CAAD Case 213/2018-T: IRC Tax on Positive Equity Variations and Loss Coverage Rulings

ARBITRAL DECISION (consult complete version in PDF)

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president, designated by the other Arbitrators), Prof. Doctor Rui Duarte Morais and Prof. Doctor Sérgio Vasques, designated by the Claimant and Respondent, respectively, to form the Arbitral Court, constituted on 10-07-2018, agree as follows:

1. Report

A..., S.A., taxpayer no. ..., with registered office in ..., ...-... ..., District of ..., (hereinafter abbreviated to "A..." or "Claimant"), has requested the constitution of an Arbitral Court in accordance with Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT").

The Claimant seeks:

• The declaration of illegality and consequent annulment of the assessment of Corporate Income Tax ("IRC") and compensatory interest no. 2017..., for the fiscal year 2014, which resulted in a total amount of IRC and compensatory interest to be paid of €1,052,316.49;

• The condemnation of the Tax and Customs Authority ("AT") for damages resulting from the provision of an undue guarantee and, specifically, for expenses incurred by the Claimant with the issuance and maintenance of bank guarantee no. ..., issued by B... CRL, on 16 April 2018, in the total amount of €1,343,659.03, with a view to suspending the tax enforcement proceedings identified with no. ...2018..., which was instituted following the failure to voluntarily pay the aforementioned assessment.

Respondent is the TAX AND CUSTOMS AUTHORITY (hereinafter "AT").

The request for constitution of the Arbitral Court was accepted by the President of CAAD and automatically notified to AT on 27-04-2018.

On 19-06-2018, the President of CAAD informed the Parties of the designation of the Arbitrators, in accordance with and for the purposes of the provision in no. 7 of article 11 of the RJAT.

Thus, in accordance with the provision in no. 7 of article 11 of the RJAT, the time limit provided in no. 1 of article 13 of the RJAT having elapsed without the Parties making any submissions, the Collective Arbitral Court was constituted on 10-07-2018.

The AT submitted a response in which it argued that the request for arbitral decision should be dismissed as unfounded.

By order of 08-10-2018 it was decided to dispense with the holding of the meeting provided for in article 18 of the RJAT and that the proceedings continue with optional pleadings.

The Parties submitted pleadings.

The Tax and Customs Authority raised the question of the untimeliness of the Claimant's pleadings.

The Arbitral Court was duly constituted.

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

The proceedings do not suffer from nullities.

2. Question of the Untimeliness of the Claimant's Pleadings

A time limit of 10 days was set for pleadings by the Claimant.

The Tax and Customs Authority raises the question of the untimeliness of the Claimant's pleadings because, "considering that the parties were notified by electronic mail on 2018-10-08, such notification is presumed to have been made on 2018-10-11, the third day following the date of preparation and dispatch of the order, in accordance with the provision of article 248 of the current Code of Civil Procedure, applicable ex vi of article 29, no. 1, paragraph e) of the RJAT, in light of the manifest absence of rules governing the matter in the latter legislation."

However, as appears from the file, notification of the order for pleadings was not made by electronic mail, but rather sent to the electronic tax address (ViaCTT), so notification is only deemed to have been made on the "fifth business day following registration of their availability in the information system supporting the public electronic notification service associated with the single digital address or in the electronic mailbox of the person being notified," in accordance with article 39, no. 10, of the CPPT, applicable to tax arbitration proceedings by virtue of the provision in article 29, no. 1, paragraph c), of the RJAT.

Thus, the notification dispatched on 08-10-2018 must be understood to have been made on 15-10-2018 (the following business day), so the Claimant's pleadings, submitted on 24-10-2018, were submitted within the 10-day time limit that was set.

Accordingly, the preliminary question raised by the Tax and Customs Authority is without merit.

3. Factual Matters

3.1. Established Facts

The following facts are considered established:

• The Claimant is a company whose principal activity is furnished accommodation for tourists (main CAE 552021) and whose secondary activity is the purchase and sale of real property (secondary CAE 68100) (document no. 5 attached with the request for arbitral decision, the content of which is hereby reproduced);

• In the exercise of its activity, the Claimant obtained financing from several credit institutions, including the banking consortium of C... (hereinafter "C...") and D... (hereinafter "D..."), in the proportion of 40% and 60% (together abbreviated as "banking consortium"), with which it entered into the following contracts:

  • Contract 1: E... SA, NIPC:..., beginning on 14-06-2007, in the total amount of €18,000,000.00, with each company owing 50% of that amount, for a term of 15 years;

  • Contract 2: A..., beginning on 31-10-2011, in the total amount of €1,177,500.00, for a term of 12 years;

• To guarantee payment of the amounts relating to such financing, the Claimant presented the following guarantees:

  • Financing Contract 1: "Voluntary mortgage in favor of C... and D..., in the proportion of 40% and 60%, respectively, of the properties identified from 1 to 8 in the supplementary document two to the deeds (for the maximum value of €13,531,500.00, for the tranche relating to A... of €9,000,000.00) and blank promissory note with filling clause associated, subscribed by A... and guaranteed by F..., NIF ... and G..., NIF:...";

  • Financing Contract 2: "Voluntary mortgage in favor of C... and D..., in the proportion of 40% and 60%, respectively, of the properties identified from 1 to 9 in the supplementary document two to the deeds (for the maximum value of €1,770,371.25); and blank promissory note with filling clause associated, subscribed by A... and guaranteed by F..., NIF ... and G..., NIF:...";

• On 24-07-2013, the banking consortium assigned the credits of which it was the holder against the Claimant to the company H... S.A., with the corresponding guarantees also being assigned (document no. 6 attached with the request for arbitral decision, the content of which is hereby reproduced);

• On the date of credit assignment, the Claimant was indebted to C... and D... in the amounts of €4,343,986.18 and €6,549,945.62, respectively, divided between principal and remunerative interest accrued and accruing, due and unpaid, totaling an amount due of €10,893,931.80, distributed as follows in the table below:

[Table content preserved as in original]

• By the assignment of credits it was stipulated that H... acquired the same from C... and D... for the price of €6,323,000.00, divided as follows:

[Table content preserved as in original]

• On 04-12-2013, H... acquired 100% of the share capital (€997,595.80) of the Claimant, which was held by the following shareholders:

[Table content preserved as in original]

(document no. 7 attached with the request for arbitral decision, the content of which is hereby reproduced);

• In such acquisition, all shares were transferred and suprements and accessory contributions were assigned in the following amounts:

[Table content preserved as in original]

• The purchase and sale price of the shares and assignment of suprements and accessory contributions was agreed upon in the amount of €980,782.94, as defined by the allocation they determined:

