Summary
Full Decision
ARBITRAL DECISION
I – REPORT
A…- SGPS, S.A., hereinafter referred to as "A…" or the "Claimant", a legal entity number …, with registered office at …, Lot …, … …, Lisbon, with share capital of €41,046,825.00, in 2012 and 2013 the parent company of a Group (the fiscal group B…) subject to the special tax treatment regime for groups of companies provided for in (in current numbering) Article 69 and following of the Corporate Income Tax Code (IRC Code), being covered by the local peripheral services of the Lisbon Tax Office … requested the constitution of a collective arbitral tribunal and submitted a request for arbitral determination.
The acts subject to the present request for determination by the Arbitral Tribunal are specifically the acts of assessment of IRC no. 2016… and 2016…, relating to the years 2012 and 2013 (Docs. nos. 1 and 2), and the corrections made by the Tax Inspection that preceded them.
At issue and object of the present challenge is the legality of those IRC assessments and corrections that preceded them insofar as they improperly disregard [according to the Claimant's allegation] the deduction of financial charges in the amounts of €607,860.62 (2012) and €760,015.51 (2013), with the consequent determination of taxable income in excess and determination of tax loss at a deficit in that same amount and also, the consequent determination of €47,500.97 as reflected tax on the excess taxable base of 2013 and €4,528.84 in corresponding compensatory interest, for a total of €52,029.81.
The Tax Authority and Customs Authority (hereinafter referred to only as the "Respondent") is the respondent.
The request for constitution of the arbitral tribunal was accepted by the Honorable President of CAAD and automatically notified to the Respondent.
Pursuant to the provisions of paragraph a) of section 2 of Article 6 and paragraph b) of section 1 of Article 11 of Decree-Law no. 10/2011, of January 20, as amended by Article 228 of Law no. 66-B/2012, of December 31, the Deontological Council of CAAD designated as arbitrators of the collective arbitral tribunal Judge José Poças Falcão, Dr. Henrique Nogueira Nunes and Dr. Luís Baptista, who communicated acceptance of the appointment within the applicable period.
Both parties were duly and timely notified of this designation and did not manifest willingness to refuse the designation of the arbitrators, pursuant to the provisions of Article 11, section 1, paragraphs a) and b) of RJAT, in conjunction with Articles 6 and 7 of the Deontological Code.
In accordance with the provisions of paragraph c), section 1, of Article 11 of RJAT, the Arbitral Tribunal was constituted on 02-06-2017.
The claimant alleged, in summary, to substantiate the request:
Following inspections at the individual level of the companies comprising the Fiscal Group headed by the claimant, the latter was notified of the Final Report of the Tax Inspection at the aggregate level (at the level of RETGS/Fiscal Group), which contained a correction upward to the taxable base in IRC of A… itself in the amount of €607,860.62 with respect to 2012, and in the amount of €760,015.51 with respect to 2013 (see pages 7 to 9 of the aggregate RIT attached as Doc. no. 4).
These corrections were made by the AT invoking as legal basis Article 32, section 2, of the EBF[1], more specifically the provision there that in the case of SGPS financial charges incurred with the acquisition of capital shares are not deductible (see pages 7 and 8 of the individual RIT previously attached as Doc. no. 3).
And the quantification of these corrections by the Tax Inspection to the years 2012 and 2013 was in turn carried out in application of Circular no. 7/2004, of March 30, of the Directorate of Services of IRC (DSIRC), both in the first quantification carried out (see pages 7, 8 and 9 of the individual RIT previously attached as Doc. no. 3) and in the second and final quantification triggered by the correction of certain relevant figures in the application of the said Circular (see page 15 of the individual RIT previously attached as Doc. no. 3).
The implementation of corrections using the formula of Circular no. 7/2004 is illegal, and even more illegal when the tax inspection, instead of adopting it as a last resort, beginning first by making a real allocation, dispenses with the outset thereof and proceeds directly to the application of the formula determined by the DSIRC.
Through a simple and elementary analysis, it is possible to observe that the formula of the Circular produces results that enormously distort upward the actual amount of financial charges that, at most, could be said to have been incurred with the acquisition of capital shares (see section 2 of Article 32 of the EBF).
Given the corporate, accounting and tax regime of supplementary contributions, in the opinion of the Claimant, these should not be considered as capital shares and, for that reason, they should be excluded from the material scope of section 2 of Article 32 of the EBF.
Given the identification between capital and share capital, the compound expression "capital shares" can only, also for that reason, unless legal data points otherwise, mean "shares of capital stock", commonly known as quotas or shares or, more generically, be identified with the expression "social interests."
If further confirmation were necessary (and it is not), the CSC[Commercial Code] takes care to expressly use the compound expression "capital shares" with the unequivocal meaning of "social interests."
The expression "capital shares" does not encompass, in light of the branch of law from which it originates (corporate law), credits arising from the performance of ancillary contributions, credits arising from the performance of supplementary contributions or similar (which, moreover, unlike capital shares, have exclusively in their origin cash payments) or any other credits. It encompasses only "social interests" (commonly known as quotas and shares).
The difference between supplementary contributions and capital shares is amply marked by both Portuguese doctrine and jurisprudence, as taught by António Pereira de Almeida ([2]) – "supplementary contributions are other obligations of partners to make cash payments in addition to share capital (…) [carried out] in those situations where, at the time of establishment, it is foreseeable that capital may become insufficient for the realization of the corporate purpose."
