CAAD Decision 234/2014-T: IRS General Anti-Abuse Clause on Company Transformation

ARBITRAL DECISION

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Prof. Doctor Guilherme W. d'Oliveira Martins and Prof. Doctor João Ricardo Catarino appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 13-05-2014, agree as follows:

1. Report

A... and B..., taxpayers nos. … and …, resident in the street …, (hereinafter simply "Claimants"), came, pursuant to subparagraph a) of no. 1 of article 2 and articles 10 and following of Decree-Law no. 10/2011, of 20 January - and on the basis of the arguments developed below -, to file a petition for arbitral pronouncement on the legality of the acts of additional assessment of IRS no. 2014..., of assessment of compensatory interest no. 2014… and of account settlement no. 2014..., relating to the year 2009, from which resulted a balance payable of € 1,560,822.67.

The Respondent is the TAX AND CUSTOMS AUTHORITY.

The Claimant opted for non-appointment of an arbitrator.

Pursuant to subparagraph a) of no. 2 of article 6 and subparagraph b) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal Counsellor Jorge Lopes de Sousa, Prof. Doctor Guilherme W. d'Oliveira Martins and Prof. Doctor João Ricardo Catarino, who communicated acceptance of the assignment within the applicable period.

The parties were notified of this appointment and manifested no will to refuse the appointment of the arbitrators, in accordance with the combined wording of article 11 no. 1 subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in conformity with what is prescribed in subparagraph c) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 13-05-2014.

The Tax and Customs Authority filed a reply in which it argued for the lack of merit of the petition for arbitral pronouncement and its acquittal from the claim.

On 14-07-2014, the meeting provided for in article 18 of the RJAT took place, in which testimonial evidence was produced and it was agreed that the case would proceed with successive written submissions.

The Parties filed submissions.

The Claimants presented the following conclusions in their submission:

1 – The situation in question in the file constitutes a typical case of situations that fall outside the scope of application of the CGAA, and cannot be censured through it,

2 – In the first place, it is underpinned by operations with genuine and lawful business objectives and economic grounds, there being no case of action with an exclusive or principal aim of obtaining tax advantages.

3 – The transformation of the limited company C..., Lda, into a joint-stock company, on 30 December 2008, was merely a moment in the process of attempting to strengthen the company's commercial capacity, of essentially family basis;

4 – The transformation in question was aimed at the alienation of the company's capital only as a mere eventuality, not serving to prepare any concrete business, immediate, already agreed or foreseeable.

5 – On the other hand, the transformation was carried out not by virtue of the fiscally advantageous regime that benefited the sale of shares (in comparison with the sale of quotas) but because of evident business strategy reasons: as C... might come to need the entry into its capital of new investors — and bearing in mind that, due to the trend towards which was witnessed in business reorganizations, there was great competition for the attraction of capital — the Claimants should have the company structured in a way to facilitate the interest and immediate entry of new capital.

6 – In any case, regardless of the objectives of the operations in question, the truth is that all transactions were carried out without the "defunction" of the legal forms used, to which recourse was had in order for them to fulfill their habitual vocation and their typical effects: C... was transformed into a joint-stock company because it was genuinely desired that it be based on that company form, and the alienation of shares was carried out because that alienation was truly desired.

7 – Now, the situations falling within the scope of the CGAA are those in which unusual legal forms are used, absolutely inappropriate, in which there is a total absence of economic purposes or, at least, a total divergence between the economic purpose achieved and the purpose for which the transaction and/or the rule mobilized were thought.

8 – In the present case, on the contrary, the means (the legal forms) were entirely consonant with the economic purposes for which they were created: there was not, therefore, any subversion of the legal system — it was not bent abusively to the unlawful tax will of the Claimants, but used in strict respect for its most common intention.

9 – Moreover, the chain of transactions that the AT deems abusive involved a favorable tax regime that the legislator wished to grant to companies and that, therefore, incentivized them to use: for that reason, the case in the file does not reflect an artificial situation, but, in part, the recourse to an absence of taxation that the legislator never sought to avoid (what the Doctrine, already widely cited in Decisions handed down within the scope of this Centre in analogous cases, calls a "conscious tax gap").

10 – Situations of this type are the core of the safest freedom of choice against anti-abuse measures, because in them no "defunction" of rules is identified, which were created, precisely, to be used in the name of tax savings: the taxpayer benefits from an exemption or reduction of the tax burden by choice of the legislator itself, an option that constitutes a presumption of non-legal disapproval of recourse to the rule that provides the benefit.

11 – The tax acts in question in the file are, therefore, illegal, by violation of no. 2 of article 38 of the General Tax Law.

Therefore, it is concluded, as in the initial petition, requesting the declaration of annulability of the acts on which the pronouncement of this Tribunal is requested, with all the legal consequences regarding the receipt of indemnifying interest.

The Tax and Customs Authority formulated the following conclusions:

I. The evidence produced in the file makes it possible to demonstrate, unequivocally, that the operation of transformation of the limited company C... – …, Lda., into a joint-stock company, the constitution of C... SGPS and the acquisition by C... SGPS, from its shareholders, of the social participations of C..., SA (current D...) without the respective payment being verified constitute acts devoid of any economic rationality that had as fundamental objective the elimination of tax burdens;

II. The Claimants practiced a complex set of acts, which had its beginning in the transformation of the limited company into a joint-stock company, globally architected for an elusive purpose, the final objective being the creation of a right of the shareholders with C... SGPS so as to obtain the exclusion of taxation of the capital gains generated which would have occurred with the simple alienation of the quotas that constituted their capital and with the normal distribution of profits;

III. As such elusive purpose is easily apprehended before the proven absence of valid economic reasons underlying the operations in question, which demonstrates that the main objective of the Claimants was the obtaining of tax benefits, in clear abuse of right.

IV. The evidence produced is not susceptible of contradicting the legality of the corrections made by the Tax Inspection, with the Claimants failing to prove, as they intended, the illegality of the assessment, instead showing that all the prerequisites for the application of the general anti-abuse clause contained in article 38 of the LGT are proven.

In these terms and in more of Law, and with the learned supplementation of Your Excellencies, the present Petition for arbitral pronouncement should be judged without merit for lack of proof, and, consequently, the Respondent acquitted from all Claims, all with the due and legal consequences.

The Arbitral Tribunal was regularly constituted and is competent.

The parties enjoy legal standing and capacity and are legitimate (arts. 4 and 10, no. 2, of the same diploma and art. 1 of Ordinance no. 112-A/2011, of 22 March).

No nullity is apparent.