[Table content preserved as in original]

• The agreed price was not paid by H..., with H... remaining indebted in the proportion of 60% and 40% to I... LDA and J...- IMOBILIARY AND CONSTRUCTION COMPANY S.A., respectively, with the credits immediately being assigned to the Claimant, which, in return, assigned to these companies, in the same proportion, credits in the same amount of €980,782.94 that it held against K..., S.A., NIPC: ... (formerly called L..., S.A.);

• On 30-06-2014, the Claimant was in a situation of undercapitalization, given that it had a negative equity value of €3,864,031.83, with the share capital value being €997,595.80;

• In accordance with the 2014 Financial Statements, as a result of the auditor's reservations stated in the Legal Certification of Accounts of 2013, the accounts for 2013 had to be restated, which had an impact on the company's equity (document no. 8 attached with the request for arbitral decision, the content of which is hereby reproduced);

• The sole shareholder of the Claimant convened the General Meeting, in accordance with and for the purposes provided in article 35 of the Commercial Companies Code ("CSC"), with a view to adopting the appropriate measures to regularize the situation of the Claimant;

• On 30-06-2014, a General Meeting is held by the Claimant with Minutes no. 47 being drawn up, which appears in document no. 9 attached with the request for arbitral decision, the content of which is hereby reproduced;

• In such Minutes, the following is stated, among other things:

Single Item: To deliberate on measures to be taken in accordance with and for the purposes provided in article 35 of the CSC, considering the provision in article 35/3 ("a) dissolution of the company; b) reduction of share capital to an amount not less than the company's equity, with respect, where applicable, to the provision in no. 2 of article 95; c) making of contributions by shareholders to strengthen capital coverage) or other measures proposed by the Board of Directors;

The Chairwoman declared the session open and immediately proceeded to the Single Item on the agenda. The director Dr. M... took the floor to inform the sole shareholder that, in accordance with the balance dated 30 June 2014, the Board of Directors verified that more than half of the company's share capital has been lost. Indeed, on this date, the company's equity has a negative balance of €3,864,031.83, with the respective share capital being €997,595.80, so it is urgent to take appropriate measures to regularize the situation. He then presented the Board of Directors' proposal with the following content:

"Considering that:

a) Account 56 - retained earnings - shows a negative balance of €8,435,778.15;

b) Account 253100101 - suprements 1 - registers a balance of €9,802,500.00 in favor of the sole shareholder;

c) Account 2722303001 - interest - registers a negative balance of €1,446,333.82 in favor of the sole shareholder;

d) Account 53 registers €1,246,994.77 as equity instruments;

e) The current fiscal and accounting rules allow the accounting entry of loss coverage through incorporation of suprements, as well as the use of other equity instruments for the same purpose,

It is proposed that the amounts of €3,479,500.00, €1,446,333.82 and €1,246,994.77 be debited from accounts 253100101, 2722303001 and 53 and credited to account 56, with a consequent loss of part of the sole shareholder's suprements and accessory contribution credits.

Considering further that:

The company's share capital is excessive given its activity and the commitments assumed by it, particularly considering the continuation of losses, even after the accounting operations proposed above,

It is proposed to reduce the share capital of the COMPANY, from the current €997,595.80 to €50,000.00, for the purpose of loss coverage, through the extinction of shares, with the share capital to be represented by 5,000,000 shares, with the unit nominal value of €0.01, consequently amending article Five, number One of the company's bylaws, which shall have the following wording:

Article Five

(...)

One - The share capital, fully subscribed and paid in cash, is EUR 50,000.00 (fifty thousand euros), represented by 5,000,000 (five million) registered shares, with the nominal value of €0.01 (one cent) each.

(...)

At the end of all these operations, account 56 (retained earnings) shall show a negative balance of €1,315,353.76 and equity shall amount to €1,061,801.99, thereby eliminating the loss of half of the company's SHARE CAPITAL, notwithstanding the continuation of losses."

Director Dr. M... further noted that the operation of carrying suprements interest, in the amount of €1,446,333.82, to the retained earnings account is supported by a report of an independent auditor.

As no one expressed a wish to speak, the vote was immediately held, with the Board of Directors' proposal being approved unanimously, and the company's bylaws amended accordingly.

• On 01-11-2014, the Claimant and the sole shareholder of the Claimant formalized a suprements contract relating to the remaining credit (i.e., the amount of credit that had not been used in June 2014 to cover losses of the Claimant) as a result of the modification of some of the contractual terms initially agreed upon (suprements contract attached with the request for arbitral decision, as document no. 10, the content of which is hereby reproduced);

• This contract states, among other things:

a) H... is the holder of all of the share capital of company A...;

b) H... is on this date the holder of a total credit of €5,440,141.69 against company A...;

c) H... became the holder of part of the credit referred to in the preceding Recital on 24 July 2013 (the "Date of Credit Acquisition"), the date on which it executed a public deed of "Credit Assignment" with C... having as its object the assignment of a credit and respective guarantees in the amount of €4,343,986.18 and, as well, another public deed also of credit assignment with D... having as its object the assignment of a credit and respective guarantees in the amount of €6,549,945.62, in a total amount of €10,893,931.80;

d) The difference between the amount of the credit referred to in Recital b) above and the amount of capital owed by A... on the Date of Credit Acquisition results from the accounting of interest that occurred in the total amount of €438,192.44, from a conversion of credits into Capital, for loss coverage, in the total amount of €4,925,833.82 and from an agreement for compensation of credits, in which the credit referred to in paragraph c) is reduced by €966,148.73;

e) It is H...'s intention to reinforce A...'s financial means so that it may exercise its activity, which they intend to do through the conversion of the credits they hold against it into suprements.

This suprements contract is freely and in good faith executed, which the Parties have agreed and mutually accept, and which shall be governed by the following Clauses and by applicable law:

First Clause

1. By this contract, H... grants to A..., as a suprements, the amount of €5,356,851.27 (the "Borrowed Capital"), of which A..., hereby declares itself a debtor.

2. The suprements referred to in the preceding number shall be effected with the signing of this Contract through the conversion of the credits that H... holds against A....

3. A... further declares itself a debtor, on this date, to H... in the amount of €83,290.42, referring to interest accounted for under the loans better identified in Recital C of this Contract.

Second Clause

1. This suprements contract enters into force on this date for an initial period of 15 (fifteen) years, automatically renewable for two periods of 5 (five) years unless terminated by either Party, by registered letter with proof of receipt addressed to the other Party, with a notice of 30 (thirty) days with respect to the Initial term or any of its renewals, thus having an unambiguous character of permanence. The date of the effective termination of this contract shall constitute the maturity date of the Borrowed Capital ("Final Maturity Date").