In the decision of case no. 9/2012-T, of CAAD, of September 7 (which is attached as Doc. 5), it is stated that "In calculating the capital loss resulting from the alienation (…) of the claimant's capital shares, losses relating to supplementary contributions cannot be considered insofar as these are not included in the concept of 'capital shares'."
And in this same line are other decisions issued by Tax Arbitral Tribunals since then – see decisions relating to cases no. 12/2013-T, of July 8, 2013, no. 39/2013-T, of October 14, 2013, no. 69/2013-T, of October 22, 2013, no. 80/2013-T, of October 10, 2013, no. 113/2013-T, of February 3, 2014, no. 653/2014-T, of February 6, 2015, among others, and, more recently, by decisions relating to cases no. 549/2015-T, of January 26, 2016, and no. 246/2016-T, of November 20, 2016.
"Shareholders' equity" is an accounting concept that includes various line items, with only one of them representing the "capital shares" of the partner (the share capital line item), with the most telling example being line item 596 – Subsidies, which has nothing to do with "capital shares."
In other words, if it is true that "capital shares" are part of the concept of "shareholders' equity," this does not mean that all realities that appear in the "shareholders' equity" of a company constitute "capital shares," nor does it seem acceptable to equate supplementary contributions with capital shares.
In the IRC Code, it was the legislator itself who assumed that capital shares are one thing (social interests) and credits for supplementary contributions another thing, hence the addition of these latter realities to the former (represented by the expression "capital shares"), operated by the State Budget Act for 2006 (Law no. 60-A/2005, of December 30), by adding the expression "other components of shareholders' equity," including (credits, or expectations of reimbursement, resulting from the performance of) "supplementary contributions."
As properly concluded in the arbitral decision issued in case no. 69/2013-T, "(…) to clarify the question of whether supplementary contributions are encompassed in the concept of 'capital shares' there is a rule from which it directly results that those are not included in this concept, which is section 3 of Article 42 of CIRC, in the wording introduced by Law no. 60-A/2005, of December 30 (current Article 45, section 3)." (see page 16 of the said arbitral decision in the PDF version published on the CAAD website).
Therefore, the expression "capital shares" used in the wording of section 2 of Article 32 of the EBF cannot have the expansion contrary to law that the AT uses to give it by including therein (credits for) supplementary and ancillary contributions.
The Circular under analysis (see its points 7 and 8 – Doc. no. 7 attached hereto), when establishing a notional method using proportions based on the value of assets to determine the financial charges supposedly (notionally) incurred with the acquisition of capital shares, goes beyond the applicable legal basis and, thereby, taints with the defect of violation of law the tax assessments made in obedience to such generic guidance[3].
That Circular seeks in a completely illegal way to implement Article 32 of the EBF, on the "Tax Regime of Companies Managing Social Interests and Venture Capital Companies," particularly as regards the criterion for deductibility of "financial charges" of SGPS."
The official IRC assessment at issue is contrary to law, more specifically to section 2 of Article 32 of the EBF, insofar as it denies the deductibility of financial charges in application of the generic guidance contained in the formula prescribed in Circular no. 7/2004.
The recent Decision of the STA of March 8, 2017, issued in Case no. 0227/16 (Counselors Aragão Seia – rapporteur – Casimiro Gonçalves and Francisco Rothes) annulled the IRC assessment as regards the exclusion of the deduction of financial charges of an SGPS because this exclusion had been carried out by applying the formula of Circular no. 7/2004 and, in the lapidary statement of this decision "[point] 7 of Circular no. 7/2004, of 30.03, of the DSIRC, establishes an indirect method, presumptive, of allocation of financial charges in disregard of Articles 87 to 90 of the LGT and is, therefore, illegal."
It will thus also be illegal, by identity of reasoning, the exclusion of the fiscal deduction of financial charges in the amounts of €607,860.62 (2012) and €760,015.51 (2013), carried out by the AT in application of the formula of Circular no. 7/2004, contained in its point 7 (and exemplified in its point 8).
It also cites, along the same lines, the decisions issued in cases nos. 738/2014-T, of CAAD, 24/2012 and 00946/09 and 00997/12, of TCAN.
It further raises the unconstitutionality of section 2 of Article 32 of the EBF in the supposed interpretation endorsed by sections 7 and 8 of Circular no. 7/2004, for violation of the constitutional principle of reservation of law to the National Assembly for matters of tax incidence – violation of Articles 103, sections 2 and 3, and 165, section 1, paragraph i), of the Constitution.
The Circular under analysis (see its points 7 and 8 – Doc. no. 7 attached hereto), when establishing a notional method using proportions based on the value of assets to determine the financial charges supposedly (notionally) incurred with the acquisition of capital shares, goes beyond the applicable legal basis and, thereby, infects with the defect of violation of law the tax assessments made in obedience to such generic guidance[4].
In conclusion, the official IRC assessment at issue is contrary to law, more specifically to section 2 of Article 32 of the EBF, insofar as it denies the deductibility of financial charges in application of the generic guidance contained in the formula prescribed in Circular no. 7/2004.
Financial charges these excluded from the calculation of taxable profit of 2012 and 2013 of A… and its fiscal group, in application of the formula of the said Circular, which amount to €607,860.62 and €760,015.51, respectively, as seen above (Docs. nos. 1 to 4).
The amount payable generated by the IRC assessment for the year 2013 has been paid (see Doc. no. 14 attached hereto).