2. Factual Matter

2.1. Proven Facts

The following facts are considered proven:

a) The Claimants, A... and B..., constituted, on 22 December 1995, the company C..., Lda., NIF ..., with the corporate purpose of "manufacture of audio and video receiver apparatus, parabolic antennas" and in the form of a limited company [Tax Inspection Report (RIT), which is part of the administrative file, whose content is reproduced];

b) The share capital amounted to € 274,338.84, with shareholder A... holding a quota of € 246,904.96, corresponding to a share of approximately 90%, and shareholder B... holding a quota of € 27,433.88, corresponding to a social participation of approximately 10% of the share capital (RIT);

c) On 28 November 2008, the shareholders of C... Lda. met in an Extraordinary General Assembly to deliberate on the following items:

1. Increase in share capital to be made by incorporation of reserves and transformation of the company into a joint-stock company;

2. Increase of the share capital from € 274,338.84 to € 1,000,000.00, with € 721,661.16 to be realized by incorporation of reserves by shareholders A... and B... and the remainder, by cash, with the entry of new shareholders;

3. Transformation of the limited company into a joint-stock company;

4. Analysis, discussion and approval of the articles of association by which the company will be governed.

d) At that Assembly, the shareholders approved the increase in share capital by incorporation of reserves, as well as the balance sheet dated 30 September 2008, which served as the basis for the preparation of the management report justifying the transformation of the limited company into a joint-stock company (RIT and Minutes no. 35);

e) The increase in share capital was subject to a public deed dated 30 December 2008, which contains:

· The amount of € 721,661.16 shall be realized by the original shareholders in proportion to their quotas, with shareholder A... holding a quota amounting to € 896,400.00, corresponding to 89.64% of the capital, and shareholder B... holding a quota amounting to € 99,600.00, corresponding to 9.96% of the capital;

· The remainder of the increase in share capital, € 4,000.00, shall be realized in cash, with the entry of 4 new shareholders, daughters and sons-in-law of the shareholders - E..., with a quota of € 1,000.00, F..., with a quota of € 1,000.00, G..., with a quota of € 1,000.00 and H..., with a quota of € 1,000.00 – who become holders of 0.10% of the share capital;

f) It was further deliberated by the shareholders to proceed with the transformation of the company into a joint-stock company, changing its designation to C..., S.A., maintaining its corporate purpose and with the shareholders holding shares with a face value of one euro each, corresponding to the quotas held (RIT and Annex III);

g) According to the Management Report Justifying the Transformation of the Limited Company into a Joint-Stock Company, the need to proceed with the transformation resulted from the existence of greater advantages, namely:

· "With regard to financing and granting of financial resources, the possibilities of joint-stock companies are unlimited;

· It will make it easier to obtain foreign funds, both at the banking level and in the capital market, also presenting economic advantages regarding the possibility of dispersal of capital through the mobilization of resources and possible strategic alliances with other economic partners;

· Possibility of access to the Stock Exchange;

· Great ease regarding the negotiability of shares, which does not happen with the transfer of quotas."

h) The transformation of the limited company into a joint-stock company was registered at the Commercial Registry Office of … on 16-01-2009 (annex I of the Administrative Act File);

i) On 24-02-2010, the Extraordinary General Assembly of the company deliberated the alteration of the corporate purpose to "manufacture of audio and video receiver apparatus, parabolic antennas, purchase and sale of real estate and resale of those acquired for that purpose, lease of own or third-party real estate and provision of related services", an alteration registered at the Commercial Registry Office on 18 March 2010 (minutes no. 38, Annex V of the Administrative File);

j) On 15-07-2010, the General Assembly met and deliberated the approval of the interim balance sheet of the company dated 31-05-2010, which served as support for the preparation of a simple spin-off project (minutes no. 40, Annex VI of the Administrative File);

k) The simple spin-off project, subject of the deed executed on 28-09-2010, was registered at the Commercial Registry Office of … on 29-09-2010 (Annex VII of the Administrative File);

l) From the spin-off resulted the constitution of a new company, C... S.A, NIF …, whose corporate purpose is the "manufacture of audio and video receiver apparatus, parabolic antennas";

m) As well as, the alteration of the company designation of the spun-off company to C...-, S.A. and of its corporate purpose to "purchase and sale of real estate and resale of those acquired for that purpose, lease of own or third-party real estate and provision of related services", with the share capital reduced to the amount of € 100,000.00;

n) On 17-02-2011, the alteration of the company designation of C... -, S.A. to D..., S.A. was registered at the Commercial Registry Office;

o) On 22-06-2009, C..., SGPS, SA. was constituted, by contract registered at the Commercial Registry Office on 26-06-2009, with a share capital of € 50,000.00, having as shareholders the same shareholders of C... S.A. (Annex VIII of the RIT);

p) The administration of C... SGPS - which has as its purpose the management of social participations in other companies, as an indirect form of exercise of economic activities and the accessory and complementary activities of that purpose that are permitted by applicable legislation – is exercised by:

· A..., President;

· B..., Vice-President;

· F..., Member;

· E..., Member;

q) On 31-12-2009, several contracts for transfer of shares were made, through which the shareholders of C... S.A. alienated all their shares to C... SGPS for the total price of € 14,000,000.00, corresponding to a unit value of € 14.00 (annex IX of the RIT);

r) Following these alienations, a credit of the shareholders of C... S.A. was recognized in the accounting of C... SGPS, in the amount of € 14,000,000.00, as evidenced by account extracts contained in annex X of the RIT (accounts .., …, …, …, … and ….);

s) With regard to payment, the sixth clause of the contracts for purchase and sale of securities states that the price owed for the purchase and sale carried out shall be settled in accordance with the payment plan to be agreed between the parties (annex IX of the RIT);

t) The accounting of C... SGPS shows the balance of € 14,000,000, shown in accounts 278 (Debtors and Creditors Miscellaneous) (RIT);

u) The Tax Inspection of the Finance Directorate of Aveiro analyzed this sequence of acts in the course of an inspection action with respect to the company D..., S.A. carried out under service order no. OI…, which led to the opening of the inspection procedure with respect to the Claimants, determined by service order no. OI…, in which the Tax and Customs Authority understood that the prerequisites for the assessment of tax due under the general anti-abuse clause contained in article 38 of the LGT were met, which implied the opening of the procedure provided for in article 63 of the CPPT;

v) In the Tax Inspection Report, whose content is reproduced, the following is stated, among other things:

2.2.2. Verification of the elements for application of no. 2 of article 38 of the LGT

Given that, for the application of anti-abuse rules the provisions of article 63 of the Code of Tax Procedure and Process must be observed, being essential for the substantiation of the decision, the compliance with various requirements, it is important, in the case in question, and after a detailed explanation of the above-stated facts, to ascertain the cumulative verification of such requirements.

a) Description of the legal transaction concluded or the legal act carried out and the transactions or acts of identical economic purpose, as well as the Indication of the Incidence Rules applicable to them

In the concrete case, the legal transactions concluded were the following:

1st Transformation of the limited company into a joint-stock company;

2nd Constitution of an SGPS company;

3rd Alienation of the shares of the operational company to the SGPS;

4th Constitution of a right with the SGPS.

The legal act of transformation of the limited company into a joint-stock company and the subsequent legal transaction of alienation of the social participations had as first objective and result, the elimination of taxation, in the context of IRS (capital gain not taxed, which resulted in the elimination of taxation in the amount of € 1,366,966.12), of the taxpayers, in the year 2009, since the gains obtained from the alienation, without the use of the structure used, would not benefit from the exclusion of taxation, characteristic of shares held for more than 12 months, remaining subject to tax, in general terms, as income of category G of IRS, as demonstrated below and quantified.

