CAAD 203/2018-T: SGPS Financial Costs Deductibility Under Article 32 EBF and Net Job Creation Tax Benefit Under Article 19 EBF in IRC

ARBITRAL DECISION

The sole arbitrator António Pragal Colaço, designated by the Deontological Council of the Centre for Administrative and Tax Arbitration to form the Arbitral Tribunal, hereby agrees as follows:

I. REPORT

1. The Claimant A... SGPS, SA, hereinafter simply designated "Claimant" or "A...", with registered office at Rua..., ..., ...-... ..., holder of the Single Identification Number for Legal Persons and registered in the respective Commercial Registry Office..., located in the jurisdiction of the Financial Services Office of... – ..., presented on 23/4/2018 a request for arbitral pronouncement under paragraph a) of section 2 of article 2, in section 1 of article 6 and of section 2 of article 10 of Decree-Law no. 10/2011, of 20 January, hereinafter designated as RJAT, as well as articles 1 and 2 of Portaria no. 112-A/2011, of 22 March, with a view to reviewing the (il)legality of the tax act embodied in the assessment of Corporate Income Tax (IRC) no. 2017..., of 15 December 2017, as well as in the statement of compensatory interest no. 2017... and in the statement of account reconciliation no. 2017..., both of 19 December 2017.

The substance of the request for arbitral pronouncement consists, first, in reviewing the legality of a correction in the amount of €110,928.03 to taxable profit under Corporate Income Tax (CIRC), which resulted from a tax inspection, based on the exclusion of the deduction in box 07, field 779 of that amount, due to non-acceptance as financial charges under section 2, article 32, of the Tax Benefits Statute (EBF – Estatuto dos Benefícios Fiscais), (former article 31), hereinafter abbreviated as EBF.

Second, the Claimant's claim also consists in that, given the inspection methodology used by the Tax Authority regarding groups of companies, in the context of the subsidiary B..., S.A. as a result of inspection proceedings, there also resulted a correction to its respective taxable profit in the amount of EUR 16,176.45 in field 771 of box 07 of the IRC Form 22 income statement, due to an excessive increase in personnel costs under the tax benefit for net creation of jobs established in article 19 of the EBF.

Finally, and third, in the context of the subsidiary C... S.A., also as a result of inspection proceedings, there also resulted a correction to its respective taxable profit in the amount of EUR 6,790.00 in field 774 of the IRC Form 22 income statement due to the correction of the tax benefit established in article 19 of the EBF.

2. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified, having been forwarded to the Tax Authority and Customs Authority on 23/4/2018.

3. The Claimant did not proceed to nominate an arbitrator, therefore, under the provisions of paragraph a) of section 2 of article 6 and paragraph b) of section 1 of article 11 of RJAT, the President of the Deontological Council designated the signatory as arbitrator of the singular Arbitral Tribunal, who communicated acceptance of the designation within the prescribed period.

4. By dispatch of 14/6/2018, the parties were notified of the arbitrator's designation, having raised no objection.

5. In accordance with the provisions of paragraph c) of section 11 of RJAT, with the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 4/7/2018.

6. In these terms, the Arbitral Tribunal is regularly constituted to review and decide the subject matter of the proceedings.

7. To support the request for arbitral pronouncement, the Claimant alleges, in summary, the following:

7.1 A... is an SGPS, having as its object, consequently, the activity of management of shareholdings in other companies, as an indirect form of carrying out economic activities.

7.2 In the 2013 fiscal year, A... was the dominant company of a group constituted under article 69 of the IRC Code in the wording in force at the date and, thus, taxed according to RETGS (Special Tax Regime for Groups), to which the following subsidiaries belonged:

• D..., S.A.;
• E..., S.A.;
• F..., Lda.;
• G..., S.A.;
• H..., Lda.;
• I... Lda.;
• J..., S.A.;
• B..., S.A.;
• K..., Lda.;
• L..., S.A.;
• C..., S.A.

7.3 It transpires that the Tax Inspectors of the Porto Finance Directorate conducted an internal inspection action, of limited scope, in the field of IRC, to the various companies that formed part of the RETGS of the A... Group, corresponding to the 2013 fiscal year.

7.4 Following the inspection action carried out on A..., the Tax Inspectors found, through analysis of its respective periodic income statement IRC Form 22, that the Claimant had entered in field 779 under the heading of non-deductible financial charges, under section 2 of article 32 of the EBF, the amount of EUR 1,105,384.51.

7.5 At the Tax Inspectors' request, the Claimant sent a document proving how it had proceeded to calculate the value that had been added to field 779 of the IRC Form 22.

7.6 Having the Tax Authority found that the values of total Gross Assets, Remunerated Assets (Loans Granted) and Remunerated Liabilities (Loans Obtained) did not correspond to the values extracted and determined from the Analytical Balance Sheet before determination and regularization as of 31/12/2013, the Claimant sent a new calculation table where it now entered the value EUR 919,019.76.

7.7 The Claimant in 2014 when filing the IRC Form 22 and in the administrative tax inspection procedure, proceeded to calculations to determine the value of interest to be added, in its view, adopting the formula (generic and indicative) established in Circular no. 7/2004, treating ancillary/supplementary contributions as capital contributions in determining the amount of non-deductible financial charges.

7.8 Upon being notified of the draft conclusions of the inspection report, the claimant exercised the right to prior hearing alleging the following:

• Lack of substantiation of the inspection report draft, since the Tax Inspectors merely invoked and cited section 2 of article 32 of the EBF, which does not pronounce, at any moment, on total gross assets, nor on revaluations of financial participations, nor (ii) makes any mention of any concrete formula for determining financial charges, nor refers to any regulation to identify the correct procedure for determining such charges;

• Illegality of the understanding provided for in Circular no. 7/2004;

• Improper equation of ancillary/supplementary contributions made by A... to capital contributions for purposes of determining non-deductible financial charges under section 2 of article 32 of the EBF.

7.9 The Tax Inspectors maintained the proposed correction to the taxable amount, it not being their responsibility to pronounce on the question of illegality of the understanding provided for in Circular no. 7/2004, understanding that for purposes of calculating non-deductible financial charges under section 2 of article 32 of the EBF, from the total value of gross assets should be deducted the effect of revaluations of financial participations in companies D... and K..., since, having not been utilized financial resources, neither can any financial charges be associated with them.

7.10 The Tax Authority should have issued an assessment reflecting, e.g., a direct allocation of financial charges borne with the acquisition of shareholdings potentially qualifying for a potential application of the tax benefit provided for in section 2 of article 32 of the EBF, i.e., in relation to which A..., could upon their respective alienation benefit from the regime of exclusion of taxation of capital gains provided for in such provision.

