Commercial Registry of Lisbon, by incorporation of reserves – cf. Permanent Certificate contained in AP2 and minute no. 11 contained in AP4.

• On 27 February 2009, the increase in capital of Pharmacy... – Sole-Proprietor, Limited by 40,000 euros is registered in the Commercial Registry of Lisbon, subscribed in cash with the admission of four new partners (fixing the capital at 50,000 euros) and, likewise, the transformation of Pharmacy … – Sole-Proprietor, Limited into a joint-stock company – cf. Permanent Certificate contained in AP2 and minute no. 12 contained in AP4.

• The transformation of Pharmacy … – Sole-Proprietor, Limited into a joint-stock company was preceded by a justificatory report, organized by the management of that company in which it is mentioned the need to adapt its legal-corporate structure to the real needs of the enterprise. This report considers that "the business development of the Company should be accompanied by a substantial modification of its legal structure, conferring on it greater agility in its activities and daily management, also with the entry of new investors" – cf. Justificatory Report attached to minute no. 12 contained in AP4.

• The capital of Pharmacy … was consequently distributed as follows:

  • Claimant, A…, 2,000 shares, 10,000 euros;
  • B…, 7,940 shares, 39,700 euros;
  • C…, 20 shares, 100 euros;
  • D…, 20 shares, 100 euros; and
  • E…, 20 shares, 100 euros,

– cf. Permanent Certificate contained in AP2.

• On the same day, that is, on 27 February 2009, the definitive contract of sale and purchase of shares was concluded, by which the Claimant sold to the company …, Lda., the ownership of 2,000 shares of the capital of Pharmacy …, S.A. for the price of 1,372,500 euros, of which 22,500 euros corresponds to a penalty for the possibility of deferment of the payment period – cf. copy of the contract of sale and purchase of shares attached with the arbitral request as Document 4.

• The company …, Lda. had as its sole partner and manager B…. The company declared the beginning of its activity on 20 August 2008 and the respective cessation on 1 March 2009, having been incorporated, by merger, in the company Pharmacy …, S.A., on 17 June 2009 – cf. Permanent Certificate contained in AP2 and minutes nos. 14 and 15.

• The Claimant reported in Annex G1, relating to "non-taxed capital gains", of the Income Tax Return Model 3 of IRS for the year 2009, submitted on 27 May 2010, the onerous disposal of shares held for more than 12 months, with the realization value of 1,372,500 euros, declaring as acquisition value 7,500 euros – cf. copy of Model 3 Declaration and Annexes attached with the arbitral request as Document 5.

• On 30 June 2011, the company Pharmacy …, S.A. resumed the legal form of a limited partnership, changed its name to Pharmacy …, Lda. and its registered office to the parish of …, municipality of … – cf. Permanent Certificate contained in AP2 and minute no. 18 contained in AP4.

• The transformation of the company Pharmacy …, S.A. into a limited partnership was preceded by a justificatory report subscribed by its administration [B…] which indicates that this operation "represents a realignment with the real structure of the company, which is an essentially family structure, in order also to ensure a reduction of costs with the maintenance of a corporate form not suited to the current development project of the company" – cf. Justificatory Report attached to minute no. 18 contained in AP4.

• On 9 January 2012, the Claimant was notified of the draft application of anti-abuse rules for the year 2009, under article 63, nos. 4 and 5 of the Tax Procedure and Process Code ("CPPT"), for exercise of the right to be heard within 30 days – cf. copy of the letter attached with the arbitral request as Document 7.

• In the view of the Tax and Customs Authority:

  • There was no reason of an economic nature that justified the transformation of the company into a joint-stock company;
  • There was no visible interest on the part of the Claimant in altering the legal nature of the company;
  • If the promissory buyer had an operational interest in altering the legal nature of the company, it would have done so, and not, as it did, reverting to the limited partnership figure at a later date;
  • The shareholder composition did not reveal the intention of creating any economic unit that would justify the use of the joint-stock company figure;
  • The transformation of the limited partnership into a joint-stock company allowed the Claimant to dispose of the equity interest in the capital of that company, renamed in shares, for the value of € 1,372,500.00 with exclusion from taxation of the capital gain obtained, under article 10, no. 2, paragraph a) of the IRS Code, substituting a transaction subject to tax (the disposal of a quota) with another, economically equivalent, not subject to taxation (sale of shares) capable of being encompassed within the anti-abuse rule contained in article 38, no. 2 of the LGT;
  • For which reason "the temporary transformation of the legal nature of the business entity 'Pharmacy …' from a limited partnership into a joint-stock company had as its principal and sole objective to prevent the taxpayer A… from being subject to IRS, due to the capital gain that, in fact, was realized in the transfer of the social shares of the capital that the taxpayer held in the company 'Pharmacy … Lda' which, in this case, would correspond to a tax liability of € 136,500.00. It was also made evident that the underlying legal transaction was effected in a fraudulent manner."

– cf. copy of the letter attached with the arbitral request as Document 7.

• The Claimant exercised the right to be heard in disagreement with the application of the anti-abuse rule by considering that:

  • The Claimant did not conclude any acts or transactions of a fraudulent nature;
  • In any case, the Claimant would always be free to decide whether it intended to dispose of its equity interests in the form of quotas or shares, such choice not representing any abuse of legal form;
  • If the Claimant had not concluded the legal transactions in question, it would not have been possible to dispose of the equity interests on the terms and conditions in which it did;
  • The non-taxation in IRS results as an automatic consequence by virtue of an expressly enshrined legal rule, constituting a mere result of the legitimate option to dispose of its shares,

– cf. copy of the right to be heard attached with the arbitral request as Document 8.

• Within the framework of service order no. OI201201331, of 23 March 2012, sanctioned by a directive of 28 March 2012, the external inspection procedure, of partial scope (IRS), to the Claimant with reference to the year 2009, whose beginning occurred on 17 April 2012, was determined. This inspection action integrated the procedure provided for in article 63 of the CPPT, for application of the general anti-abuse clause provided for in article 38, no. 2 of the LGT – cf. Tax Inspection Report ("RIT") attached with the arbitral request as Document 13.

• On 21 May 2012, the Claimant was notified to, again, if it so wished, pronounce itself on the Draft Application of the General Anti-Abuse Clause, which came to replicate and develop the argument previously invoked by the Tax and Customs Authority – cf. copy of the letter and attached documents attached with the arbitral request as Document 9.

