CAAD Case 237/2018-T: IRS General Anti-Abuse Clause (CGAA) Tax Arbitration Decision

Arbitral Decision (consult full version in PDF)

The arbitrators, Councillor Carlos Alberto Fernandes Cadilha (arbitrator-president), Dr. Marisa Almeida Araújo and Dr. Olívio Mota Amador, designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Court, agree as follows:

1. Report

A..., taxpayer number..., and B..., taxpayer number..., both resident at Street ..., no....., doravante designated as "Claimants", came pursuant to subparagraph a) of article 2(1) and articles 10 et seq. of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters or "RJAT"), to submit a request for arbitral decision requesting the declaration of illegality of the acts of assessment of IRS nos. 2018..., 2018... and 2018... and of assessment of compensatory interest nos. 2018..., 2018... and 2018..., relating to the tax years 2013, 2014 and 2015, from which resulted a total amount payable of € 578,011.90, issued following the final report of tax inspection and the indemnification provided for in articles 171 of the CPPT and 53 of the LGT.

The TAX AUTHORITY AND CUSTOMS AUTHORITY is the Respondent, hereinafter designated as "TA" or "Respondent".

1.1. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Authority on 09-05-2018.

In accordance with the provisions of subparagraph a) of article 6(2) and subparagraph b) of article 11(1) of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the undersigned signatories, who communicated acceptance of the assignment within the applicable period.

On 28-06-2018 the parties were duly notified of this designation, having not manifested any intention to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11(1) subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of subparagraph c) of article 11(1) of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 18-07-2018.

On 31-10-2018, the Tax Authority and Customs Authority submitted a reply in which it argued that the claim should be deemed unfounded.

The meeting referred to in article 18 of the RJAT was scheduled and took place on 11-12-2018, with examination of the witnesses listed by the Claimant, duly identified in the minutes of the meeting attached to the file, the TA having dispensed with the examination of its witnesses.

At the same meeting a period for submissions was granted, with the Claimant presenting its submissions on 21-12-2018 and the Respondent on 21-01-2018, and 18-02-2019 was set as the date for the pronouncement of the arbitral decision.

1.2. The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2(1) subparagraph a), and 10(1) of Decree-Law no. 10/2011, of 20 January.

The tribunal is competent.

The parties are duly represented, enjoy legal personality and capacity and have standing (articles 4 and 10(2) of the same decree and article 1 of Ordinance no. 112-A/2011, of 22 March).

With regard to this last requirement, lack of standing of the Claimants is raised, as a subsidiary claim and in the event that the CGAA is considered applicable. Considering that lack of standing is raised subsidiarily and in the event of unfoundedness of the request for arbitral decision, the tribunal decides that this requirement will be analysed if the condition on which the exception is raised comes to be met.

The case is not affected by nullities.

1.3. The Claimants support their claim by alleging, in summary, that,

i. On 31 December 1993 the incorporation of the company designated C..., SGPS, S.A., with share capital of € 11,057,395.00, represented by 2,211,479.00 shares with a nominal value of € 5.00 each, was registered in the Commercial Registry Office of..., and its corporate purpose consisted in the management of equity participations in other companies, as an indirect form of exercise of economic activities, this company being regulated by Decree-Law no. 495/88, of 30 December.

ii. As of this date, the shareholding structure of this company was summarised as follows:

iii. At the origin of the incorporation of company C..., SGPS, S.A. there was an intention to restructure the H... Group structure, initiated precisely in 1993, and which included, in addition to the incorporation of this holding, the creation of a sub-holding, designated I..., SGPS, S.A., for control of a specific area of activity.

iv. In addition to this company, which held 89.99%, C..., SGPS, S.A. also came to hold 90% of the share capital of J..., S.A., 90% of the share capital of K..., S.A., 90% of L... and 90% of M..., S.A.:

v. The share capital of company C..., SGPS, S.A. remained unchanged from its origin until 26 February 2016, the date on which it was increased, coming to amount to € 14,529,635.00.

vi. On 12 June 1991, the incorporation of the limited liability company then designated N..., LDA., with share capital of € 9,975.96, represented by two equal quotas, one belonging to A... and the other belonging to B..., was registered in the Commercial Registry Office of..., and it had, from its incorporation, as its activity the trade in cosmetic and perfume products.