7.11 Invoked by way of example, confirming ad nauseam the illegality of the said circular in its view, the judgment delivered by the Supreme Administrative Court (STA) on 31.05.2017 within the framework of case no. 1229/15; judgment delivered by the STA on 08.03.2017 within the framework of case no. 0227/16; judgment delivered by the TCAN on 28.09.2017 within the framework of case no. 2153/15.4BEPRT; arbitral decision delivered by CAAD on 21.05.2015 within the framework of case no. 738/2014-T; arbitral decision delivered by CAAD on 14.06.2017 within the framework of case no. 754/2016-T; arbitral decision delivered by CAAD on 08.02.2016 within the framework of case no. 570/2015-T; arbitral decision delivered by CAAD on 06.05.2016 within the framework of case 679/2015-T, developing in its view the tenor of the mentioned judgments.

Not dispensing with, it added,

7.12 The principle of period allocation implies that financial charges directly related to the obtaining of income, among which will stand out, naturally, the financial charges borne with the acquisition of capital contributions that gave rise to capital gains, must be accepted in the fiscal year in which they were borne, i.e., in the case under analysis, in fiscal year 2013, under the principle of period allocation enshrined in article 18 of the IRC Code.

7.13 More than refraining from disregarding the financing costs that are being added in the assessment sub judice, the Tax Authority should under the provisions of article 55 of the General Tax Law (LGT), which is nothing more than a development of the constitutional principle provided for in article 266 of the Constitution (CRP), according to which the Public Administration pursues the public interest in respect for the interest of legally protected rights and interests of citizens, have disregarded the application of the Circular by the Claimant and have made a direct allocation of financing charges to the shareholdings that benefited from the regime of article 32 of the EBF, which, in reality, were none, since the regime was repealed with effect as of 1 January 2014.

7.14 Requesting that also by virtue of violation of the provisions of section 2 of article 18 of the IRC Code, the assessment effected cannot subsist in the legal order and should be annulled under article 163 of the Code of Administrative Procedure (CPA).

Again, not dispensing with, it added

7.15 The Tax Inspectors understand that for purposes of calculating non-deductible financial charges under the aforesaid provision, from the total value of gross assets should be deducted the effect of revaluations of financial participations in companies D... and K..., since, having not been utilized financial resources, neither can any financial charges be associated with them.

7.16 Thus – conclude the Tax Inspectors – given the revaluations in question, the revaluation value to be considered for calculating non-deductible financial charges, will allegedly be the determined by the difference between the revaluation of the financial participation in D... and the reduction of the financial participation in K..., namely, EUR 17,743,881.82.

7.17 Since the interpretation made by the Tax Authority manifestly presents no correspondence in the letter of the law, going, moreover, in this particular even further beyond the Circular no. 7/2004 itself, the assessment must be annulled, as manifestly illegal with all legal consequences.

Adding,

7.18 From the application by the Tax Inspectors of Circular 7/2004: the (improper) equation of ancillary/supplementary contributions to capital contributions in determining the amount of non-deductible financial charges.

7.19 Confirming the incorrect disregard, as a cost, of financial charges relating to the performance of supplementary contributions by A..., since the Claimant, trusting then in the legitimacy of the calculation formula that was being imposed by the Tax Administration, treated, for purposes of calculating non-deductible financial charges from a tax perspective, in accordance with Circular no. 7/2004, ancillary contributions as capital contributions.

7.20 Supporting contrary understanding with the Arbitral Decision delivered on 08.02.2016 within the framework of case no. 570/2015-T, the arbitral decision of 20.11.2016, delivered in case no. 264/2016-T and the judgment of CAAD delivered in case no. 12/2013-T.

7.21 Concluding that article 32, section 2, of the EBF, in the wording in force in 2011, when establishing, referring to "capital contributions," that "do not concur in the formation of taxable profit" of SGPSs the "financial charges borne with their acquisition," does not exclude the relevance for the formation of taxable profit of financial charges borne with supplementary contributions.

7.22 The corrections effected having no legal basis in article 32, section 2, of the EBF.

Regarding the subsidiaries,

7.23 Within the framework of the inspection procedure conducted on the Companies of the Group, the Tax Inspectors proposed corrections to the taxable results of B... and C... (also jointly designated as "companies"), in the amount of EUR 16,296.45 and EUR 6,790, respectively.

7.24 Notwithstanding the arguments set out in the prior hearing statements exercised by both companies, the Tax Authority maintained (sic) the position defended in the inspection proceedings, having rejected the request made by them and proceeding with the following corrections: (i) correction in the amount of EUR 16,176.45 – relating to the proposed correction and the inclusion in tax benefits, by B..., of the amount of EUR 120 concerning the increase in donations; and (ii) correction in the amount of EUR 6,790 in the sphere of C....

7.25 With regard to B..., the correction carried out by the Tax Inspectors results from the disregard, for purposes of this benefit for Net Creation of Jobs, of employees M..., N..., O..., P... and Q...,

7.26 Alleging for this that the entry of such employees into the count of Personnel of B... occurred "via the contract of 'assignment of contractual position of employer on a gratuitous basis'".

7.27 The Tax Authority considered that these situations "do not constitute, in light of the Labor Code, creation of jobs in the sphere of B...", disregarding from the outset the employees in question, regardless of the fulfillment of all other criteria that might or might not be fulfilled.

7.28 The Tax Authority disregards employees M..., N..., O... and P..., on the grounds that their entry occurred "via the contract of 'assignment of contractual position of employer on a gratuitous basis'", with B... having entered in field 774 of its Form 22 statement relating to the tax period of 2013, an amount of EUR 35,140.82 relating to the aforementioned benefit, and C... the amount of EUR 6,790.00.

7.29 The Claimant acknowledges, having expressed this understanding throughout the inspection procedure, that, as follows from article 15 of the EBF, "the right to tax benefits (...) is non-transferable inter vivos".

7.30 Thus, with respect to the employees in question, the entities to which they were previously bound never enjoyed the benefit for Net Creation of Jobs provided for in article 19 of the EBF.

7.31 Therefore, one cannot affirm, at all, that the benefit in question was "transmitted," since none of the previous employer entities enjoyed this benefit with respect to any of these employees.

7.32 Because, as prescribed in section 6 of article 19 of the EBF "The regime provided for in section 1 can only be granted once per worker admitted to that entity or to another entity with which there exist special relationships within the meaning of article 63 of the IRC Code."