• The Claimant exercised the right to be heard by deeming the previous right to be heard entirely reproduced, concluding for the illegitimacy of the application of the general anti-abuse clause – cf. copy of the "second" right to be heard attached with the arbitral request as Document 10.

• On 17 January 2013, the Claimant was notified to exercise the right to be heard on the Draft Tax Inspection Report, which already included authorization, by the Director General of the Tax and Customs Authority, for the application of the GAAC – cf. copy of the letter notifying the Draft Tax Inspection Report attached with the arbitral request as Document 11.

• The Claimant exercised the right to be heard on the content of the Draft Tax Inspection Report, in which it reiterated the request for modification of the content and direction of the proposed decision, due to the lack of legitimacy for recourse to the application of the general anti-abuse clause – cf. copy of the "third" right to be heard attached with the arbitral request as Document 12.

• On 27 February 2013, the Claimant was notified of the Tax Inspection Report ("RIT"), which maintains recourse to the application of the general anti-abuse clause and determines the taxation in IRS, at the rate of 10%, in accordance with article 72, no. 4 of the IRS Code, on the fiscal capital gain of € 1,365,000.00 – cf. RIT attached with the arbitral request as Document 13.

• The grounds for the corrections contained in the RIT are those that follow partially transcribed:

"C – Principal indicators of the activity of the company 'Pharmacy …'

Between 2006 and 2010, the taxpayer …. designated 'Pharmacy ….. Lda.', 'Pharmacy … SA' and currently 'Pharmacy … Lda' had the following level of activity:

Source: Annual Declaration/IES

It results from the reading of the table that, between 2006 and 2010, the company maintained a similar level of operational activity.

D – Reasons invoked to justify the legal changes made

The justification for the changes that occurred in the legal form of the company Pharmacy …, are reflected in its respective minute book from which we highlight the following:

-------» minute no. 11 – deals particularly with the increase in the capital of the company Pharmacy …, Lda from € 7,500.00 to € 10,000.00.

-------» minute no. 12 – deals, among other matters, with:

• the increase in capital of the company Pharmacy …, Lda to € 50,000.00;
• the waiver of examination of the justificatory report of the transformation of the company into a limited company by an independent registered accountant;
• transformation of the company into a joint-stock company;
• approval of the partnership agreement by which the company will be governed after the transformation;

-------» minute no. 14 – whose single item consisted of the consideration and approval of the merger project dated 28/4/2009, by incorporation of the company … Sole-Proprietor, Lda, with the VAT number ….

-------» minute no. 15 – whose single item was the resolution and approval of the merger by incorporation of the company …, Sole-Proprietor, Lda, with VAT number … in the company Pharmacy …, S.A.

-------» minute no. 18 – in which, among other matters, the transformation of the company Pharmacy …, S.A. into a limited partnership is approved.

The justificatory report of the legal transformation of the limited partnership Pharmacy … Lda. into a joint-stock company, prepared by management, under the terms and for the purposes of article 132 of the Commercial Companies Code, dated 27/2/2009, emphasizes that: the transformation of the company into a joint-stock company is justified by the need to adapt its legal-corporate structure to the real needs of the enterprise, noting that the type of "limited partnership" and in particular its "sole-proprietor limited partnership" subtype, is essentially directed to the organization of a small enterprise, revealing little flexibility as regards the responsiveness of the company to new situations.

"In these terms, it is understood that the business development of the company should be accompanied by a substantial modification of its legal structure, conferring on it greater agility in its performance and daily management, also with the entry of new investors.

The transformation also has as objectives the increase in value and efficiency of the company, through a corporate structure able to meet market challenges.

It is intended, therefore, to reinforce the enterprise, in order to confer on it greater financial capacity, solidity and stability, providing its partners with integration in a stronger organization and more adequately structured.

The justificatory report of the legal transformation of the joint-stock company Pharmacy …, S.A., into a limited partnership, prepared by its administration, under the terms and for the purposes of article 132 of the Commercial Companies Code, dated 30/5/2011, refers, in defense of that transformation, that the legal change of the joint-stock company into a limited partnership represents a realignment with the real structure of the company, which is an essentially family structure, in order to ensure a reduction of costs with the maintenance of a corporate form not suited to the development project at the date of writing the report.

It should also be noted that parallel to the transformation and attending to the relocation of its principal establishment to the municipality of Oeiras, it is mentioned that the company name would be adjusted in light of the new reality.

The justificatory report of the legal transformation of the joint-stock company Pharmacy …, S.A. into a limited partnership, with change of its previous name to Pharmacy …, Lda, prepared by the Company of Registered Accountants …, under the terms and for the purposes of article 132 of the Commercial Companies Code, dated 30/5/2011, refers that it was presented by the Administration of the company the justificatory report of the transformation, the draft partnership agreement by which the company would be governed and the balance sheet with reference to 31-12-2011, having found no impediment to the projected transformation.

E – Evidence that the conclusion of the legal transaction had as its objective the obtaining of tax advantages

Combining the facts described in B, C and D, it is verified:

There exists no reason of an economic nature that could justify the alteration of the legal nature of the limited partnership into a joint-stock company insofar as, at least between 2006 and 2010, the level of activity of the firm Pharmacy … was similar as was its personnel structure, and should in light of this be considered a small enterprise.

In accordance with the justificatory report of the legal transformation of the limited partnership Pharmacy …, Lda. into a joint-stock company, the transformation of the company into a joint-stock company is justified by the need to adapt its legal-corporate structure to the real needs of the enterprise, it being noted there that the type of "limited partnership" is especially directed to the organization of a small enterprise.

In accordance with the justificatory report of the legal transformation of the joint-stock company Pharmacy …, S.A., into a limited partnership, the legal transformation of the company into a limited partnership represents a realignment with the real structure of the company, which is an essentially family structure.

Given the above, it appears evident, as the company itself recognizes, that the legal form of limited partnership is the one that best fits the real size of the company, which has remained practically constant over time.

• Also the shareholder composition does not reveal that the intention was the creation of any economic unit that would justify the use of the joint-stock company figure, insofar as the four new shareholders are close relatives and 3 of them subscribe only symbolic amounts and the shareholder who was already a partner/manager of the commercial establishment had already manifested the intention of its sale to the majority shareholder (79% of capital), that is, despite the formal existence of 5 capital subscribers in reality there exist only 1 plus, symbolically, 3 close relatives.

