CAAD 196/2018-T: SGPS Capital Gains Deductibility and Fair Value Measurement Under EBF Art. 32(2) IRC Ruling

ARBITRATION DECISION (see full version in PDF)

The arbitrators Dr. Jorge Lopes de Sousa (arbitrator-president, designated by the other Arbitrators), Prof. Doctor Tomás Castro Tavares and Dr. Carla Castelo Trindade, designated by the Claimant and the Respondent, respectively, to form the Arbitral Court, constituted on 04-07-2018, agree as follows:

1. Report

A... SGPS, S.A., legal entity no.... with registered office at ..., no...., in ... (...-...), (hereinafter referred to as the "Claimant"), filed a request for constitution of a collective arbitral court, pursuant to the combined provisions of articles 2.º, no. 1, paragraph a), 6.º, no. 2, paragraph b), and 10.º, nos. 1 and 2, of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), with a view to declaring illegal the additional corporate income tax (IRC) assessment and compensatory interest relating to the fiscal year 2013, issued under no. 2017..., dated 08-05-2017, resulting in a value to be paid of € 554,941.10.

The request for constitution of the arbitral court was accepted by the President of CAAD and notified to the TAX AND CUSTOMS AUTHORITY on 16-04-2018.

The signatories communicated acceptance of their office within the applicable period.

On 14-06-2018, the Parties were notified of the designation of the arbitrators, having expressed no intention to refuse, pursuant to the combined provisions of article 11.º no. 1 paragraphs a) and b) of the RJAT and articles 6.º and 7.º of the Code of Ethics.

Thus, in compliance with the provision in paragraph c) of no. 1 of article 11.º of the RJAT, the collective arbitral court was constituted on 04-07-2018.

The Tax and Customs Authority responded, contesting the merit of the request for arbitral ruling.

By order dated 24-09-2018, it was decided to waive the holding of the meeting provided for in article 18.º of the RJAT and for the proceedings to continue with optional pleadings.

The Parties presented pleadings.

The arbitral court was regularly constituted and is competent.

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

The proceedings do not suffer from nullities.

A decision must be rendered.

2. Facts

2.1. Proven Facts

The following facts are considered proven:

• The Claimant is a holding company dedicated to the activity of management of non-financial equity stakes;

• Together with other entities forming part of the so-called "Group B..., the Claimant is integrated into a Tax Group subject to the special regime for taxation of groups of companies (RETGS), of which it is the dominant company;

• A tax inspection action was carried out on the Claimant for the fiscal year 2013, in which the Report of the Tax Inspection was drawn up, which constitutes document no. 4 attached to the request for arbitral ruling, the content of which is reproduced in full, which states, among other things, the following:

II.3.8 - Equity Stakes Held

With respect to the fiscal year 2013, from the analysis of accounting elements and as set out in the map sent by the company to the General Directorate of Finance, A... SGPS SA held the following financial stakes (see annex 2 fls.02 2);

(...)

III - Description of the facts and grounds for purely arithmetic corrections to taxable income

In the course of the inspection action carried out for the fiscal year 2013, the accounting and tax areas selected and analyzed according to the methods and procedures adopted and with the depth considered appropriate in each situation, the following situations were detected, which gave rise to the proposals for correction of the determination of taxable income that are systematized and legally justified below.

III.1 - Of the analysis carried out

All values entered by the taxpayer in table 07 of the income tax return model 22 were subject to analysis, and it was verified that they respect entries evidenced in the accounting elements, with no non-conformities susceptible to correction found therein, except as to situations related to financial charges non-deductible under the terms of the provision in no. 2 of article 32.º of the EBF and deductions related to negative capital variations (transitional regime, provided for in art. 5 of DL 159/2009 of 13/7) of transition adjustments for increases or decreases in fair value relating to financial investments, which in the following points (III.2 and III.3) are described.

III.2. - FINANCIAL CHARGES NOT ACCEPTED FISCALLY IN LIGHT OF ARTICLE 32.º NO. 2 OF THE TAX EXEMPTION STATUTE (EBF)

From the analysis of the financial statements for the fiscal year 2013, it was verified that A... SGPS SA declared financial expenses without proceeding to their correction in the income tax return Model. 22, pursuant to no. 2 of article no. 32º of the E.B.F.

III.2.1. - Legal Framework of Article 32.º No. 2 of the Tax Exemption Statute (EBF)

Article 32.º no. 2 of the Tax Exemption Statute (EBF) provides, in the wording in force on the date of the facts now examined by the Tax Inspection (as given by Decree-Law no. 108/2008, of 26/06), that: "the gains and losses realized by SGPS and SCR through the onerous transfer, by whatever means effected, of equity stakes of which they are holders, provided that held for a period of not less than one year, and also the financial charges incurred with their acquisition, do not participate in the formation of the taxable profit of these companies".

With this provision, the legislator sought to establish the general rule of exclusion from taxation of gains realized on the onerous transfer of equity stakes held by SGPS (regardless of the legal transaction that gave rise to it, whether the shares were acquired by purchase or subscription, whether their acquisition value was or was not subject to appreciation, by incorporation of other assets, namely merger ...), for a period equal to or greater than one year, by whatever means effected, and concomitantly, the legislator understood that, as gains do not participate in taxable profit, financial charges incurred with acquisition, reinforcement, or maintenance (capital loans) of the equity capital of the stakes held should also cease to participate.

Through instruction no. 7/2004 of 30/03/2004 of the Corporate Income Tax Service Directorate, the Tax Administration clarifies that:

• The new regime, regarding financial charges, is applicable "in periods beginning after 1 January 2003, even though they relate to financing contracted before that date" (point 5).

• The fiscal year in which financial charges should be disregarded as costs for tax purposes, "should proceed, in the fiscal year to which they relate, to the tax correction of those incurred with the acquisition of stakes that are susceptible to benefiting from the special regime established in no. 2 of article 31º of the EBF, regardless of whether all conditions for application of the special tax regime for gains are already met ..." (point 6).

• Regarding the method of calculation and allocation to be used for purposes of allocating financial charges to equity stakes, point 7 provides that "given the extreme difficulty of using ... a method of direct or specific allocation and the possibility of manipulation that it would allow, such allocation should be effected on the basis of a formula that takes into account the following: the remunerated liabilities of the SGPS and SCR should be allocated, first and foremost, to remunerated loans granted by these to the participated companies and to other interest-bearing investments, with the remainder allocated to other assets, namely, equity stakes, proportionally to their respective acquisition cost".