7.33 The complex factual situation that allows the increase in charges inherent to jobs created, which the legislator carefully selected for tax purposes, is assessed by the positive difference, in a given economic year, between the number of eligible hires, namely, young people or long-term unemployed, admitted by indefinite-term employment contract - and the number of worker exits who, at the date of their respective admission, found themselves in the same conditions, with eligible entry including the employees indicated (see paragraph d) of section 2 of article 19 of the EBF).

7.34 That is the calculation that the Tax Authority, anchored in a deductive logical reasoning, should perform to decide the granting (or not) of the benefit – and not based on the effects provided for the transfer of enterprise, in light of the Labor Code, created with a specific purpose (such as the protection of workers who hold a position tending to be more weakened in the labor relation).

7.35 It is, therefore, completely irrelevant to the tax legislator whether the admission of the employee to B... or C... has inherent the maintenance of contractual and previously acquired rights (cf. section 3 of article 285 of the Labor Code).

7.36 What is relevant to the tax legislator is, indeed, the admission and consequent creation of stable and lasting jobs.

7.37 As stated in the Judgment delivered by the Constitutional Court on 31.01.2018 within the framework of case no. 53/2018, "The legislator related, in a direct manner, the increase to an employment contract, to a concrete situation of job creation. And he did not intend to create any posts for young people up to 30 years of age, but rather stable and lasting jobs (...) the issue is the creation of stable and lasting employment and not any employment, because, otherwise, the legislator would have allowed for the attribution of the regime contemplated in art. 17 of the EBF, the possibility of celebrating fixed-term contracts."

7.38 According to the information that the Tax Authority itself refers to, the employees entered B... and C... with labor relations whose seniority dates back to:

• 01.09.2009, in the case of M... (B...);
• 01.06.2002, in the case of N... (B...);
• 01.08.2000, in the case of O... (B...);
• 29.05.2006, in the case of P... (B...); and
• 01.03.2004, in the case of Q... (C...).

7.39 None of the admissions of the aforementioned employees, whether to B..., or to C..., is made under a temporary and precarious contract, but rather the admissions in question were carried out under stable and lasting relationships, with the purpose provided by the legislator being completely fulfilled.

8. The Tax Authority and Customs Authority presented a response and attached the administrative file, invoking the following:

8.1 The Respondent understands that it results unequivocally that the methodology applied for calculating non-deductible financial charges was not questioned by the Tax Inspection Services, but rather the values that served as the basis for the calculation because they had no correspondence with the amounts determined in the Analytical Balance Sheet and Regularization as of 31/12/2013.

8.2 A... SGPS, SA, is the dominant company of the A... Group, the joint-stock company having been established in late 1989, with start of business activity on 1990-01-01 and in March 2009, was transformed into an SGPS, having assumed the role of management of shareholdings of the group.

8.3 The Claimant, as a subsidiary company, company managing shareholdings, declared for fiscal year 2013, an accounting loss of €4,438,546.66 and a tax loss of €397,471.39, with the revenues of the period declared being in the amount of €805,597.14 and the Expenses of the period in the amount of €2,167,504.77, of which €2,114,598.68 correspond to Financing and Loss Expenses.

8.4 From the analysis of the periodic income statement, Form 22, of IRC, for fiscal year 2013, it was found that for purposes of determining taxable profit (Box 07) was entered in field 779 – Non-deductible financial charges (article 32, section 2 of the EBF), the amount of €1,105,384.51, with the Tax Inspection Services requesting the Claimant by electronic mail on 2017-08-22, "Clarification / Supporting document of the calculation of the value added to the respective field."

8.5 In response, by the same means, on 2017-09-08, the Claimant attached the calculation explaining the value added to the net result of the period, in the amount of €1,105,384.51.

8.6 From the analysis of the calculation provided, it was found that the values of Total Gross Assets, Remunerated Assets (Loans Granted) and Remunerated Liabilities (Loans Obtained) did not correspond to the values extracted and determined from the Analytical Balance Sheet before Determination and Regularization as of 2013-12-31.

8.7 Confronted with the discrepancies, on 2017-09-27, the taxpayer clarified, by electronic mail, that "with regard to the calculation of non-deductible financial charges, ..., the same were not calculated with the final values of the 2013-12-31 accounts and as such proceeded to correct the calculation to the correct values as of 2013-12-31", which totals the amount of €919,019.76 and not €1,105,384.51, as had been declared in the income statement, Form 22, of IRC.

8.8 In determining non-deductible financial charges, the Claimant, both in the first and in the second version of the calculations presented, always treated ancillary/supplementary contributions as capital contributions.

8.9 The disagreement arises when the Tax Inspectors confront the Claimant regarding the revaluations made to the financial participations in D... and K..., Lda, in the amount of €17,743,881.8, without recourse to financial resources, which for purposes of calculating non-deductible financial charges under section 2 of article 32 of the EBF, from the value of Total Gross Assets should be deducted the effect of revaluations of financial participations in D... and K..., since, having not been mobilized financial resources, neither can any financial charges be associated with them.

8.10 Analyzed the Analytical Balance Sheet as of 2013-12-31, namely account 41 - Financial Investments, Investments in subsidiaries, Capital Participations, Sub-account 411204 – D..., SA, it is verified that this financial participation corresponds to the amount of €18,009,443.82.

8.11 Consulted the Accounts Report of A..., it is verified that the historical cost of this financial participation was €100,000.00 and that it underwent a revaluation in the amount of €17,909,443.82.

8.12 It was thus found that the Total Gross Assets was influenced by this revaluation.

8.13 When questioned whether the revaluation of the financial participation of H.P.B involved the mobilization of financial resources, the taxpayer reported that the revaluation was made at "Fair Value," without recourse to financial resources.

8.14 It is noted that through the Analytical Balance Sheet as of 2013-12-31, it is possible to confirm the movement by debit offsetting account 561 - Carried Forward Results, Accumulated Losses, by credit. Thus, the accounting record confirms the non-mobilization of financial resources for the revaluation of the financial participation in D... in the amount of €17,909,443.82.

8.15 The subsidiary K..., Lda was also subject to a downward revaluation in the amount of €165,562.00.

8.16 In accordance with what is established in article 32, section 2 of the Tax Benefits Statute (EBF), in the wording in force at the date of the facts: "The capital gains and capital losses realized by SGPSs of capital contributions of which they are holders, provided they are held for a period of not less than one year, and, likewise, the financial charges borne with their acquisition do not concur in the formation of taxable profit of these companies".