vii. On 4 June 2007, the incorporated company – which, in 2005, ceased its activity of trading in cosmetic and perfume products and adopted the designation O..., S.A. and dedicated itself to the activity of buying and selling real estate and resale of property acquired for that purpose and real estate investments, and, as an ancillary activity, to the leasing of real estate and the provision of services related to the availability of real estate – saw its share capital increased to € 50,000.00, an increase entirely made in cash and subscribed, in the amount of € 38,774.04, by shareholders A... and B..., and, in the amount of € 1,250.00, by four new shareholders: the three children of the couple, P..., Q... and R..., and the mother of A..., S...

viii. Simultaneously, the company was converted into a joint-stock company, with its shareholding structure summarised as follows:

ix. According to the Claimants, it became an objective to concentrate in a single company the participations that each one held in company C..., SGPS, S.A. – as well as others in which they might invest in the future –, allowing already an effect of sharing of the same (albeit indirectly) with their three children. With a view to this objective, there was executed on 29 December 2005 a Deed of Settlement and Contract for the Purchase and Sale of Shares, whereby the Claimants here transferred to the company owned by them – O..., S.A. – the 221,148 shares of which they were holders in company C..., SGPS, S.A. – representing 10% of its share capital –, for the price of € 5,490,285.35 (corresponding to € 24.83 per share).

x. This value was determined, according to the Claimants, on the basis of the equity of the company in question as of the date of transfer, in light of the accounting principles in force, which were precisely intended to capture the fair value of assets and liabilities, as indeed understood by the TA.

xi. The acquisition was also envisaged in view of the necessity for unification of the social participations of the Claimants and their transfer to the ownership of a company that would better ensure their protection against eventual disputes of a family nature, particularly given the existence of an action for recognition of paternity brought in 2006 by U... against the father of the Claimant.

xii. The same reasoning underlay the conversion of the company into a joint-stock company, which took place in 2007. This was followed by the execution on 27 June 2018 of a framework agreement relating to the restructuring of the H... Group, executed between the members of the second generation of the T... family – a group in which U... was not included –, signed at the National Notary Office of ... and of a deed of partition inter vivos, so as to include therein the author of the said action, the deed of which was executed on 30 June 2016.

xiii. The concentration, in a single company, of the 7% held by Claimant A... and the 3% held by Claimant B..., would assure it (the acquiring company) ownership of shares representing 10% of the share capital of C..., S.A. and, thus, access to the legal possibilities that this threshold of ownership provides, namely, pursuant to article 392 of the Commercial Companies Code, the right to propose an administrator (at least) for the board of directors of C... SGPS, S.A., and pursuant to article 291 of the Commercial Companies Code.

xiv. It further appears that the maintenance of the participations held by the Claimants in O..., S.A. – and, later, of V... SGPS, S.A. – would allow that, in a gradual and controlled manner, the children of the couple would also gain access to the investments held by them, allowing them to enjoy and participate, to some extent, in the exercise of the business activity of their parents, offering them new perspectives of involvement in the business that would thereafter be undertaken.

xv. The capital gain achieved by the Claimants following this operation benefited from the exclusion from taxation provided for in subparagraph a) of article 10(2) of the IRS Code, which exempted from IRS taxation capital gains derived from the alienation of shares held by their shareholders for more than twelve months.

xvi. The price agreed for the transaction was not immediately paid to the Claimants, it being recorded in the accounting of O..., S.A. a debt in their favour, in that amount.

Between 29 December 2005 and 24 May 2011, that amount was reduced by € 1,039,704.08, coming to amount to € 4,450,581.27. Thus, according to the Claimants, it was allowed that O..., S.A. – and, later, V... SGPS, S.A. – would acquire the said securities, under the market conditions that would always be imposed on it, with recourse to financing from its shareholders, on whom it is always incumbent a duty of particular care and assistance in the pursuit of their respective object.

xvii. This company would hardly support or, to some extent, would be able to benefit from external financing, so the shareholders were conscious that the credit in question, contracted in the context of their responsibility as part of the company, would only be returned to them if the net assets of the company so permitted, leaving them in no doubt that this, by these circumstances, would be a credit of a nature very different from that of a common creditor.

xviii. This appeared to them, at the time, as merely one of the possible routes to follow to provide the company with an adequate level of financial means, having been selected from among the other possibilities because it was the one that best corresponded to the objectives that were at stake in the first place – the financial stability of the company and the reduction of bureaucracy in the acquisition process, according to the Claimants.

xix. The Claimants considered that, in addition to the direct activity of buying and selling real property, with the passage of time and the emergence of new opportunities, the company O..., S.A. was expanding its activity into new areas, namely the (indirect) participation in the share capital of other companies and to dispel the risk of any eventual "contamination", V... SGPS, S.A. was incorporated in 2011, by way of the carving out and transfer, for the constitution of its capital, of a social participation relating to 10% of the share capital of company C..., SGPS, S.A., with the accounting value of € 5,490,285.35. From the point of view of the entire H... Group, the holding of the various social participations directly by V... SGPS, S.A. would bring the immediate benefit of simplification and rationalisation of the global business structure, as well as, consequently, allowing, in due course, the reaping of the fruits of more professional and specialised management of that and other financial assets.

xx. For the rest, according to the Claimants, it was only in this way that the holding V... SGPS, S.A. would come to assume, in fact and definitively, the strategic function for which it had been incorporated: that of a platform for new business opportunities.