The non-consideration as expense of financial charges for purposes of determining taxable profit established in the wording of article 32.º no. 2 of the Tax Exemption Statute (EBF) constitutes a corollary of the general principle of indispensability of expenses, according to which the final deduction thereof is conditioned by its connection with the obtaining of income subject to tax, and from which it follows that "if certain costs are related to income not subject to tax, they are not fiscally deductible - cfr Freitas Pereira, "The Period of Taxable Profit", in Tax Science and Technique no. 360, January - March 1988, p. 140 - principle which informs the provision in article 23.º of the Corporate Income Tax Code.

This rule thus presupposes a correspondence between the non-taxation of results obtained with the sale of equity stakes and the deductibility of expenses associated with the holding of these assets.

The factuality arising from the analysis carried out on the elements submitted by the taxpayer, in compliance with its reporting obligations, implies that, if it is sought that in the fiscal year in question, financial charges were incurred.

Accordingly, an adjustment must be made to the taxable profit relating to financial charges allocated to the holding of equity stakes that are susceptible to benefiting from the special regime established at the time in no. 2 of article 32.º of the EBF.

III.2.2. - Determination of Financial Charges Not Accepted Fiscally Under No. 2 of Article 32.º of the E.B.F.

Presented below, in accordance with the trial balance before determination of results (in annex 3, fls. 1 to fls. 7) is a table showing the financial charges incurred by A... SGPS SA, in the fiscal year under analysis:

[TABLE]

The company A... SGPS SA was questioned about the reason for not applying no. 2 of article no. 32º of the E.B.F., to the financial charges incurred, and responded (see annex 4, fls. 13, verso):

"Regarding the Fiscal Year 2013, A... SGPS, S.A. did not apply no. 2 of Article 32º of the EBF, regarding Non-Deductible Financial Charges relating to capital stakes held at Acquisition Cost, since none of the financing had as its purpose the Acquisition of Capital Stakes of Companies held at Acquisition Cost."

From the elements in the possession of the Tax Administration, namely, those collected in the context of inspection procedures for the fiscal years 2010, 2011 and 2012, the taxpayer stated that the loans obtained were channeled for the acquisition of shares of C... .

From the analysis of the arguments presented by the company, we conclude that the taxpayer considers that the loans obtained are not related to the acquisition of capital stakes measured at acquisition cost, but rather with the acquisition of C... shares.

However, such understanding by the taxpayer cannot be accepted, in light of the Tax Administration's interpretation of the provision contained in no. 2 of article 32.º of the E.B.F., interpretation set forth in circular 07/2004 of 30/03, already previously described in point III.2.1. of this report.

That is, to the situation at issue, having regard to the corporate purpose of the company in question, it is not possible to establish a direct relationship between a particular loan and a particular acquisition of capital stake (acquisition of C... shares), nor the converse, as A... SGPS SA claims in the present procedure, that the loans obtained are not related to the acquisition of capital stakes measured at acquisition cost, due to the fact that one of the characteristics of money is its fungibility, making it extremely difficult and with an acceptable degree of reasonableness to state that a particular monetary means is directly related to a financial asset, and, on the basis of this finding, the Tax Administration, interpreting and applying the law, made the aforementioned circular 07/2004 of 30/03 public.

Moreover, regarding the extreme difficulty of effecting a direct allocation, the taxpayer, within the scope of its corporate purpose, among others, not only contracted bank loans for the purpose of acquiring C... shares, but also contracted loans for treasury support purposes, is a party to financial leasing contracts, receives funds from its equity holders, makes loans to its subsidiaries, and also held significant monetary values prior to the use of the loan contracted from D... (€100,300,000.00), in the amount of €8,000,000.00 - see annex 4, fls 1 (element collected in the context of inspection for the years 2010, 2011 and 2012), whereby it is not possible to guarantee that a particular monetary means obtained is related to a particular asset, as the fungibility of money prevents this direct association.

Furthermore, on the matter in question, the Corporate Income Tax Service Directorate spoke out, PROC. IRC: 58/2008, of 28-06-2008, stating in its point 8, the following:

"...: In fact, the fungibility of money makes it extremely difficult to determine, with exactness, what is the specific application of capital obtained, for example, through a particular loan. Therefore, the indirect method referred to above should always be used for the calculation of financial charges that will not be deductible for tax purposes, in order to avoid the possibilities of manipulation of results if this were not done."

In this way, the calculation proceeds of the total non-deductible financial charges under art.º 32 no. 2 of the EBF, together with what is stipulated in Circular 7/2004 of 30/03, as indicated below:

Remunerated Asset (loans granted / remunerated deposits)

From the analysis of the accounting documentation (analytical trial balance and elements / information collected - see annex 3 fls. 3 and annex 4 fls. 8), it is verified that A... SGPS SA granted to the subsidiaries, by way of non-remunerated loans / contributions (account 266) the amount of €7,488,451.22.

The company holds a time deposit in the amount of €77,400.00, constituting the only remunerated asset - see annex 3 fls. 2 and annex 4 fls. 8.

Remunerated Liability (loans obtained)

From the analysis of the accounting documentation - see annex 3 fls. 3 and annex 4 fls. 13, it is verified that A... SGPS SA obtains loans from its subsidiaries (account 254) in the amount of €17,248,563.77, however these, as they do not generate costs, are part of non-remunerated liabilities.

In accounts 251 and 272, the remunerated loans obtained are found - see annex 3 fls. ¾ and annex 4 fls. 10, generators of expenses of the nature of interest and other banking operations, which are listed below:

[TABLE]

Other Non-Remunerated Assets

Based on the analytical trial balance (in annex 3) and the company's balance sheet, the following describes the total non-remunerated asset:

[TABLE]

Of the Acquisition Cost (Acquisition Cost) of Equity Stakes

It is important to note, with reference to the capital stakes held by A... SGPS SA, schematized in table 4 of point II.3.8. of this report, that the stake held in C... (less than 5% and listed on a regulated market), following the approval of the Accounting Standards System (SNC), with effect from 01-01-2010, came to be measured at fair value through results, and therefore, the adjustments arising therefrom are subject to the deduction rules provided for in paragraph a) of no. 9 of article 18.º of the Corporate Income Tax Code. In this way, to the stake held in C... by A... SGPS SA, no. 2 of article 32.º of the EBF does not apply, by force of paragraph b) of no. 1 of article 46.º of the Corporate Income Tax Code.

Let us next examine the total value of capital stakes, measured at acquisition cost, that benefit from the provision in no. 2 of article 32.º of the E.B.F., in accordance with what appears in the financial statements:

[TABLE]

Calculation of Non-Deductible Financial Charges Under No. 2 of Article 32.º of the E.B.F.