8.17 Thus, for purposes of calculating non-deductible financial charges under section 2, article 32 of the EBF, from the value of Total Gross Assets should be deducted the effect of revaluations of financial participations in D... and K..., since, having not been utilized financial resources, neither can any financial charges be associated with them.

8.18 Given the two revaluations described, the revaluation value to be considered will be the determined by the difference between the revaluation of the financial participation in D... and the reduction of the financial participation in K..., Lda, which totals €17,743,881.82 (€17,909,443.82 - €165,562.00).

8.19 The calculation of non-deductible financial charges, under section 2 of article 32 EBF, were corrected to the amount of €1,216,312.54, which implied a correction to the value declared in field 779 – Non-deductible financial charges (article 32, section 2 of the EBF), of box 07 – Determination of taxable profit, of €110,928.03.

8.20 Thus, the declared tax loss of €397,471.39 became a corrected tax loss of €286,543.36.

8.21 The Claimant was notified of the Draft Tax Inspection Report by notice no. 2017... of 2017-10-27, to exercise within a period of 15 days the right to prior hearing, which was exercised.

8.22 As a result of the internal inspection procedure to A..., in the individual sphere, within the framework of credentials OI2016... was made a correction to the taxable result in the amount of €110,928.03, in field 779, of box 07, of the periodic income statement Form 22 of IRC, relating to the correction of the value of non-deductible financial charges under section 2 of article 32 of the Tax Benefits Statute (EBF).

8.23 The Claimant demonstrated that it did not have another way of determining the non-deductible financial charges it incurred, except by that means, because the company's accounting did not reflect records compatible to extract this information.

8.24 Incumbent upon the taxpayer, with reference to each tax period, the determination of taxable profit, following for this purpose the methodology described by the tax legislator, aiming at the taxation of actual effective income, it being required to make the addition, with a view to disregarding, as the law commands, the charges borne with the acquisition of shareholdings.

8.25 The disregard as costs of financial charges for purposes of determining taxable profit enshrined in section 2 of article 32 of the EBF constitutes a corollary of the general principle of indispensability of expenses, according to which the tax deduction thereof is conditioned by its connection with the obtaining of income subject to tax and from which it follows that "if certain expenses are related to income not subject to tax, they are not tax-deductible", a principle that informs the provisions of article 23 of the IRC Code.

8.26 As such, the legislator enshrined in article 32 of the EBF a solution whereby only financial charges related to the acquisition of shareholdings that benefit, with respect to capital gains or capital losses, from the tax benefit provided for in section 2 of article 32 of the EBF, are disregarded from a tax perspective as expenses, bringing to bear the Judgment no. 42/2014 of the Constitutional Court and the Arbitral Decision no. 21/2012, delivered by CAAD.

8.27 The use of the allocation method of Circular 7/2004 aims precisely, in accordance with the provisions of article 32, section 2 of the EBF, at achieving taxation as close as possible to actual profit, of financial charges attributable to capital contributions held by it.

8.28 An SGPS that develops activities not covered by the special regime provided for in section 2 of Article 32 of the EBF, by virtue of the combination of this provision with paragraph b) of section 3 of Article 17 of the CIRC, is bound by the fulfillment of the duty of separation or autonomization of activities subject to different tax regimes, which, in the context of the special tax regime of the SGPS, implies the identification of financial charges directly or indirectly related to the acquisition of capital contributions targeted by the exclusion of deduction for purposes of proceeding, where appropriate, to their respective addition to taxable profit.

8.29 The thesis that it will suffice to invoke the illegality of the provisions of Circular no. 7/2004, to request the acceptance as a tax expense of all financial charges borne with financing related to acquisitions of shareholdings, subverts the legal regime defined by the legislator, in that any possible illegality of the provisions of Circular no. 7/2004 could never constitute grounds for the express and assumed violation of the regime of Article 32, section 2 of the EBF, translated in the non-addition to the net result of the fiscal year of financial charges attributable to capital contributions, under penalty of violation of the principle of contributory capacity, inherent in article 104, section 2 of the Constitution of the Portuguese Republic.

8.30 Regarding ancillary/supplementary contributions, as was mentioned in the Tax Inspection Report, if the dominant company (A...) decided to make ancillary contributions of capital/supplementary contributions to the subsidiary companies and if for this purpose bank loans were contracted, which were applied in these subsidiaries, directly for the pursuit of their normal activities, then the financial charges associated with these loans should be attributed to the subsidiary companies and would constitute a tax expense of these.

8.31 Now, if the financial charges associated with such loans are recorded as expenses of the fiscal year in the dominant company (A...) and were not indispensable to obtain or guarantee income subject to IRC of this, under section 1 of article 23 of the IRC Code, they cannot concur in the formation of taxable profit, because they do not constitute tax expenses of the dominant company (A...) – see, (Judgment of the Central Administrative Court of the South, Case no. 05251/11, CT – 2nd Tribunal, of 2012-04-24).

8.32 Thus, the disregard of financial charges for purposes of determining taxable profit enshrined in section 2 of article 32 of the EBF constitutes a corollary of the general principle of indispensability of expenses, according to which tax deduction is conditioned by its connection with the obtaining of income subject to tax, which results from the principle established in the provisions of section 1 of article 23 of the IRC Code, in which it is stipulated that "...all expenses and losses incurred or borne by the taxpayer to obtain or guarantee income subject to IRC are deductible".

8.33 As a result of the internal inspection procedure to B..., SA, within the framework of credentials OI2016... was made a correction to the taxable result in the amount of €16,176.45, in field 774, of box 07, of the periodic income statement Form 22 of IRC, due to the excessive increase in personnel costs under the Tax Benefit for Net Creation of Jobs established in article 19 of the EBF, due to non-fulfillment of legal requirements with respect to four employees.

8.34 M..., entered as an employee of B... on 2012-01-05, via "assignment of contractual position of employer on a gratuitous basis" contract, dated 2012-01-18, executed between B... and the related entity R..., SA, nipc:....

The employee's seniority dates back to 2009-09-01, the date on which she entered R...; on 2011-02-28 she transferred to an indefinite-term employment contract.

8.35 N..., entered as an employee of B... on 2012-11-01. Previously she had celebrated a fixed-term contract on 2002-06-01, with C..., SA, nipc:..., from which results her effectiveness for several years.

The employee "will have" transitioned to B... via "assignment of contractual position of employer on a gratuitous basis" contract, but the taxpayer did not exhibit any supporting documents, despite having been requested by notice.