Had the quotas been alienated without the transformation having taken place, the gain obtained would have been qualified as a capital gain and would have been subject to IRS, pursuant to subparagraph b) of no. 1 of article 10 of the CIRS, resulting from the difference between the acquisition value of the social participations that the taxpayers held in C..., Lda, and the realization value, arising from the alienation of these participations to C... SGPS, SA - subparagraph a) of no. 4 of article 10 of the CIRS.

The interposition of the company C... SGPS between the shareholders and the company C... S.A. (current D...), through the transfer carried out and the consequent alteration of direct legal ownership to indirect ownership - and its abusive use, had as objective the future withdrawal of the profits of C... S.A. (current D...) and C... SA (new company) and the transformation of these into reimbursement of the credit generated with the transfer, resulting in the elimination of taxation, in the context of IRS of the principal shareholders of the companies under analysis and above identified, as, without the use of the structure used, on receiving the amount of €13,944,000.00 they would not benefit from the exclusion of taxation, with those flows subject to tax, as income of category E of IRS.

Although the operational company and the real estate company have not yet distributed any profits to the parent company, C... SGPS, the fact is that, if they did without the use of the structure described, the amounts paid to the shareholders in the form of profits would be subject to taxation under the terms of subparagraph h) of no. 2 of article 5 of the IRS Code.

b) The demonstration that the conclusion of the legal transaction or practice of the legal act was essentially or mainly directed to the reduction, elimination or temporal deferment of taxes that would be due in case of transaction or act with identical economic purpose, or to the obtaining of tax advantages

We consider that the transformation of the company type prior to the alienation of the social participations, aimed in the first instance, at the exclusion of taxation in the context of IRS, as per subparagraph a) of no. 2 of article 10 of the CIRS and that the future reimbursement of the credit by the company C... SGPS to its shareholders, resulting from the distribution of dividends of the operational companies, aimed at the withdrawal of dividends from the operational companies without any taxation.

To achieve those objectives, various legal acts were staged, more complex and costly, that, reveal themselves manifestly unnecessary and clearly denounce the artificial intention of their use, that is, to avoid the taxation that would be due.

In fact, the legal act of transformation of the limited company into a joint-stock company and the subsequent legal transaction of alienation of the social participations had, as previously referred to, as first objective and result, the elimination of taxation, in the context of IRS. Had the quotas been alienated without the transformation having taken place, the gain obtained would have been qualified as a capital gain and would have been subject to IRS, pursuant to subparagraph b) of no. 1 of article 10 of the CIRS, resulting from the difference between the acquisition value of the social participations that the taxpayers held in C..., Lda, and the realization value, arising from the alienation of these participations to C... SGPS, SA - subparagraph a) of no. 4 of article 10 of the CIRS.

The interposition of the company C... SGPS between the shareholders and the company D..., through the transfer carried out, the consequent alteration of direct legal ownership to indirect ownership and its abusive use, had as objective the future withdrawal of the profits of D... and C... S.A. (new company) and the transformation of these into reimbursement of the credit generated with the transfer, resulting in the elimination of taxation, in the context of IRS, of the principal shareholders of the companies. Without the use of the structure used, on receiving the amount of €13,944,000.00, they would not benefit from the exclusion of taxation, with those flows subject to tax, as income of category E of IRS.

3. Proposed Corrections and Conclusion

Accordingly, it appears that, in accordance with the above-stated, the conditions for application of the provisions of article 38, no. 2, of the LGT and article 63 of the CPPT are met.

In effect, had the sale of the company taken place without resorting to prior transformation, the capital gains obtained would have been taxed in the context of IRS, in category G.

For this reason, in light of the provisions of the indicated articles, it is incumbent upon the Tax Administration to consider ineffective within the tax context, the transformation of the company, since such acts/transactions were practiced with abuse of legal forms and had as essential objective the elimination of Taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or the obtaining of tax advantages that would not be achieved in whole or in part, without use of those means.

In light of the above, taxation should occur in accordance with the rules applicable in the absence of such structure, with the tax advantages referred to not being produced, as provided by no. 2 of article 38 of the LGT.

That is, in the present case, the taxation of the capital gains generated in the act of alienation, on 31 December 2009, must be proceeded with, as if they were quotas. The taxation of the fiscal capital gain, realized in the year 2009, is provided for in subparagraph a) of no. 1 of article 9 and subparagraph b) of no. 1 of article 10 of the CIRS, and was calculated in accordance with the provisions of subparagraph a) of no. 4 of article 10, in articles 43, 44, 48 and 51 of the CIRS. This capital gain is taxed at the special rate of 10% in accordance with no. 4 of article 72 of the CIRS, generating a tax of € 1,366,966.12, as demonstrated in the table that follows:

w) Following the procedures referred to, the additional assessment of IRS no. 2014..., dated 18-01-2014, was issued, in which the amount payable of € 1,560,822.67 is determined, prepared on the basis of the assessment of compensatory interest no. 2014.., in the amount of € 1,366,966.12, and the account settlement no. 2014..., which are the subject of the present petition for arbitral pronouncement;

x) C..., Lda. was in a phase of growth before the year 2008 and continued with good prospects for future growth, which only did not materialize in the years 2008 to 2010 but continued and continue to be confirmed at present (testimony of witness I...);

y) The company exported 90% of the parabolic antennas it produced, including to India and Pakistan, countries in which the growth potential is very large (testimonies of witnesses I... and J...);

z) In light of the company's growth, the Claimant A... intended that the company would have professionalized management and a structure that would allow management choices, namely the separation of the real estate, parabolic antenna and renewable energy sectors (testimonies of witnesses I... and J...);

aa) There was another company C... Brasil, which had the same shareholders (testimony of witness I...) (testimonies of witnesses I... and J...);

bb) In light of these various activities, the Claimant A... understood that it was justified to constitute a holding company that would undertake the overall management of the companies and facilitate the opening of the company to third-party capital, should that be necessary due to the company's growth, in addition to the structure of a joint-stock company projecting a better image than a limited company and allowing greater negotiating capacity, namely with banks (testimonies of witnesses I... and J...);

cc) C... SA has a general director and an executive board (testimony of witness I...);

dd) The transformation of the limited company into a joint-stock company was merely the first step in the restructuring (testimony of witness J...);

ee) On 06-03-2014, the Claimants filed the petition for constitution of the arbitral tribunal that gave rise to the present case.

2.2. Unproven Facts

It was not proven that the obtaining of tax advantage was the exclusive or principal motive of the operation of transformation of the limited company into a joint-stock company.

It was not proven that the Claimants had paid the amount assessed or that they had provided a guarantee to suspend an execution initiated for its collection.

2.3. Substantiation of the Determination of the Factual Matter

The facts that were given as proven based on the Tax Inspection Report are based on the agreement of the Parties, as there is no controversy about them.