Therefore, with the illegality of the additional assessment for 2013 declared, the claimant is entitled not only to the reimbursement of the amount paid of €52,276.47, but, also, under Article 43 of the General Tax Act ("LGT"), to indemnifying interest, calculated on this amount paid on March 27, 2017 (Doc. no. 14), counted from this date until full reimbursement thereof.
The Respondent presented a Response, in which it defends itself by challenge, alleging, in the sense of lack of merit of the request for arbitral determination, in summary, the following:
Using the formula referred to in circular 7/2004, the SIT [Tax Inspection Services] prepared the calculations set out below in order to calculate the value of financial charges incurred by the Claimant, with the acquisition of capital shares, and for that reason not accepted fiscally by virtue of Article 32 of the EBF.
The values used in the calculations carried out were taken from the SAF-T (PT) files and from the tables provided by the Claimant in response to the notification made. Having been attached to the RIT, in Annex 3, the table prepared with a breakdown of the SNC accounts that served as the basis for the preparation of the table and the trial balances extracted from the SAF-T (PT) files that served as the basis for the calculations carried out.
From the elements provided by the Claimant and listed in the above table, the values of €1,270,231.38, €1,331,963.72 and €906,402.12 of financial charges attributable to capital shares respectively for the years 2011, 2012 and 2013 resulted.
Given that in accordance with what is established in section 2 of Article 32 of the EBF these do not contribute to the formation of taxable profit, they were disregarded as expenses and a correction of the same amounts was made to the taxable result presented by the company.
Thus, the following corrections were made:
Based on the need to reflect in the fiscal results of the group the corrections made to the individual results declared by the Claimant, as a result of the inspective analysis referred to, two inspective actions were carried out under Service Orders OI2015… and OI2015….
In these, it is concluded that, having the individual result of one of the consolidated companies (in this case the parent company), in the years 2012 and 2013, been altered by virtue of the corrections made in the amount of €607,860.82 in 2012 and €760,015.51 in 2013, with the individual result of this company becoming €-134,517.89 in 2012 and €-247,943.42 in 2013, to reflect that change in result in the consolidated profit of the group, the results of the group are altered as follows:
Thus obtaining the consolidated taxable result of the group €-256,892.27 for 2012 and €1,341,074.56 for 2013, values which correspond to the sum of the individual taxable results of the consolidated companies in each of the years, after the corrections made to the individual taxable results of A… Portugal SGPS, S.A. in the years 2012 and 2013.
The calculations now brought by the Claimant in Articles 132 and following of the P.I., not only have no correspondence with the data available to the Respondent but notoriously did not then either.
And it should be said that the entire reasoning contained in point 3 of the P.I. is tainted by a premise little evidenced there, which is the fact that the application of the said Circular derives precisely from the impossibility of determining in concrete the social interests in question.
Wherefore, the fact that, as referred to by the Claimant, "the majority" of those already exist does not allow knowledge about all nor, it should be said, if they are the same ones.
In fact, despite the exhaustive explanation thereof in the request for arbitral determination, in which it breaks down the balance recorded under borrowings obtained, with the intention of asserting the accuracy of the method proposed by it, it is considered that it is not documented in such a way as to be able to prove:
– The amount of remunerated borrowings obtained;
– the amount of financial charges inherent to the respective borrowings
It would be the Claimant's responsibility to specifically prove the financing obtained and the corresponding financial charges.
II – PRELIMINARY RULING
This arbitral tribunal is competent.
The parties have juridical personality and capacity and are legitimate.
The case is free of nullities.
There are no exceptions or preliminary questions to be considered.
It is necessary to consider and decide the merits of the request.
III – REASONING
Proven Facts
The Tribunal considers the following facts proven:
1. The Claimant is a Company Managing Social Interests, regulated pursuant to Decree-Law no. 495/88 of December 30, having commenced activities on August 2, 1989;
2. The Claimant, by virtue of exercising as its main activity a commercial, industrial or agricultural activity, is, for IRC purposes, a taxpayer classified pursuant to paragraph a) of section 1 of Article 2 of CIRC, with the tax assessed on its profit, as stipulated in Article 3, section 1, paragraph a) of CIRC, with the company's taxable income determined pursuant to Article 15, section 1, paragraph a), in conjunction with section 1 of Article 17, both of CIRC;
3. The Claimant is also the parent company of a group of companies taxed under the Special Tax Treatment Regime for Groups of Companies (RETGS), pursuant to Article 69 of CIRC;
4. In compliance with Service Orders issued by the Finance Directorate of Lisbon, external inspective procedure was conducted with respect to the Claimant, which began on August 7, 2015 and was concluded on January 7, 2016;
5. The inspective procedure was extensive to the years 2011, 2012 and 2013, having presented a partial scope with respect to IRC;
6. In this inspective procedure the AT concluded that the Claimant did not proceed to any adjustments relating to financial charges incurred with the acquisitions of capital shares, provided for in section 2 of Article 32 of the Tax Benefits Statute (EBF), for purposes of determining its taxable profit of the years 2011, 2012 and 2013;
7. In light of the absence of adjustment and understanding by the Respondent that this did not appear coherent, it notified the Claimant on 2015-08-07 to present the SAF-T (PT) files and the list of capital holders and clarify regarding capital shares held, borrowings obtained and granted and any adjustments made in the determination of taxable profit in compliance with section 2 of Article 32 of the EBF, relating to the years 2011, 2012 and 2013;
8. Based on the elements provided and using the formula referred to in circular no. 7/2004, of March 30, 2004, of the DSIRC, the Respondent computed the values of €1,270,231.38, €1,331,963.72 and €906,402.12 of financial charges attributable to capital shares, respectively for the years 2011, 2012 and 2013, which, in its view, should be disregarded as expenses under the provisions of section 2 of Article 32 of the EBF (wording of Law no. 64-B/2011, of 12/30);
9. Consequently and by virtue of understanding the need to reflect in the fiscal results of the group, the effects of the non-acceptance of these expenses on the individual results declared by the Claimant, the Respondent understood it should carry out two new inspective actions under Service Orders OI2015… and OI2015…;
10. As a result of these inspective actions the Respondent concluded that the consolidated taxable result of the group headed by the Claimant amounted to €-256,892.27 in 2012 and €1,341,074.56 in 2013, having proceeded to two official assessments;
11. In consequence, the Claimant was notified, in its capacity as parent company of the said Fiscal Group, of the IRC assessments nos. 2016… and 2016…, relating to the years 2012 and 2013 (Docs. nos. 1 and 2 attached by the Claimant);
12. The said IRC assessments were notified to the Claimant on 30.12.2016 (year 2012) and 31.12.2016 (year 2013), and with respect to 2013 the deadline for payment was February 27, 2017 (Docs. nos. 1 and 2 attached by the Claimant).