8.36 O... - Entered as an employee of B..., on 2013-04-03, via "assignment of contractual position of employer on a gratuitous basis" contract.

The employee's seniority dates back to 2000-08-01, the date on which she celebrated an employment contract with company G..., SA (G...), nipc:..., and the same was converted into an indefinite-term employment contract still while in service of S....

8.37 P..., entered the personnel ranks of B..., on 2013-11-01, via "assignment of contractual position of employer on a gratuitous basis" contract.

The employee's seniority dates back to 2006-05-29, the date on which she celebrated a contract with C..., SA, nipc:.... That contract was converted into an indefinite-term employment contract on 2007-11-30, still while in service of C....

8.38 As a result of the internal inspection procedure conducted to C... S.A., within the framework of credentials OI2016... was made a correction to the taxable result in the amount €6,790.00, in field 774, of box 07, of the periodic income statement, Form 22 of IRC, due to the correction of the Tax Benefit for Net Creation of Jobs established in article 19 of the EBF, due to non-fulfillment of legal requirements with respect to one employee.

8.39 With respect to C..., SA, the Tax Inspectors disregard as net creation of employment the admission of employee Q..., for not meeting the requirements stipulated in article 19 of the EBF.

Because,

• The employee entered C... on 2004-03-01, with a fixed-term employment contract for a period of 6 months and, also in 2004, acquires an indefinite-term contractual bond in C...;

• On 2008-01-02, he transferred to the personnel ranks of a company in the group, I..., ACE, nipc:..., via assignment of contractual position where he maintained all acquired rights

• On 2009-01-01, he returns to C..., also via assignment of contractual position, maintaining all the rights he held.

• That is, in 2009, the employee returns to C..., via assignment of contractual position, a company that had hired him in 2004, with permanent status (C...).

8.40 As demonstrated, in the cases in question, the permanent bond occurred in the sphere of the assignee companies, with workers transitioning with acquired rights from one group company to another, via amendment to employment contracts of assignment of contractual position, thus not constituting creation of new jobs, whereby they are not eligible for purposes of determining "net creation of jobs" under section 1 of article 19 of the EBF.

8.41 Cites in support of its thesis the CAAD Judgment, issued in case no. 197/2013-T of 02/03/2014, the Judgment of the Supreme Administrative Court of 2-07-2013, delivered within the framework of case no. 06629/13, the Judgment delivered by the STA on 23/09/2009 (case 0248/09), the Judgment of the STA of 11 October 2006, in case 726/06, and the Judgment of the TCAN SOUTH no. 0561/12, of 18/02/2016.

8.42 Concludes for both business situations that the requirements are not met for the acceptance of tax benefits for job creation, which consisted in having been admitted by indefinite-term contracts workers under 30 years of age and that this admission would result in net creation of jobs.

9. By arbitral dispatch issued on 24/9/2018, the Claimant was notified to indicate which articles the designated witnesses would respond to, with the same waiving their hearing.

By arbitral dispatch issued on 2/10/2018, the holding of the meeting that respects article 18 of RJAT was dispensed with, as well as the presentation of written arguments, with a deadline of 90 days being set for the issuance of the final arbitral decision.

10. By arbitral dispatch of 2/1/2019, was extended by 2 months the arbitral decision under the provisions of article 21, section 2 of RJAT.

II. PROCEDURAL MATTERS

10. The parties have legal capacity and standing, appear properly represented (articles 4 and 10, section 2, of RJAT and article 1 of Portaria no. 112-A/2011, of 22 March).

The Tribunal is competent and regularly constituted.

The proceedings are not affected by nullities.

No exceptions were raised.

No other circumstances exist that would prevent resolution of the merits.

III. MERITS

i. Factual Matters

11. Proven Facts

With relevance for reviewing and deciding the issues raised on the merits, the following facts are established and proven:

11.A The Claimant is designated as A... SGPS, SA (A...), with registered office at Rua..., ..., ...-... ..., is holder of the Single Identification Number for Legal Persons and registered in the respective Commercial Registry Office..., located in the jurisdiction of the Financial Services Office of... –..., being the dominant company of the A... Group, having been established in late 1989, with start of business activity on 1990-01-01 and in March 2009, was transformed into an SGPS.

11.B In fiscal year 2013, A... was the dominant company of a group constituted under article 69 of the IRC Code in the wording in force at the date and, thus, taxed according to the Special Tax Regime for Groups (RETGS), to which the following subsidiaries belonged:

• D..., S.A., holding 99.96% of it;
• E..., S.A., holding 100% of it;
• F..., Lda., holding 100% of it;
• G..., S.A., holding 100% of it;
• R... S.A., holding 99.96% of it;
• H..., Lda., holding 100% of it;
• I... Lda., holding 100% of it;
• J..., S.A., holding 100% of it;
• B..., S.A., holding 100% of it;
• K..., Lda., holding 100% of it;
• L..., S.A., holding 100% of it;
• C..., S.A., holding 100% of it;

11.C The Tax Inspection Services of the Porto Finance Directorate conducted an internal inspection action, of limited scope, in the field of IRC, to the various companies that formed part of the RETGS of the A... Group, corresponding to fiscal year 2013, as to the accounts of A..., under Service Order no. OI2016..., as to the accounts of B..., under Service Order no. OI2016... and as to the accounts of C..., under Service Order no. OI2016..., resulting in corrections to taxable profit of the dominant company A... in the total amount of €171,237.60.

11.D As a result of the internal inspection procedure to A..., in the individual sphere, within the framework of Service Order OI2016... was made a correction to the taxable result in the amount of €110,928.03, in field 779, of box 07, of the periodic income statement Form 22 of IRC, relating to the correction of the value of non-deductible financial charges under section 2 of article 32 of the Tax Benefits Statute (EBF).

11.E By registered letter sent on 17/2/2017, the Claimant was notified for the internal inspection procedure, as a "dominated" company, and to present the tax file to which article 130 of the CIRC alludes, concerning the year 2013 of the same tax.

11.F On 23/2/2017, the Claimant sent to the Tax Inspection Services by electronic mail, accumulated analytical balance sheets of December, regularization, determination and year-end as of 31/12/2013, accounts reports, Legal Certification of Accounts, Report and opinion of the Sole Auditor and Statement of Responsibility.