For the purposes mentioned, a legal operation was projected to be carried out by means of which the real estate property of O... would be separated from the social participation it held in C..., SGPS, and these participations would be transferred to V.... From the legal-corporate point of view, the operation in question constituted a demerger-incorporation, in accordance with the modality provided for in subparagraph a) of article 118(1) of the Commercial Companies Code (CSC): the property of the Challenger was demerged, without the dissolution thereof being verified, and the separated segment was used for the incorporation of another company, V... SGPS, S.A.. From the organisational point of view, the participations in question stood clearly apart from the economic and financial universe linked to real estate activity, composed of other assets that are not participations, and bore their own identity, that is, a clear strategy of diversification and the purpose of giving body to the project of creating a multi-sectorial Group and not exclusively focused on the buying and selling of real estate.

xxi. Because they were closely linked, according to the Claimants, to this new economic and organisational unit, together with the social participation relating to 10% of the share capital of company C..., SGPS, S.A., a bank deposit on demand in the amount of € 50,000.00 was also transferred to V... SGPS, S.A.; and a liability relating to the debt existing by virtue of the acquisition of the social participation transferred in the amount of € 4,450,581.27, previously held by O..., S.A.. In addition to the payments indicated, all other rights, duties, contractual and procedural legal positions that fell within the scope of O..., S.A., associated with the corporate position in question, were also transferred by effect of the demerger-merger.

xxii. The operation can be represented graphically as follows:

[Diagram omitted in translation]

xxiii. With regard to its legal-tax treatment, the operation was carried out under the special regime of fiscal neutrality for business restructurings, provided for in articles 67 et seq. of the Corporate Income Tax Code. All the conditions legally required for the application of the regime were observed, according to the Claimants, namely those contained in article 74(3), so that the equity elements object of carving out and transfer by demerger were recorded in the accounting of C... SGPS, S.A. (beneficiary or incorporating company) in accordance with the exact values at which they appeared in the accounting of O..., S.A. (demerged company) – in a total amount of € 5,490,285.35.

xxiv. The Claimants note that the participations transferred to V... SGPS, S.A. as a result of the said demerger remain today in the property sphere of this company. The company V... SGPS, S.A., was incorporated in the form of a management company for social participations (SGPS), on one hand, to provide the GROUP H... with a structure similar to that of other national groups of family origin, which was, at the same time, adequate to the options taken by the T... family as to the type of composition of interests desired. On the other hand, from the moment when the purpose of the family members was to separate the interests of nuclear families, promoting the better protection of their respective interests and a possible succession, it was necessary to group the participations of each of them in a holding, which would be held by each of the T... children, their respective children and spouses, for concentration of the participations of the H... Group and, alongside these, those other participations that each of those nuclear families might have an interest in investing in on their own.

xxv. The same strategy was pursued, according to the Claimants, by each of the T... children who, in a completely autonomous manner, and in defence of their own interests and of their respective nuclear aggregate, chose to incorporate their own SGPS: the companies

a. W... SGPS, LDA., held in equal parts by F... and her husband X...;

b. Y... SGPS, LDA., held in equal parts by E... and her wife Z...; and

c. AA... SGPS, LDA., held in equal parts by BB... and her husband CC...

xxxvi. Each of these companies was destined, therefore, to serve as a holding for each of the sub-branches of the T... family, allowing separate management of various interests and protection of the patrimony inherent in the H... Group.

xxvii. Until the year 2010, V... SGPS, S.A. received the amount of € 1,020,102.52 by way of dividends and the amortisations of shareholder loans were only, according to the Claimants, € 143,908.04.

xxviii. In the same period, the shareholders reinforced the loans to the company in the amount of € 48,157.50. In the period from 2011 to 2014, it is verified, on the other hand, that the amounts of reimbursements made by V... SGPS, S.A. for the benefit of the shareholders did not coincide, and could have coincided, with the amounts received by it from its subsidiaries by way of dividends, the value of the latter being significantly higher than the value of the said reimbursements.