2. On the Final Maturity Date, A... shall reimburse H... in the full amount of €5,356,851.27, without prejudice to the obligation of payment of interest, in accordance with the provision in Third Clause of this Contract.

3. Without prejudice to the provision in number two of this Clause, A... may, voluntarily and in advance, amortize, wholly or partially, the amount of Borrowed Capital, without incurring the payment of any type of penalty, on any date, provided that it notifies H... with 48 (forty-eight) hours' notice, but never before one year has elapsed from the date of the suprements provision.

(...)

• In the accounting treatment given by the Claimant, the loss coverage operation did not contribute to the determination of the net result for the period, but rather contributed to the increase in the Claimant's equity (as a result of the credit movement in retained earnings) (accounting entry of the loss coverage operation and Simplified Business Information ("IES") relating to the fiscal year 2014 which appears in document no. 11 attached with the request for arbitral decision, the content of which is hereby reproduced);

• The Claimant debited the liability account 253100101 "Suprements H..., S.A." in the amount of €3,749,500 and the liability account 2722303001 "Interest to be paid to H..., S.A." as a credit offset to the retained earnings account (equity) "56112 - Loss Coverage" (document no. 12 attached with the request for arbitral decision, the content of which is hereby reproduced);

• In the fiscal treatment given by the Claimant to the loss coverage operation under review, no fiscal correction was introduced, as the Claimant understood that article 21, no. 1, paragraph a), of the IRC Code was applicable;

• A tax inspection was conducted on the Claimant, under the authority of OI no. 2015... for the year 2013 and OI no. 2015... for the year 2014;

• In this tax inspection, the Tax Inspection Report was drawn up which appears in document no. 4 attached with the request for arbitral decision, the content of which is hereby reproduced, in which the following is stated, among other things:

III.1. CORRECTIONS TO TAXABLE INCOME

III.1.1. GAINS NOT REFLECTED IN THE NET RESULT FOR THE TAX PERIOD

The taxpayer filed the corporate income tax return form 22 for the year 2013, within the deadline (2015-05-28), having declared a negative tax result of - €641,288.94.

From the analysis carried out on accounting elements, in particular, by verification of the taxpayer's accounting and validation of movements made in the SNC account "561121 - R.transit.-Loss Coverage prior to 2013" (as per the accounting entry transcribed below and whose supporting document is in Annex 1):

[Table content preserved as in original]

With the accounting date of 30/06/2014, A... came to record in its accounting for the year 2014 (entered electronically, according to the SAF-T file, on 12/11/2014), by the accounting entry no. 60020 in journal no. 63, as per the supporting document mentioned, the operation which it described as "Loss Coverage for compliance with Article 35 CSC".

As support for the entry described, the taxpayer has the Minutes no. 47 from the general meeting held on 30/06/2014, as per Annex 2 - Pages 1 to 2, in which the representatives of A... SA, NIPC: ... (hereinafter referred to as A...), note that, given its share capital of €997,595.80 and negative equity of €3,864,031.83, more than half of the company's share capital has been lost, wherefore they propose, and I quote,

"It is proposed that the amounts of €3,479,500.00, €1,446,333.82 and €1,246,994.77 be debited from accounts 253100101, 2722303001 and 53 and credited to account 56, with a consequent loss of part of the sole shareholder's suprements and accessory contribution credits.", they further proposed "...reducing the share capital of the COMPANY, from the current €997,595.80 to €50,000.00, for the purpose of loss coverage...".

There is also an additional supporting document, the "REPORT OF THE AUDITOR WITHIN THE SCOPE OF LOSS COVERAGE THROUGH INCORPORATION OF SUPREMENTS AND OTHER EQUITY INSTRUMENTS", as per Annex 3, which mentions in its point 5 the following: "Since the fair value associated with the suprements mentioned above is €6,323,000.00 Euros, and they are recorded in the company at a value superior to their nominal value, the sole shareholder approved the loss of part of the credits and the incorporation of this difference directly into the Retained Earnings account, with a view to Loss Coverage. The intention is that the Liability account relating to suprements shall have only €6,323,000.00 Euros and the one relating to interest payable shall have a nil value. The differential, which shareholder H... chose to apply to loss coverage instead of maintaining as a credit, amounts to €4,925,833.82 Euros".

The same report states, in point 6, that €1,246,994.77 relating to accessory contributions are transferred to retained earnings and the share capital is reduced from €997,595.80 Euros to €50,000.00 Euros for the purpose of loss coverage.

It is therefore important to establish the origin of the values applied.

Credit Assignment to H... owed by A... to C... and D...:

1. On 24/07/2013, by means of public deeds registered in the Notarial Office of N..., companies C... SA, NIPC: ... and D... SA, NIPC: ... (hereinafter referred to as C... and D..., respectively), came to assign the respective credits of which they were the holders against the taxpayer to company H..., as per deeds and supplementary documents attached in Annex 4 - Pages 1 to 32;

2. The credits referred to result from two loan contracts established between the C... and D... banking consortium, in the proportion of 40% and 60%, respectively, and the company(ies):

a. Contract 1: E... SA, NIPC: ..., beginning on 14/06/2007, in the total amount of €18,000,000.00, with each company owing 50% of that amount, for a term of 15 years;

b. Contract 2: A..., beginning on 31/10/2011, in the total amount of €1,177,500.00, for a term of 12 years.

1. On the date of credit assignment, A... was indebted to C... and D... in the amounts of €4,343,986.18 and €6,549,945.62, respectively, divided between principal and remunerative interest accrued and accruing, due and unpaid, totaling an amount due of €10,893,931.80, distributed as per the table below:

[Table content preserved as in original]

1. By the assignment of credits it was stipulated that H... acquired the same from C... and D... for the price of €6,323,000.00, divided as follows:

[Table content preserved as in original]

1. In accordance with article 582 of the Civil Code, by the assignment of credits resulting from Loan Contracts 1 and 2 to H..., all accessories of the credits were transmitted, including, without limitation, remunerative and/or default interest, commissions and any other amounts due, as well as all credit guarantees, including the mortgages and promissory notes, as follows:

Contract 1:

Voluntary mortgage in favor of C... and D..., in the proportion of 40% and 60%, respectively, of the properties identified from 1 to 8 in the supplementary document two to the deeds (for the maximum value of €13,531,500.00, for the tranche relating to A... of €9,000,000.00);