11.G Within the framework of that inspection, from the analysis of the periodic income statement, Form 22, of IRC, for fiscal year 2013, the Tax Authority found that for purposes of determining taxable profit (Box 07) was entered in field 779 – Non-deductible financial charges (article 32, section 2 of the EBF), the amount of €1,105,384.51, with the Tax Inspection Services requesting the Claimant by electronic mail on 2017-08-22, "Clarification / Supporting document of the calculation of the value added to the respective field."

11.H In response, by the same means, on 2017-09-08, the Claimant attached its calculation explaining the value added to the net result of the period, in the amount of €1,105,384.51, as reproduced:

11.I From the analysis of the calculation provided, it was found that the values of Total Gross Assets, Remunerated Assets (Loans Granted) and Remunerated Liabilities (Loans Obtained) did not correspond to the values extracted and determined from the Analytical Balance Sheet before Determination and Regularization as of 2013-12-31, previously sent.

11.J Confronted with the discrepancies, on 2017-09-27 the taxpayer clarified by electronic mail, that "with regard to the calculation of non-deductible financial charges, the same were not calculated with the final values of the 2013-12-31 accounts and as such proceeded to correct the calculation to the correct values as of 2013-12-31", which totals the amount of €919,019.76, as reproduced:

11.K The Analytical Balance Sheet as of 2013-12-31, namely account 41 - Financial Investments, Investments in subsidiaries, Capital Participations, Sub-account 411204 – D..., SA, records that this financial participation corresponds to the amount of €18,009,443.82.

11.L The Accounts Report of A... records that the historical cost of this financial participation was €100,000.00 and that it underwent a revaluation in the amount of €17,909,443.82, with the Total Gross Assets being influenced by this revaluation.

11.M The Claimant reported that the revaluation of the financial participation in D..., did not involve the mobilization of financial resources, having been made using the "Fair Value" criterion, without recourse to financial resources.

11.N In terms of accounting-patrimonial records, the Capital Equity account 561 – Carried Forward Results/Accumulated Losses was credited by offset to the debit of the Assets account 411204 –D... S.A., in the amount of 17,909,443.82€.

11.O The subsidiary K..., Lda was subject to a downward revaluation in the amount of €165,562.00.

11.P Given the two revaluations described, the value that the Tax Authority corrected was the determined by the difference between the revaluation of the financial participation in D... and the reduction of the financial participation in K..., Lda, which totals €17,743,881.82 (€17,909,443.82 - €165,562.00), giving rise to the following corrective table:

11.Q The Claimant exercised its right to prior hearing by registered letter on 14/11/2017, invoking lack of substantiation and contesting the legal basis used for the calculations of Annex 3, to the draft conclusions of the report – table in 11.P

11.R In the draft conclusions of report notified by notice..., sent by registered letter on 27/10/2017, the Respondent stated that the calculation of non-deductible financial charges under section 2 of article 32 EBF would be corrected to the amount of €1,216,312.54, which implied a correction to the value declared in field 779 – Non-deductible financial charges (article 32, section 2 of the EBF), of box 07 – Determination of taxable profit, of €110,928.03, whereby the declared tax loss of €397,471.39 would decrease to a corrected tax loss of €286,543.36, as to the individual accounts of A....

11.S The final conclusions report maintained the arithmetical corrections of the amount of €110,928.03, whereby the declared tax loss of €397,471.39 decreased to a corrected tax loss of €286,543.36, as to the individual accounts of A....

11.T As a result of the internal inspection procedure to C..., within the framework of Service Order OI2016... was made a correction to the taxable result in the amount of €6,790.00, in field 774, of box 07, of the periodic income statement Form 22 of IRC, relating to the correction of the value deducted by the Claimant under the heading of net creation of jobs, article 19 of the EBF.

11.U The Tax Authority disregarded as net job creation the admission of employee Q..., who:

• Entered C... on 2004-03-01, with a fixed-term employment contract for a period of 6 months and, also in 2004, acquires an indefinite-term contractual bond in C...;

• On 2008-01-02, transferred to the personnel ranks of a company in the group, I...–, ACE, nipc:..., via assignment of contractual position where he maintained all acquired rights

• On 2009-01-01, returns to C..., also via assignment of contractual position, maintaining all the rights he held.

11.V As a result of the internal inspection procedure to B..., within the framework of Service Order OI2016... was made a correction to the taxable result in the amount of €16,176.45, in field 774, of box 07, of the periodic income statement Form 22 of IRC, relating to the correction of the value deducted under the heading of net creation of jobs, article 19 of the EBF.

11.W The Tax Authority disregarded as net job creation the admission of four employees:

• M..., entered as an employee of B... on 2012-01-05, via "assignment of contractual position of employer on a gratuitous basis" contract, dated 2012-01-18, executed between B... and the related entity R..., SA, nipc:....

The employee's seniority dates back to 2009-09-01, the date on which she entered R...; on 2011-02-28 she transferred to an indefinite-term employment contract.

• N..., entered as an employee of B... on 2012-11-01. Previously she had celebrated a fixed-term contract on 2002-06-01, with C..., SA, nipc:....

The employee "will have" transitioned to B... via "assignment of contractual position of employer on a gratuitous basis" contract, but the taxpayer did not exhibit any supporting documents, despite having been requested by notice.

• O... - Entered as an employee of B..., on 2013-04-03, via "assignment of contractual position of employer on a gratuitous basis" contract.

She celebrated an employment contract on 2000-08-01, with company G..., SA (G...), nipc:..., and the same was converted into an indefinite-term employment contract still while in service of G....

• P..., entered the personnel ranks of B..., on 2013-11-01, via "assignment of contractual position of employer on a gratuitous basis" contract.

She celebrated an employment contract on 2006-05-29, with C..., SA, nipc:.... That contract was converted into an indefinite-term employment contract on 2007-11-30, still while in service of C....

11.X The Tax Authority proceeded to make corrections through the report delivered in hand, notice number 2017..., proceeding with the correction of €171,237.60 to the consolidated tax result of A..., altering the declared tax loss of €67,824.64 to a positive tax result of €103,412.96 as to the consolidated tax result of the respondent company.

11.Y There was issued a corrective assessment number 2017..., dated 2017-15-12, with the amount to pay of €7,513.08, which includes compensatory interest in the value of €931.83, liquidated on 19-12-2017 as per the statement of interest liquidation, with voluntary payment due date on 26/1/2018.

12. Unproven Factual Matters

No factual matter was considered as unproven.

13. Substantiation of Factual Matters

The proven facts were based on all documentary evidence contained in the file.

The Tax Authority attached the administrative file certified by the Division of Support and Planning of Tax Inspection (DAPIT), one part consisting of 54 sheets (front and back) relating to the administrative file under number OI2016..., which is essentially constituted by the individual administrative file of company A....