The act or legal transaction of the transformation of the company "Pharmacy …, Lda" into a joint-stock company did not result, as the facts described prove, from the need to adjust its legal nature to any change in its operational structure, however, it had as a fiscal consequence the possibility of enabling A… to carry out the disposal of the equity interest that it held in the capital of the referred company, after transformation into a joint-stock company and renaming of the capital in shares, for the value of € 1,372,500.00 with the benefit of exclusion from taxation of the capital gain obtained, by force of the provision in paragraph a) of no. 2 of article 10 of the CIRS and, by this means, to avoid the payment of IRS in the amount of € 136,500.00.

F) Legal Framework

(…)

The legal transactions effected in 2008 and 2009 between A… and B… corresponded in fact to the disposal, by the first, and acquisition by the second, of the equity interest that the first held in the company Pharmacy …

Under normal conditions, this operation would imply the subjection of A… to IRS taxation, by title of capital gain income, at the rate of 10%, in accordance with articles 10 and 72 of the CIRS, which, in this case, would correspond to a tax to be paid in the amount of € 136,500.00 (1,365,000*0.10).

The increase in capital of the enterprise "Pharmacy …" from € 10,000.00 to € 50,000.00 and the entry of four new partners/shareholders had as its sole objective the formal compliance with the minimum requirements necessary for the creation of a joint-stock company and to allow that, for this reason, the capital be denominated in shares and, by this means, substitute a transaction subject to tax (disposal of social shares-quotas) with another, economically equivalent, but not subject to taxation (sale of shares).

In this particular regard, it is not irrelevant to note that the transformation of the enterprise from a limited partnership into a joint-stock company was only temporary, a fact which well demonstrates that the alteration of the legal nature of the enterprise did not correspond to any need for adjustment resulting from any operational change.

G) Proposal for Application of the Anti-Abuse Rule

It results from the present information significant evidence that the temporary transformation of the legal nature of the business entity "Pharmacy …" from a limited partnership into a joint-stock company had as its principal and sole objective to prevent the taxpayer A… from being subject to IRS, due to the capital gain that, in fact, was realized in the transfer of the social shares of capital that the taxpayer held in the company "Pharmacy …, Lda" which, in this case, would correspond to a tax liability of € 136,500.00.

It was also made evident that the underlying legal transaction was effected in a fraudulent manner.

To proceed with the assessment of the missing taxes, the opening of the procedure for application of the anti-abuse provision referred to in article 63 of the CPPT is proposed.

H) Exercise of the Right to be Heard

(…)

1. The taxpayer, in exercise of the right to be heard, comes to say that recourse to the transformation of the limited partnership into a joint-stock company does not have a "fraudulent" character, because this latter legal form was essential in order that the legal transaction in question be concluded "on the terms and conditions in which it did and with whom it did".

However, the taxpayer did not specify, in any manner whatsoever, the reasons that would explain the essentiality of recourse to those legal forms.

In this way, such defense is merely formal, not having the virtue of representing any plausible justification, in order to avert the application of article 38 of the LGT.

Let us see:

The taxpayer refers to freedom of enterprise to choose the organizational structures most suited to economic activity, as well as citing the freedom to choose the legal form to adopt (quotas or shares) for the disposal of equity interests.

With respect to article 38 of the LGT, the cited freedoms are limited, but only within the tax sphere.

Even the legal regime of contractual freedom (articles 405 et seq. of the Civil Code) provides for diverse limitations on its exercise. As with any other freedom, the aforementioned freedoms admit legal limitation, when other superior interests are at stake.

Article 38 of the LGT does not, in itself, make acts or legal transactions invalid, null or voidable. This legal provision merely provides for their ineffectiveness in tax terms, when they are "essentially or principally directed, by artificial or fraudulent means and with abuse of legal forms, to reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to obtaining tax advantages that would not be achieved, in whole or in part, without the use of these means, the taxation then being carried out in accordance with the applicable rules in their absence and the mentioned tax advantages not being produced".

Therefore, the legal transactions concluded by the taxpayer while partner or manager of "Pharmacy …, sole-proprietor, Lda" and subsequently "Pharmacy ..., SA", continue to be valid, but are ineffective for the Tax Administration as regards the taxation of capital gains in IRS.

Also fallacious is the argument that the intended result was guided essentially by the "intention to dispose of the equity interests in question", as such fact is not rejected. Quite the contrary. The intended transaction [is] in fact the disposal of the equity interest of the taxpayer. But what is put in question is the manner in which such disposal was effected. In the present case, it was effected artificially with clear abuse of legal forms.

I – Conclusion

Thus, given that no economic-financial justification has been presented for recourse to the legal forms used of transformation of the limited partnership into a joint-stock company for subsequent disposal of the respective shares held by the taxpayer, with the exception of the tax advantage, the content and direction of the proposed application of the anti-abuse rules is to be maintained, subjecting the capital gain in question to taxation in accordance with article 10 of the CIRS."

– cf. RIT attached with the arbitral request as Document 13.

• In consequence, the Claimant was notified on 10 April 2013 of the IRS assessment no. 2013 … for the year 2009, resulting from Statement of Account Reconciliation no. 2013 …, the amount to be paid of € …, including compensatory interest, whose assessment has the no. 2013 ..., with payment deadline on 13 May 2013 – cf. copy of the IRS Assessment Statement attached with the arbitral request as Document 14 and of the Statement of Account Reconciliation attached as Document 15.

• The aforementioned amount in the total value of € 151,354.19 was paid on 10 May 2013 – in accordance with the extract from Banco Espírito Santo attached with the arbitral request as Document 16 and as results from AP2.

• The Claimant was informed, by letter dated 7 June 2013, that Pharmacy …, Lda. requested the opening of a Special Process for Enterprise Recovery from the Court of Commerce of Lisbon, under the Code of Insolvency and Recovery of Companies Oeiras – cf. letter attached with the arbitral request as Document 6.

• On 7 August 2013, the Claimant filed a request for constitution of a Collective Arbitral Court with the CAAD – cf. electronic request in the CAAD system.

Unproven Facts

The following facts with relevance to the decision of the case were not proven, namely:

– it would not have been possible for the Claimant to dispose of its equity interest in the company "Pharmacy …" if it had not previously transformed the limited partnership into a joint-stock company.

