CAAD 219/2018-T: IRC Deductibility of Tax Losses from Credit Assignment and Subsidiary Liquidation

ARBITRAL TRIBUNAL DECISION

I – Report

1. A... SGPS, SA, NIPC..., with registered office at..., ..., ...-... ..., hereby requests the establishment of an arbitral tribunal, pursuant to the provisions of articles 2, no. 1, paragraph a), and 10 of Decree-Law no. 10/2011, of 20 January, to assess the legality of tax acts relating to additional IRC assessment and compensatory interest assessment, in the total amount of € 1,485,700.75, further requesting condemnation to compensation for losses resulting from the provision of security.

The request is grounded in the following terms.

The Applicant is the parent company of a group of companies which includes B..., S.A. (B... Portugal), which held a subsidiary in Spain with the name C..., S.A. (C... Spain), currently named D..., S.A.

From 2010 onwards, the financial situation of C... deteriorated, reaching in the following year an accumulated debt of € 3,616,075.10, which was caused by misappropriation of funds carried out by E..., in his capacity as company attorney-in-fact with broad management and disposal powers.

In order to control and minimize damages, A... SGPS, SA entered into an agreement with Spanish lawyer F..., on 30 December 2014, at the price of € 1, a stock purchase and sale contract, by which it transferred all shares representing the capital of C... Spain, as well as, at the same price, a credit assignment contract relating to a subordinated loan of €1,310,127.11 and an ordinary loan in the amount of €79,735.35. And, on the same date, at the same price of € 1, B... Portugal entered into an agreement with F... a commercial credit assignment contract, in the amount of € 3,709,380.75, and subordinated loan assignment, in the amount of € 400,000.00.

Pursuant to the terms of the credit assignment contracts, the assignee of the credits undertook to pay an additional price of 90% of the credits assigned that it might recover, on the condition of prioritarily liquidating the commercial debts that C... maintained with third parties.

As a result of the sale of the equity interest in C..., and pursuant to the contractual terms, the Applicant proceeded, in 2014, to pay the taxes owed in Spain, in the total amount of € 312,501.08.

And as a result of the dissolution and liquidation of the Dutch subsidiary G... B.V., it suffered a tax loss of € 10,000.00, corresponding to the nominal value of its equity interest in that company, and of € 14,600.00, with reference to a loan that was granted to it.

In this context, the Applicant understands that it bore, within the scope of Group companies, losses in the total amount of € 4,109,380.70 as to the assignment of commercial credits and subordinated loan, and of € 1,389,861.46 relating to the assignment of credits as to the subordinated loan and the ordinary loan, in addition to having incurred expenses in payment of taxes that were owed by C... Spain (€ 312,501.08) and with the loss of a loan granted to the Dutch subsidiary following its dissolution and liquidation (€ 14,600.00).

However, the Tax Authority disregarded the expenses relating to credit assignment, on the grounds that it was only possible to account for 10% of the total value of the assignment, since that was the percentage value that the Applicant agreed to forego, pursuant to contractual terms, on the value of the assigned credits, implying, correspondingly, a correction to taxable income, for the year 2014, in the amount of € 1,250,875.31 and € 3,698,441.77.

It further increased taxable income by the amount of € 24,600.00, by considering undue the deduction of expenses attributed to the liquidation of the Dutch subsidiary, and by the amount of € 312,501.08, by understanding that this amount corresponds to tax debts to the Spanish State that are the responsibility of the subsidiary C... Spain.

The Applicant considers that the correction made as to credit assignment violates the general anti-abuse clause insofar as it is based on the understanding that the assignment was intended, not to transfer ownership of the credits, but to require the assignee to obtain collection of the credits on behalf of the assignor.

This perspective is, however, contrary to the contractual declaration which provides for the transfer, without reservation, of the ownership of the credits by means of a contingent price clause, whereby the price is dependent on the prior payment of company debts that are prior to the sale of equity interests and of a time limit that is set at 31 December 2018, in such a way that only when these two conditions were satisfied would there be a right to payment of an additional 90% of the credit that was recovered.

As to the tax disregard of the amount of € 312,501.08, the Tax Authority interpreted this expense as corresponding to an accounting entry of a cost relating to tax debts attributable to the Spanish subsidiary when what is at issue is not the payment of a charge belonging to a third party but the loss resulting from the assignment of a credit which A... had with respect to the subsidiary to meet its tax obligations.

The Applicant further disputes the tax relevance of the loss determined in the context of the dissolution and liquidation of the Dutch subsidiary regarding the loan granted to that entity in the amount of € 14,600.00, on the grounds that the regime of article 81 of the CIRC governing the taxation of the result of distribution does not apply to the case. This is because distribution presupposes the prior liquidation of liabilities and what is at issue is the loss resulting from a loan that was not repaid at the time of dissolution and liquidation of the subsidiary company.

The Tax Authority, in its response, reaffirming the arguments put forward in the Tax Inspection Reports, maintains that the credit assignment contracts do not constitute a true transfer but merely provide for a collection commission to be paid by a third party for amounts owed that might be recovered, and if there were an effective cession it would correspond to a waiver of the credit considering the symbolic value for which it was contracted. In any event, it should be understood that the expenses in question are not fiscally relevant, pursuant to article 23 of the IRC Code, since they do not serve to obtain income subject to taxation.

As for expenses attributable to payment of taxes owed by the Spanish subsidiary, the Administration considers that they are covered by the provisions of article 23-A, no. 1, paragraph f), of the IRC Code, which provides for the non-deductibility for purposes of determining taxable profit of taxes affecting third parties and which the taxpayer is not legally obliged to bear.