The other part of the administrative file attached consisting of 37 sheets (front and back) relates to OI2016..., which is essentially constituted by the administrative file of company C....

The Tax Authority did not attach, as was its responsibility, the complete administrative file, since it was attached as document number 5 by the Claimant the consolidated administrative file of A..., which encompasses all individual tax inspection files of the three companies, A..., C... and B..., file OI2016....

The attachment of the adequate and complete administrative file by the Respondent entity, being an obligation, essentially aims to comply with respect for the principle of contradictory proceedings and is clearly aimed at ensuring that the Tribunal can examine the case in a completely correct manner.

In reality, as has been emphasized in various Judgments of our Superior Courts, the question of the meaning and scope of the principle of contradictory proceedings within the scope of civil proceedings has been the subject of successive pronouncements by the Constitutional Court, from which the fundamental guidance criteria for our review can be gathered: "The right of access to courts is, among other things, the right to a legal resolution of conflicts, to be reached in reasonable time and with observance of guarantees of impartiality and independence, making possible, in particular, the correct functioning of the rules of contradictory proceedings, in such terms that each of the parties can adduce its reasons (factual and legal), offer its proofs, control the proofs of the adversary and debate the value and result of both."

There is indeed the fact that "the process of a State ruled by law (civil process included) must be an equitable and fair process. And, therefore, in it, each of the parties must be able to set out its reasons (factual and legal) before the tribunal before it makes its decision. It is the right of defense, which the parties must be able to exercise in conditions of equality. This is essentially the principle of contradictory proceedings, which is inherent in the right of access to courts, enshrined in article 20, section 1, of the Constitution, which states that "everyone is guaranteed access [...] to the courts for defense of their rights and legally protected interests, and justice cannot be denied due to lack of economic means." In any case, this idea that in a State ruled by law the judicial resolution of disputes must always be made with observance of due process of law is an idea that the Constitutional Court had already, in fact, though perhaps less emphatically, been emphasizing or leaving indicated in previous judgments."

Now, from all that has been described, "Unless otherwise provided, proofs shall not be admitted or produced without hearing the adverse party to whom they are to be opposed" (article 517, section 1 of the Code of Civil Procedure)…" and the concretization of this same principle in various provisions integrated in other Codes regulating "special proceedings," such as in tax proceedings, the defective compliance by the Respondent entity, which appears in the file and is therefore known to the Claimant, and in order to remedy this "defect," the Tribunal made use of document number 5 attached by the Claimant, which is mandatorily known to the Respondent, it is concluded that the principle of contradictory proceedings, even if it were necessary, is resolved from the outset.

The special Tribunal thus made "evidentiary use" of the aforementioned document 5 attached by the Claimant and of all other documentation also attached by it.

14. There exist no other facts with relevance for review of the merits of the case that have not been proven.

iii. Matters of Law

The subject of the present proceedings is review of the legality of the corrections indicated.

When the grounds invoked by the Tax Authority and Customs Authority are autonomous for determining that financial charges should be added, not relevant to the determination of taxable profit, each having potentiality to support the corrections made, they should be reviewed separately, without prejudice to the fact that, if it is concluded that one of them provides legal support for the decision taken, knowledge of the other will become irrelevant and unnecessary.

In truth, as the Supreme Administrative Court has understood, when an administrative act has more than one ground, each with potentiality to, by itself, ensure the legality of a tax (or administrative) act, it is irrelevant that one of them be illegal, because "the tribunal, in order to annul or declare the nullity of the questioned decision, issued in the exercise of binding activity of the Administration, cannot be satisfied with the verification of the non-subsistence of one of the invoked grounds, since only after verification of the failure of all of them is the Tribunal enabled to invalidate the act."

"In casu," more than a question of multiple grounds for a tax act, we have multiple situations that we could designate as "sub-tax acts."

In the Tribunal's view, there are thus three issues to decide:

A. On the "soundness" of the correction made by the Tax Authority through the alteration to the amount of €1,216,312.54, which implies a correction to the value declared in field 779 – Non-deductible financial charges (article 32, section 2 of the EBF), of box 07 – Determination of taxable profit, of €110,928.03, with the declared tax loss passing from €397,471.39 to a corrected tax loss of €286,543.36, as to the individual accounts of A....

B. On the relevance of Circular 7/2004 of 30 March of the Directorate of IRC Services (DSIRC) in the correction of €110,928.03 made.

C. On the "soundness" of the corrections made by the Tax Authority to C..., correcting the taxable result in the amount of €6,790.00, in field 774, of box 07, of the periodic income statement Form 22 of IRC, relating to the correction of the value deducted by the Claimant under the heading of net creation of jobs, article 19 of the EBF, and as to B..., correcting the taxable result in the amount of €16,176.45, in field 774, of box 07, of the periodic income statement Form 22 of IRC, also relating to the correction of the value deducted under the heading of net creation of jobs, article 19 of the EBF, corrections with impact on the consolidated tax result of the claimant.

A. Correction Made in the Amount of €110,928.03 to the Individual Taxable Profit of the Claimant

With due respect, regardless of the multiple arguments expended by both parties within the administrative procedure taken as a whole, the core of the correction pertains to the correction made to taxable profit resulting from recalculation in light of the two revaluations, which the Tax Authority made through the difference between the revaluation of the financial participation in D... and the reduction of the financial participation in K..., Lda, which totals €17,743,881.82 (€17,909,443.82 - €165,562.00), resulting in the addition of the amount of €110,928.03 under the heading of interest (financial charges). And it is solely the correction that emerges from the disregard in the formula used for determining the interest that is not deductible in accordance with article 32 of the EBF in the wording at the time of the facts under analysis.

Article 32 of the EBF provides in the wording at the time of the facts under analysis:

Article 32

Management Companies of Shareholdings (SGPS)

1-…

2 - The capital gains and capital losses realized by SGPSs of capital contributions of which they are holders, provided they are held for a period of not less than one year, and, likewise, the financial charges borne with their acquisition do not concur in the formation of taxable profit of these companies. (Wording given by article 144 of Law no. 64-B/2011, of 30 December)

The State Budget Law for 2003 altered the taxation regime for capital gains realized by SGPSs (and other IRC taxpayers equally covered by this regime), with the introduction of the rule of disregard of deductibility of financial charges borne with the acquisition of capital contributions, whose onerous transmission would generate capital gains or capital losses without tax relevance.