Motivation for the Decision on Fact

The decision on the facts was made on the basis of the examination of the documents and information attached to the proceedings and above discriminated for each of the items of the factual record.

As to the unproven fact, the decision is based on the insufficiency for its proof of the documents referenced in paragraphs C, D and E, since the existence of an "offer" letter and a promise to purchase conditioned on the requirement of transformation into a joint-stock company do not have the capacity to demonstrate that the transaction would indeed never have been carried out had the limited partnership form been maintained.

OF THE LAW

Introduction

At issue is the qualification of the operation of corporate transformation of "Pharmacy …" (from a limited partnership into a joint-stock company), carried out by the Claimant prior to the disposal of its equity interest therein, as abusive conduct for tax purposes. It is important, in this context, to provide a brief framework.

In accordance with the traditional classification made by Sampaio Dória[1] and subsequently followed by the majority of doctrine[2], fiscally less onerous conduct may give rise to three regimes with distinct consequences:

• On one side, we have the tax-legal irrelevance of omissive or commissive conducts (by action or omission) that are fiscally less onerous and do not give rise to any judgment of legal disvalue, not infringing tax rules, whether in their letter or in their spirit and teleology (intra legem);

• At the opposite extreme, is the field of tax evasion strictly speaking, in which tax law is infringed directly and frontally (contra legem);

• At an intermediate point, emerges tax avoidance, embodied in conduct that circumvents tax law in which, despite the latter not being literally infringed (the means employed are not unlawful per se), the aim is "manifestly to circumvent the tax legal order to achieve an objective contrary to the values that structure it" (extra legem)[3].

Concerning the alleged lawfulness of the means or processes employed in the avoidance conduct characterized in paragraph (c) above, this is, strictly speaking, merely apparent. The result achieved is presented as anti-juridical and anti-systemic, resulting in a fraud upon the law[4].

Thus, the avoidance phenomenon reveals itself to be contrary to the purposes of the rule(s) evaded and of the legal order itself[5], although it is an evasion perpetrated by lawful means, when considered in isolation. It presents a lesser degree of disvalue when compared to evasion, which justifies an attenuated reaction by the legal order. This reaction, without calling into question the validity of the legal acts, necessarily passes through disregarding the tax effects typically flowing from them[6].

Multiple constructions have been developed with the objective of autonomizing and conceptually framing conducts with evasive purposes, whether through the institute of fraud upon the law mentioned above (enshrined through legislation or resulting from a systematic and teleological interpretation[7]), whether through the configuration of fraudulent legal transactions (indirect, anomalous), distinguishing them from the admitted category of the fiscally less onerous transaction, this tolerated, given its conformity with the purposes of the legal order.

In this latter line of thought, there emerge diverse theories that make reference to the anomalous transaction, in which we frame the doctrine of "abuse of legal forms", which emerged in Germany[8].

This doctrine accompanies the idea that if non-normal avenues are utilized to achieve a certain economic result, resulting in situations of non-taxation, which are not in conformity with the purposes of the tax rule, the legal order should subject them to taxation identical to that which would apply to the normal or typical avenues of achieving that result.

A manifestation of this doctrine is the thesis of the indirect transaction developed by Alberto Xavier[9], according to which a transaction adopted by the parties is considered evasive when these parties deliberately intend to achieve objectives other than those proper to it by means of unusual, abnormal or inadequate processes in the legal sphere, that is, objectives other than those representing the typical structure of the transaction scheme in question[10].

Also concerning the anomalous transaction, it is worth noting the French doctrine of the abnormal act of management developed to complement the theory of abuse of law of civil origin[11].

Lastly, mention should be made of the theory of the imperfect contract of Tulio Rosembuj[12], according to which the conclusion of contracts with evasive purposes falls within the typology of imperfect contracts, which emerges within the scope of private law through economic analysis of law. Unlike so-called perfect contracts which create situations of advantage for both contracting parties, which confers efficiency on them and increases the utility and welfare of the parties, imperfect contracts have underlying them, among other distinctive features, manipulated information and negative effects for third parties, including the Tax Administration. The "imperfection" of the contract leads to unlawful tax savings, for which reason the effects corresponding to the "perfect contract" should be reconstructed, that which the parties "should have" concluded.

The General Anti-Abuse Clause Regime contained in article 38, no. 2 of the LGT

In the Portuguese case, article 38, no. 2 of the LGT enshrined a general anti-evasion rule in tax matters[13], whose application is at issue in the present arbitral process, and which combines cumulatively various of the elements noted, namely the criterion of the purpose pursued, underlying the doctrine of fraud upon the law, and the criterion of the means employed, developed by the thesis of "abuse of legal forms" which delimits its scope of application[14].

This provision states:

"2 - Acts or legal transactions are ineffective within the tax sphere if they are essentially or principally directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, in whole or in part, without the use of these means, the taxation then being carried out in accordance with the applicable rules in their absence and the mentioned tax advantages not being produced"[15].

In accordance with what is recognized by both the Claimant and the Respondent, the provision is decomposed into five elements, of which four form its respective tax factual situation, i.e., constitute the cumulative presuppositions for application of the GAAC (means, result, intellectual and normative elements)[16], and the fifth corresponds to its enactment (sanctioning element).

Also in this sense, the jurisprudence of the Central Administrative Court ("TCA") South recommends that the provision of article 38, no. 2 of the LGT "enshrines four presuppositions of its application, which are: 1 - The means element - which has to do with the form utilized, therefore, with the practice of certain acts or transactions directed, essentially or principally, to the reduction, elimination or temporal deferment of taxes; 2 - The result element - which aims at the tax advantage as the end of the taxpayer's activity, therefore, the reduction, elimination or temporal deferment of taxes; 3 - The intellectual element - which has to do with the fiscal motivation of the taxpayer, therefore, with the fact that acts or transactions practiced by the taxpayer are essentially or principally directed to the result which is the tax advantage; 4 - Normative element - which has to do with the normative-systematic disapproval of the advantage obtained, therefore, the taxpayer acts with manifest abuse of legal forms (cf. article 63, no. 2, of the Tax Procedure and Process Code)." – cf. Decision of 15 February 2011, case no. 4255/10.

However, the parties diverge as to the verification of the mentioned requirements in the present case, for which reason it is important to assess each one of them independently, without prejudice to its "relationship of connection and interdependence", as referred to by J.L. Saldanha Sanches[17], or, in the terms of Gustavo Lopes Courinha, the relationship of mutual assistance[18].