xxix. In an analysis that goes back to 2005, the date of the alienation of the participation in C... SGPS, S.A. to company O..., S.A., the dividends received by C... SGPS, S.A. totalled € 3,364,271.32 and the amortisations only the amount of € 2,580,726.08.

xxx. The difference – in the amount of € 783,545.24 – not used, according to the Claimants, for the reimbursement of credit to shareholders, was otherwise used in the activity – which was real and effective – of the company, namely to ensure investments and the current management of assets. And also in the course of the year 2016, capital contributions were made by the individual shareholders to the company (V... SGPS, S.A.), in the amount of € 375,000.00.

xxxi. According to the Claimants, article 38(2) makes the application of the clause under analysis depend on four essential requirements: The first of these requirements is contained in the "means" element of the letter of the law: it is necessary that we are, in the concrete case, before the use, by the taxpayer, of one or more acts or legal transactions. As for the second requirement, it results from the "result" element: it is essential that the execution of those acts or transactions results in a tax advantage – that is, in the elimination, reduction or temporal deferral of taxes. The third requirement relates to the "intellectual" element of the law: the tax motivation referred to must be the sole, essential or main motive of the taxpayer to execute or perform those transactions or acts and, finally, we find the "normative" element, which implies that the taxpayer's action, aimed at obtaining a tax advantage, must deserve systematic normative disapproval, because it has resulted in an abuse of legal forms, that is, in the use of institutes whose creation or emergence occurred for economic reasons that do not, total or essentially, preside over the concrete operations of the taxpayer.

xxxii. Should all the requirements listed be met, the TA could then, in compliance with the "sanctioning" element of the CGAA (corresponding to the operative clause and not to the hypothesis of the rule contained in article 38(2) of the LGT, contrary to what the TA seems to understand), decree the ineffectiveness, in the tax field, of the acts or transactions in question, which are thus rendered inopposable to it.

xxxiii. The Claimants understand that they are not met and, furthermore, invoke that the TA makes an erroneous interpretation of the rule already, since it is not the "result" element (obtaining the comparative tax advantage) that truly justifies the creation of a rule of the type of the CGAA, but rather the "means" and "normative" elements: as we shall see better, what the legislator considers reprehensible – what he considers an "abuse" – is the "artifice" (the use of unusual legal forms, absolutely inappropriate), because it is that which allows concluding on the total absence of economically valid reasons.

xxxiv. Hence they conclude that, among the situations that should be considered outside the scope of the CGAA, because they do not translate an "abuse of legal forms", are, by their nature, those in which the tax advantage is obtained through recourse to a rule or set of rules created precisely for taxpayers to derive advantages from them (and whose use, in many of those cases, can even be concluded to be encouraged by the legislator).

xxxv. On the other hand, the Claimants conclude that the legal rules were applied which, enshrining in fact favourable tax regimes, are nevertheless those strictly corresponding to the transactions or acts in question, no use of the same being able to be identified as unusual, unexpected or artificial, with intentions completely distinct from those for which the legislator conceived them. Whereby, according to the Claimants, there was no subversion whatsoever of the legal system: the facts in question fall, purely and simply, into a situation of mere tax option (not reprehensible) – and the TA's action results in the requirement – illegal and unconstitutional – that the taxpayer choose the fiscally more onerous route.

xxxvi. Furthermore, the Claimants invoke the principle of freedom of tax choice as a fundamental interpretative limit of any clause intended to prevent abuse of legal forms in the tax field.

xxxvii. Concluding that there is no ground for the application of the CGAA.

xxxviii. Subsidiarily, on the other hand they conclude that, should the CGAA be applied, the Claimants would always be parties without standing, since the ineffectiveness achieved, a posteriori, through the neutralisation of any tax advantages that would not be achieved without the use of the said artificial or fraudulent means and with abuse of legal forms, with this neutralisation occurring, in effect, in accordance with the legal terms, through the restoration of the taxation that would occur in the absence of those means, independently of the beneficiary or beneficiaries.

xxxix. According to the Claimants, it is not clear how one can interpret a CGAA – created precisely to, guaranteeing the fulfilment of the principle of tax equality, "prevent tax law from being defrauded through the manipulation of legal forms" – in such a way that it would exclude all those (many) payment obligations whose performance is made through withholding at source. Being that, according to the Claimants, in the case under analysis, where the thesis is argued that the income distributed to shareholders should, for tax purposes, have been treated in accordance with the methodology of taxation applicable to dividend distributions, one cannot admit any other procedure than that which assumes that it is on the distributing entity, tax substitute – in this case, C... SGPS, S.A. – that the act of assessment and the other consequences of the application of the CGAA are reflected.