With regard to the number of the assessment of compensatory interest and the number of the account settlement, they are based on the fact of being indicated by the Claimants and not being questioned by the Tax and Customs Authority, despite being facts within its knowledge.

In fact, no corroborating document was attached, although the amount of compensatory interest is included in the IRS assessment.

With regard to the facts that were given as proven based on the testimonial evidence, they are based on the credibility of the statements, as both witnesses appeared to testify with impartiality and with knowledge of the facts they referred to.

3. Matters of Law

3.1. Interpretation of the Act Practiced

The tax arbitral process was created by the RJAT as an alternative to the judicial objection process ([1]), so that, like this procedural means, one is faced with a contention of mere legality, in which the aim is only the declaration of illegality of acts of the types provided for in subparagraphs a) and b) of no. 1 of its article 2.

For this reason, being acts of the types referred to the object of the process, their legality must be assessed as they were practiced, with the substantiation used in them, other possible substantiations being irrelevant that could serve as support for other acts, of decision content totally or partially coincident with the acts practiced. Thus, irrelevant are substantiations invoked a posteriori, after the end of the tax procedure in which the act whose declaration of illegality is requested was practiced, including those advanced in the judicial process.

For this reason, it is important to interpret the act whose declaration of illegality is requested not only as to its decision content, but also as to its substantiation, this being a priority task when, as occurs in the case in question, more than one act of an administrative nature, in a broad sense, was practiced before the final assessment act, namely the act that authorized the application of the general anti-abuse clause (administrative act in tax matters of an authoritative type) and the act that defined the terms of its application, adhering to the substantiation of the Tax Inspection Report.

Article 38, no. 2, of the General Tax Law establishes a general anti-abuse clause, in the terms of which "are ineffective within the tax context the acts or legal transactions essentially or mainly directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, in whole or in part, without use of those means, with taxation then being effected in accordance with the rules applicable in their absence and with the said tax advantages not being produced"

In the case in question, the Tax Administration decided on the application of the general anti-abuse clause by understanding that "the legal act of transformation of the limited company into a joint-stock company and the subsequent legal transaction of alienation of the social participations had as first objective and result, the elimination of taxation, in the context of IRS (capital gain not taxed, which resulted in the elimination of taxation in the amount of € 1,366,966.12), of the taxpayers, in the year 2009, since the gains obtained from the alienation, without the use of the structure used, would not benefit from the exclusion of taxation, characteristic of shares held for more than 12 months, remaining subject to tax, in general terms, as income of category G of IRS. Had the quotas been alienated without the transformation having taken place, the gain obtained would have been qualified as a capital gain and would have been subject to IRS, pursuant to subparagraph b) of no. 1 of article 10 of the CIRS."

It is certain that the Tax and Customs Authority seems to foresee another route for the application of the general anti-abuse clause in saying that "the interposition of the company C... SGPS between the shareholders and the company C... S.A. (current D...), through the transfer carried out and the consequent alteration of direct legal ownership to indirect ownership - and its abusive use, had as objective the future withdrawal of the profits of C... S.A. (current D...) and C... SA (new company) and the transformation of these into reimbursement of the credit generated with the transfer, resulting in the elimination of taxation, in the context of IRS of the principal shareholders of the companies under analysis and above identified, as, without the use of the structure used, on receiving the amount of €13,944,000.00 they would not benefit from the exclusion of taxation, with those flows subject to tax, as income of category E of IRS."

But, the fact is that the Tax and Customs Authority ultimately did not follow this route, as it treated the amount received from the sale of the participations as income of category G of IRS and not category E, as it ultimately concluded in these terms: "the taxation of the capital gains generated in the act of alienation, on 31 December 2009, must be proceeded with, as if they were quotas. The taxation of the fiscal capital gain, realized in the year 2009, is provided for in subparagraph a) of no. 1 of article 9 and subparagraph b) of no. 1 of article 10 of the CIRS, and was calculated in accordance with the provisions of subparagraph a) of no. 4 of article 10, in articles 43, 44, 48 and 51 of the CIRS. This capital gain is taxed at the special rate of 10% in accordance with no. 4 of article 72 of the CIRS, generating a tax of € 1,366,966.12."

Thus, it must be concluded that the act that the Tax and Customs Authority understood to imply abuse for purposes of the general anti-abuse clause that is connected with the assessment of IRS impugned in the present process is only the act of transformation of the limited company into a joint-stock company, which, in light of the regime in force in 2009, prevented the taxation of the capital gains that would be taxed if they were transfers of quotas from the limited company.

3.2. Legitimate and Illegitimate Tax Planning

In the definitions elaborated by Saldanha Sanches ([2]): legitimate tax planning "consists of a technique of reduction of the tax burden by which the taxpayer renounces a certain behavior because it is linked to a tax obligation or chooses, among the various solutions that are provided to it by the legal order, the one that, by intentional action or omission of the tax legislator, is accompanied by fewer tax burdens"; while illegitimate tax planning "consists of any behavior of improper reduction, by contradicting principles or rules of the tax legal order, of the tax burdens of a given taxpayer".

Within the framework of tax planning, we can thus distinguish the situations in which the taxpayer acts against the law, beyond the law and within the law.

When this acts against the law, its action is head-on and unequivocally unlawful, as it directly infringes the tax law, and constitutes tax fraud ([3]) susceptible, furthermore, to being subject to counter-ordering or criminal censure.

Acting beyond the law occurs when the taxpayer abusively takes advantage of the law to achieve a more favorable tax result, notwithstanding the fact that it does not directly violate it. This adopts "a behavior that has as its exclusive or principal purpose contravening one or several tax legal rules, so as to achieve the reduction or suppression of the tax burden" ([4]). It being that from such rule(s) one must detect an attempt to contravene "a clear intention of taxation affirmed by the structuring principles of the system" ([5]). This type of action is commonly designated as "fraud against tax law" but, as Saldanha Sanches warns, intending to better illustrate and distinguish these situations from those of tax fraud, also designated "abusive avoidance of tax burdens", "abusive tax avoidance" or also "tax elision"([6]).

Only the action within the law appears to be legitimate – and, thus, legitimate tax planning or non-abusive – appears to be legitimate. In effect, the obtaining of a tax savings does not constitute behavior prohibited by law, provided that the action does not fall within the above-mentioned action beyond the law ([7]).

The doctrine and jurisprudence have been deconstructing the wording of the rule by pointing out five elements present in it. Corresponding one of the elements to the enactment of the rule, the remaining four appear to be cumulative requirements that make it possible to assess – as if it were a test – whether the verification of an activity characterizable as abusive tax planning ([8]).