Result Element

There can be no doubt that the tax burden that would have resulted from the sale of quotas, whose capital gains would be subject to IRS at the rate of 10%[19], is distinct from that which derived from the disposal of shares, excluded from taxation for purposes of this tax, under article 10, no. 2, paragraph a) of the IRS Code, in the wording at the date[20].

Thus, by effect of the adoption of the form of joint-stock company by the company to which the transferred equity interest related – Pharmacy …, S.A. (previously, Pharmacy …, Sole-Proprietor, Limited) – the Claimant[21] benefited from a tax saving relative to the sale of its equity interest, corresponding to 136,500.00 euros, which, otherwise, would have incurred on the capital gain obtained.

The existence of a tax advantage is, however, in no manner whatsoever sufficient to characterize abusive conduct, under the penalty of, for tax purposes, erecting as a presupposition of the effectiveness of any tax-relevant conduct the choice of the one that would lead to the fiscally more onerous regime, which is summarily repudiated.

Intellectual Element

It is required at this point that the means utilized was chosen with the primary purpose of "reduction, elimination or temporal deferment of taxes", since only transactions in which the objective of fiscal savings is manifestly the principal should be had as evasive ("tax driven transaction").

The demonstration of this principal (fiscal) intent can prove to be complex, and in the majority of cases will be, with the difficulties inherent to proof of the subjective aspect which, at the limit, would lead to a "diabolical proof". In this manner, proof of the fiscal purpose must depart from a presumption whose inference is based on objective facts: once the facts that manifestly demonstrate the tax advantage obtained by the taxpayer are evidenced, it is to be presumed, based on this proof, the intention of the taxpayer, an objective conception which was embraced by article 63 of the CPPT.

From analysis of the facts, there is reference in the offer letter and in the promise to purchase to a requirement for prior transformation of the company Pharmacy …., Sole-Proprietor, Limited into a joint-stock company, as a condition for carrying out the sale transaction of that company. However, the establishment of this condition is not accompanied nor grounded in substantive reasons, either on the side of the promissory seller, nor on the part of the promissory buyer.

On the other hand, the reasons adduced in the justificatory report of the transformation (from the perspective of the transformed company, therefore), are connected with the adequacy of the "legal-corporate structure" to the real needs of the enterprise, it remaining unclear to what needs it refers and for what reason the joint-stock company model (as opposed to the limited partnership) is, in the concrete situation, the one which best suits. Beyond which, as the Tax and Customs Authority stresses, about two years later the company returned to resume the limited partnership form, with precisely as the reason the "realignment with the real structure of the company".

In this framework, given the considerable tax advantage for the Claimant derived from the transformation of Pharmacy … (of whose capital it was a shareholder) from a limited partnership into a joint-stock company and the lack of concretization of concrete tangible reasons that would avert the presumption based on that objective element, we conclude that indeed the elimination of IRS taxation of the capital gain was the principal reason underlying the adoption of that corporate form.

The tax advantage translated in the non-incidence of IRS in the amount of 136,500.00 euros benefited directly the Claimant, who did not bear such burden, and also, in an indirect manner, reflected itself in the economic sphere of the acquirer, in the formation of the transaction price, given the elimination of the (fiscal) cost of the transaction for the seller. Were such fiscal burden to exist, it would probably be passed on, in whole or in part, in the referred price, increasing it and making the acquisition more onerous.

Means Element

In accordance with article 38, no. 2 of the LGT, the tax advantage, in order to be considered abusive, must be achieved through acts or legal transactions "by artificial or fraudulent means and with abuse of legal forms". As Gustavo Lopes Courinha stresses, what is aimed at here are "complex and unusual forms (in most cases forming an unreasonable and cumbersome structure (…)" in the context of an "anomalous option"[22].

According to Sérgio Vasques, what is at issue is "a fraud upon the principles of the system, in which the taxpayer carries out a transaction that is immediately in conformity with the law but whose contours escape all and any economic rationality, explicable only by the intent to obviate the tax that would derive from recourse to more common transactional forms."[23]

Let us see.

In accordance with the Tax and Customs Authority, the shareholder composition of "Pharmacy …" did not reveal the intention of creation of an "economic unit that would justify the use of the joint-stock company figure, insofar as the four new shareholders are close relatives and 3 of them subscribe only symbolic amounts", constituting a small enterprise and with annual billing volumes between 2006 and 2010 oscillating between 543,215 euros and 774,212 euros in a progression generally increasing (with the exception of the year 2008).

With all due respect, from this argument there does not emerge evidence of the fraudulent, artificial or abusive character of legal forms of the transformation of the limited partnership into a joint-stock company followed by the disposal of the respective equity interest held by the Claimant.

The Tax and Customs Authority clings to a reductive vision of the joint-stock company whose model would correspond only to that of a large capital company, of non-family character. It appears, however, that this is not the current matrix of this corporate form in the law of companies.

Paulo Olavo Cunha teaches that "Joint-stock companies can at present take on diverse configurations, depending on the structure of their capital, being able to:

• present themselves as relatively closed, with limitations on the transferability of their respective interests;

• correspond to the typical model of joint-stock company, as is enshrined in the CSC, or

• constitute themselves as companies with capital open to investment by the public, being designated abbreviately as open companies."[24]

"The first are joint-stock companies of a markedly family character, in which the small number of partners opted for this type for reasons unrelated to its substantive characteristics. The law does not autonomize them relative to the latter, but permits them the utilization of rules that bring them closer to limited partnerships (…) There has been assistance to an increasingly frequent option for the form of joint-stock company and the transformation of numerous limited partnerships into joint-stock companies"[25].

With this author concluding that "joint-stock companies correspond, par excellence, to the modern commercial enterprise (…) They concentrate today the great part of the productive result of the economy and the wealth of developed nations"[26].

It appears, thus, that the form of joint-stock company is not only not inadequate to enterprises of a family character but constitutes even the current paradigm of modern commercial enterprises, for which reason it is not seen that evidence has been adduced that the underlying legal transaction of transformation was carried out in an artificial, abusive or fraudulent manner, once that such corporate form is adequate to enterprises of diverse format and size, encompassing both the small and medium family enterprise and open companies[27].

In effect, the joint-stock company constitutes an adequate and suitable vehicle for the pursuit of an economic activity, within the framework of a family business, in diverse business dimensions, whether of small, medium or large enterprise, or with capital more or less open to third parties.