xl. Withholding at source is, for the tax substitute, an obligation to pay the tax in the capacity of its principal debtor. It is so, according to the Claimants, also in the present situation: if the taxable income derives from a dividend distribution, its taxation is carried out, through the regime of tax substitution, by withholding at source, with the tax then being exigible, in accordance with the IRS Code, to a person other than the beneficiary of the income. The substitute is thus considered, for all tax purposes, as principal debtor of the tax. It is the duty of the substitute, indeed, to pay the principal obligation and performs it through the mechanism of withholding at source a portion of the income of which a third party (the substituted) is holder, in the amount corresponding to the tax burden.

xli. In addition to the defect of lack of standing, the Claimants maintain that the TA did not properly comply with the burden of reasoning to which it is obliged by virtue of subparagraphs a) and b) of article 63(3) of the CPPT, namely at the level of the description of the legal transaction executed or the legal act carried out and the transactions or acts of identical economic purpose, as well as the indication of the applicable rules of incidence, and the demonstration that the execution of the legal transaction or the practice of the legal act was essential or mainly directed at the reduction, elimination or temporal deferral of taxes that would be due in the case of transaction or act with identical economic purpose, or at obtaining tax advantages.

xlii. On the other hand, the Claimants further raise that the TA's interpretation of the rule of article 38(2) of the LGT was applied, in the concrete case, with the sense that it is a sort of open legal type or overlap that allows the taxation of facts or realities that the legal order did not intend to tax, thus leading to a sort of analogical application of tax rules, to the extent that it admits that, disregarding, for tax purposes, the legal personality of a company, to whose incorporation the taxpayer was expressly encouraged by law – as was seen –, the TA can tax as dividends what it expressly recognises to be a repayment of financing contracted with shareholders, on the civil-law level. Now, interpreted with this sense, the rule is materially unconstitutional because it violates, according to the Claimants, the constitutional principle of tax legality, in particular in its dimension of the principle of typicity, provided for in article 103(2), article 104 and subparagraph i) of article 165(1) of the CRP.

xliii. On the other hand, the Claimants invoke that the method of ex officio assessment used by the TA, with reference to the years 2013 and 2014, is erroneous and equivocal, as well as violative of the principle of good faith, and, once again, of the constitutional principles of legality, of proportionality, in concretisation of the principle of equality. Since, on the one hand, with respect to the year 2015, the TA understands that the reconfiguration of the debt repayment as a dividend will be subject to autonomous taxation at the rate of 28%, pursuant to subparagraph d) of article 72(1) of the IRS Code, with respect to the years 2013 and 2014, the amount earned should be entirely pooled with the collectively assessable income of IRS of the beneficiaries, subject to the general tax rates resulting from the application of the table contained in article 68 of the IRS Code.

xliv. The purpose of the incorporation of C... SGPS, S.A. as an SGPS, of the transmission to this company of the shares of C... SGPS, S.A. and of the constitution of the credit, had in view the same purpose that led to the consecration of these legal-corporate instruments. It was not, therefore, in order to obtain a comparative tax advantage that the shareholders of V... SGPS, S.A. carried out those acts (which is not the same as saying that there were not legitimate considerations of a tax nature), but rather so that the excesses of liquidity verified at a particular moment would be released, for the fulfilment of the obligation to pay the price of the acquired asset and essential to the realisation of its respective object.

xlv. The assessments under challenge are illegal, by violation of article 38(2) of the LGT and article 63 of the CPPT and the constitutional rules identified.

xlvi. Concluding further on the illegality of the compensatory interest.

1.4. For its part, the Respondent argues, in summary, that,

i. The taxpayers describe the episode of the appearance of a fifth heir to the founder of the H... group, and the lawsuit that culminated in the recognition of the respective paternity, pointing to it as justification for the transfer of the shares of C... SGPS, held by A... and B..., to O....

ii. Now, such an argument cannot prevail, according to the TA, since the 10% of the capital of C... SGPS transmitted on 29 December 2005 to O... had already been in the possession of the taxpayers since 1993 (except for 1%, which were transmitted to them by X... on 26-12-2005), and therefore, were merely transferred from their individual sphere to the sphere of that limited company, held by the couple in equal parts (recall that the same was only converted into a joint-stock company in 2007) – it is not understood how such an operation could prevent possible family property disputes resulting from the recognition of the said heir, or even be related to such circumstance.