Furthermore, as to expenses resulting from the liquidation of the Dutch subsidiary G... B.V., the Administration understands that the capital loss attributed to financial investments and loans granted is not deductible, pursuant to the provisions of article 81, no. 4, of the IRC Code when the equity interest, as is the case, remained in the ownership of the taxpayer for a period of less than four years.

It concludes that the request is without merit.

1. Following the proceedings, a hearing was held as referred to in article 18 of the RJAT, also intended for the production of witness evidence requested by the parties.

The parties submitted written submissions, in successive periods, in which they analyzed the facts and reiterated their previous positions.

By request filed on 1 February 2019, after the submission of the submissions, the Applicant submitted a statement from F... regarding the final accounts relating to the price of transfer of credits, determined by reference to the fiscal year 2015, from which it appears that the reimbursement of the assigned credits was € 4,950.00, in the fiscal year 2015.

1. The request for the establishment of the arbitral tribunal was accepted by the President of the CAAD and notified to the Tax and Customs Authority in accordance with the applicable regulations.

Pursuant to paragraph b) of no. 2 of article 6 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the arbitrators were designated by the parties, and these designated the presiding arbitrator.

The collective arbitral tribunal was thus constituted by the undersigned, who communicated acceptance of the appointment within the applicable period.

The parties were duly notified of such designation and did not manifest their intention to refuse it, pursuant to the combined provisions of article 11, nos. 4 and 5, of the RJAT and articles 6 and 7 of the Code of Ethics.

Thus, in accordance with the provisions of no. 7 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 10 July 2018, with 10 March 2019 fixed as the date for the pronouncement of the arbitral award.

The arbitral tribunal was regularly constituted and is materially competent, in light of the provisions of article 2, no. 1, paragraph a), of Decree-Law no. 10/2011, of 20 January.

The parties have legal personality and capacity, are legitimate and are represented (articles 4 and 10, no. 2, of the same decree-law and 1 of Order no. 112-A/2011, of 22 March).

The proceedings are not affected by any nullities nor have any preliminary issues been raised.

It is for us to assess and decide.

II - Grounds

Factual Matters

1. The facts relevant to the decision of the case that may be considered established are as follows (the individual Tax Inspection Reports of B... and A... are hereinafter referred to as RIT B... and RIT A..., the administrative proceeding is referred to as PA and the request for arbitral opinion is referred to as PI).

I. A... SGPS, SA, previously named H... SGPS SA, was in the year 2014 subject to the Special Tax Treatment Regime for Groups of Companies (RETGS) provided for in articles 69 et seq. of the Corporate Income Tax Code (CIRC), being the parent company of the A... group, of which B... was a subsidiary (RIT B..., II.3.12; RIT A..., II.3.1; PI, articles 15 and 16).

II. The Spanish legal entity D..., SA (previously named I..., SA, J..., SA, C..., SA, K..., SA, hereinafter D...) was initially held by B... (80%) and by L... (10%) and M... (10%); by share purchase and sale contract and assignment of supply credits, concluded on 6.12.2013 between B... and A... (then H..., SGPS), the first sold to the second all the shares it held in, and all supplies made to, D...; on 30.12.2014, D... was transformed into a sole shareholder company, with A... as the sole shareholder (cf. RIT B..., pp. 10-11, RIT A..., pp. 9; PI, articles 17, 38).

III. On 30.6.2014, a Subordinated Loan Agreement was concluded between A... (then H..., SGPS), as lender, and D..., as borrower, in the amount of €1,310,127.11, for ten years, with repayment of capital and interest at the end of the contract, with interest calculated annually and capitalized with the capital owed, at the rate of 0% if the net result for the period is up to €100,000.00 and 7% if the net result for the period is higher than €100,000.00 (doc. no. 10 to PI; cf. also RIT A..., p. 8).

IV. On 30.12.2014, A... entered into a contract called "Cesion de Crédito" with F..., by which the first transferred to the second the credits of the first on D..., namely, the subordinated loan of €1,310,127.11 and the ordinary loan in the amount of €79,735.35, having been stipulated in the fourth clause that: "Cedent and assignee accept that the price of this credit assignment will be adjusted to 90% of the total amount that the assignee, that is, F..., receives from the debtor D..., S.L., by virtue of the loans that are today the subject of the assignment. This adjustment may take place at any time, from the date of signature of this document, and until 31 December 2018. All of this being well understood that before the assignee receives the amount of the credit acquired, the company D..., S.L. must liquidate the amount of commercial debts it maintains with third parties, which have arisen prior to the date of signature of this document. In any case, from the hypothetical and future adjusted amount of the price that the Assignee, Mr. N... must pay to the Assignor, H... SGPS, the taxes that derive from this price adjustment must be deducted, in the taxation applicable to Mr. N..." (doc. no. 10 to PI).

V. Also on 30.12.2014, by contract of "Compraventa de Acciones", A... (then H..., SGPS, SA) sold to F... all the shares representing the capital of D..., S.A.U at the price of €1.00, having been established in this contract, in the third clause, as "Obligations of the buyer," that (our translation):

"The buyer states that he is aware of the complaint filed by the company, whose shares were the subject of purchase and sale, against E... (...) for the crime of disloyal administration (...), as well as a continuing crime of misappropriation (...), a corporate crime of patrimonial falsity (...) and crime of documentary falsity (...).

He also knows that the company demands from the accused person, in said proceeding, among other amounts, 1,285,840 euros, 701,011 euros and 615,424.66 euros, all of them due to withdrawals from the company, presumably unjustified.

In this sense, and as a result of this, the buyer undertakes to take the necessary steps so that the company pays its commercial debts with suppliers, if any, and the financial debts derived from credits that the company has as creditor, with the amount that, in such case, is received from the accused person and other sums that, in such case, are collected from the company's debtors. Thus, said payment to commercial and financial creditors will be conditioned on the effective collection by D..., SA of some amount from the accused person previously mentioned stemming from the consequences of the complaint, or, in such case, from the company's other debtors.

