Summary
Full Decision
ARBITRAL AWARD
Report
On 24-03-2017, the company "A…, Lda.", NIPC…, submitted a petition for the establishment of a collective arbitral tribunal, in accordance with the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework of Arbitration in Tax Matters, hereinafter referred to as RJAT), in which the Tax and Customs Authority is the Respondent.
The petition for establishment of the arbitral tribunal was accepted by His Excellency the President of CAAD and automatically notified to the Tax and Customs Authority on 30-03-2017. Pursuant to subparagraph a) of paragraph 2 of article 6 and subparagraph b) of paragraph 1 of article 11 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of their assignment within the applicable period and notified the parties of their appointment on 17-05-2017.
Thus, in accordance with the provision set forth in subparagraph c) of paragraph 1 of article 11 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, it is hereby communicated that the collective arbitral tribunal is established on 01-06-2017, to be followed by the pertinent legal procedures.
In the scope of the petition for arbitral determination submitted by it, the Petitioner petitioned for the declaration of illegality of the dismissal of the gracious complaint submitted regarding the Corporate Income Tax assessment no. 2015…, relating to the 2011 fiscal year, which it also contests together with the corrections from the tax inspection that preceded it. Specifically, the Petitioner contests the fact that the deduction of financial charges in the amount of € 826,277.26 was disallowed, with the consequent appraisal of taxable income in excess and tax loss at a deficit in that same amount.
The corrections made by the AT to the Corporate Income Tax of the 2011 fiscal year of the Petitioner were based on two pillars:
i) The application of the formula of DSIRC Circular no. 7/2004;
ii) The equalization to equity stakes, for the purposes of applying that formula, of credits for the realization of supplementary contributions and of ancillary obligations/contributions.
As a consequence, the AT attributed to equity stakes (supplementary contributions and ancillary obligations included), 93% of the total financial charges borne by B… SGPS and the proportion between the amount of financial charges whose deduction was disallowed - € 826,277.26 – and the total financial charges, including stamp duty, borne in the fiscal year – € 890,595.95.
As for these corrections – and the result thereof in the scope of the 2011 fiscal year Corporate Income Tax – the Petitioner invokes, in summary, the following:
The formula of DSIRC Circular no. 7/2004 is based on two foundations:
i) It abstracts from knowing whether the equity stakes were or were not acquired with remunerated loans, instead seeking the proportion between equity stakes and remaining assets (and, in the interpretation of the tax inspection, equity stakes that include supplementary contributions and similar items), which in this case dictated a proportion of 93% for the "equity stakes"; and
ii) It does not distinguish financial charges by loan, but rather treats them as an undifferentiated whole, applying the previously obtained proportion (in this case, 93%) to financial charges as a whole.
The totality of interest borne by B… SGPS in this matter, in the amount of € 828,899.98, is inter-company interest, that is, interest between related companies, interest that relates to loans obtained within the group. The policy followed in the Group is that intra-group loans earn the same interest rate in each fiscal year, and in the 2011 fiscal year, it was Euribor 12 months + spread of 2.75%.
At the end of the 2011 taxation period, the equity portfolio of B… SGPS and the supplementary and ancillary contributions made by it had a total acquisition cost of € 13,222,282.25.
Applying the formula of Circular no. 7/2004 and taking as equity stakes also the supplementary and ancillary contributions made, one reaches an attribution percentage to equity stakes of the financial charges borne of 93% thereof; however, through a real allocation, and based on the destination of the financings contracted by B… SGPS generating charges in the 2011 fiscal year, it is possible to demonstrate that the generality thereof was not intended for the acquisition of equity stakes and that, in this manner, a substantial part of the financial charges borne by this company in that period are removed from the scope of article 32 of the Tax Benefits Statute.
In a total of € 20,211,278.55 in remunerated debt, the Petitioner alleges having the following distribution of its respective utilization (actual):
a) € 14,236,199.17 not allocated to the acquisition of equity stakes (€ 14,026,199.17 if the financing used in the capital increase of C… were excluded);
b) € 4,798,501.70 allocated to the acquisition of equity stakes (€ 5,008,501.70 if the financing used in the capital increase of C… is also considered as such);
c) € 1,176,577.68 whose allocation was not possible to reconstruct.