Blank promissory note with filling clause associated, subscribed by A... and guaranteed by F..., NIF: ... and G..., NIF:...;

i. Voluntary mortgage in favor of C... and D..., in the proportion of 40% and 60%, respectively, of the properties identified from 1 to 9 in the supplementary document two to the deeds (for the maximum value of €1,770,371.25);

ii. Blank promissory note with filling clause associated, subscribed by A... and guaranteed by F..., NIF: ... and G..., NIF:...;

1. Thus, by this credit assignment, C... and D... obtain an actual loss of €4,570,931.80, as they assign credits in the total amount of €10,893,931.80 for the price of €6,323,000.00, assigning with this transaction all rights and guarantees (given by mortgages and promissory notes with personal guarantees);

2. By this acquisition of credits, H... obtains a gain of €4,570,931.80, being €3,479,500.00 relating to principal and €1,091,431.80 relating to interest, as they acquire credits in the total amount of €10,893,931.80 for the price of €6,323,000.00, also obtaining with this transaction all rights and guarantees (given by mortgages and promissory notes with personal guarantees);

3. A... merely sees the holder of the credits it owes in the amount of €10,893,931.80 change from C... and D... to H..., maintaining all obligations and guarantees,

Purchase of company A...:

1. On 04/12/2013, H... came to acquire 100% of the share capital (€997,595.80) of A..., as per Annex 5 - Pages 1 to 26, which was held, in accordance with the Permanent Certificate, by the following shareholders and with the following distribution:

[Table content preserved as in original]

NOTE: Company I... SA appears in the Tax Authority (AT) records as a limited company (LDA), but appears in the commercial register as a joint-stock company (SA) since 2009.

1. In such purchase, all shares were transferred and suprements and accessory contributions were assigned in the following amounts:

[Table content preserved as in original]

1. For the same, the purchase and sale price of the shares and assignment of suprements and accessory contributions was agreed upon in the amount of €980,782.94, as per the allocation they defined:

[Table content preserved as in original]

1. The agreed price was not paid by H..., with H... remaining indebted in the proportion of 60% and 40% to I... LDA and J...- IMOBILIARY AND CONSTRUCTION COMPANY SA, respectively, which were immediately assigned to A..., which, in return, assigned to these companies, in the same proportion, credits in the same amount of €980,782.94 that it holds against K..., S.A., NIPC: ... (formerly called L..., S.A.), that is, in practice H... remained indebted to A... in the amount of €980,732.94 and K..., SA, remained indebted, in the proportion of 60% and 40% to I... LDA and J... SA, respectively, in the same amount;

2. Thus the amounts credited to account 56112 have the following origin:

a. The amount of €3,479,500.00, debited to account 253100101, is the equivalent of the gain in principal obtained by H... in the acquisition of credits owed by A... to C... and D...;

b. The amount of €1,446,333.82, debited to account 2722303001, results from the sum of the equivalent to the gain in interest obtained by H... in the acquisition of credits owed by A... to C... and D... in the amount of €1,091,431.80, with interest accrued and unpaid accounted for by A... between 24/07/2013 and 30/06/2014 (period between the acquisition of credits owed by A... to C... and D... by H... and the reference date used in loss coverage) in the amount of €354,902.02;

c. The amount of €947,595.80, debited to account 511, results from the reduction of share capital from €997,595.80 to €50,000.00;

d. The amount of €1,246,994.77 debited to accounts 53201 and 53202 (€748,196.86 and €498,797.91, respectively), refers to accessory contributions.

When asked by A... regarding the fiscal framework in IRC of the loss coverage operation, the taxpayer, as per Annex 6 - Pages 1 to 5, submitted its position, in which it considers that the loss coverage deliberated and carried out constitutes a positive patrimonial variation, which under paragraph a) of no. 1 of article 21 of the CIRC does not contribute to the determination of taxable profit.

It adds that, "To the same effect, the Tax Authority ruled in the Doctrine Sheet issued under process no. 3330/04, with a concordant opinion of the Deputy Director-General of Taxes, of 13 October 2005, according to which "The transfer of a shareholder's credit to Share Capital or to Retained Earnings with a view to cancelling the credit he holds against the company represents, in the first case, an entry of capital in kind, with corresponding increase in share capital and, in the second case, the coverage of part of the accumulated losses".

It further states that "this understanding has already been upheld by case law, through the Judgment of the Central Administrative Court South of 14 April 2012, handed down under process no. 05315/12, whereby loss coverage is fiscally neutral at the moment of its realization for the participatory company that benefits from it".

It further argues that the same understanding seems to be followed by AT in the Opinion of 1998-02-23 - Process: 2193/96.

It also understands that the introduction of no. 8 of article 46 of the CIRC merely gave expression to the understanding that defends the fiscal relevance of loss coverage only at the moment of transmission or extinction of shareholdings.

It further considers that the operation cannot be framed as a debt forgiveness, as provided in the regime under articles 863 to 867 of the Civil Code, because for this there was a need for an agreement between creditor and debtor, as the conclusion it draws from the Judgments of the Court of Appeal of Coimbra of 03 March 2015, relating to process no. 123/11.0TBIND.C1 and 02 March 2006, relating to process no. 3900/05. In this regard, it further invokes the Judgment of the Central Administrative Court South of 13 March 2007, relating to process no. 01576/07.

However, at the date of acquisition of credits from C... and D..., which occurred on 24/07/2013, H... was not a shareholder of A...: a situation that only came about on 04/12/2013 with the acquisition of 100% of A...'s capital, but whose purchase value was not paid, but rather set off against these credits and transformed into suprements on 01/11/2014, as per the contract in Annex 7 - Pages 1 to 3;

With the assignment on 24/07/2013 of credits of C... and D... to H..., the conditions and guarantees of the loans were maintained, with H... acquiring credits in the amount of €10,893,931.80 for a substantially lower value in the amount of €6,323,000.00, obtaining with this acquisition a gain of €4,570,931.80 (€3,479,500.00 in principal and €1,091,431.80 in interest).

Although reference is made to the application of suprements and suprements interest in loss coverage, this is not correct, as the accounting entry, minutes no. 47 and auditor's report are dated 30/06/2014 and the suprements contract only occurs on 01/11/2014 (which substantially alters the conditions and guarantees, in particular the higher interest rate), therefore the application made is of part of A...'s loan, acquired by H... from C... and D... and the respective interest on the loan.

Companies H... and A... are on the date of the loss coverage operation (30/06/2014) in a situation of related party relationships, as with H...'s acquisition of 100% of A...'s share capital (04/12/2013), the companies are placed in that situation.