iii. The only transmission of social participations of C... SGPS that the founder of the group made to his children occurred on 26-12-2005, when he transmitted 88,460 shares of that company (22,115 shares to each child, corresponding to 1% of the share capital for each one), at the unit price of € 24.83, totalling € 549,033.50 for each child.

iv. In attempting to legitimise the concentration in O... of the shares individually held by each of the members of the couple A... and B..., they shield themselves in the faculty, provided for in the CSC, of the holders of 10% of capital, having the right to appoint an administrator. But, according to the TA, this argument falls short, because it is possible to ascertain that A... was already, and at least since 2001, a member of the Board of Directors of C... SGPS, as is verified through the excerpt of Minutes no. 20 of that corporate body, drawn up on 31 May 2001.

v. Also the purported purpose of allowing an "involvement of the children in the business activity of their parents" is not shown to be proven, since it is verified that only R... (the eldest daughter) appears as a member of the Board of Directors of O... (and later of V... SGPS) - with no evidence of her actual intervention in the administration of either of those companies. It is also recalled that neither of them employs staff, and that the administrators are not remunerated.

vi. The atypicality and abnormality of the legal acts and transactions executed is clearly demonstrated, since, if the shareholders of C... SGPS and V... SGPS intended to carry out the acts and transactions for their economic and financial purpose, arising from the gains in competitiveness, efficiency and critical mass obtained, with transfers of the social participations of the first to the new SGPS created, they would have at their disposal normal acts and transactions of equivalent economic effect, based, however, on criteria of economic rationality.

vii. V... SGPS does not possess nor has it ever possessed, according to the TA, any other social participation (nor any other asset) beyond the 10% of C... SGPS.

viii. It is verified, according to the TA, that V... SGPS constitutes a pure holding, since it was incorporated solely with the objective of holding the social participation in the capital of C... SGPS.

ix. Its existence is reduced, almost exclusively, according to the TA, to the receipt of dividends, since the remaining income it earns is merely ancillary, and has a residual weight in its results, not even carrying out operations taxable under VAT that could demonstrate that, in some way, it interferes with the management of that its only subsidiary.

x. This reveals, in itself, according to the TA, the lack of economic rationality of these operations, which, allied to the already demonstrated incoherence of the argumentation related to a patrimonial/family motivation, leaves no doubt that its main scope was the obtaining of tax advantages.

xi. More, even if it were remotely admitted that the objective of the transfer of ownership of the shares of C... SGPS to O... had been any one of those that A... and B... come to allege, such desire could and should have occurred at the respective nominal value (€ 5/share), with no other reason being seen for the setting of a price significantly higher than that (€ 24.83/share) than the possibility of withdrawal of dividends from C... SGPS in the disguised form of payment of the debt thus generated.

xii. In order to realise this active and dynamic management of the social participations held by the SGPS, in addition to the exercise of social rights inherent to the social participations held, the legislator admits the performance of various operations by the SGPS in the pursuit of its interests and relations with its subsidiaries, which is not verified in the case of V... SGPS in the years under analysis, according to the TA.

xiii. This company, according to the TA, served essentially to receive the profits paid by C... SGPS and allow their withdrawal by the shareholders who control both companies, now transformed in the figure of debt repayment. That is, although the legislator in the preamble of Decree-Law no. 495/88 created favourable conditions to facilitate and encourage the creation of economic groups, as adequate instruments to contribute to the strengthening of the Portuguese business fabric and to provide business people a legal framework that would allow them to bring together in a company their social participations, for their centralised and specialised management, in the present case, this objective was not achieved, but merely a change of direct legal ownership for indirect ownership was made, (since the shareholders of V... SGPS continue to hold the effective power (control) over 10% of C... SGPS) achieving through this artifice an essentially fiscal end.

xiv. Contrary to what the taxpayers seek to convey, what the facts reveal is that, twelve years after the transfer of the shares of C... SGPS destined for O... (currently, and since 2011, held by V... SGPS), they have remained exactly the same: constituting the only asset of each of the SGPSs mentioned, none of which exercises any other relevant activity, or earns any other income, beyond the dividends paid by its sole subsidiary: C... SGPS.

xv. All seen, the legal figure of the SGPS was artificially de-functionalised. For verification of how far one has fallen from the normative motivation underlying the incorporation of SGPSs, one should have in mind what is stated in the preamble of D.L. no. 495/88, of 30/12, concerning the introduction of SGPSs in the national legal order: "to facilitate and encourage the creation of economic groups, as adequate instruments to contribute to the strengthening of the Portuguese business fabric" and "to provide business people a legal framework that allows them to bring together in a company their social participations, for their centralised management". Now nothing of this happened, according to the TA.