13. The amount payable generated by the IRC assessment for the year 2013 – €52,276.47 – was paid by the Claimant on 27-3-2017 (see Doc. no. 14 attached);
14. In 2006, "A…" already held the majority of capital shares that it continued to hold in 2012 and 2013.
Unproven Facts
There are no other facts relevant to the object of the case, proven or unproven.
Reasoning as to the Factual Matter
The judge or arbitrator does not have the duty to rule on all the facts alleged, but rather has the duty to select only those relevant to the decision, taking into account the cause (or causes) of action that underlies the request formulated by the plaintiff (see Articles 596, section 1 and 607, sections 2 to 4, of the Civil Procedure Code, as amended by Law 41/2013, of 6/26) and note whether it considers it proven or unproven (see Article 123, section 2, of the Tax Procedure Code).
According to the principle of free evaluation of evidence, the Tribunal bases its decision, with respect to the evidence produced, on its intimate conviction, formed from the examination and evaluation it makes of the means of evidence brought to the case and in accordance with its life experience and knowledge of persons (see Article 607, section 5, of the Civil Procedure Code, as amended by Law no. 41/2013, of 6/26). Only when the probative force of certain means is pre-established by law (e.g., full probative force of authentic documents – see Article 371, of the Civil Code) does the principle of free evaluation not dominate in the appreciation of the evidence produced.
In casu, the Tribunal's conviction regarding the essential factual framework described was based on the critical analysis of the position of the parties in their respective pleadings in conjunction with the documents attached to the record, being that, despite being notified to do so, the AT did not attach a copy of the administrative instructing file nor justified the omission.
The Tribunal particularly weighed that the dispute between the parties is essentially one of law and not of fact.
III – REASONING (Cont.) – THE LAW
As a preliminary approach to the legal reasoning, it should be noted what has long been the understanding of case law regarding the duty to appreciate the arguments presented by the parties and which is translated into the non-obligation (emphasized) of courts to appreciate all arguments formulated (See, inter alia, Decision of the Plenary of the 2nd Section of the STA, of June 7, 1995, appeal 5239, in DR – Appendix of March 31, 1997, pages 36-40 and Decision STA – 2nd Sec. – of April 23, 1997, DR/AP of October 9, 1997, page 1094).
Questions to be Decided
From the tenor of the request for arbitral determination formulated by the Claimant and the position assumed by the AT, the following questions are evidenced as being the object of the dispute:
1st – Whether the financial charges incurred by the Claimant with the performance of ancillary contributions are or are not deductible for tax purposes under Article 32-2 of the EBF (Tax Benefits Statute);
2nd – Whether capital increases are or are not included within the scope of the provision for fiscal non-deductibility of financial charges contained in the cited Article 32-2 of the EBF;
3rd – Whether the method of determination of financial charges provided for in Circular no. 7/2004, of March 30, of the Directorate of Services of IRC (DSIRC), suffers from illegality;
4th – Whether Article 32-2 of the EBF suffers from unconstitutionality in the interpretation endorsed by sections 7 and 8 of Circular no. 7/2004 of DSIRC; and
5th – Whether indemnifying interest is due and exigible to the AT.
Analyzing and deciding each of the questions:
1st – Whether the financial charges incurred by the Claimant with the performance of ancillary contributions are or are not deductible for tax purposes under Article 32-2 of the EBF (Tax Benefits Statute)
Pursuant to section 2 of Article 32 of the EBF, in force at the date of the tax facts now under review, "the gains and losses realized by SGPS from capital shares of which they are holders, provided they are held for a period of no less than one year, and likewise, the financial charges incurred with their acquisition, do not contribute to the formation of taxable profit of these companies."
In casu, the Claimant is an SGPS that incurred financial charges to make contributions of the "supplementary" type, although designated "ancillary." If these contributions are classified within the concept of "capital shares," the situation will be covered by the regime provided for in section 2 of Article 32 of the EBF, excluding their fiscal deduction.
