CAAD 204/2016-T: IRC Transfer Pricing, Special Relations & Repair Costs Deductibility Ruling

ARBITRAL DECISION

IMT - Tax benefits tourism utility

I - REPORT

1. On 1 April 2016, A…, SA, NIPC…, with registered office at Rua da …, …, …-…, …, (hereinafter Claimant, A… or A…), requested, under subsection a) of no. 1 of article 2, subsection a) of no. 2 of article 6 and subsection a) of no. 1 and no. 2 of article 10 of the Legal Framework for Tax Arbitration (RJAT), the establishment of an Arbitral Tribunal for assessment of the legality and consequent declaration of illegality of the assessment of Corporate Income Tax (IRC) for the fiscal year 2011.

2. In the request for arbitral pronouncement, the Claimant opted not to appoint an arbitrator.

3. Pursuant to no. 1 of article 6 of the RJAT, by decision of the President of the Deontological Council, Maria Manuela Roseiro was appointed as sole arbitrator, who accepted the appointment within the legally established timeframe.

4. The parties having been notified and there being no refusal of said appointment (article 11, subsections a) and b) of the RJAT and articles 6 and 7 of the Deontological Code), the arbitral tribunal was constituted on 20 June 2016, in accordance with the provision of subsection c) of no. 1 of article 11 of the RJAT, and on the same date an arbitral order was issued notifying the Tax and Customs Authority (AT or Respondent) pursuant to article 17 of the RJAT.

5. On 5 September 2016, the Respondent submitted a Reply and attached the Administrative File, raising an exception of untimeliness to which the Claimant responded on 14 September.

6. In response to a request for clarification by the tribunal, the Respondent attached, with clarification on the raised exception, new documents, which the Claimant considered improper. The tribunal accepted the documents and deferred resolution of the question of the timeliness of the Request to the final decision, scheduling the meeting provided for in article 18 of the RJAT and examination of witnesses, initially for 6 December 2016, and subsequently, due to difficulties in coordinating the parties' schedules, for 16 January 2017, with the deadline for decision extended by two months pursuant to no. 2 of article 21 of the RJAT.

7. At the meeting held, with examination of witnesses, a period of fifteen days was granted for the parties to submit arguments, successively - which occurred on 1 and 21 February, respectively - and the date of 20 April 2017 was set for issuance of the final decision, with a further extension of the deadline for decision. (no. 2 of article 21 RJAT).

8. Request for arbitral pronouncement

The Claimant invokes, in summary (our responsibility):

• It engages in the activity of "production of sparkling wines", and seeks assessment of the legality of the IRC assessment for the year 2011, in the amount of € 30,166.10, arising from corrections made following conclusions of tax inspection on the taxable matter of the same year, and of which it was notified for payment until 1 February 2016, as well as compensatory and default interest, all totalling € 33,885.48.

• The illegality of the tax act derives from incorrect interpretation and application of the law concerning two situations: correction of "transfer prices and indispensability of cost" through imputation of an interest rate on loans made to company B… and "discrepancies regarding the qualification and tax treatment of expenses" made by the Claimant in that fiscal year.

• Regarding the first issue, the situation originates from the restructuring of a Group to which the Claimant, Company C…, SA and B…, SA belonged, with three individual shareholders and D… participating in the share capital of the three companies (D… with 24.75% of the capital of the Claimant and 80% of the capital of C… and 80% of the capital of B…, plus € 1,280,000.00 of loans granted to the latter).

• When D… decided to divest from this sector of activity, a global transaction was prepared – the individual shareholders created a company (E…, SA) and obtained a loan of 4.8 million euros with which they acquired the shareholdings in the three companies held by D…, as well as the loans in B…, having pledged the acquired assets and personal guarantees of one of the shareholders.

• From 1 January 2011, E… merged with the Claimant transmitting all assets and liabilities under the tax neutrality regime, including the loans on B… and bank debt of 4.8 M €, which meant, in 2011, interest in the amount of € 204,153.00 for the Claimant, which accounted for it as a bookkeeping and tax cost.

• The AT considered that the part of the loan contracted by E… (subsequently assumed by A…) to acquire the loans on B… was not indispensable because it generated no positive taxable income in the future and applied the transfer pricing institute arguing that an independent subject would have stipulated interest on the loans and, instead of tax disallowing the part of interest borne with the loan allocated to the acquisition of loans (correction under article 23 of the CIRC), it fictionally imposed an interest rate applying a reference rate defined by the Bank of Portugal and increasing taxable financial income by € 49,251.50 without notifying the debtor (B…) of the correlative adjustment (increase of costs).

• In applying the aggressive legal institute of transfer pricing provided for in article 63 of the CIRC, the AT cannot disregard the types of transactions undertaken, and can only interfere in prices in transactions actually conducted by taxpayers in accordance with their contractual freedom, having, to guarantee this balance, the duty of substantiation, describing the special relationships, indicating the unfulfilled obligations of the RS and applying and quantifying the corrective methods as an independent third party would conduct the transaction, not being able to forget the specific vicissitudes of the transaction in question.

• In the concrete transaction undertaken, D… decided it would only sell the business as a whole and thus E… had to acquire the shareholdings and the loans to B…, these at nominal value, exposing that it was forced to purchase all wine businesses, anticipating overall satisfactory profitability, and that although some were more attractive than others they were not severable.

• The substantiation of the Respondent does not comply with the provision of no. 3 of article 77 of the LGT and article 63 of the CIRC because an independent third party would have conducted a transaction on the same terms as the Claimant, that is, acquired loans and paid interest to acquire them despite being reimbursed without interest. And, if it had sought to acquire them at a price lower than their face value, D… would not have done the transaction as it assumed it wanted to sell them at face value.

• The core of the tax act proceeds from the assumption that the Claimant could charge interest downstream, which it cannot do; because the loans previously granted by D… to B… bore no interest, as permitted by law (article 243 of the CSC) - and which was never challenged by the Tax Administration - and the conditions cannot be changed especially because the debtor (B…) did not intervene in the transaction (article 577 CC).

• And it would be the same in the case of the transaction being conducted between independent subjects, who would also not charge interest, so interest cannot be fictionally imposed for purposes of special relationships, under penalty of violation of articles 63 of the CIRC and 77, no. 3, of the LGT.

• Costs of bank financing for the respective acquisition must be considered indispensable for obtaining profit because the purchase of the assets was made as a unit, with a causal relationship existing between the investment and the cost to generate income, and thus are fully deductible under article 23 of the CIRC.

• There was also violation of no. 11 of article 63 of the CIRC, because if there be an increase of the Claimant's taxable income it should correct the sphere of the other party (B…) by symmetrically increasing costs, which was not performed.

• Regarding the second issue (whether expenses for works are of the fiscal year or tangible assets), the object of the Claimant's activity requires maintenance work on buildings, vineyards and production equipment, which were accounted for and imputed to fiscal year 2011 as maintenance and repair expenses, in the Accounts of Supply and External Services – specialized services Conservation and Repair of buildings – (SNC 622621), ESE – Specialized services- Conservation and repair of basic equipment (SNC 622631) and specialized works (account 6211).

• The works are divided into two main categories: buildings and surrounding areas, including vineyards (in the amount of €103,691.09), comprising a) Repair and construction of walls, water systems and earth movement (€ 53,500.00); b) Installation of fan coil units in restaurant, conference room and bathrooms (€7,872.35); c) furniture in dwelling (€15,253.29); d) Supply and application of granite (€14,100.00); and electrical material (€12,975.45) and equipment expenses in a total of €37,656.84, comprising a) production of chilled water (€12,955.00 + €8,295.00) b) installation of cooling tower (€ 10,726.23) and transfer of cooling tower and condensation system (€ 5,680.61).