xvi. Not only was there no formation of any new economic group, nor bringing together of assets and activity in a single company, but rather, each of the shareholders of the parent company itself – C... SGPS – incorporated its own SGPS, and everything remained materially as it was before the incorporation of said SGPSs with respect to social participations and management.

xvii. Note that the SGPSs maintained as their sole asset the participations that their shareholders and sole administrators had in the parent company and that were transmitted to them by these latter; and the sole administrators of each SGPS continued to be the administrators of the parent company, and to have control and dominion over it.

xviii. The reasoning of the draft decision and the application of the CGAA followed, in accordance with the law, what was stipulated in article 63(3) of the CPPT. It is further stated that, before giving effect to what is stipulated in article 63(4) of the same legal provision – and as previously instructed – an opinion was requested from the DSPCIT - Directorate for Planning and Coordination of Tax Inspection on the application of this anti-abuse rule, which, proving favourable, was set out in Information no. 124/2017, dated 28/06/2017.

xix. The alleged participation of O... – and later of V... SGPS – in the restructuring of the H... group was never carried out: after acquiring, on 29/12/2005, the 10% of C... SGPS, this company held by the couple A... and B..., it did not again acquire or dispose of anything whatsoever, acting in fact as a mere "safe" for that social participation; it is incorrect to argue the possibility of appointing an administrator that possession of 10% of capital would provide, when it is known that A... has been a member of the Board of Directors of C... SGPS since its incorporation, being frequently cited for its interventions in the Minutes of General Assemblies, all the more so that it is undeniable that the objective of holding that percentage relates rather to the necessity of compliance with the requirements provided for in the former article 46 of the CIRC (in force at the time) so that O... could benefit from the elimination of the double economic taxation of dividends that C... SGPS would distribute in the future;

xx. Recognising that the exclusion from taxation in the alienation of shares held for more than 12 months was a relevant aspect in the design of the operation, the taxpayers confirm that only that fiscal neutrality would permit the cancellation of its burden, whereby nothing more need be added; as for the credit that was granted by the shareholders to O... – and later, to V... SGPS – in the payment of the shares alienated, it need only be said that the taxpayers did not thereby achieve the supposed intent of "providing the company with conditions for maximisation of the investments realised, in view of the expected profit", since those companies of theirs never distributed any profits to them – herein lies thus another of the essential pillars of the artificiality of these operations – that if they did, such income would be irremediably taxed under IRS in the sphere of the taxpayers;

xxi. Highlighting that V... SGPS amortised the debt to its shareholders in amounts lower than the dividends it received from C... SGPS, they seek to demonstrate the exercise of a real and effective activity on the part of this company – however, this is not so, because, as described in the IRA, the activity of O... (and especially of V... SGPS) is reduced to the holding of this participation and the payment of the respective debt, as it receives the dividends associated with the same.

xxii. With regard to the cumulative verification of the requirements enshrined in the legal provision for the application of the CGAA: means element: the legal transactions in question pertain to the alienations of parts of capital of C... SGPS to the company held (and later, to the SGPS incorporated) by the taxpayers, in a pre-planned manner, as is demonstrated by the fact that they did not possess financial resources to pay for them immediately, proving necessary the use, over the years, of the dividends paid by the subsidiary, to amortise the debt thus generated; result element: this requirement is also verified, since there were used, on one hand, in the transmission of the shares of C... SGPS from the individual sphere to the sphere of company O..., the exclusion from taxation provided for in law for the alienation of shares held for more than 12 months, and, on the other hand, the exemption from taxation stipulated in article 51 of the CIRC – elimination of the double economic taxation of distributed profits; intellectual element: also in the concrete case does the third requirement occur, because the tax motivation of the taxpayers proved to be preponderant, in the face of the alleged family/economic motivations; normative element: the normative-systematic disapproval of the advantage obtained is verified when the behaviour of the taxpayers proves to be anti-legal, having regard to the spirit of the tax-exempting rule, from the outset because the interposition of company O... and V... SGPS – which function as vehicles – had as its sole purpose the use of the exclusion from taxation of dividends earned by legal persons;

xxiii. According to the TA, this conception is also adopted at the level of Community judicial instances, manifested in various rulings of the CJEU, notably the Cadbury-Schweppes ruling, in which it was decided that, when the minimisation of taxation concerns only purely artificial expedients designed to circumvent the tax normally due, the position of the taxpayer should not be accepted; being certain that the freedom of tax management has its expression in the freedoms of initiative and enterprise, contemplated in the CRP, the same, when seen from the side of the State, is concretised in the principle of fiscal neutrality, a rule in which it is established as a priority incumbency of the State to ensure the efficient functioning of markets, repressing abuses; thus, not being, nor being able to be in question the freedom of taxpayers to choose in the configuration of their transactions, that is, the exercise of their private autonomy, what the application of this CGAA seeks to limit is the possibility of the will of taxpayers being relevant as regards the degree of their tax burden.