This was not a shareholders' contribution, with the objective of achieving the so-called loss coverage on 30/06/2014, but rather the use of the gain obtained by H..., in the acquisition of the existing debt to C... and D... on 24/07/2013, for a value lower by €4,570,931.80 (€3,479,500.00 in principal and €1,091,431.80 in interest), at a time prior to its transition to the status of sole shareholder (which only occurred on 04/12/2013), and the use of interest accrued to A...'s accounting for the period between 24/07/2013 and 30/06/2014, resulting from the maintenance of the loan conditions assigned, which amounted to €354,902.02.

In minutes no. 47 and in the auditor's report, the loss of H...'s sole shareholder's credits is mentioned, part of which coincide with the gain obtained by it in the acquisition of credits (€3,479,500.00 in principal and €1,091,431.80 in interest).

On the date of the loss coverage operation, the credits applied refer to those of H...'s loan (through the acquisition of the loans granted by C... and D...), under the same conditions originally contracted, regarding which, by minutes no. 47 of the general meeting of A... held on 30/06/2014, in which, besides the chairman and secretary of the general meeting (O... and P..., respectively), the members of the company's board of directors (M... (Chairman), Q... (Member) and R... (Member)) were present, it was deliberated by the representatives of sole shareholder H... (M..., Q... and R...), simultaneously in the capacity of investing company and invested company, parent company and subsidiary company, to accept granting a loss of credits held by H... against A..., so that it would apply them to retained earnings, thereby covering part of the accumulated losses of the latter.

The loss of credits recognized and accepted by H... in the minutes of A...'s general meeting, results, not from an amount delivered in the form of suprements by shareholder H..., but from the forgiveness of part of the loan (in the same amount that H... itself benefited from) and the respective interest on those loans, which H... acquired as an investor and not as a shareholder, as H... notified A..., for the purposes of the provision in no. 1 of article 583 of the Civil Code, at least of the credits assigned by C..., in Annex 8 - Pages 1 to 2.

Moreover, since this investment is prior to the shareholder status, the birth of A...'s obligation to H... occurs before the latter's transition to shareholder status and, having indeed maintained the original contractual conditions of the loans (Annex 9), as is demonstrated and reinforced by the accrual of interest in A... (as cost accruals) between 24/07/2013 and 01/11/2014 (the date on which it converted, by contract, the loan into suprements), in Annex 10 - Pages 1 to 4, it is further demonstrated that the agreed loss represents a financing gain, not taxed in IRC in Form 22 for 2014 filed by A....

Therefore, we are in the presence of an actual debt forgiveness, the accounting entry of which was made in a manner to present itself as being able to benefit from the provision in paragraph a) of no. 1 of article 21 of the CIRC, but which in fact seeks to avoid the taxation in IRC of a financing gain associated with the forgiveness of part of a loan and the respective interest, by moving it to the credit of the retained earnings account (56112), instead of doing so in a revenue account, thereby ensuring that the respective gains were not reflected in the determination of the net result for the taxable period of 2014, benefiting A... from the non-taxation in IRC of the amount of €4,925,833.82;

Thus, in accordance with article 21 of the CIRC, as it is not considered an exception to the contribution to the formation of taxable profit, positive patrimonial variations not reflected in the net result for the tax period, result in IRC corrections of €4,925,833.82, to be made in field 702 (positive patrimonial variations) of table 07 of Form 22 of IRC, for the period of 2014, as results from the calculation of the assessment in question and is demonstrated:

[Table content preserved as in original]

Due to this correction, the tax payable for the year 2014 is substantially altered, with the taxpayer moving from a situation of tax loss to a situation of taxable profit, therefore in accordance with no. 1 of article 52 of the CIRC (in force on the date of the facts by the version of Law no. 2/2014, of 16 January), tax losses determined in a given tax period are deducted from taxable profits, if any, in one or more of the 12 subsequent tax periods.

However, in accordance with no. 8 of article 52 of the CIRC, the provision in no. 1 no longer applies when it is verified, on the date of the end of the tax period in which the deduction is made, that, in relation to the period to which the losses relate, the change in ownership of more than 50% of the share capital or the majority of voting rights has occurred, meaning that to the taxable profit now determined for 2014, only the tax loss determined in 2013 is deducted, as demonstrated in the following tables, relating to the determination of Taxable Income and IRC payable in 2014:

[Table content preserved as in original]

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IX. RIGHT TO BE HEARD – REASONING

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Point 2. - OF THE PROJECT REPORT AND THE CORRECTIONS PROPOSED BY THE TAX INSPECTORS

Regarding the correction proposed under IRC, from which results an increase in taxable profit of €4,925,833.82, because it is considered that the accounting entry to which the taxpayer entitled "loss coverage" constituted an actual financing gain associated with the forgiveness of part of a loan and the respective interest (debt forgiveness), the taxpayer considers that the same is capable of benefiting from the provision in paragraph a) of no. 1 of article 21 of the CIRC, qualifying the said correction as illegal, requesting that it be revoked from the final report.

Point 2.1 - Preliminary Point: Of the misunderstandings in the origin of the IRC corrections proposed by the Tax Inspectors

The taxpayer points out, as repeatedly stated in paragraphs 24, 25, 38, 41, 48, 51, 52 and 53 of the exercise of the right to be heard, that the proposed correction stems from a misunderstanding in the analysis of the facts, from errors in the analysis of factuality, from errors of consideration and inconsistencies, and/or from an untenable interpretation of paragraph a) of no. 1 of article 21 of the CIRC, considering that the AT's conclusions lack sense, valid justification, and legal foundation, thus believing that the proposed correction results from error regarding the factual presuppositions and the subsumption of facts to the applicable legal rules on the matter at hand.

Such errors, inconsistencies, misunderstandings, or misinterpretations, as properly explained in point III of the project report, did not occur. Nevertheless, we shall again address the main questions raised by the taxpayer, in order to demonstrate more unequivocally that the proposed correction is justified and properly founded:

1. SUPREMENTS

The taxpayer continues to try to make believe that the accounting operation it called loss coverage was made through the application of suprements, when it has already been evidenced in the project report, that on 30/06/2014, there was no active suprements contract between A... and H..., with such a contract only coming into existence on 01/11/2014.

In this regard - the suprements contract - the taxpayer wrongly concludes in paragraph 41 of that exercise of the right to be heard, that the Tax Inspection Services consider that the credits held by H... were (for the aggregate amount of €10,893,931.80) converted into suprements on 01/11/2014, when on page 13 of the project report, nothing was stated regarding the amount stipulated for purposes of the suprements contract, which was also attached in Annex 7 - Pages 1 to 3.