In this sense, the buyer declares that it does not accept as such any responsibility in case it does not receive the collections mentioned";

and in the fourth clause, as "Obligations of the seller," that:

"The seller undertakes to provide the company with the necessary funds to proceed with the payment of the tax debt that the company has to date. The liquidations proving the value of such debts are attached to this document. This commitment does not affect the bank guarantee that the seller and/or his group of companies has granted to the tax authority as a form of guarantee for the payment of said tax debt" (cf. contract at fls. 74 et seq. and 216 et seq. of PA and doc. no. 9 to PI).

VI. On 30.12.2014, B... entered into a contract called "Cesion de Crédito" with F..., by which the first transferred to the second the credits it held on D..., namely, commercial debt credit of €3,709,380.75 and credit corresponding to subordinated loan in the amount of €400,000, having been stipulated in the fourth clause that: "Cedent and assignee accept that the price of this credit assignment will be adjusted to 90% of the total amount that the assignee, that is, F..., receives from the debtor D..., S.L., by virtue of the loan and commercial debt that are today the subject of the assignment. This adjustment may take place at any time, from the date of signature of this document, and until 31 December 2018. All of this being well understood that before the assignee receives the amount of the credit acquired, the company D..., S.L. must liquidate the amount of commercial debts it maintains with third parties, which have arisen prior to the date of signature of this document. In any case, from the hypothetical and future adjusted amount of the price that the Assignee, Mr. N... must pay to the Assignor, B..., SA, the taxes that derive from this price adjustment must be deducted, in the taxation applicable to Mr. N..." (doc. no. 11 to PI, fls. 38 et seq. of PA).

VII. As a result of the transactions indicated, in company B... the internal document 12000106, from the MISCELLANEOUS journal, was recorded on 30.12.2014, with the description "Observations: For the assignment of the commercial debt of customer D...", moving the following accounts of the Accounting Standardization System (SNC) – cf. RIT B..., pp. 9-10:

Table - Internal Document 12000106, from the MISCELLANEOUS journal, dated 2014-12-30

having thus recognized in the period of 2014 a loss in the value of €4,109,379.75.

VIII. For its part, in company A... the internal document 12000010, from the MISCELLANEOUS journal, relating to the assignment of subordinated loans and loans granted to the subsidiary D..., SA, was recorded on 30.12.2014, moving the following SNC accounts – cf. RIT A..., pp. 7-8:

Table - Assignment of subordinated loans and ordinary loans

IX. Company A... recorded on 2014-12-30 the internal document 12000011, from the MISCELLANEOUS journal, with the description "D... - Tax Debts", integrating the respective posting a debit of SNC Account 6853 - Alienations (Losses and expenses in subsidiaries, associates and joint ventures) for credit of SNC Account 278919 - Tax Agency (Other debtors and creditors) in the amount of € 312,501.08, thus having recognized an expense in the amount of € 312,501.08 relating to tax debts (taxes), interest, charges and fines owed to the Spanish State, the responsibility of D... (RIT A..., pp. 6-7).

X. In the period of 2014, A... recorded accounting the liquidation of company G... B.V., as per internal document 7000004, from the MISCELLANEOUS journal, in the following terms (RIT A..., p. 6):

Table III - Liquidation of subsidiary G...B.V.

XI. The equity interest in company G... B.V. remained in the ownership of A... for less than four years.

XII. The Applicant, in light of suspicions of irregularities committed at D..., hired O... to conduct a financial-accounting analysis which resulted in the executive report called "Financial Investigation" of 28.5.2012, which is attached as doc. no. 7 to PI (in accordance with said document and statements by P...).

XIII. D... filed on 5.10.2012 in Spain against E... a criminal complaint for disloyal administration, misappropriation, patrimonial falsity and documentary falsity, in accordance with the provisions of the Spanish Criminal Code, invoking serious irregularities, for personal enrichment, in his conduct as de facto administrator of the company, given his capacity as company attorney-in-fact with broad management and disposal powers (as per powers of attorney attached as docs. nos. 5 and 6 to PI, subsequently revoked as per doc. no. 8 to PI), having initiated the subsequent criminal proceedings (cf. doc. no. 3 to PI and docs. at fls. 41 to 73 verso and 183 to 215 of PA).

XIV. E... was acquitted of the crimes of which he was accused in the aforementioned proceeding (fact acknowledged by Administrator P...).

XV. The A... Group was subject to inspection procedures relating to the fiscal year 2014, which resulted in the individual RIT of B..., referring to Service Order no. OI2015..., and of A..., referring to Service Order OI2017..., and the Group RIT, which are attached at fls. 145 et seq., at fls. 21 et seq., repeated at fls. 152 et seq., and at fls. 109 et seq., repeated at fls. 251 et seq. of PA, by which the following corrections were made to taxable profit in companies B... and A..., to the extent relevant to the object of these proceedings:

• corrections in B... and A... regarding losses related to credits on D... SA, in the amounts respectively of €3,698,441.77 and €1,250,875.31;

• correction in A... relating to the deduction of two losses incurred as a result of the dissolution and liquidation of a Dutch subsidiary, namely, loss corresponding to the equity interest at nominal value of € 10,000 and loss corresponding to a loan granted to the subsidiary, at nominal value of € 14,600;

• correction in A... in the amount of € 312,501.08, relating to payment of tax debts (taxes), interest, charges and fines of D....

XVI. The Applicant, as parent company of the A... Group subject to the RETGS, was subject to additional IRC assessment no. 2017..., for the fiscal year 2014, which determined the amount payable, with compensatory interest, of €1,485,700.75 (cf. IRC assessment statement, interest assessment statement and account settlement statement attached as doc. no. 1 to PI), in light, notably, of the correction to the tax base of Applicant A..., SGPS, SA in the amount of €1,587,976.39 and of the Group company, B..., SA, in the amount of €3,698,441.77.