The transformation of the corporate form (from limited partnership into joint-stock company) does not in these circumstances constitute an anomalous and unusual option or an "indirect transaction", nor can it be stated that the limited partnership is the most common form as opposed to the joint-stock company.

As, in an identical manner, the subsequent disposal of the shares cannot be considered anomalous, perfectly suited to the transfer of the underlying business.

The fact that the adoption of the referred corporate form had as a consequence (and even as a motive, as was verified above) a tax advantage does not constitute a valid criterion for assessing the artificial character of the means, to be assessed in another plane, which is that of the suitability of the acts for the pursuit of the business aimed at in a framework of normality.

We are, in sum, in the domain of the space of free choice of means of private and economic action, concluding for the non-verification of the element relating to the artificial character of the means or to abuse of legal forms.

Normative Element

The verification of this requirement aims to distinguish cases of tax avoidance (extra legem) from cases of intra legem tax planning.

The delimitation of the boundaries of the evasive act depends on the "requirement of disapproval by the Tax System of the result obtained"[28] through the confrontation of the result pursued with the intention or spirit of the law, the Code of the tax in question or the tax legal order itself as a system of distribution of tax burdens.

The divergence in the treatment of capital gains obtained from the disposal of quotas and shares constitutes the school example on which J.L. Saldanha Sanches relies to conclude that: "if the legislator, while taxing capital gains from the disposal of quotas, leaves the capital gains from shares untaxed or taxes them at a reduced rate, one cannot help but accept fiscally the transformation of a commercial company into a company with shares even if the transformation is motivated by exclusively fiscal reasons."[29]

And likewise, we add in reinforcement of this illustration, if the legislator decides that a certain savings instrument, such as for example a retirement savings plan or a share savings plan, should have a privileged tax regime, it is not at all reproachable by the legal order that taxpayers channel their savings that were previously applied to other instruments (such as, by way of example, fixed-term deposits) to the new products that benefit from tax advantages, solely and exclusively in order to access that more favorable tax treatment and reduce or eliminate their tax burden.

A different question is whether at the legislative level such distinctions reflect the correct distribution of tax burdens and, if not, whether that inadequacy is, at least, duly justified in light of other objectives, extra-fiscal.

In effect, since the commencement of the IRS Code, the different tax treatment of capital gains obtained from the disposal of quotas and shares has deserved criticism and proposals for legislative change.

Recall, for example, the proposals from the Reports of the Commission for the Development of Tax Reform, in 1996[30], and of the Working Group for the Study of Fiscal Policy, Competitiveness, Efficiency and Justice of the Tax System, in 2009[31], and the attempts to implement legislative changes that would end this discrimination[32].

On this disagreement and the evolution and rationale of such regime, consultation is made of the arbitral decision of case no. 43/2013, of 26 November 2013, which notes that it was "a measure intended to encourage the transformation of limited partnerships into joint-stock companies (Maria Teresa Barbot Veiga Faria, Status of Tax Benefits, explanatory notes, 1995, Rei dos Livros Publisher, p. 176). And, contrary to what AT contends in the proceedings, the law does not restrict such incentive to certain capital markets situations (e.g. listed companies), being very doubtful that such restriction would increase the legitimacy of the discrimination...".

However, independently of the disagreement with the legislative policy underlying this, in this normative context, one must conclude "as has been concluded in identical situations (Cases 123/2013, 124/2013 and 138/2013) submitted to tax arbitration at the CAAD, that the normative element, associated with the disapproval of the tax legal order, is lacking in this case, without which the general anti-abuse clause is not applicable." [33]

"For if the transformation of a limited partnership into a joint-stock company were motivated by exclusively fiscal reasons, one would not be facing a reprehensible act vis-à-vis the tax legal order, since the legislator itself opted for taxing in IRS the gains deriving from the sale of quotas and for not taxing in the context of that tax the gains resulting from the sale of shares." [34]

"A situation such as this, in which the legislator resisted at length in eliminating such regime maintaining a 'conscious gap in taxation', is not susceptible to the application of the general anti-abuse clause. And it does not fall to the law applier to substitute itself for the options of taxing or not taxing certain realities followed by the fiscal legislator" [35].

Consequently, the normative element (of disvalue) cannot be found to be verified, which constitutes an essential presupposition for application of the GAAC regime.

Sanctioning Element

Given that the cumulative verification of all the requirements necessary for application of the GAAC has not been demonstrated, in particular as regards the means element and the normative element, there is no place for application of the enactment of the rule, leading to the ineffectiveness of the legal transactions within the tax sphere, contrary to the position defended by the Tax and Customs Authority.

In conclusion,

For one to conclude by the applicability of the GAAC we would have to identify an intention of abusive conduct that is "as clear and unequivocal as is clear and unequivocal the intention of the legislator to tax that type of operations".[36] Now, given what is set forth above, such certainty is not achieved in this case.

What appears clear in this case is that the legislator intended to exclude from the scope of IRS the capital gains obtained from the transmission of shares as a measure to encourage the transformation of limited partnerships into joint-stock companies, for which reason the conduct of the Claimant cannot be censured as it conformed to that purpose.

On the other hand, as was decided, for example, in Case no. 43/2013-T mentioned above, "there exists no prohibition on opting for a less fiscally onerous conduct, when that option is not artificial and/or prohibited by law (…)". In effect, choosing the less onerous conduct does not mean, ipso facto, that one is faced with an illegitimate tax planning.

The presuppositions of fact and law on which the application of the General Anti-Abuse Clause depends are thus not judged to be verified.

In consequence, the acts of assessment of IRS and compensatory interest relating to the year 2009 are declared illegal by violation of the provision in article 38, no. 2 of the LGT, suffering from error as to the presuppositions of fact and law, and, in consequence, are annulled under article 135 of the Administrative Procedure Code.

On Indemnity Interest

The Claimant lodges a claim for indemnification of "all damages suffered (…) including the respective indemnity interest".

There can be no doubt that the claim relating to indemnity interest has standing in the present procedural means.

In effect, article 24, no. 5 of the RJAT provides that "payment of interest, independent of its nature, is due, in accordance with the terms provided for in the general tax law and in the Tax Procedure and Process Code", which, combined with the fact that the arbitral process is an alternative to judicial appeal, must be understood as permitting the condemnation of the Tax and Customs Authority to the payment of indemnity interest in the arbitral process.