As expressly assumed by the parties, the vexata quaestio is thus to determine whether the concept of "capital shares" includes only social interests or also includes supplementary contributions.
The definition of the scope of "capital shares" has already been extensively dealt with in cases that proceeded in CAAD under nos. 9/2012-T, 69/2012-T, 12/2013-T, 24/2013-T and 39/2013-T, to cite only a few, available at http://www.caad.org.pt/tributario/tributario-jurisprudencia.
The Tax Benefits Statute (approved by Decree-Law no. 215/89, of July 1) as well as the remaining fiscal legislation do not contain the definition of "capital shares" for tax purposes. Thus, there is a need to apply the provisions of Article 11 of the LGT, which establishes the rules of interpretation of tax rules.
Notwithstanding the lack of such definition in systematic terms, the legislator clearly separates the concept of capital shares from the concept of shareholders' equity in section 3 of Article 45 of CIRC, in the wording given to it by Law no. 60-A/2005, of December 30, by stating that: The negative difference between gains and losses realized through the onerous transfer of capital shares, including their redemption and amortization with capital reduction, as well as other losses or negative patrimonial variations relating to capital shares or other components of shareholders' equity, namely supplementary contributions, contribute to the formation of taxable profit in only half of their value.
That is, the legislator uses the concept of "shareholders' equity" in its exact commercial and accounting sense, which makes it possible to conclude that, taking into account the literal and systematic elements, the concept of "capital" in the expression "capital shares" is not synonymous with "shareholders' equity," with supplementary contributions and ancillary contributions that follow the regime of the former expressly included in the latter.
On the other hand, the absence of a fiscal definition of "capital shares" leads the interpreter – in observance of the aforementioned Article 11 of the LGT – to seek that definition in commercial law and in accounting law, taking into account, in this latter case, the model of partial dependence that is established between accounting and tax law in the determination of taxable profit.
Supplementary contributions "are cash payments that may be made by partners of a limited liability company for strengthening of its assets, in addition to share capital, not bearing interest and being able to be returned to them, which are not included in the share capital of the company" (LUÍS BRITO CORREIA, in Commercial Law, 2nd vol., 1989, page 297).
In the specific case of joint stock companies, which corresponds to the legal status of the Claimant, the partners conferred on ancillary contributions the nature of supplementary contributions and, consequently, the rules provided for in Articles 210 to 213 of the CSC are applicable to them.
Pursuant to section 1 of Article 210, supplementary contributions can only be required of partners if provided for in the corporate agreement, which must establish: (i) the total amount of supplementary contributions; (ii) the partners who are obligated to make supplementary contributions among the partners obligated to them and (iii) the criterion for distribution of supplementary contributions among the obligated partners.
The limitations on the restitution of supplementary contributions provided for in Article 213 constitute one of the most important characteristics – if not the most relevant one – of this institute: supplementary contributions can only be returned to partners when the following conditions are met: (i) provided that the net situation does not fall below the sum of capital and legal reserve; (ii) the partner has already released his share and (iii) insolvency of the company has not been declared.
This regime is clearly distinct from the obligation to make contributions to share capital (Articles 25 to 30 of the CSC and special rules for general partnerships – 176, section 1, paragraph a), 178 and 179; for limited partnerships – 202 to 208 and for joint stock companies – 277 and 285 and 286).
In accounting terms, supplementary contributions form, with other items – namely share capital – the so-called shareholders' equity of the entity – residual interest in the assets of the company after deducting all of its liabilities (See paragraph 49 of the Conceptual Framework, Notice no. 15652/2009 in DR no. 173 – II Series, of September 7).
However, the aggregation in shareholders' equity of the share capital item, supplementary contributions and ancillary contributions does not mean the uniformization of their nature. In no case are shareholders' equity and share capital synonymous, especially since only share capital is transferable.
From all of the foregoing, it is concluded that the application of the regime of Article 32, section 2 of the EBF to financial charges incurred with ancillary contributions has no legal support, since such contributions do not meet the concept of capital shares, being deductible in tax terms.
Therefore, the corrections made do not have, in light of the foregoing, legal support in Article 32, section 2, of the EBF.
2nd – Whether capital increases are or are not included within the scope of the provision for fiscal non-deductibility of financial charges contained in the cited Article 32-2 of the EBF
In light of the doctrine of the AT cited above, capital shares received upon the incorporation of the company or in a capital increase do not constitute acquisitions for purposes of Article 32, section 2 of the EBF, wherefore it will be improper to exclude the fiscal deduction of any charges allegedly incurred.
Wherefore, in sum, the subscription of capital in a capital increase or upon the incorporation of a company does not constitute acquisition of capital shares.
3rd – Whether the method of determination of financial charges provided for in Circular no. 7/2004, of March 30, of the Directorate of Services of IRC (DSIRC), suffers from illegality
Within the scope of Article 32, section 2 of the EBF, and the difficulties of its practical application, the AT felt the need to publish a circular – Circular no. 7/2004 – which aimed to clarify the method of distribution of financial charges, taking into account the manner of allocation of the financing that gave rise to the financial charges, considering its application, that is, the assets that had been acquired through those resources by SGPS. In this sense, and according to the AT, the said Circular does nothing more than elaborate on the provisions of section 2 of Article 32, allowing the practical difficulties of direct imputation of charges to be overcome.