Having established the values in the preceding tables, relating to Financial Charges (Table 5), Remunerated Assets (Table 6), Remunerated Liabilities (Table 7), Other Assets (Table 8) and Capital Stakes (Table 9), the calculation proceeds of the value of financial charges to be disregarded in the determination of taxable profit, (in line 779 of table 7 of the declaration model 22), according to the indirect method contained in Circular 7/04 of 30/03 (the remunerated liabilities of the SGPS and SCR should be allocated, first and foremost, to remunerated loans granted by these to the participated companies and to other interest-bearing investments, with the remainder allocated to other assets, namely, equity stakes, proportionally to their respective acquisition cost), as follows:

[TABLE]

In accordance with the above table, the value to be added for purposes of determining the fiscal result totals €738,799.10.

III.3. - NEGATIVE CAPITAL VARIATIONS (TRANSITIONAL REGIME, ART.º 5.º OF DL 159/2009 OF 13/07.

The matter in question is related to adjustments arising from the change in accounting model from cost (POC) to fair value (IFRS/SNC), with effect from fiscal year 2010, which led to the adaptation of the Corporate Income Tax Code to the new accounting normative, with a transitional regime having been established for the tax deductibility of said adjustments, provided for in art.º 5.º no. 1 of Decree-law no. 159/2009.

It is important to note that A... SGPS SA was subject to inspection procedures covering the years 2010, 2011 and 2012, with the Tax Administration proceeding, in these fiscal years, to correct the value of adjustments for increase or decrease in fair value declared by the taxpayer, in the context of the transitional regime, relating to non-deductible financial charges for the years 2008 and 2009, pursuant to no. 2 of article 32.º of the E.B.F.

Thus, in the fiscal year under analysis, it would impact, proportionally, in the same amount, the values corrected by the Tax Administration in prior fiscal years (2010 to 2012).

However, due to the fact that in the fiscal year 2013 the taxpayer declared in field 705 of the model 22 of the Corporate Income Tax an amount greater than that declared in previous years, an analysis was carried out, as explained below.

III.3.1. OF THE VERIFICATION AND ANALYSIS OF THE VALUE ENTERED IN FIELD 705 OF TABLE 07 OF THE MODEL 22 OF CORPORATE INCOME TAX (NEGATIVE CAPITAL VARIATIONS)

With reference to the Corporate Income Tax return declaration Model 22 of the fiscal year 2013, it was verified that the taxpayer declared in the corresponding table 07 - field 705, negative capital variations (VPN) in the context of application of the Transitional Regime pursuant to article 5.º no. 1 of Decree-Law no. 159/2009, in the amount of €13,259,523.48 - see annex 4 fls. 16.

Regarding the nature of the aforementioned value, the taxpayer clarified the following, see annex 4 fls. 4 and 5.

"The company presents in 2013 an Accounting Result of Euro 2,136,379.64 (positive) and a Tax Result of Euro 13,502,759.97 (negative). The value that accounts for a large part of this difference is relating to negative capital variations (transitional regime provided for in no. 5º, nos. 1, 5 and 6, of DL nº 159/2009, of 13/7) "Field 705 of Q07 of M 22 - where the amount of these negative capital variations was Euro 13,259,523.48.

A... SGPS is the dominant company of a Group of Companies integrated in the Special Regime for Taxation of Groups of Companies (RETGS) and has held since 2007 a financial stake of less than 5% in C..., S.A. (C...), NIF:... .

In the context of the Official Chart of Accounts (POC), i.e., until 31 December 2009, the stake in C... was recorded in the accounting statements at acquisition cost (61,998,932 €), less the impairments that reflected successive reductions in Market Value, which, pursuant to the fiscal norms in force at the time, had no tax significance.

With the approval of Decree-Law 158/2009, of 13 June, of the Accounting Standards System (SNC), which succeeded the POC and entered into force on 1 January 2010, the company proceeded to record the aforementioned stake in C..., in accordance with Accounting and Financial Reporting Standard 27 NCRF 27.

NCRF 27 defines as a measurement criterion for financial instruments in the form of investments in equity instruments with publicly disclosed quotation - which is the case of the stake in C... - the fair value criterion with possible fair value gains and losses recognized directly in the profit for the period.

With the transition to SNC, and in accordance with NCRF 3, the company recognized in equity the effect arising from the recognition at fair value of the stake in C... as of 31 December 2010, i.e., it recognized a loss in the amount of 54,537,180.20 €.

This Fair Value Loss constituted a transition adjustment to SNC, tax-relevant under the terms of the Corporate Income Tax Code, whereby the provision in no. 1 of article 5.º of Decree-Law 159/2009, of 13 June, was applicable to it, a statute aimed at adapting the Corporate Income Tax Code to the international accounting standards adopted by the European Union and to SNC.

In accordance with that article, the Company can deduct from taxable profit, in equal installments, over 5 years (i.e., from 2010 to 2014) in the proportion of 1/5 in each year, that fair value loss.

As stated above, in the declaration of Model 22 Corporate Income Tax of 2013, the company deducted the losses relating to the stake in C... . In this sense, it included in the declaration in field 705 of table 07 of the Dec. Mod. 22 of Corporate Income Tax, the following values:

[TABLE]

The elements in the above table relate to adjustments in fair value related to the financial stake in C..., recognized by the taxpayer in the fiscal year 2010, by force of the change in the accounting normative POC - IFRS/SNC, and tax-deductible in 1/5 in accordance with the transitional regime embodied in nos. 1 and 5 of article 5.º of DL 159/2009 of 13/06.

It is verified that the loss determined in the amount of €54,537,180.20 arises from the difference between the adjustments of C... shares in the years 2008 (-55,512,153.50) and 2009 (974,973.30). As for the total negative adjustment in the amount of -€55,512.153,50, the taxpayer considered 1/5 (in accordance with the transition regime) as negative capital variation, that is €11,102,430.70, but contrary to previous fiscal years, did not apply in 2013, no. 3 of art.º 45.º of the Corporate Income Tax Code, a legal provision that limits the tax deductibility of losses or negative capital variations relating to capital stakes to 50%.

Clarification was requested from the taxpayer, and it responded as per the document in annex 4 fls. 11, which is summarized below:

• After the fiscal year 2012, A... SCPS, S.A., while advised by consultant E... (E...) filed its respective Requests for Administrative Review, deciding to apply the adjustment criterion of 100% of the losses determined by Bank C... .

• It states the rejection by the Tax Administration of the requests for administrative review and subsequent recourse to CAAD, with the decision of the latter being favorable to its claims.