Consultation is made to this extent of article 124 of Law no. 3-B/2010, of 28 April, which authorized the Government to legislate "in the sense of instituting arbitration as a form of alternative jurisdictional resolution of conflicts in tax matters", in order that the tax arbitral process would constitute an alternative procedural means to the judicial appeal process and to the action for the recognition of a right or legitimate interest in tax matters.

It should also be noted that, notwithstanding the fact that the judicial appeal process is essentially a process of mere annulment, characterized by constitutive pronouncements (articles 99 and 124 of the CPPT), in it the Tax and Customs Authority may be condemned to the payment of indemnity interest which, in accordance with article 30, no. 1, paragraph e) of the LGT, integrates the tax and indemnification relationship for undue security (also supporting this are articles 43, no. 1 of the LGT and 61, no. 4 of the CPPT).

It is further added that in accordance with the provision in article 100 of the LGT "the tax administration is obliged, in case of total or partial merit of a claim, judicial appeal or appeal in favor of the taxpayer, to immediately and fully restore the legality of the act or situation object of the dispute, comprising the payment of indemnity interest, if applicable, as from the end of the deadline for execution of the decision".

The cited provisions of the LGT and the CPPT are applicable not only in consequence of the mentioned alternative character of the arbitral means to judicial appeal, but also by the express reference, as subsidiary law, of article 29, no. 1, paragraphs a) and c) of the RJAT.

In the case at hand the presuppositions of article 43, nos. 1 and 2 of the LGT are met, given the illegality of the acts of assessment of IRS and compensatory interest, which implies the restitution of the amount paid by the Claimant in the sum of € 151,354.19, and its imputation to the Tax and Customs Authority, which practiced the tax acts on its own initiative in error as to the presuppositions of fact and law, and, in this manner, without legal foundation.

Thus, the Claimant is entitled to indemnity interest, calculated on the amount of € 151,354.19, at the applicable rate in force between the date of payment made by the Claimant and when it will be reimbursed of that amount, currently 4% (cf. articles 43, no. 4 and 35, no. 10, both of the LGT; 61, nos. 2 to 5 of the CPPT; 559 of the Civil Code and Ministerial Order no. 291/2003, of 8 April).

However, the merit of the claim for indemnity interest does not extend to the claim for indemnification of all damages suffered lodged by the Claimant, which cannot be known or examined in arbitral proceedings.

In fact, in cases in which the taxpayer intends an indemnification superior to that which results from indemnity interest, the proper means to concretize such right will be an action for the recognition of a right (cf. article 145 of the CPPT) or, at the limit, a common administrative action (see to this extent the study of Jorge Lopes de Sousa, On the Civil Liability of the Tax Administration for Unlawful Acts, Practical Notes, Áreas Publisher, 2010, in particular pp. 127 to 131).

Although the Law that authorized the Government to legislate on the RJAT provides for the arbitral process also as an alternative means to the "action for the recognition of a right or legitimate interest in tax matters"[37], the fact is that "Decree-Law no. 10/2011, of 20 January (RJAT), implemented the mentioned legislative authorization with a narrower scope than initially provided, not specifically contemplating an alternative competence to that of the action for the recognition of a right or legitimate interest in tax matters", as stressed in the arbitral decision issued in case no. 76/2012-T, of 29 October 2012.

Thus, it is not possible to know of the claim in that segment, being the same denied.

DECISION

In view of which, this panel of arbitrators concludes for the merit of the request for declaration of illegality of the IRS assessments and compensatory interest object of this action and, in consequence, agrees to:

• Annul the acts of assessment of IRS and compensatory interest, in the total amount petitioned of € 151,354.19;

• Condemn the Tax and Customs Authority to reimburse to the Claimant the amount paid of € 151,354.19;

• Condemn the Tax and Customs Authority to the payment of indemnity interest on that amount, at the legal rate, counted from the date on which the payment was made until the complete reimbursement of those sums.

The value of the case is set at € 151,354.19, in accordance with the provisions of articles 3, no. 2 of the Regulation of Costs in Arbitration Proceedings ("RCPAT"), 97-A, no. 1, paragraph a) of the CPPT and 306, nos. 1 and 2 of the Civil Procedure Code.

The amount of costs is set at € 3,672.00 at the charge of the Tax and Customs Authority, as the defeated party in these proceedings with total set-off, in accordance with the provisions of articles 12, no. 2 of the RJAT and 4, no. 4 of the RCPAT and with the general procedural rule on costs contained in article 527, nos. 1 and 2 of the Civil Procedure Code.

Let notification be made.

Lisbon, 31 July 2014

Text prepared by computer, in accordance with article 131, no. 5 of the Civil Procedure Code (CPC), applicable by reference from article 29, no. 1, paragraph e) of the RJAT, with blank verses and reviewed by the panel of arbitrators.

The drafting of the present arbitral decision is governed by the old spelling.

The arbitrators,

Alexandra Coelho Martins

José Rodrigo de Castro

Miguel Patrício

[1] Cf. "Legitimate Tax Evasion: Concept and Problems", in Science and Tax Technique no. 143, Centre for Tax Studies, Lisbon, November 1970, pp. 41-97.

[2] Although not always accompanied by uniform terminology by all authors. By way of illustration and example, see, Luís Menezes Leitão "Tax Evasion and Fraud vis-à-vis the Theory of Interpretation of Tax Law", in Tax no. 32, 1991, p. 12 et seq.; João Taborda da Gama, "Evasive Act, Harmful Act – Notes on the Admissibility of the Combat of Tax Evasion in the Portuguese Legal Order", in Law Faculty Review of the University of Lisbon, Vol. XL, nos. 1 and 2, Coimbra Publisher, 1999, pp. 289-316; J. L. Saldanha Sanches, The Limits of Tax Planning, Coimbra Publisher, 2006, pp. 21-24.

[3] Cf. J. L. Saldanha Sanches, The Limits …, p. 22.

[4] On the doctrine of fraud upon the law, with origins in Roman law, see António Menezes Cordeiro, "Brief Notes on Fraud upon the Law", in Studies on the occasion of the XXXth anniversary of the Centre for Tax Studies, Lisbon, 1993, pp. 121-128: "Contra legem facit quid id facit quod lex prohibet, in fraudem vero qui salvis legis verbis sententiam eius circumvenit" - (Paulus, D. 1.3.29; cf. also Ulpianus, D.1.3.30), in the translation of J. de Castro Mendes "He acts contrary to law who does what the law prohibits; he acts in fraud of the law who avoids its command while respecting the words of the law" - General Theory of Civil Law, Vol. II, AAFDL, 1979, p. 332.