The Claimant, however, calls into question the legal role of that Circular, alleging that the AT did not limit itself to interpreting section 2 of Article 32 of the EBF, but rather created a method substitutive of the method provided for in the legal provision. In this sense, the rules contained in points 7 and 8 of the Circular of the DSIRC no. 7/2004, of March 30, more specifically the formula provided for therein, with a claim to mandatory application, for segregation of the financial charges referred to in (at the date of the facts) Article 32, section 1, of the Tax Benefits Statute, is unconstitutional, for violation of the principle of legality or reservation of law, in fiscal matters, provided for in Article 103, section 2, and 165, section 1, paragraph i), of the CRP.
Thus, it is important, in the first place, to assess what the exact scope of the Circular is and, then, taking into account the legal role that falls to Circulars, to conclude whether the principle of legality was violated or not.
Section 7 of that Circular provides: "given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that the same would allow, that imputation should be carried out on the basis of a formula that takes into account the following: the remunerated liabilities of SGPS and SCR should be imputed, in the first place, to the remunerated loans granted by these to the participating companies and to other investments generating interest, with the remainder being allocated to the remaining assets, namely social interests, proportionally to their respective acquisition cost."
Thus, according to the AT, section 2 of Article 32 of the EBF would support an interpretation in the sense of the admission of an indirect calculation formula that allows taxpayers to determine the possible distribution of the total financial charges incurred, between deductible and non-deductible financial charges for tax purposes, in an SGPS, such resulting from the fact that there is, as a rule, no direct factual relationship between the total funds obtained by the SGPS, and which entailed, e.g., the payment of interest, and the funds invested in the acquisition of social interests.
In this regard, it is referred to in case 738/2014-T of CAAD that: "(…)the Administration understood it necessary to clarify the way to estimate the charges that could be attributed to the acquisition of those social interests, through Circular 7/2004, based on the idea of the fungibility of money. It advances in that circular with the adoption of a very simple mathematical formula – although complicated from the point of view of the assumptions used in the classification of the items to be considered – in order to ascertain, in the application of Article 32, section 2, of the EBF, what the "financial charges incurred" with the acquisition of capital shares are, in the face of the total financial charges incurred by the entity in the accounting period, given that the fiscal legislator chose their fiscal disregard for purposes of determining the taxable profit of each of the economic periods."
In a question somewhat similar to that now raised by the Claimant, within the scope of case no. 21/2012-T, where the appellant questioned the constitutional compliance of the application of a pro rata formula in the determination of financial charges associated with the acquisition of interests, excluded from the formation of taxable profit, in opposition to the method of direct or actual allocation, discourse proceeded in the following sense: "(…)63. Nevertheless, it will always be said that, agreeing with the hermeneutic approach advocated by the Claimant, nothing in the letter of section 2 of Article 31 of the EBF [which came to correspond to the cited section 2 of Article 32] allows one to withdraw the validity and, therefore, necessary application of the indirect method of allocation of such financial charges. 64. It is considered that in cases where there is possibility of direct allocation, it should not be set aside, that if the ratio legis of the rule provided for in section 2 of Article 31 of the EBF passes to safeguard the validity of a regime of neutrality of income and costs associated with gains excluded from taxation, ensuring that income not fiscally relevant should correspond, correspondingly, a cost that is associated with it also fiscally irrelevant, then, thus, to achieve such purpose, any method (direct or indirect) is good once the safeguard of the aforementioned ratio legis is guaranteed (…)."
See, by way of example, what is referred to in the Decision of the Central Administrative Court of the South, Case no. 02312/08, in which it is stated: "(…)the Circular beyond being illegal due to lack of legal authorization to interpret extensively norms of tax incidence, would be illegal, by abusive distortion of community rule and its illegal transposition. In that sense, also the said Circular, by limiting the incidence rule would be unconstitutional for violation of the provisions of Article 165, section 1, paragraph i) and Article 103, section 2, of the Constitution of the Portuguese Republic, violating the principle of separation of powers. By that means, the administration had usurped the functions of the legislator."
Therefore, the Claimant understands that Circular no. 7/2004, of March 30, used by the Tax Administration to proceed with the correction under review, goes beyond mere interpretation of tax law, having no basis in Article 32, section 2 of the EBF.
From the foregoing, it results that the legislator considers that only the charges directly incurred with the acquisition of capital shares are excluded from taxation. On the other hand, the legislator did not consider it necessary to institute a different criterion that, in light of the real practical difficulties of distinction, would allow the ascertainment, even if indirectly or estimated, of financial charges with the acquisition of non-taxed capital shares.
Thus, the method applied by the Circular violates the provisions of section 2 of Article 32 of the EBF, as it does not attend to the charges actually incurred with the acquisition of non-taxed social interests, but to approximate values and presumptions that lack legal foundation.
In fact, the application of the formula provided for in the Circular does not allow one to discern which charges were incurred with the acquisition of non-taxed social shares, but rather establishes a proportional allocation between the set of remunerated liabilities and loans to the participating companies and the remainder that finances the other assets (including social interests), from which results an estimate of the charges (which may or may not correspond to the actual charges).
Moreover – and as decided in the Decision of CAAD of 21/12/2012, Proc. 24/2012 – "(…) Circular no. 7/2014, by setting criteria and methods, through which the incidence of tax is verified, is, to the extent that its application has external efficacy, namely in corrective tax assessments, unconstitutional, for violation of the principle of legality embodied in Article 103, and the formal reservation of law contained in Article 165, section 1, paragraph i), both of the Constitution. This notwithstanding the mere illegality that would always result from the confrontation between that Circular and Article 8 of the General Tax Act (…)."