Except for the matter stated in XIV, there is no disagreement between the parties regarding the facts indicated above, with the documents attached to the proceedings and the factual information reported in the RIT not being subject to challenge (article 76, no. 1 of the LGT).

The factuality referred to in XIV should be considered proven, in accordance with the provisions of article 466, no. 3 of the CPC, since it constitutes a confession resulting from the testimony of P..., who, in his capacity as Administrator of A... SGPS SA and B..., should be framed as statements by a party.

Legal Matters

1. The questions that arise relate to the tax disregard of losses which the Applicant understands to have borne, within the scope of the tax group companies, with the assignment of credits held on the Spanish subsidiary company, in the total amount of € 4,109,379.75 as to B... and of 1,390,206.02 as to A... itself, and losses incurred in expenses with payment of taxes that were owed by the subsidiary in Spain, in the amount of € 312,501.08, as well as with the credit on Dutch subsidiary, in the amount of € 14,600.00, following its dissolution and liquidation.

Regarding the credit assignment contracts, the Applicant argues, in general, that the correction made by the Tax Authority violates the general anti-abuse clause insofar as it is based on the understanding that the assignment was intended, not to transfer ownership of the credits, but to require the assignee to obtain collection of the credits on behalf of the assignor. Such a perspective, according to the Applicant, is contrary to the contractual declaration which provides for the transfer, without reservation, of the ownership of the credits, with the contracts merely containing a contingent price clause, whereby the price is dependent on the prior payment of company debts that are prior to the sale of equity interests and of a time limit that is set at 31 December 2018. In such a way that only when these two conditions were satisfied would there be a right to payment of an additional 90% of the credit that might be recovered.

As to the tax disregard of the amount of € 312,501.08, the Tax Authority interpreted this expense as corresponding to an accounting entry of a cost relating to tax debts attributable to the Spanish subsidiary that would be covered by the non-deductibility rule of article 23-A, no. 1, paragraphs e) and f), of the IRC Code, whereas the Applicant understands that what is at issue is not the payment of a charge belonging to a third party which the taxpayer was not legally obliged to bear, but rather the loss resulting from the assignment of a credit which it had on the subsidiary to meet its tax obligations.

The non-tax relevance of the loss determined in the context of the dissolution and liquidation of the Dutch subsidiary company regarding the loan granted to that entity is also disputed. The Tax Authority, starting from the circumstance that the equity interest remained less than four years in the ownership of the taxpayer, considered such loss as non-deductible, in application of the provisions of article 81, no. 4, of the IRC Code. The Applicant argues, in contradiction, that the provision merely regulates the taxation of the result of distribution, which presupposes the prior liquidation of liabilities as a result of distribution, and what is at issue, in the case, is the loss resulting from a loan that was not repaid at the time of dissolution and liquidation of the subsidiary company.

These are the questions to be clarified.

Credit Assignment

1. In accordance with the facts considered established, the Applicant and its subsidiary B... Portugal entered into, on 30 December 2014, individual credit assignment contracts, at the price of €1.00, by which they transferred to F... certain credits which they had on the Spanish subsidiary C.../D..., S.L. In each of these contracts, it was stipulated that the price of the credit assignment would be adjusted to 90% of the total amount that the assignee receives from the debtor and such adjustment could take place at any time, from the date of signature of the contract until 31 December 2018. It was further provided that, prior to the receipt of the acquired credits, the assignee, as owner of the capital stock of the Spanish subsidiary, should liquidate the commercial debts that that entity maintains with third parties that are prior to the date of signature of the contract.

It is also established that, on the same date, the Applicant sold to F... all the shares representing the capital of C... Spain/D..., S.A., at the price of €1.00, having been established that the buyer undertakes to take the necessary steps so that the company pays its commercial debts with suppliers and provides the company with the necessary funds to proceed with the payment of the tax debt that the company has as of the date of the contract.

It should first be noted that the Tax Inspection Reports, based on the content of the 4th clause, question the characterization of the contracts as corresponding to a credit assignment, understanding that there is merely a collection commission in question.

This conclusion is drawn from the following excerpt from the Tax Inspection Reports relating to A... and B...:

"The contract in question does not constitute an effective credit assignment, since until 2018-12-31, A... [B...] will recover 90% of the value received by F..., which does not constitute a true assignment of credit, but merely the establishment of a collection commission to be paid to a third party for the amount of credit that it manages to recover, since apart from that commission the right to the credit remains by virtue of this same contract in B...".

The removal of the characterization of the contracts in question as typical credit assignment contracts may also find some foundation in the applicable legal regime.

In light of the provisions of article 577, no. 1, of the Civil Code, there is a credit assignment when the creditor, by legal transaction, transfers his right to another person. This figure consists, therefore, of the substitution of the original creditor by another person, with the remaining elements of the legal obligation remaining unaltered, which means that there is no substitution of the legal obligation by another, but merely the transfer on the active side of the existing legal relationship (Almeida Costa, Law of Obligations, 12th edition, Coimbra, p. 557).

Thus, in order for a legal transaction to be characterized as a credit assignment, it is necessary that, by agreement between assignor and assignee, there be a definitive and absolute transfer of all legal positions, active or passive, which are covered by the credit situation, in such a way that it is the assignee who comes to hold the substantive and procedural ownership of the credit right, and such legal position cannot be understood as merely the attribution of the power to demand the credit.