These elements, around which both parties moreover construct their arguments, consist of:

– the means element, which concerns the path freely chosen – act or legal transaction, isolated or part of a structure of acts or sequential, logical and planned legal transactions, organized in a unitary way – by the taxpayer to obtain the desired tax gain or advantage ([9]);

– the result element, which concerns the obtaining of a tax advantage, by virtue of the choice of that means, when compared with the tax burden that would result from the practice of the acts or legal transactions "normal" and of equivalent economic effect ([10]);

– the intellectual element, which requires that the choice of that means be "essentially or mainly directed [...] to the reduction, elimination or temporal deferment of taxes" (article 38, no. 2 of the LGT), that is, which requires not the mere verification of a tax advantage, but rather that one ascertains, objectively, whether the taxpayer "intends an act, a transaction or a given structure, only or essentially, by the prevailing tax advantages that they provide" ([11]);

– the normative element, which "has as its primary function to distinguish cases of tax elision from cases of legitimate tax savings, in consideration of the principles of Tax Law, being that only in cases in which an intention contrary to law or non-legitimating of the result obtained is demonstrated can one speak of that" ([12]);

– and, finally, the sanctioning element, which, presupposing the cumulative verification of the remaining elements, leads to the sanction of ineffectiveness, in the exclusive tax context, of the acts or legal transactions deemed abusive, "with taxation then being effected in accordance with the rules applicable in their absence and with the said tax advantages not being produced" (final part of article 38, no. 2, of the LGT).

Despite this deconstruction, the analysis of the elements cannot be static, as, as Courinha emphasizes, "the fixation of one element may, in practice, depend on another", so these "will frequently not cease [...] to aid each other" ([13]).

3.3. Analysis of the Situation

In the case in question, briefly, the Claimants contest that the transformation of the limited company into a joint-stock company constitutes abusive tax planning, arguing that such transformation is justified by various genuine economic reasons, namely, the company's growth, the potential for future growth, the fact of acting in distinct areas and the better image that joint-stock companies have in relation to limited companies, especially in relations with banks.

The evidence produced clearly confirms the reality of these economic reasons.

On the other hand, it is also unequivocal that the company resulting from the transformation into a joint-stock company has subsisted until the present and with increasingly increasing business volume.

In this light, it will proceed to examine whether the elements referred to are verified, necessary for the application of the general anti-abuse clause, with the presupposition that, if one of them is not verified, the assessment act impugned will be illegal.

3.3.1. Result Element

Comparing in an isolated and objective manner the legal transactions of the transformation of the company into a joint-stock company and the subsequent sale of shares (acts or legal transactions carried out) and the possible maintenance of the company as a limited company and the subsequent sale of quotas (acts or legal transactions equivalent or of identical economic purpose), it is unequivocal that the first situation benefited from a more advantageous legal tax regime than the second, as, while the first is not subject to taxation, pursuant to article 10, no. 2, of the CIRS, in the wording of Decree-Law no. 228/2002, of 31 October, the second is considered a capital gain, pursuant to article 10, no. 1, subparagraph b), of the CIRS, income taxed at a rate of 10%, pursuant to article 72, no. 4, of the CIRS, in the wording of Decree-Law no. 192/2005, of 7 November.

The result element is thus verified, as the Claimants obtained a tax advantage from the transformation of the limited company into a joint-stock company.

3.3.2. Means and Intellectual Elements

Although the above finding is sufficient to fill that requirement, its fulfillment is, in itself, irrelevant for the application of the general anti-abuse clause, in light of the structure of acts and legal transactions carried out: "in no case, a tax advantage or benefit will by itself indicate any idea of legal abuse" ([14]).

The so-called "step transaction doctrine", theory constructed in Anglo-Saxon legal orders and which underlies the argument of the Tax Administration, consists in the consideration of the complex set of acts or legal transactions that arise in a global, planned architecture, composed of preparatory and complementary acts or legal transactions, in addition to the act or legal transaction that is objectively censured, in that only through their full vision is the elusive design detected ([15]).

With regard to the fulfillment of the prerequisites for application of the general anti-abuse clause concerning the means and intellectual elements, the Claimants argue that there are reasons that go beyond the merely fiscal to justify the accomplishment of the operations in question.

For what has been said, it is manifest that there are no elements that permit the formulation of a conclusion to the effect that the obtaining of tax advantage was the exclusive or principal motive of the operation of transformation of the limited company into a joint-stock company, there being good economic reasons that would advise such transformation.

At minimum, one must remain in a situation of doubt regarding the objective sought by the transformation, doubt that, by virtue of what is prescribed in no. 1 of article 100 of the CPPT, must be procedurally valued in favor of the Claimant and not against it, which has the same practical effects as the positive proof that the objective pursued was not of a tax nature.

Thus, it must be concluded that one of the requirements for the application of the general anti-abuse clause is not verified, which is that the act or legal transaction be essentially or mainly directed to the reduction, elimination or temporal deferment of taxes that would be due if it were not practiced.

3.3.3. Normative Element

The legislator is not particularly demanding with regard to the substantiation of this aspect concerning the normative-systemic disapproval of the advantage obtained; however, doctrine has considered this to be fundamental in the distinction between legitimate and illegitimate planning.

In the words of Saldanha Sanches, it is "necessary to find, in the tax legal order and as a sine qua non condition for the application of the anti-abuse clause, the unequivocal signs of an intention to tax [...], first, because abusive tax avoidance cannot be confused with the permanent attempt of the taxpayer to reduce its taxation or to carefully weigh – non-abusive tax planning – the consequences of tax law in its business or personal activity [...], second, because in that permanent effort to reduce the tax burden we can find the use by the taxpayer of what we can qualify as deliberate omissions – just or otherwise, is another matter – of the tax legislator and, if that has happened, the task cannot be attributed to the law applier that primarily falls to the legislator" ([16]). In effect, it emphasizes, it must be possible to extract "an unequivocal intention of taxation" ([17]), so that not merely a gap or a less clear provision suffices.

This author even gives, as an example of "conscious tax gap" the situation that is here the object of application of the general anti-abuse clause (the transformation of a limited company into a joint-stock company and the subsequent sale of shares), emphasizing that "if the legislator, at the same time that it taxes the capital gains from the alienation of quotas, leaves untaxed the capital gains from shares or taxed them at a lower rate, cannot the tax authority refuse to accept the transformation of a commercial company into a company of shares even if the transformation is motivated by exclusively tax reasons" ([18]).

Effectively, "even if the transformation [were] motivated by exclusively tax reasons", it is the legislator that opts, expressly, to tax the sale of quotas and to leave untaxed the sale of shares in that context, as results from the above-cited articles.

And it did so deliberately and insistently, as this is a rule reviewed and weighed several times.

In fact, in the initial wording of the CIRS, the taxation in IRS of the capital gains obtained from the "onerous alienation of social shares" was already provided for [article 10, no. 1, subparagraph b), in the wording of Decree-Law no. 442-A/88, of 30 November], but the capital gains from the alienation of "shares held by their holder for more than 24 months" were excluded [article 10, no. 2, subparagraph c)], this temporal limit which had the evident objective of preventing the exclusion of taxation with respect to capital gains that, in the concept then prevailing, were considered speculative.