In this same sense, the Decision of the Northern Central Administrative Court, of January 15, 2015, Proc. 00946/09.0BEPRT pronounced itself where it is stated: "(…) The fact that in its methodology it used the criteria recommended in circular no. 7/2004, of March 30, in particular its points nos. 7 and 8 does not save the legality of the operation, as the criteria and assumptions for allocation of the remunerated liabilities of SGPS clearly surpass the content of Article 31/2 of the EBF by creating presumptions and proportional calculations that the legislator clearly did not assume nor consent to (…)."
That is: Circular no. 7/2004 cannot be a valid and acceptable interpretation of the provisions of Article 31/2 of the EBF insofar as it does not comply with the rules and basic principles that govern legal hermeneutics in light, namely, of the principle established in Article 11-1 of the LGT ("in the determination of the meaning of tax rules and in the qualification of the facts to which they apply, the general rules and principles of interpretation and application of laws are observed").
In order to uncover the true meaning and scope of legal texts, the interpreter makes use of interpretive factors which are essentially the grammatical element (the text, or the "letter of the law") and the logical element, which, in turn, is subdivided into the rational (or teleological) element, systematic element and historical element. (See Baptista Machado, Introduction to Law and Legitimating Discourse page 181; Oliveira Ascensão, The Law – Introduction and General Theory, 2nd Ed., Calouste Gulbenkian Foundation, Lisbon, page 361).
It is Article 9 of the Civil Code (CC) that provides the rules and fundamental elements for correct and adequate interpretation of rules.
From this it results that if the interpretation must reconstruct "legislative thought," it must, however, be done by the interpreter or applicant always proceeding from the necessary premise of the existence of a minimum of correspondence with the letter of the law.
That is: the literal or grammatical element (text or "letter of the law") "is the starting point of interpretation. As such, it is immediately incumbent upon it to have a negative function: to eliminate those meanings that do not have any support, or at least some correspondence or resonance in the words of the law (See Pires de Lima and Antunes Varela, Annotated Civil Code – vol. I, Coimbra ed., 1967, page 16).
Now, from the foregoing it appears sufficiently evident that Circular no. 7/2004 "interprets" the provisions of Article 32-2 of the EBF in terms that violate the aforementioned rules of hermeneutics insofar as it surprises in legislative material that is innovative and not merely a valid interpretation of the text of the law.
In the sense of the illegality of the arithmetic corrections in light of the criterion defined in the cited Circular no. 7/2004, several Tax Arbitral Tribunals constituted within the scope of CAAD have already pronounced themselves (see, designedly, the decisions issued in cases nos. 21/2012-T, 24/2012-T, 292/2015-T, 295/2015-T, 738/2014-T, 69/2016-T, 663/2015-T and 277/2016-T) and also judicial courts (see, e.g., Decision TCAN in case no. 00997/12.8BEPRT of 14-3-2013).
Well then, the AT in applying the method provided for in paragraph 7 of Circular no. 7/2004, of March 30, violated the provisions of section 2 of Article 32 of the EBF, which provides for the non-deductibility of financial charges of the charges actually incurred with the acquisition of capital shares but which does not contain such provision with respect to the subscription of share capital.
On the other hand, such charges would always be subtracted from the said rule of non-deductibility insofar as the subscription of share capital and/or subscription of capital in an operation of capital increase does not form part of the concept of acquisition of capital shares.
4th – Whether Article 32-2 of the EBF suffers from unconstitutionality in the interpretation endorsed by sections 7 and 8 of Circular no. 7/2004 of DSIRC.
This question, beyond being moot, has already been answered in the context of the answer to the previous question.
5th – Whether indemnifying interest is due and exigible to the AT.
The Claimant requests the reimbursement of the tax and indemnifying interest improperly paid to the AT, in the amount of €52,276.47, plus indemnifying interest from the date of that payment [27-3-2017], at the legal rate, pursuant to Article 43 of the LGT and 61 of CPPT.
The Claimant paid the sums assessed, as referred to in 13 of the proven factual matter.
In accordance with the provisions of paragraph b) of Article 24 of RJAT, the arbitral decision on the merits of the claim that is not subject to appeal or challenge binds the tax administration from the end of the period provided for appeal or challenge, the latter being required, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for the spontaneous execution of sentences from judicial tax courts, to "restore the situation that would have existed if the tax act subject to the arbitral decision had not been carried out, adopting the necessary acts and operations for this purpose," which is in line with the provisions of Article 100 of the LGT [applicable by virtue of the provisions of paragraph a) of section 1 of Article 29 of RJAT] which establishes that "the tax administration is obligated, in case of total or partial success of a claim, judicial challenge or appeal in favor of the taxpayer, to immediate and complete restoration of the legality of the act or situation subject to the dispute, comprising the payment of indemnifying interest, if applicable, from the end of the period for execution of the decision."
Although Article 2, section 1, paragraphs a) and b), of RJAT uses the expression "declaration of illegality" to define the jurisdiction of arbitral tribunals operating within CAAD, making no reference to condemnatory decisions, it should be understood that the jurisdiction includes the powers attributed to courts in judicial challenge proceedings, being that the interpretation that is in line with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as a first guideline, that "the tax arbitral process must constitute an alternative procedural means to judicial challenge proceedings and to the action for recognition of a right or legitimate interest in tax matters."