As Antunes Varela explains (Of obligations in general, vol. II, 5th edition, Coimbra, p. 317 and note 2), the principal effect of the credit assignment contract is the transfer from the assignor to the assignee of the right to the debtor's performance, in which the "assignee is not limited to acquiring the (formal) power to demand the performance, in which it differs from the mere attorney-in-fact whom the creditor would have charged with the collection of the credit," since the "assignee, in addition to the power to demand the performance, has the power to retain the object of the performance as a thing (in the broad sense) of his own, for the satisfaction of his own interest (and not that of the assignor)".

In these terms, it is required, for the effects of the credit assignment contract to be realized, that is, the transfer of the credit, that the acquirer be able to retain, definitively, in his patrimony, the performance or sums owed by the debtor assignee, in terms of a final acquisition of the results of the collection of the credit. Only in such legal-contractual circumstance can the definitive transmissive effect of the credit assignment be effectively recognized.

Taking into account that, in the situation of the case, there is an express binding that the price should be adjusted to 90% of the total amount that the assignee receives from the debtor C... Spain/D..., S.L., it would be difficult to characterize such contractual relationship as a typical credit assignment contract.

And the legal characterization that might best suit the legal transactions in question is the so-called "assignment for collection" or "cash assignment," which corresponds to "the need of someone to transfer the collection of credits to another, so that the latter does it in its own name, albeit on behalf of the mandator," and for this purpose "the parties effect a nominal assignment of the credit, undertaking thereafter that the assignee will deliver the result of the collection to the assignor," in which case "a fiduciary transaction arises, within which the assignment of credits comes associated with a collection mandate, without representation" (Luís Menezes Leitão, Credit Assignment, p. 470).

Furthermore, this characterization is entirely consistent with the explanation that B... transmitted to the Tax Authority, which is reproduced in RIT B..., p. 15:

"From the perspective of Dr. F..., the transaction in question represented the possibility of a potential gain of 10% on each of the debts he might manage to recover, and from the perspective of B..., said transaction represented a possibility of recovery of the same by means of "the granting of a commercial discount" of 10%. In this way, it was sought to increase the probability of success in the recovery of D...'s credits from its customers and, consequently, the recovery of credits held by B... on D....

B... does not have (and, in truth, does not see the reason why it should have) evidence of the steps taken by Dr. F... for the purposes of recovery of these credits. Nevertheless, whenever one of these events occurs, and within the scope of the contract concluded between the parties, Dr. F... informs B..., with the distribution of amounts being made (in the proportion 90%/10%) between the parties".

1. Furthermore, independently of their legal characterization, the transactions in question cannot have as a practical effect the deduction as a fiscal cost, with respect to the year 2014, of the total value of the credits that have been assigned.

The assignment of credits begins by constituting a liberality, in that the transmission is made at the symbolic price of €1.00, and becomes onerous only as a result of the other conditions that are contractually stipulated: the price is adjusted to 90% of the amount that the concessionaire manages to recover from the debtor insofar as it exceeds the total commercial debts that that entity maintains with third parties that are prior to the date of signature of the contract; the recovery of credits may occur until 31 December 2018. That is, then, the price that the assignee would have to pay, as consideration, with respect to the credits that, in that period of time, would have been recovered if the subsidiary's commercial debts had been liquidated in the meantime.

Being this the specificity of the credit assignment, in the case at hand, it is not possible to consider that, in the year 2014, with the conclusion of the contracts in question, the assigning companies definitely transferred the right to the monetary performances implied in the assigned credits, in such a way that it can be said that, by force of the conclusion of the assignment contract, the taxpayer incurred, in the fiscal year in which the conclusion of that contract occurred, a loss in relation to the total value of the assigned credit.

1. Article 18, no. 1, of the IRC Code enshrines the accounting principle of economic specialization of fiscal years, which consists of including in fiscal results the revenues and costs (today, revenues and gains) corresponding to each fiscal year, independently of their effective receipt or payment. This is an accounting criterion that reflects the principle of annual periodization of the tax and means that the cost or revenue is tendentially associated with the moment of issuance of the supporting document.

As has been recognized by the jurisprudence, it is not always justified to interpret the periodization principle referred to in the aforementioned article 18 of the IRC Code in a strictly literal sense, especially when the attribution of the revenue or cost to a fiscal year different from that to which it pertained does not result in prejudice to the National Treasury and the correction may translate into a worsening of the tax burden on the taxpayer (cf. Supreme Administrative Court judgment of 13 October 1996, Case no. 20404).

It does not seem, however, that this jurisprudential understanding — which allows the principle of specialization of fiscal years to be articulated with the principle of justice — has relevance to the case.

In 2014, when the credit assignment contract was concluded, it was not excluded that the assignor, in accordance with the contract terms themselves, would obtain, in the future, a patrimonial advantage, at the percentage of 90%, associated with the performances that were the subject of the assignment. In that year, consequently, the losses were limited to 10%, corresponding to the value of the credits which the assignor effectively relinquished, as a result of the assignment. For their part, the amounts corresponding to the credits not recovered could only be recorded as costs in the fiscal year in which the taxpayer lost the patrimonial advantage, in accordance with the principle that revenues and costs are allocated to the fiscal years in which they were obtained or borne. And, consequently, losses exceeding the percentage value of 10% of the assigned credits could only be considered in the fiscal year 2018, since it was until the last day of that tax period that, in accordance with the contract terms, the price adjustment could be made.

The statement by F... regarding the result of the final accounts relating to the price of transmission of credits, determined by reference to the fiscal year 2018, which the Applicant submitted after the submission of the submissions, does not alter the data of the problem. To admit that the reimbursement was € 4,950.00, in the fiscal year 2015, this reveals that the taxpayer did not incur in that tax period a loss corresponding to the entirety of the assigned credits and that it is not prevented from declaring as a loss, in the tax period relating to 2018, the remainder up to 90% of the total amount of the credits.