On the same matter of fact, the Tax Administration spoke out in the doctrinal opinion, Process no. 39/2011 of 24-02-2011 of the Director General, having decided:

"Transitional Regime

11 - Thus, the change in accounting policy (from the cost model to the fair value model) resulting from the entry into force of SNC, with retrospective effect, determines, in this case, a loss recognized in retained earnings which, for tax purposes, in accordance with article 45.º no. 3 of the CIRC, participates to the extent of 50% of its value in the formation of the taxable profit of the tax periods of 2010 and of the four following periods.

The Tax Administration, pursuant to art.º 68-A of the General Tax Law, is bound by the generic guidance contained in circulars, regulations or instruments of identical nature, regardless of their form of communication, and cannot fail to apply, in the case at hand, the guidance contained in the aforementioned doctrinal opinion, that is, the application of no. 3 of article 45.º of the C.I.R.C.

A... SGPS SA invokes the favorable decision of CAAD, however CAAD decisions are not uniform, see, for example, the decision contained in process no. 25/15-T of 24-09-2015 (regarding the Subject: Corporate Income Tax - article 18.º, no. 9, paragraph a) and article 45.º, no. 3, of the CIRC - adjustments for fair value), whose decision is favorable to the Tax Administration.

In this way, the Tax Administration cannot consider as negative capital variation the value of €5,551,215.35 (155,512,153.50/5 X 50%) relating to 50% of 1/5 of the value declared by A... SGPS SA, relating to negative adjustments of capital stakes C..., whereby the said value will be increased for purposes of determining the tax result in the year under analysis.

Continuing the analysis of the composition of the value (€13,259,523.48) considered by the taxpayer as negative capital variation (entered in field 705, table 07, model 22 of Corporate Income Tax, fiscal year 2013), shown in the table presented by it and above transcribed, it is verified that the value of €2,317,789.33 under the description "1/5 of financial charges (11,588,964.64 Euros)", relates to fair value adjustments arising from the transitional regime (POC - IFRS/SNC, with effect in the year 2010 and in the four following periods), related to the application of the regime provided for in no. 2 of article 32.º of the E.B.F. and of circular 07/2004, in the years 2008 and 2009.

These adjustments were subject to correction in the context of inspection procedures carried out by the Tax Administration in the fiscal years 2010, 2011 and 2012.

By force of application of the transitional regime, in the fiscal year 2013, the correction proceeds in the same amount and with the same grounds as that carried out by the Tax Administration in the fiscal years 2010, 2011 and 2012, and which is explained below:

In the fiscal years 2008 and 2009, the taxpayer, by application of Circular 7/2004, determined non-deductible financial charges under article 32.º no. 2 of the EBF, which were increased in table 07 of the Income Tax Return Dec. Mod. 22, respectively in the amounts of €6,353,655.85 and €5,235,290.79, totaling €11,588,946.65.

However, the taxpayer, in the declarations Mod. 22 of the years 2010, 2011, 2012, and also in the fiscal year now under analysis, in the heading of negative capital variations considered the total deductibility of these charges, in the proportion of 1/5, under the authority of article 5.º no. 1 of the transition regime from POC to the new accounting normative (IFRS/SNC) provided for in Decree-Law no. 159/2009, proceeding with a direct allocation of all financial charges incurred with the acquisition of capital stakes, whether with capital stakes measured at acquisition cost, whether with those measured at fair value reflected in results (C... shares).

Such situation is explained by the fact that the taxpayer considers that the financing obtained generating financial charges are not related to the acquisition of capital stakes measured at acquisition cost, as described in point III.2.2 of this report, or even, as the taxpayer stated in the context of inspection procedures for the years 2010, 2011 and 2012, that bank loans were channeled for the acquisition of C... shares, that is, from fiscal year 2010 onward, the taxpayer begins to defend a direct allocation of financial charges, and faced with this understanding, did not proceed to correct the financial charges incurred non-deductible under no. 2 of article 32.º of the E.B.F. in the fiscal year under analysis, as well as considered the entirety of financial charges increased fiscally in the fiscal years 2008 and 2009 as negative capital variation, in the proportion of 1/5 in accordance with the rules of the transitional regime.

However, as already mentioned regarding the financial charges incurred in the year 2013, point III.2. of this report, also in the calculation of the negative capital variation relating to the transitional regime, cannot the taxpayer consider that the value of financial charges increased in the fiscal years 2008 and 2009 become wholly deductible, to the extent that, for the reasons already invoked, the application of an indirect method is always required, as determined in circular 07/2004 of 30/03.

Now, with the change in accounting normative, and in the case in question, the capital stake held by A... SGPS SA in C..., came to be measured at fair value, reflected in results, and the variations in fair value are relevant for tax purposes under paragraph a) of no. 9 of article 18.º of the Corporate Income Tax Code, whereby, only to these, the provision in no. 2 of article 32.º of the EBF ceases to be applicable.

Thus, the financial charges incurred in the years 2008 and 2009, related to the capital stake held by A... SGPS SA in C..., not accepted as tax expenses in these prior periods, come to be deductible, being recognized in the context of the transitional regime in the tax period of 2010 and of the four following periods.

In this way, could not the taxpayer, as it did, consider as negative capital variation in the year 2013, 1/5 of all financial charges incurred in the years 2008 and 2009, but only, 1/5 of the charges proportional to the capital stake held in C... .

Such situation determines that for the fiscal years 2008 and 2009, the financial charges that would be accepted fiscally are recalculated, excluding, from the value of acquisition of financial stakes the amount of C... shares, as indicated below:

The content of the tables that follow, constructed on the basis of trial balances before determination of results, fiscal years 2008 and 2009 (see annex 3 fls. 9 to fls. 29) were reproduced from the report of tax inspection, notified to the taxpayer, in the context of inspection procedures for the years 2010, 2011 and 2012:

[TABLES]

Thus, in accordance with the calculations described below, for the fiscal years 2008 and 2009, the amount of financial charges allocated to capital stakes, non-deductible under no. 2 of article 32.º of the EBF, was determined in light of Circular 7/2004 of 30 March, excluding from capital stakes, measured at acquisition cost, the amount of C... shares measured at fair value.

[TABLES]

According to the above, having regard to the financial charges allocated to capital stakes, non-deductible in the fiscal years 2008 and 2009, results in a correction to the value declared as negative capital variation in the fiscal year 2013, in the amount of €1,675,125.22, as determined in the following table:

[TABLE]

In summary, of the value of €13,259,523.48, entered by the taxpayer in field 705, table 07, model 22 of Corporate Income Tax, fiscal year 2013, as negative capital variation, the following are not considered tax-deductible, in accordance with the above set out in this point III.3.1. of this report, the values of €5,551,215.35 (relating to 50% of €11,102,430.70, under no. 3 of article 45.º of the Corporate Income Tax Code, transitional regime) and €1,675,125.22 (relating to non-deductible financial charges under no. 2 of article 32.º of the E.B.F. transitional regime).