This regulation was completed with that contained in the EBF, in its initial wording, given by Decree-Law no. 215/89, of 1 July, which established the following:

Article 35 (EBF)

Transformation of limited companies into joint-stock companies

For purposes of no. 1 of article 5 of Decree-Law no. 442-A/88, of 30 November, subparagraph c) of no. 2 of article 10 of the IRS Code and article 34 of this Statute, it is considered that the acquisition date of shares resulting from the transformation of limited companies into joint-stock companies is the date of acquisition of the quotas that gave rise to them.

This rule, which aimed at the transitional regime, was completed with an identical rule of permanent application, which was contained in article 18, no. 5, subparagraph a), of the EBF.

These two rules evidence the enormous dimension of legislative concern in encouraging the transformation of limited companies into joint-stock companies, to the point of averting taxation in the context of capital gains even in situations in which the taxpayer holds the new shares resulting from the transformation for a very short period, including in situations in which the sale of the new shares is made immediately following the transformation, as it is precisely to situations of very short-term holding of the new shares that the referred rules apply. This evidences that, weighing the conflicting values in this situation, it was legislatively understood to dispense with taxation in the context of capital gains, regardless of whether the tax advantage granted was the sole objective of the transformation, as it is considered of superior public interest the economic result achieved, of the subsequent existence of a company of shares.

With Law no. 30-B/92, of 28 December, this subparagraph c) of no. 2 of article 10 came to exclude from taxation "shares held by their holder for more than 12 months", thus increasing the scope of the non-taxation of the alienation of shares, or, from another perspective, the restriction of the concept of speculative capital gains.

Law no. 39-B/94, of 27 December, reaffirmed the vigor of this regime, eliminating subparagraph c) of no. 2 of article 10, but transposing its wording to the new subparagraph b).

Law no. 30-G/2000, of 29 December, eliminated the exclusion of taxation of capital gains arising from the alienation of shares, but limited the exclusion to shares acquired after its entry into force, expressly maintaining the previous regime for shares acquired before that date (article 4, no. 5, of DL no. 442-A/88, of 30 November, in the wording given by Law no. 30-G/2000).

This new regime was never applied, as Law no. 109-B/2001, of 27 December, established, in no. 9 of its article 147, that in the years 2001 and 2002 the regime prior to Law no. 30-G/2000 would be applicable and, afterwards, Decree-Law no. 228/2002, of 31 October, reintroduced the regime of non-taxation of capital gains derived from the alienation of "shares held by their holder for more than 12 months", by giving a new wording to subparagraph a) of no. 2 of article 10 of the CIRS.

This wording was maintained until its repeal by Law no. 15/2010, of 26 July.

Thus, it is manifest that there was a deliberate legislative option, maintained with variations since the initial wording of the CIRS, towards the non-taxation of some of the capital gains from the alienation of shares, an option that, like that of the fixing of a lower liberating rate, is justified by the existence of a "policy of development of the financial market", expressly recognized in the 5th paragraph of point 12 of the Report of the CIRS.

The "Statement of Reasons" of Bill no. 1/IX, which resulted in Law no. 16-B/2002, of 31 May, which granted the Government the legislative authorization necessary to approve Decree-Law no. 228/2002, is illuminating in the sense that it was recognized that the non-taxation of non-speculative capital gains arising from the alienation of shares was preferable to their taxation by saying:

With the entry into force of Law no. 30-G/2000, which made the revision of the IRS Code necessary, carried out by Decree-Law no. 198/2001, of 3 July, the scope of incidence was expanded to all capital gains of securities and the liberating rate of 10% was eliminated.

Following this amendment, the capital gains of securities are simultaneously consolidated and subject to the general progressive rates, which are between 12% and 40%.

It is further noted that, in accordance with article 3 of Law no. 30-G/2000, the said regime of taxation of capital gains only applies to securities acquired after 1 January 2001, with the previous tax regime being maintained for capital gains on those acquired before that date.

That tax regime was, however, altered, temporarily, by Law no. 109-B/2001, of 27 December (State Budget for 2002), which established an exemption from the taxation of capital gains for income below 2500 Euros, making, however, the consolidation, only, for purposes of determining the rate to be applied to the remaining income.

Considering that the impact of this fiscal reform on the capital market was highly prejudicial for investors, configuring itself as a disincentive to investment, with all its inherent negative consequences for the development of a policy for economic recovery, it is urgent to repeal the regime of taxation of capital gains approved by Law no. 30-G/2000 and, subsequently, adopted by Decree-Law no. 198/2001 and, consequently, to resume the regime of application of the liberating rate of 10%, as well as the exclusion of taxation of capital gains of immovable securities held by their holder for more than 12 months, taxing only the speculative capital gains.

The Preamble of Decree-Law no. 228/2002, of 31 October, which reintroduced the exclusion of taxation of capital gains arising from the alienation of shares held by their holder for more than 12 months is also illuminating regarding the existence of this legislative intention by saying:

The regime of taxation of income from capital gains derived from the onerous alienation of securities, when the IRS Code came into force, was significantly altered by Law no. 30-G/2000, of 29 December.

The most salient features of the framework then instituted consisted in the abolition of the tax exclusion that benefited capital gains arising from the alienation of bonds and other debt securities and the alienation of shares held by their holder for more than 12 months, with a generalized taxation of these incomes beginning to apply, attenuated by a basic exemption for positive balances below a certain amount and by the consideration of positive or negative balances in a percentage that varies depending on the period of holding of the securities by the alienator.

By virtue of the establishment, by Law no. 109-B/2001, of 27 December, of a transitional taxation regime applicable to these incomes in the years 2001 and 2002, the regime arising from Law no. 30-G/2000, of 29 December, never came to be applied.

The present decree-law gives effect to the authorization granted to the Government by Law no. 16-B/2002, of 31 May, in the sense of the restoration, in the IRS Code, of the essential lines of the regime for taxation of these incomes.

From a systemic point of view, there is the addition of the preference manifested by the legislator for the adoption of the model of company organization of the joint-stock company, whose adoption since the initial wording of the CIRS it sought to promote and is evident in Decree-Law no. 76-A/2006, of 29 March, which reformed a vast set of laws related to commercial companies, with special attention to the simplification and elimination of registration and notarial acts and procedures (article 1, no. 1) and to joint-stock companies (article 1, no. 2: "the present decree-law also aims to update national company legislation, adopting in particular measures to update and make flexible the models of governance of joint-stock companies").

Explaining the reasons of economic policy underlying the reform, the legislator states, in the preamble of that Decree-Law:

Thus, the broad lines of the reform carried out by this decree-law are related to the following ideas. On one hand, the concern to promote the competitiveness of Portuguese companies, allowing their alignment with advanced organizational models. The present review of the Code of Commercial Companies is based on the assumption that the refinement of company governance practices directly serves the competitiveness of national companies. That is the first underlying objective that this decree-law seeks to pursue, in favor of greater transparency and efficiency of Portuguese joint-stock companies. Upon embarking on this path, Portugal will place itself on par with the most advanced European legal systems in the field of company law, highlighting the United Kingdom, Germany and Italy as countries that have similarly oriented legislative reforms on the basis of these assumptions. […] It is further important to point out the addressing of the specificities of small joint-stock companies as a concern that was underlying the preparation of this decree-law."