Moreover, the reference to said suprements contract has importance for the assessment of the situation, not because of its value, but because of the date on which it was constituted and on which it converts A...'s debt to H... into suprements, destroying all references that the taxpayer makes to suprements whenever it intends to configure the accounting operation occurring on 30/06/2014 as a loss coverage through incorporation of suprements (which only come into existence on 01/11/2014, the date on which the contract that converts the non-forgiven credit into suprements is executed), as is the case with what it states in paragraphs 20, 30, 36 and 42 of the exercise of the right to be heard.

1. H...

In paragraphs 26, 27, 32 and 35 of the exercise of the right to be heard, the taxpayer argues that the capacity of H... at the moment of the assignment of credits held by the consortium (C.../D...) against A... - which acted as an investor, as it was not a shareholder on that date - should not be relevant to the analysis of the operation in question, arguing that only its capacity as a shareholder on the date of the operation under review should be relevant.

Running the risk of repeating ourselves, it is important to reiterate that, since H...'s investment, in acquiring on 24/07/2013 the credits held by the consortium (C.../D...) against A..., is prior to its shareholder status, which only occurred on 04/12/2013 through the acquisition of A...'s shares, it is on that date that the birth of A...'s obligation to H... occurs, which takes place before the latter's transition to shareholder status and, having indeed maintained the original contractual conditions of the loans, the loss of credits agreed on 30/06/2014 represents a financing gain, not taxed in IRC in 2014 and not a loss coverage under the exclusion of paragraph a) of no. 1 of article 21 of the CIRC.

It is important to note that H... was created on 19/12/2012, with a share capital of €50,000.00, having as its corporate purpose (among others) the acquisition and management of credits and management of real estate assets, and that it invested in the acquisition for €6,323,000.00 of all credits held by C.../D... against A... on 24/07/2013, using financing, since its own equity did not allow it to do so directly.

H..., on 04/12/2013, acquired 100% of A...'s capital, but whose purchase price was not paid, but rather set off against the credits acquired from the banking consortium, as per the contract in Annex 7 - Pages 1 to 3.

1. THE CREDITS

The taxpayer understands that the characterization of the credit that gave rise to the accounting operation at issue is irrelevant, seeking to remove relevance from the emergence of A...'s debt to H..., and always seeking to try to qualify the forgiven credit as a suprements provided by shareholder H..., as it argues in paragraphs 29, 30, 31, 36 to 44 and 49 of the exercise of the right to be heard.

As already mentioned, on several occasions, on 30/06/2014, the taxpayer recorded in its accounting an accounting operation that leads to the retained earnings account, a forgiveness of part of a loan and the respective interest, which it called "loss coverage", seeking to make believe that such forgiveness has its origin in a suprements by shareholder H... and not in a financing contract acquired by it from said consortium (C.../D...). However, there is only a suprements contract on a date subsequent to the accounting operation at issue, invalidating that this was its origin.

Thus, such debt forgiveness and not of suprements, as agreed in Minutes no. 47 (Annex 2 - Pages 1 to 2) and confirmed in the auditor's report (Annex 3), represents in fact a financing gain, which by not being considered by the taxpayer as income or gain under article 20 of the CIRC, because the taxpayer considers this operation may benefit from the provision in the exclusion of paragraph a) of no. 1 of article 21 of the CIRC, seeks to avoid the taxation in IRC in 2014 of the amount of debt forgiveness of €4,925,833.82.

1. LOSS COVERAGE

The taxpayer frames the accounting operation recorded as "loss coverage for compliance with Article 35 CSC", coming, as expected, whenever referring to the operation, to refer to it in those terms, as in paragraphs 15, 16, 18, 20, 24, 27, 28, 30, 31, 32, 34, 35, 36, 38, 39, 40, 42, 44, 46, 48, 49, 50 and 51 of the exercise of the right to be heard, capable of benefiting from the provision in the exclusion of paragraph a) of no. 1 of article 21 of the CIRC.

However, as already stated, this was not a shareholders' contribution, with the objective of achieving the so-called loss coverage on 30/06/2014, but rather the accounting entry to retained earnings of equal gains obtained by H... in the acquisition of the existing debt to the consortium (C.../D...) on 24/07/2013, for a value lower by €4,570,931.80 (€3,479,500.00 in principal and €1,091,431.80 in interest), and of interest accrued to A...'s expenses relating to the period between 24/07/2013 and 30/06/2014 (resulting from the maintenance of the conditions of the assigned loans, which amounted to €354,902.02), seeking, in that way, to avoid the taxation in IRC of these financing gains, placing them under the umbrella of "loss coverage".

Moreover, had these gains been taken to the profit determination for the year 2014, they could later, through A...'s management decision, be taken to retained earnings, thereby attenuating the undercapitalization of the company invoked as the reason for carrying out the accounting operation called "loss coverage".

It is further noted that in the same accounting operation, the amount of €1,246,994.77 relating to accessory contributions and the reduction of share capital from €997,595.80 to €50,000.00 with the same purpose were taken to retained earnings, without such movements having been questioned.

1. PARAGRAPHS 45 and 46

The taxpayer states in paragraphs 45 and 46 of the exercise of the right to be heard that A...'s management decision to define the company's capital structure in light of the situation of loss of half the share capital was based on "suitable information, namely, the information contained in the Report prepared by the auditor" as appears in Annex 3.

However, such suitable information states in its point 5 the following: "Since the fair value associated with the suprements referred to above is €6,323,000.00 Euros, and they are recorded in the company at a nominal value superior, the sole shareholder approved the loss of part of the credits and the incorporation of this difference directly into the Retained Earnings account, with a view to Loss Coverage. The intention is that the Liability account relating to suprements shall have only €6,323,000.00 Euros and the one relating to interest payable shall have a nil value. The differential, which shareholder H... chose to apply to loss coverage instead of maintaining as a credit, amounts to €4,925,833.82 Euros.".

That is, the auditor also incorrectly qualifies as suprements the credits that H... acquired from the consortium (C.../D...) and approved losing in favor of A..., wrongly considering that this forgiveness should be applied directly to retained earnings - avoiding taxation in IRC - thus, the gain that H... obtained upon acquiring the credits from said consortium, would in this way be transferred to A...'s sphere in the form of capitalization of the company, without such income being taxed in IRC.

1. PARAGRAPH 48

The taxpayer considers, as it states in paragraph 48 of the exercise of the right to be heard, to be justified the economic rationale and context of the operation. It further adds that it considers the correction proposed by the Tax Inspection to lack sense and legal foundation.