III.4. - CORRECTIONS TO THE TAX RESULT

In view of the above set out in the preceding points (III.2 and III.3 of this report), the following table describes the corrections to be made to the tax result declared by A... SGPS SA in the fiscal year 2013:

[TABLE]

IV - Reason and Exposition of the Facts Implying Recourse to Indirect Methods

Not applicable.

(...)

IX - Right to a Hearing

(...)

I - Arguments of the Taxpayer

In the document on the right to a hearing, the company A... SGPS SA comes to set out its arguments on the content of the draft report notified, expressing its disagreement, both as to the application of no. 3 of article 45.º of the CIRC (noting that the exercise of the right to a hearing on the draft corrections is not the proper forum for discussing the question of the applicability of the aforementioned norm, reason for which it defers the discussion of the proposed corrections with this ground to the reaction to the subsequent tax assessment), and as to the application of the limits on the deductibility of financial charges provided for in no. 2 of article 32.º of the EBF, with reference to the financial charges of the fiscal year 2013 and to charges of the same nature incurred in the fiscal years 2008 and 2009, these latter reflected in the capital variation deducted for purposes of determining taxable profit for the year 2013, on the basis of the reasons briefly summarized below:

• The majority of the equity stakes held by A... SGPS SA, whether in 2008 and 2009, or in 2013, excluding the acquisition value of the financial stake relating to C... shares, relate to shares of companies in the group acquired by A... SGPS SA, by means of increases in its capital, by contribution in kind, or accessory contributions in kind made by the respective shareholders, describing and identifying in the hearing document (points i to ix), the capital stakes acquired by A... SGPS SA, also attaching the minutes of deliberation of the General Assembly.

• It states that the acquisition value relating to the majority of the stakes mentioned in the previous point amounts to €155,677,871.54, and cannot this value be disclosed for purposes of determining the value of capital stakes acquired for purposes of gauging non-deductible financial charges under no. 2 of article 32.º of the EBF, for the simple reason that, objectively, they were not acquired with recourse to any financing means.

• Admitting that it would not be illegal to apply the understanding set forth in circular no. 7/2004, stating that it is, requiring that the Services exclude from the basis of determining the ratio of capital stakes to other assets, the shares that, having been acquired via contributions in kind, would manifestly never be susceptible to generating financial charges for purposes of their acquisition.

• It understands that only the value of €2,490,909.46, remaining from the difference between the value of acquisition of stakes considered by the Tax Administration (€158,168,781.00) and the value of €155,677,871.54, could constitute component of the calculation of the equation contained in circular no. 07/2004, as it corresponds to the value of increases in capital in cash effectively realized by A... SGPS SA in the participated companies.

II - Analysis of the Taxpayer's Arguments / Conclusion

It should be noted from the outset that the corrections proposed by the Tax Administration, contained in the draft report notified, as to the value relating to the component Capital Stakes (acquisition cost), for purposes of calculating non-deductible financial charges, pursuant to circular 07/2004, is the sum of the acquisition values of the subsidiaries contained in tables 11 (years 2008 and 2009) and 9 (year 2013) of the draft report.

Expressing the illegality of the application of circular no. 7/2004, A... SGPS SA, nonetheless understands that the Tax Administration would be required to only consider the value of €2,490,909.46 (fiscal year 2013), as the acquisition value, for purposes of the calculation contained in circular 07/2004, however the calculation of the exponent is based on assumptions that do not reflect the reality of the facts, as follows:

The exponent arrived at the result of €2,490,909.46, considering as a deduction the total acquisition value of capital stakes made by contributions in kind (€155,677,871.54) including those relating to companies; F... SA, G... SA and H... SA, and, as an addition, the total acquisition value determined by the Tax Administration (€158,168,781.00 - table 9 of this report), a total value which does not contemplate, the acquisition values of the three aforementioned companies, for the reason that in the fiscal years 2008 and following, those companies, by the analysis carried out, were not part of the asset base of A... SGPS SA, a situation reflected in the minutes no. 18 of the company - see annex 6 fls. 19 and 20.

Thus, admitting the hypothesis of the Tax Administration understanding in the same manner as the exponent (as to the method of determination of the acquisition values of capital stakes, which is not the case as will be explained below), the value of €2,490,909.46, advanced by the exponent, could not be considered, as it results from the difference of two components, whose constituent elements are not entirely relatable.

Regarding the allegation of A... SGPS SA, in respect of the fact that the capital stakes of the majority of the companies held have been made by contributions in kind, and that by not generating financial charges, should not be relevant to the calculation contained in circular 07/2004, the Tax Administration understands, relating to the stakes acquired by the exponent, via contributions in kind, mentioned in the hearing document, and held by her in the years 2008 and later, the following:

The reality is that A... SGPS SA, from the date of 29-12-2006 - see minutes no. 2 in annex 6 fls. 8 to fls. 10, and as of 31-12-2007 - see minutes no. 18 in annex 6 fls. 19 to 20, came to hold, directly and indirectly, the totality of the capital of the companies set out below:

[TABLE]

The acquisition of the capital stakes by A... SGPS SA was effected by means of increases in capital by contributions in kind and accessory contributions in kind, made by its shareholders, who transmitted to her by exchange, the capital stakes (revalorized) of the companies identified in the above table, subscribing in exchange for new shares of A... SGPS SA.

The financial operation, previously performed, configures an actual acquisition by A... SGPS SA, susceptible of generating future benefits for the company, either through distribution of dividends, or by possible sale.

In the case in question, the fact that there is no monetary flow / movement of treasury in the operation previously described, does not imply that we are not facing an actual acquisition and an actual financial investment, on the contrary, the facts fully meet the concepts of acquisition value and financial investment, and cannot be disregarded, having regard to the manner and means by which they are effected, whereby, as already mentioned above, fls. 9 of this report, the company within the scope of its corporate purpose also contracts bank loans, and one cannot, having regard to the fungibility of money, establish a distinction between forms of financing, for purposes of determining non-deductible financial charges.

In this way, there being an actual acquisition, the interpretation of the exponent of the provision contained in instruction Circular no. 7/2004, for purposes of application of no. 2 of article 32.º of the EBF, as to the formation of the value of acquisition of capital stakes, when distinguishing stakes held with recourse to monetary flow / movement of treasury and stakes held with recourse to contributions of assets, is not in line with the instruction contained in circular no. 7/2004, as it is not apparent from the spirit of the instruction, that acquisitions of capital stakes with payment in kind do not enter into the calculation of the value of acquisitions that will be considered, for purposes of allocation of financial charges incurred.