• The Claimant requires annual maintenance work in its three assets – a) winery and warehouses, b) offices and c) vineyards – the facilities, old and situated in harsh climate, must be impeccable because of marketing; the vineyards require annual work on roads, walls, water systems, and many of the equipment only work at harvest time, also requiring annual repairs, with the refrigeration system undergoing significant wear.

• The works and maintenance and emergency repair are annual in nature generating no additional future economic benefits, and should be considered costs of the fiscal year, following the expenses analyzed in the Arbitral Award in case 359/2015-T and not, as the AT did, as amortizable investment expenses at rates of 5%, 10%, and 12.5% per year depending on whether they concern walls, real estate/facilities and others, respectively.

• The works carried out by the Claimant are conservation and restoration works (in the real estate, to maintain quality standards; in the vineyards, annual work for harvest and damage repair, and in equipment, emergency works caused by natural causes) and not works and expansion of buildings or new constructions, nor even major repairs and improvements.

• As normal conservation, maintenance and repair works they should be assumed as total fiscal year cost, in accordance with the law and jurisprudence cited.

• Even if not so considered, the Claimant would have accelerated the tax use of the cost, being only a matter of fiscal year specialization, with tax payable over the long term being equal (moreover, the fact that the Claimant accelerated costs in a fiscal year where it possessed a tax benefit of rate reduction, revoked from 2012 onwards, proves there was no intent to avoid tax since it would pay less tax if it had proceeded to amortize the works over ten years).

• Having been a mere formal violation of fiscal year specialization, without fraudulent intent, based on logical and plausible interpretation of the law, the tax act should be annulled, in accordance with the cited jurisprudence.

• Even if annulment of the tax is not proceeded, this argument applies to compensatory interest due to lack of culpable conduct (award of the STA of 23/04/2013, in case 01195/12).

1. The Respondent's Reply

The Respondent replied, in summary (our responsibility):

By Exception - Untimeliness of the Request for Arbitral Pronouncement

• The object of the present arbitral action is the IRC assessment no. 2015…, to which corresponds the account reconciliation statement no. 2015…, delivered in the electronic mailbox Via CTT, and notified to the Claimant on day 15-12-2015 (the date on which the Claimant accessed the electronic mailbox), in accordance with article 39 of the CPPT.

• The period for submission of a request for arbitral pronouncement was 90 days (article 102, nos. 1 and 2 of the CPPT applicable by referral from subsection a) of no. 2 of article 10 RJAT), counted continuously from the notification of the IRC assessment no. 2015…, which occurred on 15 December 2015, and thus ended on 14 March 2016, which makes the present request, submitted on 1 April 2016, untimely, with the exception of untimeliness verified which leads to absolution of the Respondent from the instance (articles 576, 577 and 278 of the CPC, by virtue of article 2, subsection e) of the CPPT and article 29, no. 1, subsections a) and e) of the RJAT).

By opposition

• The issue of transfer pricing enshrined in the IRC Code is justified by the need to ensure equal treatment of IRC taxpayers, whether integrated into group structures or independent entities, and thus their respective tax rules supersede accounting itself: its objective is to prevent logic aimed at the group's overall interests from distorting the tax situation of each entity that comprises it.

• One seeks to correct any deviations verified in defining the terms and conditions of operations conducted between related entities, for not having observed the principle of full competition, through practice established in domestic law and in international law (no. 1 of article 9 of the OECD MC), enabling tax administrations to make adjustments to taxable profit, when, in commercial or financial operations between two related companies, conditions different from those that would have been established between independent companies are accepted or imposed.

• In the present case, the AT demonstrated, in accordance with no. 3 of article 77 of the LGT, that between the Claimant and company B…, S.A. there exist special relationships (subsections a) b) and d) of no. 4 of article 63 of the CIRC) and thus the terms and conditions established for the financial operation corresponding to loans granted to company B…, S.A. must observe the principle of full competition (article 63, no.1, of the CIRC), it being certain that an independent entity that resorts to bank financing to acquire certain assets, including credits, becoming responsible for financial charges, would not in normal market conditions waive obtaining remuneration from the loans granted in the present case.

• Following the merger operation with E…, the Claimant assumed responsibility for the remunerated loan contracted between independent entities – E… and F…- to acquire the social shareholdings and the loans to D…, by virtue of which interest and other charges recognized as expenses for tax purposes are owed (article 23 CIRC).

• Being a part of the financing intended for acquisition of loans granted to company B…, S.A., from which it obtains no remuneration, it is legitimate to conclude that the absence of remuneration finds justification in the existence of special relationships between creditor and debtor entities.

• The argument that D… had not previously fixed interest and that, given the absence of intervention of the debtor in the contract for assignment of credit, it is not possible to alter the initial conditions of the contract (period of repayment and interest rate) is not valid, because, for tax purposes, the provision of article 63, no. 1, of the IRC Code applies: in a related operation, terms and conditions must be contracted, accepted and practiced substantially identical to those normally would be contracted, accepted and practiced between independent entities in comparable operations.

• Nor does the invocation of the deficit situation of debtor B… of itself preclude the application of the provision of article 63 of the Code, although it may be taken into account in fixing the terms and conditions of the financial operation.

• Thus, with the requirements verified of operations conducted on terms that departed from those normally agreed between independent entities, the AT could make the necessary corrections so that the respective amount corresponds to what would have been obtained if the operation had proceeded in a normal market situation (no. 2 of article 3 of Ordinance no. 1446-C/2001), selecting the method deemed most appropriate (see no. 2 of article 63 of the IRC Code and nos. 1 to 3 of article 4 of Ordinance no. 1446-C/2001).

• In the present case, according to the RIT, the choice fell on the so-called Comparable Market Price Method, taking into account the nature of the operation and the relevant economic and financial circumstances, seeking to ensure the highest degree of comparability (Preamble, 5th paragraph, and article 6 of Ordinance no. 1446-C/2001).

• In the case of financial operations, the factors to consider in the search for comparable operations are "(…) the amount and duration of the loan, its nature or objective (…), the guarantee accompanying the loan and the financial situation of the borrower. The discount rate of the Central Bank, or the base rate, may constitute a starting point; (…)" (Report of the OECD Committee on Fiscal Affairs of 1979, Transfer Pricing and Multinational Enterprises (paragraph 199).

• The AT took into account data provided by the Bank of Portugal (interest rates on loan balances by other monetary financial institutions to non-financial companies resident in the euro area – over five years, that is, interest rates on bank loans to non-financial entities in the euro area, and the absence of specific guarantees provided for in the loan contract and the alleged deficit situation of the debtor were considered, assuming the need to provide some type of aid to the subsidiary, with no spread increase reflecting this greater risk and not exceeding the average interest rate, 4.25%, that the Claimant bears with financing obtained in 2011, resulting in all in a positive adjustment to taxable profit, of €49,251.59, applying article 63 (and not no. 1 of article 23) of the IRC Code.

• As for the symmetric correction in the legal sphere of company B… S.A., the AT is only obliged to effect this correlative adjustment, with effects on the determination of taxable profit of that taxpayer, within 180 days from the date of knowledge, or the date on which it will be possible to obtain knowledge of the finality of the decision, whether administrative or judicial, of the positive corrections made to the taxable profit of the other taxpayer (article 63, no. 11, of the CIRC and no. 1 of articles 17, no.1, and 20, no.1, of Ordinance no. 1446-C/2001).