In this context, a deliberate legislative option is detected in the sense of averting the taxation of non-speculative capital gains, as an incentive to the creation of joint-stock companies, forms of more advanced organization, which tending to provide more professionalized and efficient management, with benefits for the economy in general and, reflexively, for the very interest of taxation of business income.

On the other hand, it is to be noted that the assertion of public interest in not taxing non-speculative capital gains arising from the holding of shares was, consciously, considered superior to that of the collection of the revenue that taxation could generate and that this assertion was made after the General Tax Law had already provided for the general anti-abuse clause, in its article 38, no. 2.

Being thus, the Tax and Customs Authority, in a State governed by the rule of law, based on popular sovereignty, on the principle of the separation of powers and on the primacy of Law (articles 2 and 3, nos. 1 and 2, of the Constitution of the Portuguese Republic), cannot fail to comply with the judgments of value legislatively formulated, not being able to superimpose its own judgments about the management of public interests on the weighing of conflicting values effected legislatively, even if it deems them more adequate and balanced than those emanating from the organs of sovereignty with legislative competence.

That is, more concretely, having the legislator expressly considered the public interest of the creation of joint-stock companies superior to the interest in the taxation of non-speculative capital gains and materialized its preference in an incentive to the creation of joint-stock companies, creating for the holders of its capital a privileged tax regime in relation to the holders of capital of limited companies, cannot, through the application of the general anti-abuse clause, be rendered impossible, through administrative means, that legislative objective, applying to those who gave satisfaction to that public interest through the creation of joint-stock companies the regime that would apply to them if they had not satisfied it.

Or, from another perspective, perhaps more clarifying, in general, in a situation of transformation of limited companies into joint-stock companies, one cannot understand that the act was essentially or mainly directed to the satisfaction of the fiscal interest of the participants (as required by no. 2 of article 38 of the LGT for the activation of the general anti-abuse clause), as that act, objectively and necessarily, with the will of the taxpayer or without it, always directs itself to the satisfaction of the public interest in the increase of the creation of joint-stock companies, an interest that, in the legislative view, is always the essential or principal one to consider in that situation, for purposes of taxation.

For this reason, in situations of this type, of transformation of limited companies into joint-stock companies, the abuse of legal forms indispensable to enable the application of the general anti-abuse clause and the existence of an intention contrary to the legislative design are only discernible in situations in which the public interest of the creation of joint-stock companies cannot be deemed to be satisfied, such as, for example, may occur in situations in which the creation of the joint-stock company is not followed by its maintenance as economic reality for an appreciable period of time.

In the case in question, it is unequivocal that no such situation is verified and, for this reason, was satisfied with the operation of transformation of the limited company into a company of shares the interest that, in the legislative perspective, is the principal one to consider, superior to that of taxation itself.

On the other hand, in this action of the Claimants, in perfect harmony with the legislative purpose that was sought to be achieved with the creation of a more favorable tax regime for the holders of shares, is not apparent the use of any artificial or fraudulent means or abuse of legal forms (as required by the application of the general anti-abuse clause) since the transformation of limited companies into joint-stock companies is expressly provided for in law as a normal means of creation of companies of this type (articles 1, no. 2, and 130 of the Code of Commercial Companies), including within the ambit of taxation of income [article 43, no. 6, subparagraph b), of the CIRS]. What would, certainly, constitute artifice or legislative fraud, incompatible with the constitutional principle of trust, inherent in the principle of democratic rule of law, would be to legislatively incentivize IRS taxpayers to the creation of joint-stock companies, through the announcement of the attribution of a tax advantage and, once the public interest sought to be pursued with such an incentive is satisfied, not to recognize their right to the promised advantage.

Consequently, a situation falling within no. 2 of article 38 of the LGT does not occur, first and foremost because there is no act that can be deemed to be directed essentially or principally to the obtaining of tax advantages (as it was also directed to the creation of a joint-stock company because it was intended that it function with the characteristics and potentialities inherent to it), but also because no artificial or fraudulent means was used to obtain tax advantages.

This interpretation is not contrary to the Constitution, in particular to the principle of fiscal capacity, equality, legality and fiscal neutrality.

Any violation of these principles can only emerge from the very difference in legal treatment between the sale of quotas and the sale of shares and not from the interpretation now being made, regarding the non-verification of a situation of application of the general anti-abuse clause. On the other hand, these principles do not represent absolute values, there being no constitutional obstacle to their being limited for the pursuit of other constitutionally protected values, as occurs, namely, in the generality of situations in which tax benefits are granted. In the case, that difference in treatment, as previously set out, results from a long and repeated path traveled by the legislator, which has demonstrated the will not to tax these situations and to privilege and promote the adoption of a "model of governance of joint-stock companies". It is framed in a legislative framework that is not limited to the dynamization of the stock market, as the creation of joint-stock companies, which are a more advanced form of organization of commercial companies and potentially greater concentration of capital and greater economic efficiency, aligns with the first of the priority incumbent tasks of the State listed in article 81 of the CRP, which is the promotion of the increase of the economic well-being and quality of life of people, which presupposes the creation of wealth and the adoption of forms of organization of companies that potentiate it.

It is concluded, then, that, even if the transformation of a limited company into a joint-stock company were motivated by exclusively tax reasons, one would not be faced with an act condemnable in light of the tax legal order, since the tax legislator itself opted to tax in the context of IRS the gains arising from the sale of quotas and to refrain from taxing in the context of that tax the gains resulting from the sale of shares.

A situation of this type, in which the legislator has resisted long in eliminating such regime while maintaining a "conscious tax gap", does not appear to be susceptible of application of the general anti-abuse clause, in situations in which the purpose legislatively sought of the creation of joint-stock companies has been achieved, namely, as occurs in the case in question, in which the joint-stock company created subsists as economic reality with the characteristics proper to it and potentialities different from those that the maintenance of the limited company would have. And it is not for the applier of the law to substitute itself for the options to tax or not to tax certain realities followed by the tax legislator.

3.3.4. Sanctioning Element

It not having been demonstrated that the cumulative verification of all the requirements demanded for application of the general anti-abuse clause, there is no place for the application of the enactment of article 38, no. 2, of the General Tax Law, leading to the ineffectiveness of the legal transactions in the tax context, contrary to what the Tax and Customs Authority understood.

3.3.5. Conclusion

It is concluded, then, that the factual and legal prerequisites for the application of the general anti-abuse clause are not verified.

Consequently, the assessment act whose declaration of illegality is requested is illegal, which has as prerequisites the verification of the requirements for application of the general anti-abuse clause, by violation of what is prescribed in article 38, no. 2, of the LGT.

For this reason, the petition for declaration of illegality of the additional assessment of IRS assessment no. 2013… in the amount of € 373,071.97, relating to the year 2009, must be deemed meritorious, as it suffers from the vice of violation of law, by error as to the factual and legal prerequisites, which justifies its annulment (article 135 of the Code of Administrative Procedure).