Furthermore, note that the application of the formula (see fls. 11 and 15 of this inspection report), to which point 7 of circular no. 7/2004 refers, does not affect the entirety of the financial charges incurred for acquisition of capital stakes, as part of them is allocated to other assets (see table of other non-remunerated assets, fls. 10 of this inspection report), whereby these non-remunerated assets contain entered values that are also not susceptible to generating financial charges.

Moreover, in an operation of contribution of assets, the beneficiary company will experience an appreciation, and should concomitantly participate in the determination of the calculation of financial charges, the value corresponding to these stakes, in the measure that this will be, in case of sale, what will serve as the basis for the calculation of the gain.

Therefore, for purposes of application of no. 2 of art.º 32.º of the EBF, concatenated with the instruction contained in Circular no. 7/2004 of 30/03, the Tax Administration understands that the total value of acquisition of capital stakes held by A... SGPS SA, with reference to the years 2008, 2009 and 2013, are €157,294,097, €157,774,194.49 and €158,168,781.00, respectively.

By the described, the maintenance of the corrections contained in the draft inspection report duly notified to company A... SGPS SA is proposed.

The respective correction document is drawn up and a notice of offense is filed.

• In the context of its activity, the Claimant contracted, in July 2007, a bank loan with D... in the amount of € 100,300,000.00, on which stamp duty and banking commission were charged in the amounts of € 501,500.00 and € 300,900.00 (Annex 1 and Annex 2 to the inspection report drawn up with reference to the fiscal year 2012 attached to the request for arbitral ruling as document no. 5, and Annex 4 to the inspection report attached as Document no. 4);

• The aforementioned amount was credited to the Claimant's account on 24 July 2007 (aforementioned documents);

• With the same value date, a purchase acquisition of a 1st batch of C... shares was effected by D..., upon instructions of the Claimant, for a total amount, including banking commissions, of €36,200,701.53 (aforementioned documents);

• With the same value date, a purchase acquisition of a 2nd batch of C... shares was also effected by D..., upon instructions of the Claimant, for a total amount, including banking commissions, of € 63,402,778.47 (Annex 1 to the inspection report drawn up with reference to the fiscal year 2012 attached as Document no. 5);

• On 22 April 2008, the Claimant contracted a loan with Bank I..., in the amount of € 9,000,000.00, from which € 45,200.00 was deducted as opening commission and Stamp Duty (Document no. 6 attached to the request for arbitral ruling, the content of which is reproduced in full);

• From this amount, a sum of € 8,900,000.00 was transferred to the Claimant's demand deposit account on 24-04-2008, entirely applied for the acquisition, on 29 of the same month, of a 3rd batch of C... shares for the value of € 9,022,330.78 (Documents nos. 7, 8, and 9 attached to the request for arbitral ruling, the contents of which are reproduced in full);

• The shares acquired in the years in question gave the Claimant a financial stake in the capital of C... of 0.095%;

• This stake had been recorded in accounting according to the historical cost criterion, as required by the Official Chart of Accounts (POC) at the time, and would come to be measured, from 2010 onward, with the transition to the Accounting Standards System, in accordance with the fair value method, with recognition of changes in value directly in the profit for the period, in accordance with Accounting and Financial Reporting Standard (NCRF) 27;

• In the fiscal years 2008 and 2009, the Claimant, in completing the respective income tax returns model 22, added to the net accounting profit for purposes of determining taxable profit the financial charges incurred with the acquisition of the said C... securities, through the allocation method provided for in Circular 7/2004 (Document no. 4);

• From 2010 onward, following the option to adopt the fair value method in the valuation of the stake in question (in C...), the Claimant ceased to add in the model 22 declaration the financial charges incurred in the fiscal year, deducting, in field 705 of the income tax returns model 22 presented with reference to the fiscal years 2010 to 2014, the fair value loss recognized with the transition to SNC, under the transitional regime provided for in article 5.º of Decree-Law no. 159/2009, of 13 July;

• In the model 22 declaration referring to the fiscal year 2013 in question, the Claimant deducted in the said field of the declaration the amount of € 13,259,789.33, of which € 10,941,734.15 related to the adjustment based on the aforementioned Decree-Law no. 159/2009, of 13 July (1/5 of the loss recognized in 2010 arising from the recognition of the stake at fair value), and €2,317,789.33, relating to 1/5 of the financial charges incorrectly added in the fiscal years 2008 and 2009 through the application of Circular 7/2004, allocated to the stake in C...;

• In the year 2013, moreover, the Claimant incurred financial charges relating to bank financing and leasing contracts in the amount of € 861,580.48 (Document no. 4).

• Beyond the stake in C..., the Claimant held, as of the date of the inspection report, capital stakes recorded at the historical acquisition cost, in a total value of € 158,168,781.00 (tables 4 and 9, and Annex 2, fls 2, of the Inspection Report attached as Document no. 4);

• The majority of the capital stakes making up the said amount of € 158,168,781.00 were acquired by the Claimant by means of contribution in kind in its capital, namely the following:

(i) with the stake in company J..., S.A., in the value of € 111,260.00, transmitted to the Claimant through an increase in capital in kind approved by deliberation of 29 December 2006, which resulted in the increase of capital to € 111,310,270.00;

(ii) with the stake in company K..., S.A., in a total value of € 329,600.00, transmitted to the Claimant as accessory contributions in kind;

(iii) with the stake in company L..., S.A., in a total value of € 27,794,300.00, transmitted to the Claimant as accessory contributions in kind;

(iv) with the stake in company M..., S.A., in a total value of € 4,965,600.00, transmitted to the Claimant as accessory contributions in kind;

(v) with the stake in company N..., S.A., in a total value of € 8,900,000.00, transmitted to the Claimant as accessory contributions in kind;

(vi) with the stake in company O..., S.A., in a total value of € 4,557,327.00, transmitted to the Claimant as accessory contributions in kind;

(vii) with the stake in company P..., Lda., in a total value of € 35,000, transmitted to the Claimant as accessory contributions in kind;

• The "acquisition value" relating to the indicated stakes (already considering the reduction meanwhile verified in the stake in company O..., S.A., from € 4,395,600 to € 2,245,500), acquired via contribution in kind in capital, amounts to € 154,960,270;

• Still during the fiscal year 2012, the Claimant carried out an operation of conversion of contributions in company K..., S.A. in the amount of € 184,298.21, into accessory contributions of capital (copy of the minutes which appear in document no. 10 attached to the request for arbitral ruling, the content of which is reproduced in full);