The amount of remunerated debt whose destination is known amounts thus to € 19,034,700.87, of which 25.21% (€ 4,798,501.70 / € 19,034,700.87) relating to equity stakes, and the remaining 74.79% relating to other assets.
If the financing for capital increases (in this case, of C…, in the amount of € 210,000) were included in the debt allocated to the acquisition of equity stakes, the percentage would only increase to 26.31% (€ 5,008,501.70 / € 19,034,700.87). Applying that percentage of 25.21% of allocation of equity stakes, obtained from the specific distribution of the remunerated debt contracted by B… SGPS, we have that at most € 296,615.23 of the portion of remunerated debt whose allocation was not possible to reconstruct will relate to equity stakes (25.21% x € 1,176,577.68), for a total of € 5,095,116.93 (€ 4,798,501.70 + € 296,615.23). And if the capital increase of C… were included, which is not conceded, we would have additional € 309,557.59 by indirect allocation (26.31% x € 1,176,577.68) and a total of € 5,318,059.29 (€ 5,008,501.70 + € 309,557.59).
Thus, of the total financings existing in the sphere of B… SGPS on 31 December 2011 (€ 20,211,278.55), only the amount of € 4,798,501.70 or, at most, of € 5,095,116.93, will be attributable to the acquisition of equity stakes (of which, due to repayments that occurred, only € 4,660,116.93 were in debt at the end of that year), which does not include the realization of supplementary and ancillary contributions nor capital increases.
The Petitioner thus understands to have demonstrated that the method provided for in DSIRC Circular no. 7/2004 is not adjusted to its reality, in that from the application of a direct allocation method, complemented with the application (at most) of the percentage resulting from the proportion obtained from the actual reality of the known allocation (the overwhelming majority) of debt in the company to the part, residual, of the remunerated loans obtained whose use cannot already be reconstructed, it is demonstrated that at most only a small portion of the financings it contracted (€ 5,095,116.93, in a total universe of € 20,211,278.55, that is, 25.21%) is attributable to the acquisition of equity stakes.
According to the result obtained with the application of the direct allocation method, complemented, at most, with the residual application, to some loans whose allocation cannot be reconstructed, of the percentage of allocation drawn from the known reality itself of the company, the financings contracted by B… SGPS that generated financial charges in the 2011 taxation period attributable to the acquisition of equity stakes held by it at that date were at most only € 5,095,116.93 (of which only € 4,660,116.93 were in debt at the end of that period), of which € 4,798,501.70 segregated by the direct allocation method and € 296,615.23 segregated by the residual application of the percentage resulting from the known allocation in the actual reality of the company itself in concrete terms.
With respect to the portion segregated by the direct allocation method, the amount of non-deductible interest for tax purposes under article 32, paragraph 2, of the Tax Benefits Statute, will correspond to the result of the application of the interest rate in effect in the 2011 fiscal year for intra-group loans – 4.254%, of which 2.75% corresponding to the spread and 1.504% corresponding to the Euribor to the financings that, as demonstrated by the Petitioner, were intended for the acquisition of equity stakes, that is, in the amount of € 207,174.77 (or, if the financing for capital increases (in this case, of C…, in the amount of € 210,000) were included here, the interest attributable to the acquisition of equity stakes segregated by direct allocation method would comprise an additional € 8,933.40, for a total of € 216,108.17.
Applying residually the percentage resulting from the known reality of the specific allocation in the company of remunerated indebtedness to the portion not susceptible to direct allocation we have that:
i) € 296,615.23 in loans allocated to the acquisition of equity stakes segregated by the application (residually, to loans whose destination was not possible to reconstruct) of the percentage of 25.21%, which in turn represent 1.47% of the total remunerated loans obtained (€ 296,615.23 / € 20,211,278.55);
[1.47% x € 61,695.97 (total of financial charges that relate to stamp duty = € 906.93 (total of financial charges that relate to stamp duty attributable to this portion of remunerated loans);
If the capital increase of C… were included in the calculations as being acquisition of equity stakes, the percentage would be 1.73% (€ 349,556.23/ € 20,211,278.55), and the amount would rise to € 1,067.34 (1.73% x € 61,695.97)
ii) € 4,798,501.70 in loans allocated to the acquisition of equity stakes segregated by the direct allocation method (€ 5,008,501.70 if the capital increase in C… were included), which in turn represent 23.74% of the total remunerated loans obtained (€ 4,798,501.70 / € 20,211,278.55), or 24.78% if the capital increase of C… were included (€ 5,008,501.70 / € 20,211,278.55);
23.74% x € 61,695.97 (total of financial charges that relate to stamp duty) = € 14,646.62 (total of financial charges that relate to stamp duty attributable to this portion of remunerated loans); and if by chance capital increases were included on the side of equity stakes, 24.78% and € 15,288.26 (€ 61,695.97 x 24.78%).