Regarding Expenses relating to tangible asset items

• As described in the RIT (Point III.2.4) by consultation and analysis of the description of the invoices, in a total of 141,347.93, it is verified that it is not a matter of "repairs, maintenance expenses, alterations and substitutions but rather acquisition of services associated with tangible fixed asset items, essentially buildings and equipment …", and thus should have been capitalized and entered in the respective asset accounts.

• Regarding works on buildings and surrounding areas (€103,691.09) it is verified that by their effective content, they exceed mere conservation and maintenance, respecting improvements that improved and enhanced the property and surrounding parts. As for the expenses that fell on equipment (€37,656.84) they do not constitute repairs, but rather "requalifications", investment expenses, with improvement of existing technology and the company's productive capacity, increasing the value and useful life of the goods involved.

• Despite the difficulty in applying the criteria provided for in Regulatory Decree no. 25/2009, of 14 September (subsection a) of no. 5 of article 5), the Claimant failed to demonstrate that many of the works in question exhaust their functional capacity in a single fiscal year, all leading to believe that they will provide future economic benefits that, under normal operating conditions, will be projected over several fiscal years.

• The works performed on the vineyards and buildings show prolonged durability: in real estate and equipment, they diverge from those conducted in 2010; they are part of a process of modernization and requalification of the various facilities where the activity is conducted and the equipment allocated to it, corresponding to the final phase of that requalification (Report of the Board of Directors of 2011).

• The standards of SNC concerning assets, NCRF no. 7, concerning tangible fixed assets and article 23 of the CIRC should be taken into account, according to which it is the responsibility of the taxpayer to demonstrate the tax deductibility of expenses accounted for.

• It is verified that the improvements/constructions and repairs made in the new facilities/machinery should be capitalized, recognized as tangible fixed assets, having resulted in the calculation of depreciations for 2011, using the straight-line method, pursuant to no. 1 of article 5 of Regulatory Decree no. 25/2009, and the rates corresponding to the goods to which they relate in accordance with article 29 of the CIRC.

• In calculating the depreciations, taking into account the provision of no. 1 of article 30 and no. 1 and no. 5 of article 31 of the CIRC and article 5 of Reg. Decree no. 25/2009, the straight-line method was used for calculating depreciations and depreciation rate (tables of Reg. Decree no. 25/2009 of 14/09) resulting in the positive correction to taxable profit of non-accepted expenses, under subsection a) of no. 1 of article 23 of the IRC Code, in the amount of € 141,347.93, and the deduction, by virtue of subsection g) of no. 1 of the same article, of annual depreciations of capitalizable expenses (major repairs and improvements), in the amount of €14,288.06.

• Therefore the contested correction is legal, and should be maintained in the legal order, as well as the compensatory interest under article 35 of the LGT for the Claimant's delay in payment and remittance to the State of the tax owed.

1. Reply to the exception, production of witness evidence and arguments

10.1. Reply to the exception

The Claimant, indignant at what it considers distortions made by the AT concerning the object of the assessment since three assessments will have been issued but by obvious error of the AT and the object of the Request is undoubtedly the third assessment in the amount of € 30,166.10 which gave rise to enforcement proceedings, and considering such confusions intentional and censurable, requests condemnation of the respondent in the amount of 8 thousand euros for bad faith litigation.

It argues that, being the appealable act the third assessment referred to, its respective payment period was until 1 February 2016, and thus the Request for arbitral pronouncement could be submitted within 90 days from the end of the period for voluntary payment of installments legally notified to the taxpayer. It concludes that the present Request for pronouncement (on 1 April 2016) was submitted on day 59 of the 90-day period and thus is timely.

10.2. Witness evidence

From the examination of the four witnesses presented by the Claimant – the Certified Public Accountant and the Official Accounting Technician who provide services to A… and two officials with managerial functions, one in the administrative area and the other in the production area - information resulted about the evolution and business and group reorganization of the Claimant, as well as about functioning "in the field" (allocation of areas, facility and equipment problems, etc.), which the tribunal takes into account in assessing the present case.

10.3. Arguments

In the arguments, Claimant and Respondent reiterated, broadly, the arguments set forth in the initial pleadings regarding the applicability of the rules on transfer pricing and imputation of interest on loans as well as the tax qualification of certain expenses.

Still regarding the preliminary issue, the AT referred in arguments that the notification of the IRC assessment no. 2015…, in the amount of € 31,166.10, was not accompanied by any collection document, with the notification of the assessment and the statement of account reconciliation no. 2015… expressly stating (i) indication of the means of defense, (ii) that there was no payment or refund owing and (iii) that the remaining amount owed from prior assessments remained unpaid.

Thus, it states, the period for submission of the arbitral request is counted from notification of the assessment act and not, as the Claimant considered, from the end of the voluntary payment period, given that the notified act did not determine payment of any tax installment.

And it considers that the circumstance of there being an outstanding amount that gave rise to the institution of tax enforcement proceedings is not relevant for determining the commencement of the period for challenging, because the legislator expressly distinguished facts capable of determining the starting point for exercising that right, namely, and for what is relevant here, notification with indication of a period for payment of a tax installment or notification of assessment without a collection document.

1. Issues to decide

As a preliminary issue there is the need to decide on the exception of untimeliness of the Request for arbitral pronouncement.

If this is without merit, the fundamental issues to assess are:

• Appropriateness of application in the situation of loans that the Claimant holds over B…, its subsidiary, of the rules on transfer pricing and, in the event that be accepted, legality of the method used in the corrections made to the taxable matter.

• Qualification of expenses with works carried out by the Claimant on buildings, vineyards and equipment, deciding whether these are expenses of a single fiscal year or to be amortized over several fiscal years and, in the latter case, if compensatory interest is owed.

1. Clarification of procedural issues

The Singular Tribunal is materially competent and is regularly constituted, pursuant to articles 2, no. 1, subsection a), 5, no. 2, and 6, no. 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10, no. 2, of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings do not suffer from vices that would invalidate them.

The exception raised will be assessed after the facts are established.

II. LEGAL REASONING

1. Established facts

a) The Claimant, A…, SA, (A…, also known as A… or A…), is a joint stock company, registered in the activity of "Production of Sparkling Wines" (CAE 011022), retail trade in beverages (CAE 47250) and viticulture (CAE 01210), which produces and markets the brand of sparkling wines "…", also performing the activity of management of shareholdings in various companies, namely C…, SA. and B… (RIT, Doc. no. 2 attached with the Request and PA, fls. 4 to 49, section II, 3.1.).

b) A… develops productive and commercial activities in the area of …, …, where it has the vineyards, warehouses and offices. It also has a rented warehouse for storage and distribution of finished product in …(RIT, II.3.3.).

c) A… was subject to a general scope inspection action for fiscal year 2011, under Service Order no. OI2014…, originated by the PNA/T Control of tax benefits (internally, reduction of IRC rates and increase of depreciations) (RIT, II.2).

d) The inspection action began on 2 March 2015 and ended on 9 November 2015, having been, "given the complexity and value of the operations" subject to extension of period by three months (articles 36, 3, d) and 15 of the RCPIT), (RIT, II, 1 and 2).

e) The draft final report of the tax inspection, dated 12 November 2015, and dispatched on 13 November, was sent to the Claimant by letter no. 2015…, of 16 November 2015, for prior hearing (RIT, IX).

f) The Claimant, which proceeded to correct irregularities detected in VAT, did not exercise the right to hearing, the draft RIT being, with correction of error subsequently detected, converted into final Report (RIT, IX) with date of 2 December and dispatched on that date (RIT, IX, p. 45 and 46).

g) In 2011, the majority of shares of A… were held by three shareholders, G…, H… and I…, with the remainder held by the company itself, following acquisition operations in 2010 and merger occurring in 2011 (RIT, II, 3.1.).