• In 2013, the Claimant carried out an increase in capital in company Q..., S.A., in the amount of € 1,706,282, by contribution in kind in the form of conversion of contributions (copy of the minutes which appear in document no. 11 attached to the request for arbitral ruling, the content of which is reproduced in full);

• Subsequently, an operation of conversion of contributions in company K..., S.A., in the amount of € 172,180.54, into supplementary contributions of capital (copy of the minutes which appear in document no. 12 attached to the request for arbitral ruling, the content of which is reproduced in full);

• From which it results that, of the said amount of € 158,392,847.00, only € 1,145,750.00 result from investments made by the Claimant, through subscription of increases in capital in the participated companies;

• The aforementioned increases in capital occurred distributed over the years 2007 to 2012, with the following detail: 2007: €57,000.00; 2009: €480,097.49; 2010: €322,402.51; 2011: € 221,250; 2012: €40,000 and 2013: € 25,000.00 (Annex 3 to the inspection report drawn up with reference to the fiscal year 2012 attached to the request for arbitral ruling as Document no. 5 and Document no.10);

• In the fiscal year 2013, the Claimant presented, as an individually considered entity, an individual tax loss of € 13,502,759.97 and, as the dominant company of the Group, taxable profit resulting from the algebraic sum of the tax results of the Group, of € 6,799,562.38;

• In November 2015, following a similar procedure to which it had been subject for the fiscal years 2010, 2011 and 2012, the Claimant was subject to an external inspection action by the tax inspection services of the Directorate of Finances of Lisbon with focus on the fiscal year 2013.

• As a result of that inspection procedure, corrections were made to the individual tax result of the Claimant, in the amounts of € 7,965,139.67 (Tax Inspection Report attached as Document no. 4);

• Following these corrections to the individual result, the Claimant was subsequently notified, as the dominant company of the group, of the consequent corrections to the tax results of the Group, setting the tax result at a taxable profit of € 14,764,702.05, in replacement of the initially determined taxable profit of € 6,799,562.38 (Inspection Report for the results of the Group attached to the request for arbitral ruling as document no. 13, the content of which is reproduced in full);

• From these corrections, and considering the effect of the decisions favorable to the Claimant rendered in Arbitration Processes nos. 231/2015-T and 149/2016-T, with impact on the result of fiscal year 2012 and on tax losses reportable to 2013, resulted in the setting of a taxable matter for fiscal year 2013 of € 3,691,175.52, in replacement of the taxable matter of € 1,699,890.59 determined in the model 22 declaration (Document no. 1 attached to the request for arbitral ruling, the content of which is reproduced in full);

• In December 2017, the Claimant was notified of the additional corporate income tax assessment and compensatory interest which is the object of this request for arbitral ruling, which, based on the corrected taxable matter of € 3,691,175.52, proceeds with the determination of tax and compensatory interest additionally to be paid of € 554,941.10, increased by compensatory interest (Documents nos. 1 to 3 attached to the request for arbitral ruling, the contents of which are reproduced in full);

• On 13-04-2018, the Claimant submitted the request for arbitral ruling that gave rise to these proceedings.

2.2. Facts Not Proven and Reasoning for the Facts

The facts were determined to be proven on the basis of the facts alleged by the Claimant not contested by the Tax and Customs Authority, documents attached to the initial petition and which are contained in the administrative file.

The Tax and Customs Authority does not contest what is alleged by the Claimant regarding the matter of fact that it alleges.

3. Legal Issues

The Tax and Customs Authority made corrections to the Claimant's taxable matter for the fiscal year 2013:

• relating to financial charges incurred in 2013, which it considered are not deductible by force of the provision in no. 2 of art.º 32.º of the EBF, in the amount of €738,799.10, a value that was determined by applying the method provided for in point 7 of Circular no. 7/2004, of 30 March;

• relating to negative capital variations, resulting from transition adjustments due to reductions in fair value of financial instruments:

  • in the amount of €5,551,215.35, for the Claimant not having applied the 50% reduction provided for in no. 3 of article 45.º of the Corporate Income Tax Code; and
  • in the amount of €1,675,125.22, because the Claimant could not consider as negative capital variation in the year 2013, 1/5 of the entirety of financial charges incurred in the years 2008 and 2009, but only, 1/5 of the charges proportional to the capital stake held in C..., inasmuch as only to this stake does the provision in no. 2 of article 32.º of the EBF cease to be applicable, in harmony with point 7. of Circular no. 7/2004.

3.1. Question of Corrections Arising from the Application of No. 2 of Article 32.º of the EBF and Circular No. 7/2004, of 30 March

The correction in the amount of € 738,799.10 was made because the Tax Administration considered non-deductible financial charges, pursuant to article 32.º, no. 2 of the EBF, to the extent that it exceeds what results from the application of the indirect method provided for in point 7 of Circular no. 7/2004.

The correction of € 1,675,125.22, by reduction of the negative capital variation entered in table 07 of the model 22 declaration of fiscal year 2013, based on the transitional regime established in no. 1 of article 5.º of Decree-Law no. 159/2009, of 13 July, is based on the following understanding of the Tax Administration:

• the Claimant, in the model 22 declarations presented from fiscal year 2010, including that of 2013, "considered the total deductibility of these charges, in the proportion of 1/5, under the authority of article 5.º no. 1 of the transition regime from POC to the new accounting normative (IFRS/SNC) provided for in Decree-Law no. 159/2009, proceeding with a direct allocation of all financial charges incurred with the acquisition of capital stakes, whether with capital stakes measured at acquisition cost, whether with those measured at fair value reflected in results (C... shares)";

• "in the calculation of the negative capital variation relating to the transitional regime, cannot the taxpayer consider that the value of financial charges increased in the fiscal years 2008 and 2009 become wholly deductible, to the extent that, for the reasons already invoked, the application of an indirect method is always required, as determined in circular 07/2004 of 30/03";

• "with the change in accounting normative, and in the case in question, the capital stake held by A... SGPS SA in C..., came to be measured at fair value, reflected in results, and the variations in fair value are relevant for tax purposes under paragraph a) of no. 9 of article 18.º of the Corporate Income Tax Code, whereby, only to these, the provision in no. 2 of article 32.º of the EBF ceases to be applicable";

• "the financial charges incurred in the years 2008 and 2009, related to the capital stake held by A... SGPS SA in C..., not accepted as tax expenses in these prior periods, come to be deductible, being recognized in the context of the transitional regime in the tax period of 2010 and of the four following periods.

• "In this way, could not the taxpayer, as it did, consider as negative capital variation in the year 2013, 1/5 of all financial charges incurred in the years 2008 and 2009, but only, 1/5 of the charges proportional to the capital stake held in C...".