Thus, the amount of financial charges potentially non-deductible cannot exceed:
+ € 194,556.76 (interest segregated by direct allocation relating to remunerated loans for the acquisition of equity stakes); and if by chance capital increases were included on the side of equity stakes, € 203,490.16;
+ € 14,646.62 (stamp duty proportionally attributable to remunerated loans for the acquisition of equity stakes segregated by direct allocation –
percentage or proportion that they represent of the totality of remunerated loans, and their application to the total of charges with stamp duty); and if by chance capital increases were included on the side of equity stakes, € 15,288.26;
+ € 13,524.94 (interest and stamp duty – total financial charges – attributable to the remunerated debt whose allocation is not possible to reconstruct, determined by the application of the percentage obtained from the known reality of the specific allocation in the company of remunerated indebtedness; and if for the purpose of obtaining that percentage by chance capital increases were included on the side of equity stakes, € 13,685.35;
= Total non-deductible financial charges at most relating to financing for the acquisition of equity stakes, in the amount of € 222,728.32; and if by chance capital increases were included on the side of equity stakes, € 233,463.77.
The correction made by the Tax Inspection in the total amount of € 826,277.26 is therefore excessive by at least € 603,548.94 (€ 826,277.26 - € 222,728.32) or, if you will, at the very least by € 592,813.49 (€ 826,277.26 - € 233,463.77).
After this factual demonstration, the Petitioner argues that the formula imposed by DSIRC Circular no. 7/2004 constitutes a violation of article 32, paragraph 2, of the Tax Benefits Statute, in that it results in the imposition by the AT of a criterion of proportional allocation as opposed to a criterion of direct (or specific) and actual allocation. Now, being the AT subject, like all public administration, to the principle of legality, such criterion, provided for in Circular no. 7/2004, of 30 March, of the DSIRC, will only be admissible if it is in accordance with the law, that is, if it is a mere interpretive reflection of what already exists in the law. Now, from paragraph 2 of article 32 of the Tax Benefits Statute then in force, it does not result anywhere that such financial charges may be those resulting from a proportion between equity stakes and total assets in the company's balance sheet, regardless of whether the charges thus notionally segregated using such proportion correspond, or do not correspond, to charges actually incurred in the acquisition of equity stakes. The Circular under analysis (see its points 7 and 8), when it establishes a notional method using proportions based on the value of assets, for determining the financial charges supposedly (notionally) incurred in the acquisition of equity stakes, goes beyond the applicable legal basis and, thereby, infects with the vice of violation of law the tax assessments made in compliance with such generic guidance.
The Petitioner further invokes the following legal arguments against the position of the AT:
The realization of supplementary and ancillary contributions does not qualify as acquisition of equity stakes for the purposes of article 32, paragraph 2, of the Tax Benefits Statute; and
The entries for the realization of capital increases (€ 210,000 of capital increase of C…) do not generate equity stakes to which the non-deductibility of financial charges provided for in paragraph 2 of article 32 of the Tax Benefits Statute applies.
In the Reply presented, the AT contests the position of the Petitioner based on the following arguments:
It considers not to be duly documented and, therefore, cannot be considered proven, the following:
The amount of remunerated loans obtained;
The amount of financial charges inherent to the respective loans;
The relationship with the alleged loans contracted in 2009 and 2010.
Subparagraph b) of paragraph 3 of article 17 of the IRC Code in conjunction with the special regime provided for in paragraph 2 of article 32 of the Tax Benefits Statute determines the obligation to identify financial charges directly or indirectly related to the acquisition of equity stakes targeted by the exclusion of deduction for the purpose of proceeding, where applicable, to their respective increase to taxable income. The methodology presented, of alleged direct allocation, does not allow for the concrete assessment of which financial charges correspond to the acquisition of equity stakes, as such non-deductible for the purposes of article 32 of the Tax Benefits Statute, which reinforces the correctness of the method applied in the scope of the inspection procedure.