This alteration is embodied in the fact that both the income associated with holding capital contributions, such as dividends and capital gains, and expenses, such as financial charges borne with financing obtained with a view to holding capital contributions, do not concur in determining taxable profit. In summary, the activity typified in article 1 of the SGPS regime is (was), as a rule, excluded from taxation.

This is implemented in the aforementioned section 2 of article 32 of the EBF.

This regime is embodied in the attribution of a benefit which, however, was offset by the non-concurrence, for purposes of determining taxable profit, of financial charges borne, creating an environment of neutrality between gains with certain financial assets and expenses associated with the liability necessary for the acquisition and maintenance of those assets. Assets which in the future generate, in their entirety, gains excluded from taxation.

As Jean Paul Sartre already stated in his philosophy, that "…existence precedes essence," also in the matter we are reviewing, the normative enactment precedes the substance it aims to standardize.

The recalculation performed by the claimant with respect to the value of participations in the two subsidiaries, which resulted from the application of the fair value criterion, which also therefore has concatenation with the application of the equity method, which even if it did not emerge as a conclusion of the accounting entry made and considered as proven in 11.N In terms of accounting-patrimonial records, the Capital Equity account 561 – Carried Forward Results/Accumulated Losses was credited by offset to the debit of the Assets account 411204 –D... S.A., in the amount of 17,909,443.82€., results from the Claimant's own response to the Tax Authority of the application of fair value and from the report and accounts as per 11.K The Analytical Balance Sheet as of 2013-12-31, namely account 41 - Financial Investments, Investments in subsidiaries, Capital Participations, Sub-account 411204 –B..., SA, records that this financial participation corresponds to the amount of €18,009,443.82…

11.L The Accounts Report of A... records that the historical cost of this financial participation was €100,000.00 and that it underwent a revaluation in the amount of €17,909,443.82, with the Total Gross Assets being influenced by this revaluation…

11.M The Claimant reported that the revaluation of the financial participation in B..., did not involve the mobilization of financial resources, having been made using the "Fair Value" criterion, without recourse to financial resources… eliminates all and any consideration that might exist with supplementary capital contributions, or more specifically supplementary contributions, or even capital contributions, whereby the Claimant when mentioning to support its thesis in article 115 of its erudite brief "the arbitral decision of 20.11.2016, delivered in case no. 264/2016-T:( )" does so incorrectly, according to our view, because it is not applicable to the present case.

It must not be overlooked that the Claimant delivered in a timely manner an initial IRC Form 22 for fiscal year 2013, where it proceeded to self-assess IRC, having added to the Accounting Result in determining taxable profit (Box 07) in field 779 – Non-deductible financial charges (article 32, section 2 of the EBF), the amount of €1,105,384.51, and from that self-assessment did not proceed to any necessary claim and challenge, even if for that determination it used the criteria, or part of them, set out in Circular 7/2004, with which it disagrees on "purported" illegality, and which it even states that the Tax Inspectors would have had to disapply (if they had applied it). Regarding that use, the tax act on which it may have been based became consolidated in the legal order, or better, was not subject to any modification within a period in which it could be until now.

If we attend to the tables contained in the facts given as proven 11.J (prepared by the Claimant) and 11.Q (prepared by the Tax Authority), we find that the difference relates to the value contained in Other Assets, while in the Claimant's preparation table the value contained in Other Assets is 28,009,363 (11.J), in the Tax Authority's preparation table the value contained in Other Assets is 10,265,481.08 (11.Q), whereby the value of Non-Remunerated Assets which was 72,595,458 (11.J) changes to the value of 54,851,575.48 (11.Q), decreasing the value of the numerator of the fraction and consequently the final value to be added.

The difference corresponds to the value of 17,743,881.82 (11.J), which is ultimately the value of the revaluation of participations in D... and K..., leading to elaborate, reinforcing, the essential question to answer – Is it correct from a legal standpoint to deduct the value of revaluations from other assets for purposes of calculating the value of interest to be added for purposes of calculating taxable profit?

We advance from the outset that in our view the question is confined to an arithmetical correction of the Claimant's accounting.

But let us attempt to discern in a hermeneutic manner.

The Vexed Question of Determining Non-Deductible Expenses (Financial Charges)

The Tax Administration (now Tax Authority and Customs Authority) issued a circular on 30 March, through its Directorate of IRC Services, which was numbered 7/2004, which aimed to "facilitate" the determination of the value to be added to the respective IRC Form, whose content was as follows:

Circular 7/2004, of 30 March, of the DSIRC

Tax Regime of Management Companies of Shareholdings and Venture Capital Companies

Reason for the Instructions

1. Having raised doubts regarding the tax regime applicable to management companies of shareholdings (SGPS) and venture capital companies (SCR), provided for in article 31 of the Tax Benefits Statute (EBF), as given by Law no. 32-B/2002, of 30 December (State Budget Law for 2003), the following understanding is sanctioned:

Regime Provided for in Section 2 of Article 31 of the EBF

1. Law no. 32-B/2002, of 30 December, altered the tax regime applicable to capital gains and capital losses realized by SGPSs and SCRs established in article 31 of the EBF, with section 2 of this provision stating that "the capital gains and capital losses realized by SGPSs and SCRs through the onerous transmission, in whatever manner it operates, of capital contributions of which they are holders, provided they are held for a period of not less than one year, and, likewise, the financial charges borne with their acquisition, do not concur in the formation of taxable profit of these companies".

Regime Provided for in Section 3 of Article 31 of the EBF

1. Section 3 of the same article, having the nature of an anti-abuse provision, excludes the application of the regime provided for in section 2 with respect to "capital gains realized and financial charges borne when capital contributions have been acquired from entities with which there exist special relationships, under section 4 of article 58 of the IRC Code, or entities with domicile, seat or actual management in territory subject to a more favorable tax regime, contained in a list approved by order of the Minister of Finance, or residents in Portuguese territory subject to a special taxation regime and have been held, by the alienator, for a period of less than three years and, likewise, when the alienator has resulted from transformation of a company to which the regime provided for in that section would not be applicable with respect to capital gains of the capital contributions subject to transmission, provided that, in this latter case, less than three years have elapsed between the date of transformation and the date of transmission."

Temporal Application of the New Regime

1. Section 5 of article 38 of Law no. 32-B/2002, in turn, prescribes that "the amendment introduced in article 31 of the EBF applies to capital gains and capital losses realized in tax periods commencing after 1 January 2003, without prejudice to continuing to apply, with respect to the positive difference between capital gains and capital losses realized before 1 January 2001, the provisions of paragraphs a) and b)