h) Prior to the restructuring process referred to in the preceding point, in 2009, the share capital of A… was held in the percentage of 24.75% by company D…, SGPS, SA, and the remainder by shareholders G…, H…, I… and J… (RIT, III. 2.1., p. 9).

i) D…, which was part of Group K…, held 80% of the share capital of Company C…, SA (C…) and 80% of the share capital of B…, SA, with A… holding the remainder of the capital in the former and also, jointly with shareholders G…, H…, the remainder of the capital of C…, with the said shareholders also being directors in the three companies (in A… also I…), thus verifying a situation of special relationships under article 63 of the CIRC between A… and the two companies C… and B… (RIT, III.2.1.).

j) On 21 December 2009, G…, H…, I… and J… and L… incorporated "E…, SA", a company that did not develop any activity in fiscal years 2009 and 2010 (RIT, III.2.1.pp. 8 and 9).

k) Following a restructuring plan of group K…, the purchase and sale operation was finalized on 23 September 2010 whereby D… sold: to A…, 80% of the share capital held in C… for €7,000,000.00, and to E…, the shares it held in A… (€ 2,200,000.00) and in B… (€ 1,120,000.00), as well as the loans, in the amount of €1,280,000.00, held over the latter (RIT, III.2.1. p. 10 and 11).

l) E…, to conduct the acquisition referred to in the preceding point obtained financing of € 4,800,000.00, from F…, having pledged the shares of A… and B… acquired from D… as guarantee, as well as personal guarantees from shareholder G… and wife, with it being a condition of the operation the realization, within 24 months, of a merger between E… and A…, by incorporation of the former in the latter (RIT, III.2.1. p. 10 to 15).

m) Taking into account an allocation of the financing referred to in the preceding point in function of the different applications also referred to there, and having also taken into account the remainder for cash reserves, an allocation to acquisition of loans results of a percentage of 27% (RIT, III.2.2.2. p. 15).

n) The agreed merger was conducted under the special regime provided for in articles 73 to 78 of the CIRC, with the final registration of the merger being conducted on 23 December 2011, with retroactive effect to 1 January 2011 (RIT, III.2.1. p. 18).

o) With the merger, A… became owner of the assets acquired by E… from D… (shareholding and loans in B…) and 20% of own shares, and also of the liability relating to the loan, in the amount of €4,800,000.00, made by F…, becoming responsible for the respective interest (RIT, III.2.1, pp. 11 to 13).

p) In 2011, the Claimant bore interest, at the average rate of 4.25%, with bank financing of 4.8M€, in the amount of € 204,153.02, which it qualified as a bookkeeping and tax cost, without debiting any interest to B… (RIT, III.2.2, p. 32.).

q) The loans of €1,280,000.00 appear in the Balance Sheet of B… for 2010 and 2011 as a liability, non-current liability, financing obtained (RIT, III, 2.3.4., p. 26).

r) Verifying the existence of unremunerated loans and the relationships existing between the companies, as well as the coincidence of members of their respective boards of directors and their intervention in the preparation of the merger process, including obtaining financing, it was considered that one was facing related operations, but which were not included in the "transfer pricing tax file (DFPT)" existing in A… for 2011, which only describes and quantifies commercial operations, saying nothing regarding financial operations, specifically regarding acquisition of an unremunerated loan (RIT, III.2.3.4.p. 23 to 25).

s) In the final Report of the Inspection, it was concluded that, taking into account the special relationships, of the type defined in subsection b) and d) of no. 4 of article 63 of the CIRC, existing between A…, B… and E…, faced with the shareholding structure and composition of the board of directors of the companies, and the acquisition of an unremunerated loan, when that acquisition implied an expense, there was a need to determine a price in accordance with the principle of competition, a value that would be practiced between independent entities (RIT. III.2.3.5., pp. 27 to 34).

t) The analysis conducted led to a correction being made in the taxable result for fiscal year 2011, in the amount of €49,251.59, by "Use of the comparable market price method (MPCM) by means of external comparables, using the weighted average rate of loans (period over 5 years) granted by monetary financial institutions to non-financial companies resident in the euro area (data available from the Bank of Portugal-annex no. 9), application of the interest rates indicated in the preceding number to the amount of the loan" (RIT, III.2.3.5., pp. 35 and 36).

u) This correction produced an adjustment in terms of IRC, concluding that "the non-collection of interest provided a global economy of global tax for A… in the amount of € 12,312.90 (RIT, III.2.3.5., p. 36).

v) From the documentary analysis of losses and expenses recognized in fiscal year 2011 (in a total of 141,347.93, the tax inspection raised doubts regarding 14 invoices which the Claimant justified as concerning maintenance expenses, repair, alterations and substitutions of equipment/facilities (SNC accounts 622621–Supply and external services–specialized services – Conservation and repair Buildings; 622631 – ESE – Specialized services – Conservation and Repair Basic Equipment; 6211–Specialized Works), coming to conclude in the RIT that it was rather "acquisition of services associated with tangible fixed asset items, essentially buildings and equipment, being able to be divided into two groups" (RIT.III.2.4.).

w) In the works referred to in the preceding point, the RIT identified, distinguishing, the expenses relating to buildings and surrounding areas, in a total of €103,691.09: (i) Repair and construction of walls, earth movement and repair and maintenance of the water system; (ii) supply and installation of two fan coil units in the restaurant facilities, conference room and bathrooms; (iii) furniture for dwelling; (iv) Supply and application of granite; and (v) electrical material; and the expenses that fell on equipment, in a total of €37,656.84: (i) Alteration in the current chilled water production installation; (ii) Transfer of the cooling tower and condensation system; (iii) Installation of the cooling tower; and (iv) 30% of the Budget relating to the alteration in the chilled water production installation." (RIT.III.2.4.3., p. 38).

x) The RIT came to consider, regarding the expenses with buildings and surrounding areas that "these works exceed, by their content, mere conservation and maintenance, respecting improvements that improved and enhanced the property and surrounding parts" and, regarding equipment: "The contracted services do not constitute repairs are "requalifications" that constituted investment expenses, were intended to improve existing technology and the company's productive capacity and increased the value and useful life of the goods involved. We are in the presence of major interventions that altered the capacity and useful life of the equipment. Or, that is, taking into account the description and values contained in the documents, it is verified that: Given the nature of the works and goods invoiced the same are not exhausted nor consumed in a single fiscal year only. Their use in the taxpayer's activity will continue in the following fiscal years because the walls, fan coil units, furniture and electrical material applied, as well as the operations performed on the equipment, do not end their use at the end of 2011. They are various services but by their characteristics and invoiced value we verify that their use is not limited nor exhausted in the year under analysis, and it is probable that their use will be prolonged over several fiscal years, generating future economic benefits. In fact, some of these expenses are part of the policy of requalification of the entity's old real estate property with a view to modernizing the basement areas and providing the company with spaces for tourism use (cf. indication in the Report of the Board of Directors for the year 2011. Let us pay attention to the criteria for the definition and recognition of an expense already previously exposed in point III.5.1 defined, respectively, in paragraphs 76 to 78 and 92 to 96 of the conceptual framework (CF). According to these criteria we verify that the invoices in question do not respect expenses that should be immediately recognized in the fiscal year in which they are incurred. The future economic benefits associated with these operations are associated with the tangible fixed asset to which it is associated, that is, they will flow to the entity beyond the current accounting period, not being limited nor exhausted in fiscal year 2011. In IRC and in accordance with article 18 and article 23, the expenses also do not meet the requirements to compete, in full, for the formation of the taxable result of 2011. Thus, the tax correction of the expenses accounted for in account 622631 is to be proposed which amounts to the total value of 141,347.93€.». (RIT, III.2.4., pp. 38 and 39).