1. The Applicant further argues that the clause established in the credit assignment contracts constitutes a contingent price clause which cannot be considered applicable since the financial conditions on the part of the Spanish subsidiary do not exist that would allow for the realization of future economic benefits that could satisfy the payment of such price. Thus the Applicant concludes that we are faced with a contingent asset which, in accordance with § 30 of Accounting Standard for Financial Reporting 21 (NCRF 21), should not be accounted for. In support of this understanding, it invokes the rule of § 32, which clarifies when contingent assets should or should not be recognized: "Contingent assets are not recognized insofar as this may result in the recognition of revenues that may never be realized. However, when the realization of revenues is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate".

The central idea which, by this line of argument, is intended to be exposed, is that the realization of the additional price component is eventual and uncertain because it depends on the change in the negative patrimonial situation of the Spanish subsidiary.

It seems to be understood, however, that in the accounting and tax recognition of credit assignment what is at issue is not a contingent asset, understood as "a possible asset arising from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more future uncertain events not entirely under the control of the entity" (§ 8 of NCRF 21), but more precisely a financial asset as "a contractual right to receive money or another financial asset from another entity" (§ 5 of NCRF 27). And in accordance with § 31 of this accounting standard, an entity should derecognize a financial asset only when the situations described therein are verified and, among these, when "the entity transfers to another party all significant risks and benefits related to the financial asset" (§ 31, paragraph b). Which is in full consonance with the subsequent § 33, which provides: "If the transfer does not result in derecognition, since the entity has significantly retained the risks and benefits of possession of the transferred asset, the entity should continue to recognize the transferred asset in full and should recognize a financial liability for the consideration received".

In the case at hand, the mere conclusion of a credit assignment contract does not determine the effective and substantial passage of the risks and benefits to the acquirer, and thus does not imply the derecognition of the financial asset, but rather its maintenance on the balance sheet of the assignor in light of the possibility of recovering part of the credits that were the subject of the assignment.

On the other hand, if it were understood that, with the assignment of credits at the symbolic price of €1, the Applicant intended to alienate all its interests in the company, on the basis that the price adjustment would be remote or would never be realized, then the assignment could be framed in the category of assignment by title of liberality, which, in itself, would make it incapable of being considered as an expense or loss for the determination of taxable profit, in function of the provisions of article 23, no. 1, of the IRC Code, which rule is also corroborated by article 24, paragraph a), and it is further necessary to note that article 24, paragraph b), excludes from the formation of taxable profit potential or latent capital losses. And, in that sense, only the adjustment of the price at 90% of the amount of credits that the assignee comes to collect, and which will revert to the assignor, justifies that the credit assignment may be qualified as an onerous contract.

Which, in any event, excludes the presupposition upon which depends the derecognition of a contingent asset under the provisions of § 31, paragraph b), of NCRF 27.

There is, therefore, no reason to declare the illegality of the assessments insofar as they operate the tax disregard of the values attributed to credit assignment.

1. The Applicant further argues that the Tax Authority violates the rules of the anti-abuse clause by not basing the recharacterization of the contract on the regime of article 38, no. 2, of the LGT and by not following the specific tax procedure for the application of an anti-abuse provision to which article 63 of the CPPT refers.

As is known, the general sense of the provision of article 38, no. 2, of the LGT is to permit the tax disqualification of any legal act or transaction carried out by the taxpayer with the sole or principal objective of obtaining a tax advantage, which may constitute fraud of tax law. The legal effect resulting from the operation of the anti-abuse clause is to consider the acts as carried out in accordance with the normal standard of legal commerce to obtain the same economic result, determining the tax obligation in function of equivalent acts that could be carried out.

It is thus required that an artificial or fraudulent act or transaction has been carried out that represents an abuse of legal forms and that had as its sole or principal objective the obtaining of a tax advantage.

The point is that, in the case at hand, the Administration merely carried out the tax classification of the legal transactions carried out by the Applicant for the purposes of determining taxable profit and at no time declared the ineffectiveness of such transactions or established that they were intended for the obtaining of a tax advantage by fraudulent means.

What is at issue, therefore, is not the tax disregard of a legal form of transaction held as artificial, for the purpose of taxation being carried out in accordance with another legal practice that is understood to be more common, but rather the fixing of the meaning and the decisive scope of the transaction, as concluded by the parties, in function of the interpretation and characterization of the integrating statements, so as to determine the tax effects that the transaction may produce.

Since the anti-abuse clause was not applied, there is no room for the invocation of the procedural vices or lack of reasoning which respect the respective legal regime.

Expenses Relating to Tax Debts

1. The Tax Authority further disregarded the amount of € 312,501.08 corresponding to tax debts attributable to the Spanish subsidiary on the grounds that these are expenses not deductible in accordance with the provisions of article 23-A, no. 1, paragraphs e) and f), of the IRC Code, which provides for the non-deductibility for purposes of determining taxable profit of taxes affecting third parties and which the taxpayer is not legally obliged to bear and of fines and penalties.

The Applicant contends that what is at issue is not the payment of a charge belonging to a third party but the loss resulting from the assignment of a credit which A... had on the subsidiary to meet its tax obligations.

In accordance with the facts established, company A... recorded on 30 December 2014, in an internal document, with the description "D... - Tax Debts," the amount of € 312,501.08 which was recorded as a credit to SNC Account 278919 - Tax Agency, thus having recognized an expense relating to tax debts, interest, charges and fines owed to the Spanish State and which were the responsibility of D... (point IX).