Judicial challenge procedure, despite being essentially an annulment process for tax acts, admits the condemnation of the Tax Administration in the payment of indemnifying interest, as is apparent from Article 43, section 1, of the LGT, in which it is established that "indemnifying interest is due when determined, in a voluntary claim or judicial challenge, that there was error attributable to the services from which payment of the tax debt results in an amount greater than legally due" and from Article 61, section 4 of CPPT (as amended by Law no. 55-A/2010, of December 31, which corresponds to section 2 in the original wording), which states "if the decision recognizing the right to indemnifying interest is judicial, the period for payment is counted from the beginning of the period for its spontaneous execution."
Thus, section 5 of Article 24 of RJAT, by stating that "payment of interest, regardless of its nature, is due, according to the terms provided for in general tax law and in the Code of Procedure and Tax Procedure" should be understood as allowing recognition of the right to indemnifying interest in arbitral proceedings.
In the case at hand, it is clear that, following the illegality of the assessment act, there is place for reimbursement of what was paid, by virtue of the aforementioned Articles 24, section 1, paragraph b), of RJAT and 100 of the LGT, as this is essential to "restore the situation that would have existed if the tax act subject to the arbitral decision had not been carried out," in the part corresponding to the correction that was deemed illegal.
With respect to indemnifying interest, it is also clear that the illegality of the act is attributable to the Tax and Customs Authority, which, on its own initiative, carried out without legal support.
One is faced with a vice of violation of substantive law, embodied in error in the legal premises, attributable to the Tax Administration.
Consequently, the Claimant is entitled to indemnifying interest, pursuant to Article 43, section 1, of the LGT and Article 61 of CPPT, calculated on the amount improperly paid.
Thus, the Tax and Customs Authority should give execution to the present decision, pursuant to Article 24, section 1, of RJAT, determining the amount to be refunded to the Claimants and calculating the respective indemnifying interest, at the supplementary legal rate for civil debts, pursuant to Articles 35, section 10, and 43, sections 1 and 5, of the LGT, 61, of CPPT, 559 of the Civil Code and Ordinance no. 291/2003, of April 8 (or decree or decrees that succeed it).
Indemnifying interest is due from the date of payment (27-3-2017), until the date of processing of the credit note, in which it is included (Article 61, section 5, of CPPT).
IV – DECISION
In accordance with the foregoing, the members of this Arbitral Tribunal agree on:
1. Finding the request for declaration of illegality of the additional IRC assessments nos. 2016… and 2016…, relating to the years 2012 and 2013 (Docs. nos. 1 and 2), issued in consequence of the corrections to taxable profit in the context of tax inspection (Doc. no. 3 – Individual Tax Inspection Report (RIT) – and Doc. no. 4 – Aggregate RIT), which resulted in an increase in the taxable base of the Fiscal Group mentioned in the amount of €607,860.62 in 2012 (reduction of the tax loss from €864,753.09 to €256,892.27) and in the amount of €760,015.51 in 2013 (increase of taxable profit from €581,059.05 to €1,341,074.56) – see the table on page 9 of the Report of Inspection on the aggregate attached above as Doc. no. 4) and, with respect to 2013 still, which resulted in additional tax payable in the amount of €47,500.97 and compensatory interest in the amount of €4,528.84, for a total of €52,029.81 (Doc. no. 2), to be wholly well-founded;
2. Annulling the said assessments and account settlement;
3. Finding the request for refund of the sum paid corresponding to the said assessments (total of €52,029.81) to be well-founded and condemning the Tax and Customs Authority to refund it;
4. Finding the request for payment of indemnifying interest to be well-founded and condemning the Tax and Customs Authority to pay it to the Claimant, calculated on the sum to be refunded, from the date of payment (27-3-2017), until the date of processing of the credit note, in which it should be included (Article 61, section 5, of CPPT), at the legal rates in effect until payment, pursuant to Article 559 of the Civil Code and Ordinance no. 291/2003, of April 8 (or decree or decrees that succeed it);
5. Condemning the Tax and Customs Authority in the costs of the present proceeding.
Value of the Proceedings
In accordance with the provisions of Article 306, section 2, of CPC and 97-A, section 1, paragraph a), of CPPT and 3, section 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is set at €314,611.51.
Costs
Pursuant to Article 22, section 4, of RJAT, the amount of costs is set at €5,508.00, pursuant to Table I appended to the Regulation of Costs in Tax Arbitration Proceedings, charged to the respondent Tax and Customs Authority.
LISBON, November 7, 2017
The Collective Arbitral Tribunal
José Poças Falcão
(President)
Henrique Nogueira Nunes
(Adjunct Arbitrator)
Luís Baptista
(Adjunct Arbitrator)
[1] Incorrectly identified in the individual RIT as Article 31. In 2012 and 2013 it already had the numbering of Article 32.
[2] PEREIRA DE ALMEIDA, António, in "Commercial Companies," Coimbra Publisher, 3rd edition, page 38.
[3] And it also goes beyond the legal basis when from the very moment of holding capital shares (as opposed to having held for one year) it orders the exclusion of the deduction of financial charges that it notionally imputes to them.
[4] And it also goes beyond the legal basis when from the very moment of holding capital shares (as opposed to having held for one year) it orders the exclusion of the deduction of financial charges that it notionally imputes to them.
Frequently Asked Questions
Automatically Created