y) In the correction proposal, the RIT, taking into account that «(…) under article 23, it is the responsibility of the taxpayer to demonstrate the tax deductibility of the expenses accounted for. As already mentioned the same only presented the invoices for purchase", concludes: "Taking into account the precepts of the conceptual framework of the standards, namely the concept underlying the definition of asset as well as the provision in NCRF 7, we verify that civil works/machine repair work falls within the definition of tangible fixed asset and meets the recognition criteria in accordance with the standard and the definition of asset provided in the conceptual framework. - The works and repairs were carried out on assets used by the taxpayer in its operational activity and implied a return of income through increased efficiency in their use by the entity (ex: roof remodeling, floor restoration, piping, wall reinforcement, drainage of waters; - The repairs in the machines increased their efficiency (capacity); -The useful life of the improvements/constructions and repairs was expected at the date they were carried out - 2011, that their use would be greater than one year (fact confirmed on the present date – May 2015 - in which the assets in question have not since 2011 been the subject of new repairs); - The cost of these items is reliably measured by the return of monetary value spent (value of the invoices). Given the above, we can state that the improvements/constructions and repairs, carried out in the new facilities/machinery, meet the criteria referred to in the conceptual framework NCRF 7, and insofar as they generate future economic benefits and are reliably measurable, they should be capitalized, that is, recognized as tangible fixed assets.». (RIT, III.2.4., pp. 40 and 41).

z) In the inspection procedure, the AT also understood that the works undertaken should not be treated as a total cost of the fiscal year, but as amortizable investment expenses [at annual rates of 5% (walls) 12.50% (furniture and equipment) and 10% (walls, electricity and refrigeration facilities) with these percentages being deductible from IRC of 2011, pursuant to the table attached to Reg. Decree 25/2009, of 14/09, and thus concluded that, under subsection g) of no. 1 of article 23 of the CIRC, a value of depreciation to be considered in the fiscal result of 2011 resulted in the total amount of 14,288.06€ (9,633.79€ regarding real estate and 4,654.27€ regarding equipment). (RIT, III.2.4., pp. 41 and 42).

aa) Thus, the Tax Inspection Report proposed corrections to taxable matter in IRC in the amount of € 176,311.46 (table p.44 of RIT).

bb) In …, area where the vineyards are located and where the Winery and warehouses are located, there is occurrence of high temperatures in Summer and very low ones in Winter, with strong storms (testimony of witnesses).

cc) In …, there is annually a need for maintenance work, both on the vineyard roads and accesses (land coverage, walls), and on the roofs, interior and furniture of buildings (wineries, bathrooms, refectory, conference room and "dwelling", the latter being a house where interns and oenologists are housed during harvest time), and on equipment (such as refrigeration systems, electrical installations, fan coil units).(testimony of witnesses).

dd) The equipment necessary for wine and sparkling wine production includes a refrigeration system, vats and presses, which must be annually cleaned and/or repaired before harvest, the only time they operate (testimony of witnesses).

ee) The facilities are visited annually by thousands of people (mentioned as 25 thousand) and the refectory serves meals, lunches and dinners, to customers. (testimony of witnesses).

ff) In fiscal year 2010, the tax inspection made corrections to taxable matter in the total amount of € 245,054.90 (Doc. no. 3 attached to the proceedings with the Request).

gg) Following notification of the RIT for fiscal year 2011 the respective account reconciliation statement (…) was prepared, with identification 2015-… -… and IRC assessment no. 2013… was issued, dated 3 December 2015, referring compensation date 04-12-2015, with tax payable in the total amount of € 148,809.43[1] and saying "You are hereby notified of the IRC assessment relating to the period to which the income relates, according to the explanatory note attached and substantiation already forwarded. You may lodge a complaint or appeal within the terms and periods established in articles 137 of the CIRC and 102 of the CPPT, counted continuously after the date of this notification, which is deemed made at the moment the recipient accesses the electronic mailbox, or in the absence of access to the same, on the 25th day after its sending". (doc 1 attached with the Request, fls. 1 and 4, doc. no. 1 attached with the Reply and doc. no. 4 attached on 4/Nov by the AT).

hh) From the account reconciliation statement, referring to compensation date 4 December 2015, a balance payable of € 147,809.43 resulted, and in the payment references, the payment deadline date of 1 February 2016 was indicated (p. 4 of doc. no. 1 attached with the Request).

ii) Having verified the existence of an error in the preparation of the account reconciliation statement, another account reconciliation statement (…) was issued with identification 2015-… -… where the value entered in field 371 was corrected, in the prior account reconciliation statement… (Doc. no. 5 attached on 4/nov 2016 and request of the Claimant of 14/09/2016).

jj) This was followed by notification of assessment no. 2015… and, thereafter still, of a third assessment 2015…, which replaces assessment no. 2015… and regularizes the collection note no. 2015…, in the amount of € 31,166.10[2], dated 10 December 2015 (Doc. no. 3 attached on 4/Nov2016).

kk) The demonstration of IRC assessment no. 2015… and the account reconciliation statement no. 2015… were notified to the Claimant, electronically, through documents identified by code 2015… and by code 2015…, delivered in the electronic mailbox Via CTT on day 10-12-2015 and assessment 2015…, was notified in the electronic mailbox of Via CTT on day 15-12-2015 (Communications Management System (SECIN) (articles 6, 8, 10 and 16 of the Reply).

ll) In the account reconciliation statement no. 2015… it appears as "payment deadline date 2016-02-01" (doc. no. 1 attached with the Request)

mm) The "assessment demonstration" no. 2015… stated: «You are hereby notified of the IRC assessment relating to the period to which the income relates, according to the explanatory note attached and substantiation already forwarded. You may lodge a complaint or appeal within the terms and periods established in articles 137 of the CIRC and 102 of the CPPT, counted continuously after the date of this notification, which is deemed made at the moment the recipient accesses the electronic mailbox, or in the absence of access to the same, on the 25th day after its sending» (Doc. no. 1, attached with Request, p. 5).

nn) That tax assessment, because not paid in time, gave rise to notification from the finance authorities for payment, citation in enforcement proceedings (no. …2016…) suspended following provision of guarantee (Request attached by the Claimant and doc. attached with information from the Finance Service of …).

oo) The certificate for execution, issued on 21-02-2016, refers to IRC debt for the period of 2011, in the amount of € 30,166.10, for compulsory collection from 02-02-2016. The document also refers to the amount of default interest (252.00) and costs (€ 650.02) (Doc. no. 3 attached to the information from the SF of …, referred to in the preceding point).

pp) The present request for arbitral pronouncement was submitted by the Claimant on 1 April 2016 (cfr. CAAD platform).

1. Unproven facts

It is not considered proven that the works undertaken constitute requalification/alteration works of facilities.

1. Substantiation of evidence

The establishment of factual matters was made on the basis of facts alleged by the parties and not contested, as well as documents attached to the proceedings and witness evidence produced.

1. Application of law

16.1. The issue of untimeliness of the Request

As seen above, the Respondent, taking into account that the IRC assessment no. 2015…, object of the present arbitral action, was notified to the Claimant, via electronic mailbox Via CTT, on 15 December 2015, and applying articles 39 and 102, nos. 1 and 2 of the CPPT, considers that the 90-day period for submission of a request for arbitral pronouncement, ended on 14 March 2016, and thus the Request, submitted on 1 April 2016 is untimely.