As was extensively explained and detailed, both in point III of the project report and its annexes, and now in this analysis of the exercise of the right to be heard, the proposed correction is concretely described, contextualized and proven, as well as presenting the proper legal foundation for the proposed correction.

Nevertheless, running the risk of repeating ourselves, but briefly, debt forgiveness in fact represents a financing gain, which by not being considered by the taxpayer as income or gain under article 20 of the CIRC, because the taxpayer considers this operation can benefit from the provision in the exclusion of paragraph a) of no. 1 of article 21 of the CIRC, seeks to avoid the taxation in IRC in 2014 of the amount of debt forgiveness of €4,925,833.82.

Thus, such amount, as it cannot benefit from such exclusion, contributes to the formation of taxable profit, therefore as it was not added to Table 07 of Form 22 for 2014 in positive patrimonial variations not reflected in the net result of the tax period, it is infringing the provision in article 21 of the CIRC, such infraction being punishable by the provision in no. 1 of Article 119 and no. 4 of Article 26 of the RGIT.

1. PARAGRAPHS 50 and 51

The taxpayer comes to alert the Tax Inspection Services, as it states in paragraphs 50 and 51 of the exercise of the right to be heard, that payment of the tax resulting from the taxation of the operation at issue "influences management decisions" and is "capable of conditioning, in an absolutely relevant manner, management decisions".

In this regard, with due fairness, it should be said that any company that pays the taxes owed is, above all, complying with its tax obligations, which obviously influence management decisions, but that place it on equal footing with the other tax-complying companies.

1. PARAGRAPH 52

The taxpayer comes to summarize its considerations in paragraph 52 of the exercise of the right to be heard, referring to the conclusions presented by the Tax Inspection Services in the Project Report as justified by a "thesis", based on errors and inconsistencies, resulting "from error regarding the factual presuppositions and the subsumption of facts to the applicable legal rules on this matter".

Now, the Tax Inspection Services confined themselves to the facts determined and verified during the inspection procedure carried out, which are documented in the taxpayer's accounting and in documentation provided by it as a complement (which is attached to the report).

It was those evident facts, and not presumptions, that allowed for the proper framing of the operation which the taxpayer called "loss coverage" vis-à-vis the provision in article 21 of the CIRC and in particular to paragraph a) of its no. 1.

Such framing, contrary to what the taxpayer considers to be acceptable, points to the operation not being able to benefit from the exclusion of paragraph a) of no. 1 of article 21 of the CIRC, as follows:

At the date of acquisition of credits from the consortium (C.../D...), which occurred on 24/07/2013, H... was not a shareholder of A..., a situation that only came about on 04/12/2013 with the acquisition of 100% of A...'s capital, but whose purchase price was not paid, but rather set off against these credits, as per the contract in Annex 7 - Pages 1 to 3.

With the assignment on 24/07/2013 of credits of said consortium to A..., the conditions and guarantees of the loans were maintained, with H... acquiring credits in the amount of €10,893,931.80 for a substantially lower value in the amount of €6,323,000.00, obtaining with this acquisition a gain of €4,570,931.80 (€3,479,500.00 in principal and €1,091,431.80 in interest).

Although reference is made to the application of suprements and suprements interest in "loss coverage", this is not correct, as the accounting entry, Minutes no. 47 and auditor's report are dated 30/06/2014 and the suprements contract only occurs on 01/11/2014 (which substantially alters the conditions and guarantees, in particular the higher interest rate), therefore the application made is of part of A...'s loan, acquired by H... from the consortium and the respective interest on the loan.

We are not in the presence of a shareholders' contribution, with the objective of achieving the so-called "loss coverage" on 30/06/2014, but rather of the accounting entry directly to retained earnings of debt forgiveness in the amount of €4,925,833.82, obtained from the sum of equal gains obtained by H... in the acquisition of the existing debt to the consortium on 24/07/2013, for a value lower by €4,570,931.80 (€3,479,500.00 in principal and €1,091,431.80 in interest), at a time prior to its transition to sole shareholder status (which only occurred on 04/12/2013), and of interest accrued to A...'s accounting for the period between 24/07/2013 and 30/06/2014, resulting from the maintenance of the conditions of the assigned loans, which amounted to €354,902.02.

Minutes no. 47 and the auditor's report mention the loss of H...'s sole shareholder's credits, part of which coincide with the gain obtained by it in the acquisition of credits from the consortium (€3,479,500.00 in principal and €1,091,431.80 in interest).

On the date of the operation at issue, the credits applied refer to those of H...'s loan (through the acquisition of the loans granted by the banking consortium C.../D...), under the same conditions originally contracted, regarding which, by Minutes no. 47 of the general meeting of A... held on 30/06/2014, in which, besides the chairman and secretary of the general meeting, the members of the company's board of directors were present, it was deliberated by the representatives of sole shareholder H..., simultaneously in the capacity of investing company and invested company, parent company and subsidiary company, to accept granting a loss of credits held by H... against A..., so that it would apply them to retained earnings, thereby covering part of the accumulated losses of the latter.

The loss of credits recognized and accepted by H... in Minutes of A...'s general meeting, results, not from an amount delivered in the form of suprements by shareholder H..., but from the forgiveness of part of the loan (in the same amount that H... itself benefited from) and the respective interest on those loans, which H... acquired as an investor and not as a shareholder.

Moreover, since this investment is prior to the shareholder status, the birth of A...'s obligation to H... occurs before the latter's transition to shareholder status and, having indeed maintained the original contractual conditions of the loans, it is further demonstrated that the agreed loss represents a financing gain of A..., not taxed in IRC in Form 22 for 2014.

Therefore, repeating the conclusion already reached, we are in the presence of an actual debt forgiveness, the accounting entry of which was made in a manner to present itself as being able to benefit from the provision in paragraph a) of no. 1 of article 21 of the CIRC, but which in fact seeks to avoid the taxation in IRC of a financing gain associated with the forgiveness of part of a loan and the respective interest, by moving it to the credit of the retained earnings account (56112), instead of doing so in a revenue account, thereby ensuring that the respective gains were not reflected in the determination of the net result for the taxable period of 2014, benefiting A... from the non-taxation in IRC of the amount of €4,925,833.82;

Point 2.2.1 - Of the illegality of the corrections proposed under IRC for violation of article 21, no. 1, paragraph a), of the IRC Code

The taxpayer presents, in paragraphs 58 to 54 of the exercise of the right to be heard, the provision in paragraph a) of no. 1 of article 21 of the CIRC, as well as making reference to the doctrine sheet relating to process no. 3300/04, with opinion of 13/10/2005 and the opinion of 23/02/1998, handed down under process no. 2193/96, seeking thereby to demonstrate that, in the case at hand, we are in an identical situation, considering it will be equally capable of benefiting from the provision in paragraph a) of no. 1 of article 21 of the CIRC.