As for the alleged exclusion of supplementary contributions and capital increases in view of what is provided for in paragraph 2 of article 32 of the Tax Benefits Statute, it is the understanding of the Respondent that the concept of equity stakes encompasses the shares of capital stock, which include capital increases, supplementary contributions and ancillary contributions, all of which are subject to the same regime.
With respect to Circular 7/2004, the AT understands that it is not the same that creates standards of incidence, it is the law that, interpreted in the sense defended by the AT, precludes the deductibility of financial charges incurred with financings linked to the acquisition of the social equity stakes transferred and that realize, albeit potentially, capital gains excluded from taxation, for the purpose of determining the taxable income of the fiscal year in which they are incurred.
II. Dismissal of Preliminary Issues
The tribunal is competent and is regularly constituted.
The parties have legal personality and capacity and are duly represented.
The procedural means is appropriate.
There are no nullities, exceptions or prior issues that prevent the examination of the merits of the case.
III. Factual Findings
III.1 Facts Considered Proven:
With respect to the factuality brought to the proceedings by the Parties, the Tribunal considers as proven, by reason of the documentary evidence offered and the facts alleged and not contested, the following facts with relevance to the final decision:
In the year 2011, the Petitioner was the dominant company and responsible for the Corporate Income Tax assessment of the Group ("Fiscal Group") to which in the 2011 fiscal year the Special Regime for Taxation of Groups of Companies was applicable, and which was composed of itself and the companies:
• Clinical Analysis Laboratory B…, SGPS, S.A. (hereinafter B… SGPS);
• D…, Lda.;
• E…, Unipessoal, Lda.;
• Clinical Analysis Laboratory F…, Unipessoal, Lda.;
• Clinical Analysis Laboratory G…, Lda.;
• H…, Lda.;
• I…, Lda.;
• J…, Lda.;
• Clinical Analysis Laboratory K…, Lda.;
• L…, Lda.
The petitioner was the recipient, in its capacity as dominant company of the referred Fiscal Group, of the Corporate Income Tax assessment no. 2015…, relating to the 2011 fiscal year, issued following the correction to taxable income in the scope of tax inspection which resulted in a reduction of the tax loss determined by the Fiscal Group in the amount of € 826,277.26 (reduction of the tax loss from € 1,747,021.51 to € 920,744.25).
The correction to taxable income results from the prior correction to the amount of deductible financial charges relating to loans from the Petitioner to its investees, such correction made by the Tax and Customs Authority pursuant to Circular 7/2004.
The totality of interest borne by B… SGPS in the amount of € 828,899.98, is interest that relates to loans obtained within the group.
Within the group, the interest rate is equal for all loans, and in the 2011 fiscal year was Euribor 12 months + spread of 2.75%.
At the end of the 2011 taxation period, the equity portfolio of B… SGPS and the supplementary and ancillary contributions made by it had acquisition costs in a total of € 13,222,282.25.
The financial movements that occurred between 31.12.2009 and 31.12.2011 are those summarized in the table infra:
[Table preserved as in original]
There were, in the scope of the appraisal in question, amounts that could not be reconciled, which materialized in a difference of € 5,378.84 (Column "Diff." of the table above).
In a total of € 20,211,278.55 in remunerated debt, € 14,236,199.17 were not used in the acquisition of equity stakes / € 14,026,199.17 excluding the financing used in the capital increase of C…);
In a total of € 20,211,278.55, € 4,798,501.70 were used in the acquisition of equity stakes / € 5,008,501.70 including the financing used in the capital increase of C…);
In a total of € 20,211,278.55, there is € 1,176,577.68 whose allocation was not possible to reconstruct;
The amount of remunerated debt whose destination is known amounts to € 19,034,700.87, of which 25.21% (€ 4,798,501.70 / € 19,034,700.87) relating to equity stakes, and the remaining 74.79% relating to other assets;
By including in the debt allocated to the acquisition of equity stakes the financing for capital increase of C…, in the amount of € 210,000, the percentage of remunerated debt intended for equity stakes increases to 26.31% (€ 5,008,501.70 / € 19,034,700.87);
Of the total financings existing in the sphere of B… SGPS on 31 December 2011 (€ 20,211,278.55), only the amount of € 4,798,501.70 / € 5,095,116.93 (considering the capital increase of C…), is attributable to the acquisition of equity stakes, in the terms that are discriminated as follows:
[Table preserved as in original]
III.2 Facts Considered Not Proven
There are no facts with interest for the decision of the case that have been considered not proven.