The Claimant argues that this position constitutes bad faith litigation, defending that being 1 February 2016 the end of the payment period for the (successive) assessments of which it was notified, the request for arbitral pronouncement submitted 59 days later, on 1 April 2016, is timely.

Beyond the divergences over the documentation to be considered relevant or not, it is verified that:

• The Claimant was notified of a first assessment no. 2013… of fiscal year 2011, dated 3 December 2015, with amount payable of € 147,809.43 and after corrections, the assessment to be taken into account in the proceedings is assessment no. 2015…, dated 10 December 2015, indicating as amount € 31,166.10;

• In various documents attached to the proceedings, namely in the first assessment, the payment deadline date of 1 February 2016 appears;

• The assessments referred to were notified electronically on 10-12-2015 and 15-12-2015, respectively, and in both was communicated: "You are hereby notified of the IRC assessment relating to the period to which the income relates, according to the explanatory note attached and substantiation already forwarded. You may lodge a complaint or appeal within the terms and periods established in articles 137 of the CIRC and 102 of the CPPT, counted continuously after the date of this notification, which is deemed made at the moment the recipient accesses the electronic mailbox, or in the absence of access to the same, on the 25th day after its sending".

The Respondent argues (with greater clarity in the arguments) that the Claimant cannot invoke the counting of the period in accordance with subsection a) of no. 1 of article 102 of the CPPT because assessment no. 2015… does not provide for any tax installment payable, and thus subsection b) of no. 1 of article 102 applies, with the period for challenge being counted from notification. The Claimant responds that there was a tax installment to be made, so much so that having not made it, enforcement proceedings followed which is pending (attaching information that all indicates referring to the assessment here under discussion). The Respondent did not attach elements on the enforcement proceedings, but seeming to admit their existence defends, in an equivocal manner, that "the circumstance of there being an outstanding amount that gave rise to the institution of tax enforcement proceedings is not relevant for determining the commencement of the period for challenge, because the legislator expressly distinguished facts capable of determining the starting point for exercising that right, namely and for what is relevant here, notification with indication of a period for payment of a tax installment or notification of assessment without a collection document."

On the other hand, it is noted that the AT, upon communicating to the Claimant, in any of the assessments, that it could "lodge a complaint or appeal within the terms and periods established in articles 137 of the CIRC and 102 of the CPPT, counted continuously after the date of this notification, which is deemed made at the moment the recipient accesses the electronic mailbox, or in the absence of access to the same, on the 25th day after its sending", seems to adopt the understanding that whenever there is electronic notification subsection a) of no. 1 of article 102 does not apply, an interpretation that does not seem appropriate to us, as derogatory of the provision in question.

All things considered, it is held that, given that the deadline for payment clearly appears on the assessment resulting from the corrections made by tax inspection and having not been proven that from the second assessment no obligation to pay any tax installment resulted, the provision of subsection a) of no. 1 of article 102 of the CPPT is to apply – if the deadline of the initial assessment was counted in that manner it should not be reduced following errors subsequently committed to which the Claimant was unaware. Moreover, the document relating to the enforcement proceedings mentions the date 02-02-2016 as being that for counting periods for purposes of enforcement.

Therefore, it is decided in favor of the timeliness of the Request.

Regarding the request for condemnation of the Tax and Customs Authority as bad faith litigant, it is judged without merit. Indeed, despite highlighting the lack of clarity as to the data on the pending enforcement proceedings, and on the other hand, the content of the assessment notifications which do not distinguish regarding the counting of the period to react against the tax act, the situations of subsections a) and b) of no. 1 of article 102 of the CPPT, the tribunal considers that the issue raised by the AT derives from the interpretation it made of the situation, proceeding with its respective factual and legal substantiation, not being a mere expedient used in bad faith.

16.2. Treatment of A…'s loans over B…

From the factual matter established and interpreted in light of the witness testimony collected, it is concluded that the Claimant (A…) is a company that has grown considerably since the late 1980s based on good knowledge in the area of wines, especially sparkling wines. Associated in the 1990s with D… (a company with the same shareholders as M…, according to one of the witnesses), A… sought in the late first decade of 2000, to accomplish a "new turn-around", reacquiring domain, meanwhile occurred, of D… over the three companies –A…, B… and C… . This strategy was carried out by the individual shareholders common to the three referred companies, deciding to create a vehicle company, E… . This company – which never came to have its own activity – acquired from D…, with financing obtained from F…, shares of A… and B… as well as loans over the latter. The shares of C… were acquired directly by A… from D… .

The restructuring of the group was completed with a merger, by incorporation of E… in A… .

The loans initially granted by company D… (through M…) in B… and for which, according to testimony of the persons responsible for the company's accounts, no interest was charged, continued not to imply any costs for the assignee thereof. But the company creditor of the loans – A…– pays interest for the financing obtained and which it continues to bear for the respective acquisition.

The AT considered the situation covered by article 63 of the CIRC and Ordinance no. 1446- C/2001, with the substantiation that:

• There exist special relationships between the Claimant and B…, S.A. either due to the holding of capital of one in the other (article 63, no. 4, a) or due to the shareholding structure and composition of the board of directors of the companies (subsections b) and d) of no. 4 of article 63);

• The financial operation existing between the two companies must observe the principle of full competition (no. 1 of article 63 of the IRC Code), it not being possible to oppose the impossibility of stipulating interest because they were not initially stipulated with D… – what counts for tax purposes is the provision of article 63, no. 1, of the IRC Code;

• An independent entity that resorts to bank financing to acquire certain assets, including credits, becoming responsible for financial charges, would not in normal market conditions waive obtaining remuneration from the investment realized, namely from the loans granted in the present case.

• The option effected in the present case is due to the fact that there exist special relationships between creditor and debtor, the situation becoming subject to corrections in accordance with the provision of article 63 of the CIRC and Ordinance no. 1446- C/2001.

Against this the Claimant argues that the AT could not fix interest on the loans because the position it acquired, as creditor of the same, derives from the merger with E…, a company which, in turn, had acquired that position from D…, jointly with the social shareholding in the company debtor of the loans, B… . Thus, the Claimant would be, as assignee, precluded from stipulating interest on the loans since they had not been stipulated originally, when granted by D…, being indeed gratuitous, as permitted by the Business Code (article 243 and following), with the conditions not being subsequently alterable without authorization of the debtor (article 577 and following of the CC). And any independent third party would be bound equally. It argues that the fiction of interest violates articles 63 of the CIRC and 77, no. 3, of the LGT and alleges that the position of any other third party seeking to make the same transaction would have been identical to this, because D…, when deciding to divest entirely from the wine sector, would only agree to sell its shareholding as a whole, which was what E… was forced to accept, and to do so was forced to finance itself.

It concludes that the application of transfer pricing suffers from error in substantiation when it assumes different conduct by an independent third party when this would have acted in the same way if it wanted the transaction. It further states that, were there tax correction, it should be based on article 23 of the CIRC due to lack of indispensability of the cost (interest) relative to the purchase of the loans and never in the fiction of interest, via the institute of transfer pricing. Added to this is that in the application of these no symmetric and concomitant correction was made in the accounts of B… as the law commands (article 63, no. 11, of the CIRC).

Regarding the invocation of alternative application of article 23 of the CIRC, the AT emphasizes that the basis of the correction was not the refusal based on dispensability of costs, since the situation was even considered justified given the situation of the subsidiary. As for the lack of symmetric correction in the legal sphere of B…, S.A., the AT reaffirms that the correlative adjustment in the sphere of the taxpayer who appears as counterparty in the related operation is only effected pursuant to the provision of no. 11 of article 63 of the IRC Code, of no. 1 of article 17 and of no. 1 of article 20, both of Ordinance no. 1446-C/2001.