Thus, also underlying this second correction is the understanding that "the application of an indirect method is always required, as determined in circular 07/2004 of 30/03".

The Claimant disagrees with this understanding of the Tax Administration, defending, in conclusions:

• Having the Tax Administration not demonstrated the verification of the prerequisites that would legitimize recourse to indirect methods of quantification of taxable matter in the case in question, the tax act under review is manifestly illegal, by violation of the constitutional principles of legality and taxation by real income and violation of articles 81.º, no. 1, and 85.º, no. 1, of the General Tax Law;

• By establishing criteria for allocation of financial charges to the acquisition of equity stakes not provided for in law, Circular no. 7/2004 is manifestly illegal by violation of the principle of legality constitutionally established, a defect which extends to the tax act under review that results from the application of those criteria.

• Having failed to demonstrate the existence of financing for the acquisition of capital stakes, or the sale of capital stakes generating gains or losses encompassed by the provision in no. 2 of article 32.º of the EBF, pursuant to the terms imposed by articles 74.º and 75.º of the General Tax Law, the Tax Administration did not meet the factual and legal prerequisites that would legitimize the disregard of the charges incurred by the Claimant under that provision, being also for this reason illegal the corrections made.

• Not being the regime provided for in no. 2 of article 32.º of the EBF applicable to gains obtained and losses suffered with the onerous transfer of financial instruments measured by the fair value criterion, whose positive or negative variations in fair value are recognized directly in the profit for the period, it would always be illegal, by violation of no. 2 of article 32.º of the EBF, the correction of financial charges directly assumed for the acquisition of securities of that nature which underlies the corporate income tax assessment and interest impugned.

• Even admitting that the application of the understanding set forth in Circular no. 7/2004 would not be illegal, the correct application of that provision would always require that, in addition to excluding the loans contracted for the acquisition of the aforementioned financial instruments from the basis of calculation of financial charges allocable to capital stakes, the shares be equally excluded from the basis of determining the ratio of capital stakes, which, having been acquired by the Claimant by way of contributions in kind, would manifestly never be susceptible to generating any financial charges for purposes of their acquisition.

• Being it no more than for this reason manifestly excessive and illegal, in light of the provision in no. 2 of article 32.º of the EBF, the corrections underlying the corporate income tax assessment which is the object of this request for arbitral ruling.

3.1.1. Question of the Mandatory Application of the Method Provided for in Point 7 of Circular No. 7/2004

The first question raised by the Claimant regarding these corrections is, thus, to know whether the Claimant was obligated to apply the method provided for in point 7 of Circular no. 7/2004, to determine the existence of financial charges allocable to the acquisition of equity stakes, for purposes of article 32.º, no. 2 of the EBF.

Article 32.º of the EBF, in the wording in force in 2012 (introduced by Law no. 64-B/2011, of 30 December), establishes the following:

2 - The gains and losses realized by SGPS of capital stakes of which they are holders, provided that held for a period of not less than one year, and also the financial charges incurred with their acquisition do not participate in the formation of the taxable profit of these companies.

In Circular no. 7/2004, of 30 March, the Corporate Income Tax Service Directorate set out its understanding on the application of this norm, saying, among other things, the following:

Method to be used for purposes of allocation of financial charges to equity stakes

1. Regarding the method to be used for purposes of allocating financial charges incurred with the acquisition of equity stakes, given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that it would allow, such allocation should be effected on the basis of a formula that takes into account the following: the remunerated liabilities of the SGPS and SCR should be allocated, first and foremost, to remunerated loans granted by these to the participated companies and to other interest-bearing investments, with the remainder allocated to other assets, namely equity stakes, proportionally to their respective acquisition cost.

Articles 81.º and 85.º of the General Tax Law, invoked by the Claimant, establish the following, insofar as relevant:

Article 81.º

1. Taxable matter is valued or calculated directly according to the criteria particular to each tax, with the tax administration only being able to proceed to indirect valuation in the cases and conditions expressly provided for in law.

Article 85.º

1. Indirect valuation is subsidiary to direct valuation.

2. To indirect valuation shall apply, whenever possible and the law does not prescribe otherwise, the rules of direct valuation.

The general regime of relevance of gains and losses and financial charges for the formation of the taxable profit of entities subject to Corporate Income Tax was expressed in the participation of gains and financial charges in their entirety [articles 20.º, no. 1, paragraph h), and 23.º, no. 1, paragraph a), of the Corporate Income Tax Code in the wording resulting from Decree-Law no. 159/2009, of 13 July), and in the participation of losses to the extent of 50% [under the terms of articles 23.º, no. 1, paragraph l) and 45.º, no. 3, of the same Code].

For SGPS, article 32.º, no. 2, of the EBF (in addition to other situations provided for in its no. 3), established a special regime, which did not necessarily translate into a benefit, which was expressed, in general, in the irrelevance for the formation of the taxable profit of SGPS of gains and losses realized on capital stakes held for at least one year, accompanied by the non-participation for the formation of the taxable profit of financial charges incurred with their acquisition.

In no. 2 of article 32.º of the EBF it is established that the "financial charges incurred with their acquisition" do not participate in the formation of the taxable profit, referring to the capital stakes, whereby it must be concluded that its literal content indicates that only financial charges that are connected to the acquisition of equity stakes are encompassed by the non-deductibility established therein.

Beyond being this the interpretation that results from the literal content, it is corroborated by the explanation for its introduction in the EBF that was given in the Report of the State Budget for 2003 (Law no. 32-B/2002, of 30 December).

In fact, as referred to in Circular no. 7/2004, the regime of this norm was introduced in the EBF by Law no. 32-B/2002, of 30 December, which approved the State Budget for 2003, giving new wording to article 31.º, whose regime came to be contained in article 32.º after the renumbering made by Decree-Law no. 108/2008, of 26 June.

In Bill no. 28-IX, which came to give rise to the Budget Law for 2003, the text of that article 31.º, no. 2, appeared with wording identical to that in force in 2012 (in article 32.º, no. 2), the only difference being the addition of the reference to "ICR" (abbreviation of "venture capital investors"), which is irrelevant for the interpretation of the norm.

In the aforementioned Report of the State Budget for 2003, after noting a shortfall in the execution of the 2002 budget as to Corporate Income Tax, the introduction of various measures is announced aimed at the "broadening of the tax base and measures of moralization and neutrality", among which that of the non-deductibility of financial charges directly associated with the acquisition of capital stakes by SGPS, which is announced in the following terms:

"The non-deductibility for purposes of determining taxable profit of financial charges directly associated with the acquisition of capital stakes by SGPS is established";

It is unequivocal, therefore, that it was intended that only financial charges directly associated with the acquisition of capital stakes be encompassed by