However, as we have already had the opportunity to mention, we are not in the presence of a shareholders' contribution, with the objective of achieving the so-called "loss coverage" on 30/06/2014, but rather of the accounting entry directly to retained earnings of debt forgiveness in the amount of €4,925,833.82, obtained from the sum of equal gains obtained by H... in the acquisition of the existing debt to the consortium on 24/07/2013, for a value lower by €4,570,931.80 (€3,479,500.00 in principal and €1,091,431.80 in interest), at a time prior to its transition to sole shareholder status (which only occurred on 04/12/2013), and of interest accrued to A...'s accounting for the period between 24/07/2013 and 30/06/2014, resulting from the maintenance of the conditions of the assigned loans, which amounted to €354,902.02, thus being impossible for such accounting operation carried out by the taxpayer to benefit from the provision in paragraph a) of no. 1 of article 21 of the CIRC.

It is further noted that in the same accounting operation, the amount of €1,246,994.77 relating to accessory contributions and the amount of €947,595.80 relating to the reduction of share capital from €997,595.80 to €50,000.00 were taken to retained earnings, without such movements having been questioned, as these indeed meet the conditions to benefit from the provision in paragraph a) of no. 1 of article 21 of the CIRC.

The taxpayer further refers, regarding the operation at issue, in paragraphs 65 to 73 of the exercise of the right to be heard, to the doctrine and case law it considers to be applicable to its specific case, making reference to the Judgment of the Central Administrative Court South (TCA South), of 17/04/2012, relating to process no. 05315/12, to the Judgment of the Central Administrative Court North (TCA North), of 10/03/2016, relating to process no. 00958/11.4BEAVR, as well as to the Judgment of the Supreme Administrative Court (STA), of 18/06/2013, relating to process no. 01265/12.

In this regard, it should be noted that the Tax Inspection Services do not possess the power of a court, so the existence of case law may affect the manner in which future courts will decide cases covered by it.

• Following the inspection, the Tax and Customs Authority issued the assessment of Corporate Income Tax ("IRC") and compensatory interest no. 2017..., for the fiscal year 2014, which resulted in a total amount of IRC and compensatory interest to be paid of €1,052,316.49;

• On 16-04-2018, the Claimant provided bank guarantee no. ..., issued by B... CRL, in the total amount fixed of €1,343,659.03, with a view to suspending the tax enforcement proceedings identified with no. ...2018..., which was instituted following the failure to voluntarily pay the aforementioned assessment (document no. 16 attached with the request for arbitral decision, the content of which is hereby reproduced);

• Until 16-07-2018, the Claimant spent on the provision of guarantee the amount of €19,480.39 (document submitted by the Claimant on 26-10-2018, the content of which is hereby reproduced);

• On 04-04-2018, the Claimant submitted the request for arbitral decision that gave rise to the present proceedings.

Facts Not Proved and Reasoning for the Establishment of Factual Matters

There are no facts relevant to the decision of the case that have not been proved.

The facts were established as proved on the basis of documents attached by the Claimant and those in the administrative file, with no controversy regarding factual matters.

4. Matters of Law

A banking consortium was the holder of credits against the Claimant, with guarantees, and on 24-07-2013, H... acquired those credits, with the nominal value of €10,893,931.80, for the amount of €6,323,000.00, with the assignment of credits transmitting the corresponding guarantees.

On 04-12-2013, H... acquired from the Claimant's shareholders, for the price of €980,782.94, all shareholdings of the Claimant (in the amount of €997,595.80), with suprements (in the amount of €14,634.21) and accessory contributions (in the amount of €2,259,224.78) being assigned to it.

In June 2014, the Claimant was in a situation of undercapitalization, given that it had a negative equity value of €3,864,031.83, with the share capital value being €997,595.80.

H..., sole shareholder of the Claimant, convened the General Meeting of the latter, to "deliberate on measures to be taken in accordance with and for the purposes provided in article 35 of the CSC, considering the provision in article 35/3 ("a) dissolution of the company; b) reduction of share capital to an amount not less than the company's equity, with respect, where applicable, to the provision in no. 2 of article 95; c) making of contributions by shareholders to strengthen capital coverage) or other measures proposed by the Board of Directors".

In the Minutes of the meeting held on 30-06-2014, the following is stated:

a) Account 56 - retained earnings - shows a negative balance of €8,435,778.15;

b) Account 253100101 - suprements 1 - registers a balance of €9,802,500.00 in favor of the sole shareholder;

c) Account 2722303001 - interest - registers a negative balance of €1,446,333.82 in favor of the sole shareholder;

d) Account 53 registers €1,246,994.77 as equity instruments;

e) The current fiscal and accounting rules allow the accounting entry of loss coverage through incorporation of suprements, as well as the use of other equity instruments for the same purpose,

It is proposed that the amounts of €3,479,500.00, €1,446,333.82 and €1,246,994.77 be debited from accounts 253100101, 2722303001 and 53 and credited to account 56, with a consequent loss of part of the sole shareholder's suprements and accessory contribution credits.

In addition, it was deliberated in the general meeting to reduce the company's share capital, from €997,595.80 to €50,000.00, for the purpose of loss coverage, through the extinction of shares, with the share capital to be represented by 5,000,000 shares, with the unit nominal value of €0.01.

Subsequently, a suprements contract was executed on 01-11-2014 relating to the credit that had not been used for the operation carried out on 30-06-2014.

The Claimant understood that the said operation, which it considered to be "loss coverage," does not constitute a positive patrimonial variation for the determination of taxable matter, as it is capable of being framed in paragraph a) of no. 1 of article 21 of the CIRC.

In the accounting treatment given by the Claimant, the loss coverage operation did not contribute to the determination of the net result for the period, but rather contributed to the increase in the Claimant's equity (as a result of the credit movement in retained earnings).

The Tax and Customs Authority understood, in summary, the following:

This was not a shareholders' contribution, with the objective of achieving the so-called loss coverage on 30/06/2014, but rather the use of the gain obtained by H..., in the acquisition of the existing debt to C... and D... on 24/07/2013, for a value lower by €4,570,931.80 (€3,479,500.00 in principal and €1,091,431.80 in interest), at a time prior to its transition to sole shareholder status (which only occurred on 04/12/2013), and the use of interest accrued to A...'s accounting for the period between 24/07/2013 and 30/06/2014, resulting from