III.3 Substantiation of the Decision on the Factual Matter
First and foremost, it is important to note that the Tribunal does not have to pronounce on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and to discriminate the proven matter from the unproven matter [see art. 123, paragraph 2, of the Code of Tax Procedure and article 659, paragraph 2 of the Code of Civil Procedure, applicable ex vi article 29, paragraph 1, subparagraphs a) and e), of RJAT]. Thus, the facts pertinent to the judgment of the case are chosen and selected in accordance with their legal relevance, which is established with attention to the various plausible solutions of the question(s) of Law (see article 511, paragraph 1, of the Code of Civil Procedure, applicable ex vi article 29, paragraph 1, subparagraph e), of RJAT).
In light of the foregoing, the factual framework relevant in the case sub judice is that which was described above. To establish it, the Tribunal weighed the positions of the parties in their respective pleadings, as well as all the documentary evidence incorporated into the proceedings, including the copy of the administrative proceeding attached by the AT.
It is true that, in the scope of tax law, the burden of proof does not have the subjective dimension of other areas of law, but rather an objective one, in the sense that what matters for the decision of the merits of the case, whether in the administrative procedure or in judicial proceedings, is what results from the truth of the facts achieved, regardless of which party bears the burden of such proof, given the predominance of the inquisitorial principle contained in articles 99 of the General Tax Law and 13 of the Code of Tax Procedure. However, when such proof is not achieved and in the impossibility of the tribunal remaining in a non liquet situation – see art. 8, paragraph 1 of the Civil Code – then the case must be decided against the party burdened with that burden of proof (in this case, the AT). Thus, having considered the foregoing and the positions assumed by the parties, the documentary proof and the copy of the Administrative Proceeding attached to the proceedings, the facts listed above were considered proven and not proven, with relevance to the decision.
IV. Substantiation of Law
The main issue to be decided in these proceedings concerns the decision on the (il)legality of the act of dismissal of the gracious complaint and of the additional Corporate Income Tax assessment no. 2015…, relating to the 2011 fiscal year, resulting from the disallowance of the deduction, by the Petitioner, of financial charges in the amount of € 826,277.26, with the consequent appraisal of taxable income in excess and tax loss at a deficit in that same amount.
The regime provided for in paragraph 2 of article 32 of the Tax Benefits Statute, added by paragraph 5 of article 38 of Law no. 32-B/2002, of 30/12, provided, at the date of the facts, that "the capital gains and capital losses realized by SGPS and by SCR through onerous transfer, whatever the title by which it operates, of equity stakes of which they are holders, provided they are held for a period not less than one year, and likewise, the financial charges incurred with their acquisition, do not contribute to the formation of the taxable income of these companies".
On this matter (financial charges incurred with the acquisition of equity stakes in SGPS) the Tax Administration issued Circular no. 7/2004, of 30 March, of the Corporate Income Tax Service Directorate (DSIRC), where the following is provided: - with respect to financial charges, the new regime "is applicable in taxation periods beginning after 1 January 2003, even though they relate to financings contracted before that date", as provided in point 5); - in the fiscal year in which the financial charges should be disregarded as costs for tax purposes, "one should proceed, in the fiscal year to which they relate, to the fiscal correction of those that have been incurred with the acquisition of equity stakes that are susceptible to benefit from the special regime established in paragraph 2 of article 31 of the Tax Benefits Statute, regardless of whether all the conditions for the application of the special regime for the taxation of capital gains have already been met", as provided in point 6); - "as to the method to be used for the purpose of allocating the financial charges incurred to the acquisition of social equity stakes, given the extreme difficulty of using (…) a direct or specific allocation method and to the possibility of manipulation that the same would allow, that allocation should be made on the basis of a formula that takes into account the following: the remunerated liabilities of the SGPS and SCR should first be attributed to the remunerated loans granted by these to the investee companies and to other investments generating interest, allocating the remainder to the remaining assets, namely social equity stakes, proportionally to their respective acquisition cost."