In light of this description, resulting from an internal document prepared by the Applicant itself, it appears clear that the situation in question constitutes the payment of taxes, interest, charges and fines owed to the Spanish State by C... Spain/D... by A..., which, regardless of whether it does not fall within the general deductibility criterion to which article 23, no. 1, of the IRC Code refers, is covered by the specific limitations to the tax deductibility of charges contained in article 23-A of the IRC Code, which, in its no. 1, paragraphs e) and f), provides as follows:

The following charges are not deductible for purposes of determining taxable profit, even when accounted for as expenses of the tax period:

(…)

e) Fines, penalties and other charges, including compensatory and default interest, for the commission of infractions of any nature that do not have a contractual origin, as well as for behaviors contrary to any regulation on the exercise of the activity;

f) Taxes, fees and other tributes that affect third parties which the taxpayer is not legally obliged to bear;

(…).

The Applicant argues that it is not, in the case, a tax charge of a third party accounted for as a cost, but a credit on the subsidiary that was the subject of assignment together with other commercial debts.

If that were the case, there would be no reason to adopt a solution different from that considered, for the reasons previously set out, as to the credit assignment. There having been no definitive transfer of the credits and there still being open the possibility of the assignor recovering in part the monetary performances, the taxpayer cannot account as an expense the total values of the assigned credits, including what was intended to offset payment of the subsidiary's tax debts.

And, in any event, being an expense, accounted for autonomously, that relates to tax charges of a third party, its non-deductibility results directly from the aforementioned provision of article 23-A, no. 1, paragraphs e) and f), of the IRC Code, being irrelevant that the cost incurred may have generated a credit right in favor of the Applicant.

The arbitral request is, also in this respect, without merit.

Loss with Credit Determined with the Dissolution and Liquidation of the Dutch Subsidiary

1. The Tax Authority rejected the tax deduction of losses borne by the Applicant as a result of the dissolution and liquidation of the Dutch subsidiary G... B.V., resulting from the participation in capital (€ 10,000) and credits on the subsidiary (€ 14,600), by considering, in application of the provisions of article 81, no. 4, of the IRC Code, that the capital loss attributed to financial investments and loans granted is not deductible when the equity interest remained in the ownership of the taxpayer for a period of less than four years.

The Applicant argues that article 81 relates to the result of distribution and, therefore, to the result obtained after the liquidation operations, including those relating to the liquidation of liabilities, so that the rejection of the tax relevance could only occur with respect to the equity interest, and not to the credits which it held on the subsidiary.

Regarding the taxation of shareholders as a result of distribution, no. 1 of article 81 of the IRC Code establishes that the value attributed to each shareholder, minus the acquisition value of the corresponding equity interests and other equity instruments, shall be included for tax purposes in the IRC (when the shareholder is a legal entity). When the value attributed in distribution is less than the acquisition cost of the equity interests, such difference is considered a capital loss which is deductible from the income of the parent company (no. 2, paragraph b)), provided that "the equity interests have remained in the ownership of the taxpayer for a period of less than four years" (no. 4, at the end).

However, this temporal limitation only applies to equity interests and not to credits on the dissolved and liquidated company. Indeed, the result of distribution to which article 81 of the CIRC refers is the final balance after all assets and liabilities of the dissolved company have been liquidated (and its credits paid or not) and the capital loss that is conditioned, as to its deductibility, by the provisions of no. 4 of that article is that which will be determined as a result of distribution.

In these terms, the rejection of the tax deduction of the loss relating to credits held by the Applicant on the subsidiary is illegal.

Compensation for Indemnification Due to Provision of Security

1. The Applicant further requested payment of the corresponding compensation for the provision of undue security, invoking the provisions of article 53 of the LGT, having alleged and proven for this purpose that it proceeded with the constitution of a mortgage in favor of the Tax Authority on 10 properties, for the purpose of obtaining the suspension of the fiscal enforcement proceedings in view of the challenge of the tax assessment acts.

Article 171 of the CPPT guarantees compensation in case of a bank guarantee or equivalent improperly provided, which may be requested in the proceedings in which the legality of the enforceable debt is disputed, and it must be understood that the arbitral proceedings are also the proper procedural means to assert this claim since it may have as its object the assessment of claims relating to the declaration of legality of tax assessment acts (article 2, no. 1, paragraph a), of the RJAT).

Article 53 of the LGT further permits that the debtor who offers bank guarantee or equivalent to suspend fiscal enforcement shall be compensated in whole or in part for losses resulting from its provision, if it has maintained it for a period exceeding three years, except when it is verified in the challenge that there was error attributable to the services in the tax assessment, in which case the compensation is not dependent on the period for which the security was in force.

Still in application of the provisions of article 53, no. 1, of the LGT, in case of partial merits of the arbitral request, the compensation shall be owed in the proportion of the verdict.

However, as has been decided in the Supreme Administrative Court judgments of 24 October 2012 (Case no. 0528/12) and 10 October 2018 (Case no. 0469/14), only bank guarantee, pledge, guarantee insurance or any other means capable of justifying the existence of expenses that may occur as a result of the passage of time, to which article 199, no. 1, of the CPPT refers, and which have as their maximum limit the guaranteed value of the rate of indemnificatory interest (article 53, no. 3, of the LGT), can be understood as security for the intended compensation purposes.

This is not the case with the voluntary mortgage, which is subject, in principle, only to emolument costs of constitution and registration, and which cannot be understood as security equivalent to any of the forms of security recognized in the aforementioned article 199 of the CPPT.

There is thus no place in these proceedings for compensation, even partial, for the provision of security.

III – Decision

It is hereby decided:

• To find the arbitral request well-founded with respect to the loss of a credit granted to the Dutch subsidiary G... B.V., following its dissolution and liquidation, in the amount of € 14,600.00, and to annul the corresponding tax act;

• To find the arbitral request without merit with respect to the corrections to taxable income, in the amounts of € 1,250,875.31, € 3,698,441.77 and € 312,501.08;

• To find the request for compensation for provision of undue security without merit.