Assessing and deciding:

The question is whether the situation sub judice falls under the provision of article 63 of the CIRC (whose no. 1 provided "In commercial operations, including, designedly, operations or series of operations on goods, rights or services, as well as in financial operations, conducted between a taxpayer and any other entity, subject or not to IRC, with which it is in a situation of special relationships, terms or conditions must be contracted, accepted and practiced substantially identical to those that would normally be contracted, accepted and practiced between independent entities in comparable operations") and whether the corrections made in the inspection procedure are substantiated.

Taking into account the provision of no. 4 of the same article, which considers special relationships to exist between two entities in situations where one has the power to exercise, directly or indirectly, significant influence on the management decisions of the other, enumerating, illustratively different situations - subsections a) through h) – it was considered by the Respondent that this is the case of the Claimant in its relationship with company B…, being entities related, by verification of the criteria contained in subsections a), b) and d) of no. 4 of article 63 of the CIRC, given the percentage of participation held by the first of the second, and the identity of the directors of both companies.

The Claimant does not contest the existence of special relationships. It argues rather that:

• It could not apply interest to the loans of which it is creditor because it is a loan for which the debtor never bore interest - practice permitted by the Commercial Code – and the initial conditions of the contract cannot be altered especially because the debtor did not intervene in the assignment of credit.

• Because any third party was bound to these same conditions and because it could not have acquired, through E…, the shareholdings of B…, without the loans, faced with the negotiating impositions of D…, it must be concluded that the purchase of all the assets was effected at fair price and with financing conditions that would be practiced with third parties.

Regarding the loan contract (of which no written example exists, being a situation maintained over years, with D…, connected to M… providing the amount in question to the subsidiary, without charging interest) even if the legal analysis is adopted on the non-susceptibility of alteration of conditions for civil and commercial purposes, there will always be a need to take into account the treatment specifically for tax purposes, and it is that which is at issue in the corrections effected by the tax administration.

On the other hand, the invocation of non-applicability of the imposition of no. 2 of article 63 of the CIRC[3], seems fallacious. Even though the problems arising in the concretization of the comparison provided for in article 63 are not unknown, this tribunal does not consider it appropriate the Claimant's thesis based on the argument that a third party placed in the same position as the Claimant, that is interested in the restructuring of the group, would have taken the same negotiating options without being able to refuse the conditions imposed by the seller.

Regardless of investigation of the specific conditions of negotiating balance between the parties involved (and there, the alleged negotiating power of the seller D…, so closely linked to M…, when selling participation in a company, this, moreover, allegedly in financial difficulties, was not proven), an argument that denies the applicability of the provision of article 63 based on the excessively strong link between the companies involved constitutes a clear evasion of application of the objectives precisely aimed at by the law in question.

That is, when it is alleged that it is not possible to find the position of an independent third party because the question only arises due to, in the present case, a great dependency, and it is argued that a third party equally dependent would act in the same way, one is precisely avoiding application of the law which aims to prevent the deviations derived from the dependency in question.

Thus, the provision contained in article 63 that, in the case of occurrence of special relationships between entities, these must adopt terms and conditions that would normally be agreed, accepted or practiced between independent entities, cannot be evaded invoking that, given the degree of binding existing, there is no basis for comparison…. It would be the same as saying there is no danger because the situation is too dangerous…

What the law seeks to prevent is precisely that the power of a company to have significant influence over another leads to distortion of tax results[4] that would exist without that relationship, and for this reason requires that for tax purposes, related entities adopt an action identical or similar to that which would be adopted by independent entities in comparable operations (that is if the relationship of dependency did not exist).

As analyzed by the Constitutional Court, in Award no. 252/2005, of 10 May 2005, «In this respect, the standard in question traces a framework of action that operates before the possibility that a relationship between entities could dictate an artificial construction of taxable income, admitting a correction of the quantum of tax faced with the expression it assumes, in the absence of such relational bond, between independent subjects. And, in that framework of action, the standard is suitable to make known to its recipient(s) what the quantitative expression of the tax fact is that is releveled. Which equally determines the circumstance that this profit is fully apprehensible by the taxpayer, insofar as, both the concrete modeling of the tax facts, as well as its bookkeeping expression has as its reason for being the non-evidence of the actual profit that would emerge in similar circumstances before relationships between independent persons.»

Thus, and returning to viewing the proven facts, we conclude that the Respondent did not violate legality in understanding that:

• Between the Claimant and company B…, S.A. there exist special relationships, pursuant to the provision of subsections a), b) and d) of no. 4 of article 63 of the CIRC;

• It is acceptable to consider as costs of the Claimant costs of financing obtained to strengthen the position in an already its subsidiary, acting in the same production area and that is in a financial situation, with difficulty in accessing loans in the market;

• In the financing granted to the subsidiary in question, the Claimant is obliged to impute costs for the financing provided, in the case under the form of loans.

For this reason, the Respondent considered that it could make the necessary corrections to taxable profit so that the respective amount corresponds to what would have been obtained if the operation had proceeded in a normal market situation. (no. 2 of article 3 of Ordinance no. 1446- C/2001, choosing the method for determination of transfer price (nos. 1 and 2 of article 4 of Ordinance no. 1446-C/2001) (a method which, in itself, the Claimant does not contest) having taken into account even the situation of fragility of the subsidiary.

Regarding, still, the invocation of illegality due to lack of symmetric correction in the legal sphere of company B…, account must be taken of the regulation of no. 11 of article 63 of the IRC Code, carried out, in accordance with no. 13 of the same article 63, by articles 17 and 20 of Ordinance no. 1446-C/2001.

Now, pursuant to no. 1 of article 20 of this Ordinance "the General Tax Authority must proceed to the appropriate correlative adjustment in the determination of taxable profit of the taxpayer within 180 days from the date of knowledge, or the date on which it will be possible to obtain knowledge, of the finality of the decision, whether administrative or judicial, of the positive corrections made to the taxable profit of the other taxpayer by virtue of both being in a situation of special relationships and having not been observed between them the principle of full competition", for which the Respondent's argument is recognized as correct to the effect that only after the primary adjustment becomes definitive is the AT obliged to promote the correlative adjustment in the sphere of the taxpayer who appears as counterparty in the related operation.

That is, in the present case, in which the Claimant did not accept the corrections made, the correlative adjustments in the following fiscal years would only have taken place – in the case of recognition of the reasoning of the appellant - after the finality in judgment of the decision ending the litigation.

Thus, it is concluded that the correction to taxable profit effected regarding interest imputed to loans does not suffer from any illegality, not affecting in that part the assessment.

16.3. Costs of works undertaken by the Claimant

A… has in …, near …, office facilities and warehouse for sale, with the production, processing and storage area being situated in … . This area, where the vineyards, Winery and Warehouses are located, is characterized by high temperatures in Summer and very low ones in Winter, with copious rainfall and strong storms.

The testimony produced was to the effect that, in …, every year there is a need for maintenance work, both on vineyard roads and accesses (land coverage, walls), and on roofs, interior and furniture of buildings (wineries, bathrooms, refectory, conference room and "dwelling", the latter being a house where interns and oenologists are housed at harvest time), and on equipment (such as refrigeration systems, electrical installations, fan coil units). The facilities are visited annually by thousands of people and the refectory serves meals daily. The refrigeration system and chilled water production are goods in use, with intense usage in a short period of time and significant wear that is verified in this type of wine production sector activity.

Regarding the expenses effected by A… in 2011, discrepancies arose in the tax inspection action conducted on the company in 2014 regarding the qualification and tax treatment of expenses in the total amount of € 141,347.93.