Another question that matters to decide concerns the method to be used for the determination of financial charges that should be excluded from the determination of taxable income and, more exactly, if that (method) can be concretized, without violation of law, through Circular no. 7/2004, of 30-4, of the AT.
The Petitioner questions the legality and constitutionality of this circular, alleging that the AT did not merely interpret what is provided in paragraph 2 of article 32 of the Tax Benefits Statute, but rather created a substitute method of the method provided therein. In this sense, the norms contained in points 7 and 8 of DSIRC Circular no. 7/2004, of 30 March, more specifically the formula provided therein, with the pretension of mandatory application, for the segregation of financial charges referred to in the Tax Benefits Statute, would be unconstitutional, by violation of the principle of legality or the reserve of law, in tax matters, provided in article 103, paragraph 2, and 165, paragraph 1, subparagraph i), of the Constitution of the Portuguese Republic.
Point 7 of that Circular provides that: "given the extreme difficulty of using, in this matter, a direct or specific allocation method and to the possibility of manipulation that the same would allow, that allocation should be made on the basis of a formula that takes into account the following: the remunerated liabilities of the SGPS and the SCR should first be attributed to the remunerated loans granted by these to investee companies and to other investments generating interest, allocating the remainder to the remaining assets, namely social equity stakes, proportionally to their respective acquisition cost". Thus, according to the AT, paragraph 2 of article 32 of the Tax Benefits Statute would support an interpretation in the sense of admitting an indirect calculation formula that allows taxpayers to determine the possible distribution of total financial charges incurred, between deductible and non-deductible financial charges for tax purposes, in a SGPS, such resulting from the fact that there is, in general, no direct factual relationship between the total funds obtained by the SGPS, which implied the payment of interest, and the funds invested in the acquisition of social equity stakes.
In this regard, it is noted in proceedings 738/2014-T, of CAAD that: "(...) the Administration understood the need to specify the way to estimate the charges that can be attributed to the acquisition of those social stakes, through Circular 7/2004, based on the idea of the fungibility of money. It advances in that circular with the adoption of a very simple mathematical formula - albeit complicated from the point of view of the assumptions used in the classification of the items to be considered -, in order to determine, in the application of art. 32, paragraph 2, of the Tax Benefits Statute, which are the "financial charges incurred" with the acquisition of equity stakes, faced with the total financial charges incurred by the entity in the accounting period, given that the legislator chose the disregard of their fiscal treatment for the purpose of determining the taxable income of each economic period".
In the Decision of the South Central Administrative Court, rendered in the scope of proceedings no. 02312/08, it is further stated, in this regard, that: "(...)the Circular in addition to being illegal due to lack of legal authority to extensively interpret standards of tax incidence, would be illegal, due to abusive distortion of community norm and its illegal transposition."
From the legal regime set forth it results that the legislator considers that only charges directly incurred with the acquisition of equity stakes are excluded from deduction. On the other hand, the legislator did not consider it appropriate to establish a different criterion that, given the real practical difficulties of distinction, would allow for the determination, even if indirectly or estimated, of the financial charges directly incurred with the acquisition of equity stakes.
Thus it seems to us that the method applied by the Circular violates what is provided in paragraph 2 of article 31 of the Tax Benefits Statute, because it does not address the charges actually incurred with the acquisition of untaxed social equity stakes, but rather approximated values and presumptions that lack legal foundation. In effect, the application of the formula provided in the Circular does not allow for the perception of which charges were incurred with the acquisition of untaxed social equity stakes, but establishes a proportional allocation between the set of remunerated liabilities and the loans to investees and the remainder that finances the other assets (including social equity stakes), from which results an estimate of the charges (which may or may not correspond to the actual charges). Moreover - and as decided in the CAAD Decision of 21/12/2012, Proc. 24/2012 -"(...) Circular no. 7/2014, in setting criteria and methods, through which the incidence of tax is verified, is, to the extent that its application has external efficacy, namely in corrective tax assessments, unconstitutional, by violation of the principle of legality embodied in article 103, and the reserve of formal law contained in article 165, paragraph 1 subparagraph i), both of the Constitution of the Portuguese Republic. This notwithstanding the mere illegality that would always result from the confrontation between that Circular and article 8 of the General Tax Law (...)". In the same sense, the Decision of the North Central Administrative Court, of 15 January 2015, Proc. 00946/09.0BEPRT where it states:"(...) The fact that in its methodology it has used the criteria recommended in circular no. 7/2004, of 30 March, in particular its points nos. 7 and 8 does not save the legality of the operation, because the criteria and assumptions for the allocation of remunerated liabilities of the SGPS clearly exceed the content of art. 31/2 of the Tax Benefits Statute creating presumptions and proportional determinations that the legislator clearly did not assume or consent to (...)".