Value of the Case

The Applicant indicated as the value of the case the amount of € 1,485,700.75, which was not contested by the Respondent and corresponds to the value of the assessment which it was sought to contest, and thus the value of the case is fixed in such amount.

Notify.

Lisbon, 15 February 2019

The Presiding Arbitrator

Carlos Fernandes Cadilha

The Arbitrator Vogal

Tomás Cantista Tavares (dissenting according to the dissenting opinion attached)

The Arbitrator Vogal

João Menezes Leitão

Dissenting Opinion

1. I dissented on two issues: a) Non-acceptance for tax purposes (in accordance with article 23 of the CIRC) of losses on credit assignment (difference between nominal value of credits and sale value of 1€ - 1€) carried out by companies of the A... SGPS group: b) Non-acceptance for tax purposes of the loss resulting from the fact that the applicant paid the tax debts owed by the Spanish subsidiary and qualified as an assigned loan in the operations described in a).

2. The object of the proceedings centers solely on the legal-tax analysis of credit assignment contracts (and price adjustment mechanism). If it is a true and proper credit assignment — the accounting and tax losses are accepted for tax purposes: if, however, from the analysis of the effects of the contract it is concluded that there is no credit assignment in question, but a mandate without representation "assignment for collection" — then the assignor did not have (still in 2014) any accounting and tax loss.

3. I understand that the parties carried out a true and proper credit assignment (with price adjustment) — "sale" at a symbolic price (but real and market price — and therefore, there is never any issue of liberality with price revision, once certain conditions are met) — for the following cumulative reasons:

i) Letter of the contract: it refers, in various points that it is a credit assignment with the reference, including for the articles of Spanish law that regulate this institute:

ii) Systemic involvement: it is normal in the world of business that the sale of equity shares of a company is accompanied by the assignment of credits that the seller (and other group entities) have on the sold company to the buyer of the shares (assignee). The seller-assignor completely distances itself from the activity of the company by alienating all its interests (capital and credits) in that company: and the buyer-assignee takes over the company's business by acquiring all interests (capital and credits) in the company. This is what occurred in the case at hand: the sale of equity shares is accompanied by the sale of credits: and the contracts do not allow for the revocation or annulment of the agreements (sale of equity shares and assignment of credits).

iii) Economic weighing of the transaction from two perspectives. First: the probability of price adjustment was remote given the economic circumstances of the debtor (for me this is therefore a credit assignment with a better fortune clause): whereas in a mandate one expects, as a rule, an activity of the mandatary with results, at least partial, from his credit collection work. Second: this price adjustment explains itself by the fair economic allocation of the contract risk: would it make sense for someone to buy an asset for 1 euro and, in the remote but possible hypothesis, manage to collect all amounts from D... Spain against the debtors (the E... Son), keep the entire gain? Would it not be more balanced for there to be, as was provided, a price adjustment, for the balance of risk and harmony of the contract? Of course it would — and, in that sense, the parties entered into a real credit assignment with price revision, under conditions (somewhat usual in the business world).

iv) Legal analysis of the agreement:

a) No legal incompatibility between credit assignment and price revision clauses, with conditions. The price revision of the assignment, as an effect of future conditions does not degrade the legal nature of the credit assignment agreed between the parties. In the concrete case, there is price revision of the credit assignment, subject to temporal and collection conditions — something normal in the dynamic of credit assignment transactions and in the primacy of contractual freedom that governs the parties.

b) In "assignment for collection" the mandate is always freely revocable, because conferred in the interest of the mandatary, generating the obligation of retransfer of the credit to the mandatary (Luis Menezes Leitão, credit assignment. p. 472) That is, so to speak, the essential characteristic of this figure. However, none of this occurs in the contracts of the proceedings, before the letter of the agreements and witness evidence. The assignment of credits could never be revoked, by will of the mandatary (applicant). The assignment is own and definitive, only with price correction, under certain conditions.

1. Furthermore, I understand that the (i) complexity of the legal question (is the agreement a proper credit assignment or an "assignment for collection" which requires high legal knowledge, on the borderline of institutes) (ii) with the necessity of the subject to make a fiscal decision in 2014 - in its self-assessment, without prior intervention by the Tax Authority. (iii) that the option followed is not unreasonable but plausible (it is a credit assignment with associated tax loss) and (iv) that in 2018, in light of the wording of the price adjustment clause — and loss becomes real and effective, even sharing the mandate thesis (and the assignors received negligible values between 2014 and 2018 then, in essence, we are faced with a question of specialization of fiscal years (record the loss in 2014 or 2018) In this context, I would follow the jurisprudence of the Higher Courts which permits the formal violation of specialization of fiscal years by force of the material principle of justice and protection of confidence (Judgment Supreme Administrative Court of 2/4.2008. case 080707, Arbitral judgment in case 22/2018-T, and also see Tomás Cantista Tavares, IRC and Accounting: from realization to fair value. Almedina, 2011, p.62 et seq).

2. Finally, if in case the transaction between the parties were reconfigured (it would not be a credit assignment but an "assignment for collection"), the legal-tax garb would never be based on article 23 of the CIRC (the provision mobilized in the grounds), but on article 36 of the LGT (which was not brought to the grounds). This involves, in my opinion, a defect in reasoning and violation of law. An average interpreter, from the controversy of the indispensability of expenses of article 23 of the CIRC (also mobilized in the grounds for the timeliness of the recording of the expense, a topic irrelevant to the judgment) cannot extract or infer the rhetoric of knowing whether the parties agreed to a credit assignment or an "assignment for collection" (since this argumentative arsenal is based on article 36 of the LGT, which indicates, expressly, that the qualification of the legal transaction carried out by the parties does not bind the tax administration, nor the courts).

15 February 2019

Tomás Cantista Tavares