While the Claimant understands that these expenses are of mere conservation and repair, qualified as a total cost of the fiscal year; in contrast, the AT advocates that they should be qualified as tangible assets (acquisition of services associated with tangible fixed asset items, by remodeling and expansion of buildings) whose tax deduction must be made, via depreciations, over several fiscal years.

Based solely on documents it is difficult to prove the dimension of the works and significance from the point of view of qualification as conservation work or remodeling. Given that there are various facilities and a large territorial space, occupied by these and by the vineyards, with roads and walls that need annual maintenance, receiving workers, clients and visitors, demonstrating what type of works these are would require a far more exacting substantiation than that undertaken by the AT.

That the works undertaken can raise doubts was recognized by the Certified Public Accountant who explained that it becomes difficult to apply criteria in classifying "new work" or "maintenance", but that the option has been made not in favor of the old theory of diluting results but of immediately assuming expenses whenever it is not a matter of increasing the useful life of goods but only of restoring their useful life. Although some of the justifications given by the Claimant for the qualification assigned in the contested cases may be considered debatable, it is verified that the substantiation of the Respondent is not presented as entirely convincing nor sufficient.

Thus, the Respondent did not prove the verification of the assumptions, increase of the real value of the asset or its probable duration, justifying the application of article 31, no. 5 of the CIRC and no. 5 of article 5 of Regulatory Decree no. 25/2009, of 14 September. Nor is the different application of depreciation rates adequately substantiated. In fact, even though some classifications of the type of works may be case-by-case dubious, it is verified that the amount of expenses realized annually is very similar, able to support the thesis that, overall, these are maintenance expenses. Moreover, such average level of annual expenses produces an effect similar to that of dilution of all expenses over several fiscal years.

Deciding on the question of expenses with works, it is concluded that to a large extent the invoices that raised doubts do not, prima facie, constitute expenses included in "major repairs or improvements". Both in those cases and in others that may raise more doubts, the Administration would have, to sustain the contrary of their accounting by the Claimant – as expenses of the fiscal year, as annual maintenance work - to have collected substantially different and more in-depth evidence of the dimension and context of the works in question, as is required by the duty of substantiation of tax acts (article 77, no. 1, of the LGT).

In conclusion, on this second issue, the tribunal decides in favor of the merit of the Request to the extent that the corrections concerning classification of a set of works as expenses relating to tangible asset items are not adequately justified, affecting in that respect the legality of the assessment[5].

1. Value and object of the request

The Claimant identifies as the object of the request for arbitral pronouncement the assessment of € 30,166.10 and respective compensatory and default interest, in the amount of € 3,709.78 and € 9.60, respectively, indicating a total value of € 33,885.48. It refers to doc. no. 1 attached with the Request. That document, fl. 1, contains a note (dated 14-12-2015) referring an account reconciliation (04-12-2015), and the following values: issued €147,809.43, canceled €117,643.33, owed €30,166.10. The reconciliation includes cancellation of default interest of €9.60. At fls. 5, contains assessment no. 2015…, in the amount of 31,166.10, an amount that seems explained at fls. 3 (account reconciliation statement) with the following values: "by reconciliation of 2011 assessment – 27,416.72; default interest 9.60, compensatory interest 3,708.78". This amount coincides with that indicated by the Collection Division in doc. 3 attached by the AT on 4/Nov/2016.

Whereas the Finance Service of … refers to an assessment of € 30,116.10 and it is this amount that was subject to enforcement proceedings in case no. …2016…[6], with the clarification of the discrepancies not being evident.

Nor does the value of € 33,885.48 object of the Request appear confirmed (because in the account reconciliation where the amounts of compensatory and default interest are referred, these contribute to the sum of €31,166.10).

All things considered, taking into account the available and analyzed elements, it is decided to take into account as the value of the case the amount of €31,166.10, an amount coinciding with that recognized in the papers of the Respondent, both in its Reply and in the arguments.

III. DECISION

1. In view of the above, the present Arbitral Tribunal decides:

a) To find the request for arbitral pronouncement partially well-founded and to annul the IRC assessment no. 2015…, in the amount of € 31,166.10, relating to fiscal year 2011, as far as it concerns the IRC and compensatory interest derived from the correction made regarding expenses with works, a correction that influenced in the amount of € 127,059.87 the assessment;

b) To find the request for arbitral pronouncement without merit regarding the corrections made regarding interest imputed to the loan of the Claimant over its subsidiary B…, that is in the amount of €49,251.59, acquitting the Tax and Customs Authority of the request in that part.

c) To condemn the Parties to bear the costs of the present proceedings in the proportion of their respective defeat, of 27.93%, the Claimant and 72.07%, the Respondent.

1. Value of the proceedings and costs

The value of the proceedings is fixed at € thirty-one thousand six hundred and forty-four euros and seventy-five cents) pursuant to article 97-A, no. 1, of the CPPT, applicable by virtue of article 29, no. 1, a) of the RJAT and of article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

The amount of costs is fixed at € 1,836.00 (one thousand eight hundred and thirty-six euros), calculated in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, all pursuant to articles 12, no. 2, and 22, no. 4, of the RJAT and article 4 of the RCPAT, to be borne by the Claimant and Respondent pursuant to the preceding number, that is, of € 512.79 (five hundred and twelve euros and seventy-nine cents) and € 1,323.21 (one thousand three hundred and twenty-three euros and twenty-one cents), respectively.

Lisbon, 20 April 2017.

The Arbitrator

Maria Manuela Roseiro

[1] Corresponding to €130,617.83 of tax, €18,182.00 of compensatory interest and 9.60€ of default interest (information from the Collection Division, Doc. no. 3 attached by the AT on 4/Nov of 2016).

[2] Corresponding to € 27,446.72 of tax, €3,709.78 of compensatory interest and €9.60 of default interest, according to Doc. 3 attached by the AT on 4/Nov 2016 (Inf Collection Division).

[3] "The taxpayer must adopt, for the determination of terms and conditions that would normally be agreed, accepted or practiced between independent entities, the method or methods capable of ensuring the highest degree of comparability between the operations or series of operations it undertakes and others substantially identical, in normal market situations or in the absence of special relationships, taking into account, designedly, the characteristics of the goods, rights or services, market position, economic and financial situation, business strategy, and other relevant characteristics of the taxpayers involved, the functions performed by them, the assets used and the sharing of risk".

[4] (…) «As a reflection of an intentional "embrace", fruit of a common will capable of leading to "the values of transactions transferring part of the taxable matter between the various fiscal poles of the same center of converging economic interests, departing from those that would be practiced by independent entities"» Award CT 252/2005, including citation of Fernando Rocha Andrade, Transfer Prices and Taxation of Multinationals: Recent Developments and the New Portuguese Legal Framework, op. cit., pp. 333.

[5] In this case nothing prevents such partial declaration of illegality [see, by all, Award of the STA of 13 November 2013, case no. 285/2013 (…) «when an assessment act is based on a specific taxable matter and it is found that part of it was calculated illegally, by reason of not being able to be considered, there is no obstacle whatsoever that the assessment act be annulled regarding the part that corresponds to the taxable matter whose consideration was illegal, with the assessment remaining in the part that corresponds to taxable matter that is not affected by any illegality (See, also in this sense Code of Tax Procedure and Process annotated by Jorge Lopes de Sousa, 6th edition, vol. II, p. 342.). » Also Award of the Plenary of the STA of 10 April 2013.].

[6] There are also mentioned the amount of costs and default interest, expenses of the enforcement proceedings whose remedy are not the object of proceedings for challenge because they are not an act consequent to the tax act (see Award of the STA of 1 July 2009, case 0374/09)