That is: Circular no. 7/2004 cannot constitute a valid and acceptable interpretation of what is provided in article 31, paragraph 2, of the Tax Benefits Statute, in that it does not comply with the rules and basic principles that govern legal hermeneutics in the light, in particular, of the principle established in article 11, paragraph 1, of the General Tax Law ("in the determination of the sense of tax norms and in the qualification of the facts to which they apply, the general rules and principles of interpretation and application of laws are observed").
With the objective of unveiling the true meaning and scope of legal texts, the interpreter makes use of the interpretive factors which are essentially the grammatical element (the text, or the "letter of the law") and the logical element, which, in turn, is subdivided into the rational element (or teleological), systematic element and historical element. (See Baptista Machado, Introduction to Law and to Legitimizing Discourse, p. 181; Oliveira Ascensão, Law – Introduction and General Theory, 2nd Ed., Calouste Gulbenkian Foundation, Lisbon, p. 361).
It is article 9 of the Civil Code that provides the rules and fundamental elements for the correct and adequate interpretation of norms. From this it results that if interpretation must reconstruct the "legislative thought", it must, however, the interpreter or applicant do so always starting from the necessary assumption of the existence of a minimum correspondence with the letter of the Law. That is: the literal or grammatical element (text or "letter of the law") "is the starting point of interpretation. As such, it has from the outset a negative function: that of eliminating those meanings that do not have any support, or at least some correspondence or resonance in the words of the law (See Pires de Lima and Antunes Varela, Annotated Civil Code – vol. I, Coimbra ed., 1967, p. 16).
Now, from the foregoing it seems to result sufficiently demonstrated that Circular no. 7/2004, "interprets" what is provided in article 31-2, of the Tax Benefits Statute in terms that violate the aforementioned rules of hermeneutics in that it contains innovative legislative matter and not a mere valid interpretation of the text of the Law.
Returning to the specific case: without prejudice to the judgment of the legality of the method used, the Tax and Customs Authority, as was earlier stated when substantiating the factual matter, would have to prove the assumptions of the fiscal correction made, namely the existence of financial charges not taxed with the acquisition of equity stakes. Instead, the AT merely proceeded to correct a certain amount of financial charges, without taking care to prove the existence of the factual assumptions of its action. By applying the method provided in paragraph 7 of Circular no. 7/2004, of 30 March, it violated what is provided in paragraph 2 of article 32 of the Tax Benefits Statute, which only provides for the non-deductibility of financial charges actually incurred with the acquisition of equity stakes.
V – Decision
In consequence of the foregoing, this Arbitral Tribunal decides as follows:
a) Annul the decision rendered in the scope of the gracious complaint on 21 December 2016 by the Chief of the Administrative and Contentious Justice Division of the Finance Directorate of Porto, in the part in which, as set forth above, dismissed the petition that is now the object of these proceedings;
b) Annul the additional Corporate Income Tax assessment no. 2015…, relating to the 2011 fiscal year, the demonstration of interest assessment no. 2015… and the demonstration of account correction no. 2015…, as well as the correction of the value deducted as financial charges in the amount of € 826,277.26.
Value of the Proceeding: In accordance with the provision of article 306, paragraph 2 of the Code of Civil Procedure and article 97-A, paragraph 1, subparagraph a) of the Code of Tax Procedure and 3, paragraph 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is set at € 190,043.77.
Costs: The amount of costs is set at € 3,672.00 (table I attached to the Regulation of Costs in Tax Arbitration Proceedings), the payment of which is the responsibility of the Tax and Customs Authority (article 22, paragraph 4, of RJAT).
Lisbon, 19 September 2017
The Collective Arbitral Tribunal
José Poças Falcão
(President)
Paula Florindo
(Member)
Raquel Franco
(Member)
Frequently Asked Questions
Automatically Created