4. Indemnifying Interest

The Claimants formulated a petition for payment of indemnifying interest.

However, they did not provide proof of having paid the amount assessed.

Under the terms of article 43 of the LGT, in the part here applicable, "indemnifying interest is due when it is determined, in amicable settlement or judicial objection, that there was error attributable to the services resulting in payment of the tax debt in an amount superior to that legally due".

As results from this rule, without payment there is no right to indemnifying interest.

For this reason, the petition for indemnifying interest formulated is denied.

5. Indemnity for Undue Guarantee

The Claimants formulated a petition for indemnity for undue guarantee.

However, it was not proven that the Claimants had provided a guarantee to suspend a tax execution connected with the amount assessed that is the subject of the present process.

For this reason, the petition for indemnity for undue guarantee is denied.

6. Value of the Case

In accordance with the provisions of article 306, no. 2, of the CPC and 97-A, no. 1, subparagraph a), of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Processes, the value of the case is fixed at € 1,560,822.67.

7. Decision

In accordance with the above, the arbitrators in this Arbitral Tribunal agree to:

a) Judge meritorious the petition for arbitral pronouncement in the part in which annulment of the additional assessment of IRS no. 2014...., of the assessment of compensatory interest no. 2014... and of the account settlement no. 2014..., relating to the year 2009, from which resulted a balance payable of € 1,560,822.67, is requested;

b) Annul the assessments and account settlement statements referred to;

c) Judge without merit the petition for arbitral pronouncement in the part in which indemnifying interest is requested;

d) Judge without merit the petition for arbitral pronouncement in the part in which indemnity for undue guarantee is requested;

8. Costs

Under the terms of art. 22, no. 4, of the RJAT, the amount of costs is fixed at € 20,808.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Processes, to be borne by the Tax and Customs Authority.

Lisbon, 16-09-2014

The Arbitrators

(Jorge Lopes de Sousa)

(Guilherme W. d'Oliveira Martins)

(João Ricardo Catarino)

[1] In no. 2 of article 124 of Law no. 3-B/2010, of 28 April, which is the legislative authorization law on which the Government based itself to approve the diploma that became Decree-Law no. 10/2011, of 20 January (RJAT), it is established that "the tax arbitration process must constitute an alternative procedural means to the judicial objection process and to the action for recognition of a right or legitimate interest in tax matters", but this Decree-Law only attributed to the tax arbitral courts competence for annulment, as results from its article 2.

[2] Cfr. Saldanha Sanches, J.L., The Limits of Tax Planning, Coimbra Editora, Coimbra, 2006, p. 21.

[3] Cfr. AcTCAS of 12-02-2011, proc. no. 04255/10.

[4] Cfr. Jónatas Machado and Nogueira da Costa, Course in Tax Law, Coimbra Editora, Coimbra, 2009, pp. 340-341.

[5] Cfr. Saldanha Sanches, J.L., The Limits..., p. 181.

[6] Cfr. Saldanha Sanches, J.L., The Limits..., pp. 21-23; also Judgment of the Central Administrative Court South of 12-02-2011, proc. no. 04255/10.

[7] Cfr. Saldanha Sanches, J.L., Business Restructuring and Limits of Tax Planning, The Two Constitutions – In the Ten Years of the General Anti-Abuse Clause, Coimbra Editora, Coimbra, 2009, pp. 49-50, which states, in this regard: "the consecration of the general anti-abuse clause implies [...] that from its introduction is clearly delimited what the taxpayer can and cannot do. Fiscal abilities, fiscal dexterity cease to be possible (artificial and fraudulent operations that have as their main or sole purpose the obtaining of tax savings through fraud against law) and the taxpayer begins to have his behavior judged in accordance with this criterion. [...] the evolution of law is clear in the sense of providing legal foundation for tax planning, provided it is practiced without the abuse of legal forms, without artificial and fraudulent legal transactions, but limiting itself to choosing the route that is open and that allows him to realize tax savings". Cfr., also, Marques, Paulo, In Praise of the Tax, Coimbra Editora, Coimbra, 2009, pp. 360-364.

[8] That is, a "planned action of the taxpayer that translates into seemingly lawful behavior, generating a tax advantage not admitted by the tax legal order" (cfr. Courinha, Gustavo Lopes, General Anti-Abuse Clause in Tax Law: Contributions to its Understanding, Almedina, Coimbra, 2009, pp.15-17 and 163-165; as well as Judgment of the Central Administrative Court South of 15-02-2011, proc. no. 04255/10, conclusions XIII and XIV).

[9] As results from the following part of article 38, no. 2, of the LGT: "acts or legal transactions essentially or mainly directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferment of taxes".

[10] This results from the following segment of article 38, no. 2, of the LGT: "reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, in whole or in part, without use of those means". It also results from article 63, no. 3, subparagraphs a) and b) of the CPPT, in the wording given by Law no. 64-B/2011, of 30 December, which require that the Tax Administration include in its substantiation, respectively, "the description of the legal transaction concluded or the legal act carried out and the transactions or acts of identical economic purpose, as well as the indication of the Incidence Rules applicable to them" and "the demonstration that the conclusion of the legal transaction or practice of the legal act was essentially or mainly directed to the reduction, elimination or temporal deferment of taxes that would be due in case of transaction or act with identical economic purpose, or to the obtaining of tax advantages".

[11] Cfr. Courinha, Gustavo Lopes, General Anti-Abuse Clause..., p. 180.

[12] Cfr. Courinha, Gustavo Lopes, General Anti-Abuse Clause..., p. 211.

[13] Cfr. Courinha, Gustavo Lopes, General Anti-Abuse Clause..., p. 165. Similarly, Saldanha Sanches, J.L., The Limits..., p. 170, which points out a "relation of connection and interdependence in relation to the requirements demanded by law".

[14] Cfr. Leite de Campos, Diogo, and Costa Andrade, João, Contractual Autonomy and Tax Law, The General Anti-Evasion Rule, Almedina, Coimbra, 2008, p. 82.

[15] "Either legal acts or legal transactions can arise isolated (adapted to the obtaining of the economic utility and the tax advantage), or, in what is perhaps the most common hypothesis, form a set – a set of acts or a set of transactions. To do so, they should form a logical, sequential and indivisible unit directed to that – a structure [...]. The doctrine and British jurisprudence [...] ascertained the verification of that unity when – step-by-step doctrine – at the moment of the realization of the first act, it will be unreasonable to admit that others will not necessarily follow it, in a way to complete it, and thus obtaining the tax advantage sought and the economic purpose safeguarded" (cfr. Courinha, Gustavo Lopes, General Anti-Abuse Clause…, pp. 166-167).

[16] Cfr. Saldanha Sanches, J.L., The Limits..., p. 180.

[17] Cfr. Saldanha Sanches, J.L., The Limits..., pp. 180-181.

[18] Cfr. Saldanha Sanches, J.L., The Limits..., p. 182.