[5] In this sense, João Taborda da Gama, "Evasive act …", pp. 294, 313 and 314, and J. L. Saldanha Sanches, The Limits …, pp. 102-104 and, from this Professor, "Abuse of Law in Tax Matters: Nature, Scope and Limits", in Science and Tax Technique no. 398, Centre for Tax Studies, Lisbon, Apr.-Jun. 2000.

[6] The ineffectiveness affecting legal acts should be merely fiscal. Even because conducts in fraud of law may have other non-fiscal purposes that are legitimate and, consequently, should not, in that sphere, be affected by any invalidating sanction.

[7] In this sense, Manuel de Andrade dispenses with the enshrinement of the fraud upon law regime through legislation: "if we think well about it, the entire problem reduces to the correct interpretation of the prohibitive rule, according to its purpose and substantial scope. This said, there will be relevant fraud if it is shown that the intent of the law was to prohibit not only the transactions that it specifically aimed at, but any others tending to pursue the same result, only not mentioning them because it did not foresee their possibility, or it was deliberately a mere exemplificative purpose. One speaks in this case of material rules. There will be no relevant fraud if it is ascertained that the law specified certain transactions only because it wanted to combat certain means (those same transactions) of achieving a given end or result, on account of deeming them particularly grave and dangerous" – cf. General Theory of Legal Relationship, Vol. II, Almedina, 9th reprint, Coimbra, 2003, pp. 377 et seq.. See also, with identical position, Carlos Pamplona Corte-Real, "Extensive Interpretation as a Process to Repress Fraud upon Law in Portuguese Tax Law", in Science and Tax Technique no. 152-153, Aug.-Sep. 1971, Centre for Tax Studies, Lisbon, pp. 43-75.

[8] See the enlightening summary of Gustavo Lopes Courinha, in The General Anti-Abuse Clause in Tax Law Contributions to its Understanding, Almedina, 2004, pp. 149 to 161, this doctrine tracing back to the Reichsabgabenordnung of 1919.

[9] Cf. The Indirect Transaction in Tax Law, in Science and Tax Technique no. 147, Centre for Tax Studies, Lisbon, March 1971, pp. 7-9 (offprint).

[10] Despite the merits of these theories, it is noted that evasion is not realized solely through the adoption of legal transactions, being able to be achieved through simple legal acts, mere procedures or material operations.

[11] On this subject see Charles Robbez Masson, The Notion of Tax Evasion in French Domestic Law, Library of Financial Science, Vol. 29, LGDJ, Paris, 1990 (with preface by Maurice Cozian), pp. 289 et seq., according to which the notion of abnormal act of management results from a "building built long and patiently from legal jurisprudential root", and presents undeniable advantages for the French Tax Administration, in light of its vast field of application.

[12] Cf. Fraud Upon Law, Simulation and Abuse of Forms in Tax Law, second edition, Marcial Pons – Legal Monographs, 1999, pp. 65 et seq..

[13] Complemented by article 63 of the CPPT which contains the procedural regime for application of the GAAC.

[14] On this subject see J.L. Saldanha Sanches, Manual of Tax Law, 2nd edition, Coimbra Publisher, 2002, pp. 120-123; José Casalta Nabais, Tax Law, 2nd edition, Almedina, Coimbra, 2003, pp. 207-223 and M.H. de Freitas Pereira, Taxation, Almedina, September 2005. The latter stresses that "we are faced with an application in the tax domain of the so-called doctrine of abuse of legal forms. Thus, the tax law, aiming to reach with taxation a certain taxpaying capacity, resorts for this effect to acts or legal transactions that are normally used to achieve the end or the economic result associated with that capacity. If the taxpayer reaches this same end or result using acts or transactions, albeit lawful, unusual or artificial in the situation in question should be subject to identical tax burden. That is the true reason for being of the anti-abuse rule", pp. 415-416.

[15] Wording introduced by Law no. 30-G/2000 of 29 December.

[16] See Gustavo Lopes Courinha, The General Anti-Abuse Clause …, p. 165.

[17] Cf. The Limits …, p. 170.

[18] Cf. The General Anti-Abuse Clause …, p. 165.

[19] In accordance with articles 10, no. 1, paragraph b) and 72, no. 4 of the IRS Code, in the wording of Decree-law no. 192/2005, of 7 November.

[20] Introduced by Decree-law no. 228/2002, of 31 October.

[21] In the capacity of owner of the transferred equity interest and beneficiary of the income.

[22] Cf. The General Anti-Abuse Clause …, p. 185.

[23] Cf. Manual of Tax Law, Almedina, 2011, p. 313.

[24] Cf. Law of Commercial Companies, Almedina, May 2006, pp. 30 and 31.

[25] Cf. Law …, pp. 33 and 34.

[26] Cf. Law …, p. 34.

[27] It should be noted that the economic substance of "Pharmacy …" which effectively conducted a business activity for profit was never put in question, whose billing in the year 2009 amounted to 604,864 euros. Thus, we are not faced with a situation similar to or comparable to that examined by the Decision of the TCA South, of 14 February 2012, in case no. 5104/11, in which the held company did not have "typical and normal commercial activity and neither assets nor any physical structure, in which the acts practiced did not aim to generate any profit for itself, as an autonomous entity, having only practiced formal acts of intermediation".

[28] Cf. J.L. Saldanha Sanches, The Limits …, pp. 182-183.

[29] Cf. J.L. Saldanha Sanches, The Limits …, p. 182.

[30] Cf. Edition of the Ministry of Finance, 1996, p. 479.

[31] Cf. pp. 195-196, note 89.

[32] Cf. Resolutions of the Council of Ministers no. 119/97, of 14 July, and no. 10/98, of 23 January.

[33] We follow the reasoning of the decision issued in Case no. 43/2013 mentioned above.

[34] Idem.

[35] Idem. Cf. J.L. Saldanha Sanches, The Limits …, pp. 180-182.

[36] Cf. Case no. 43/2013 (note 21) mentioned above.

[37] Cf. article 124 of Law no. 3-B/2010.