xxiv. The TA concludes that we are faced with a manifest abuse of legal forms: the taxpayers succeeded, through the interposition of the company that they already held – O... – and, since 2011, the SGPS that arose from its demerger – V... SGPS – which is nothing more than a mere "safe" for social participations of C... SGPS – in receiving dividends from the latter without being subject to any taxation, through the abusive use of the figure of debt repayment. Would this have been the intention of the legislator in instituting the Legal Framework for SGPSs (through Decree-Law no. 495/88)?

xxv. The position of the taxpayers that they find outside the scope of the CGAA are situations in which the tax advantage is achieved through recourse to rules whose use is encouraged by the legislator. But, here, there are no alternative options, within the parameters of the law, to the taxation of dividends paid by C... SGPS – these are income from capital, which fall within the scope of IRS, in category E. The said "viable option available" that A... and B... assure they have is nothing more than illegitimate tax planning, since, as has been extensively demonstrated, it aims solely to exempt from taxation those same income, configuring them artificially as repayments of a debt specifically created for this purpose.

xxvi. Anti-abuse rules aim to combat tax evasion carried out through legal transactions/legal acts that are formally lawful. It is, therefore, intended to prevent, by mere manipulation of legal form, the obtaining of a reduction in tax burdens.

xxvii. Citing Saldanha Sanches, the TA concludes that "A transaction will be artificial (a requirement that is verified, or not, after comparison between the legal transaction used and the one that would have been used absent the tax law), and for that reason, and in a certain sense, fraudulent when its use can only be explained for reasons of a fiscal nature: that is, the legal transaction is executed with a certain intention, forcing, in the application of the law, a judgement of the intention of the agent"; whereby, the onerous alienation of the shares that A... and B... held in C... SGPS (corresponding to 9% of its capital), having been held by the same for more than 12 months, were excluded from taxation by virtue of the provision of subparagraph a) of article 10(2) of the CIRS (rule later repealed by Law no. 15/2010, of 26 July, in force until the year 2009); this exclusion from taxation of capital gains from parts of capital was exploited by the taxpayers to stipulate a sufficiently high price for the said transaction, so as to allow them to maximise the subsequent withdrawal of dividends from that company, in the form of payment of the debt constituted in that manner; note that, with respect to the transmission of the remaining 1% of the capital of C... SGPS held by them, no capital gain was ascertained (they were sold at the same price at which they were acquired 3 days before - € 24.83 per share);

xxviii. Should there have been one, it would have been taxed because it did not meet the holding period stipulated in the law to benefit from the said exclusion;

xxix. The taxpayers actually relinquished the direct participation they had in the capital of C... SGPS – which, recall, amounted to 9% for the couple, and was increased to 10% through the acquisition of the remaining 1% from X... E..., only 3 days before – but maintained that same participation indirectly, via O... (later V... SGPS), companies in which they participate 100%.

xxx. According to the TA, the artificiality of this operation resides precisely in these two vectors: on one hand, in the price stipulated for it - which may correspond to the respective market value, that is not being questioned - but which is shown to be unsustainable for the financial structure that the acquiring company possessed; and on the other, in the circumstance that, for that same reason and because obviously they did not expect (nor needed) to be reimbursed of the price immediately, the alienators decided not to receive it, or rather, decided to receive it through the dividends that C... SGPS would pay, a premise that A... controlled, since he was always an administrator of C... SGPS.

xxxi. With this operation, the taxpayers did not renounce that part of their patrimony – they merely transferred it, with absolute certainty – from their individual sphere to the sphere of a company held and totally controlled by them.

xxxii. In practice, and in terms of rights associated with the quality of shareholders, and expectations of future gains, they remained unchanged, given that, as sole shareholders and administrators of the new company holding the 10% of C... SGPS, the same would flow (as we have seen, have in fact been flowing, all the more without any taxation) to A... and B... in exactly the same manner.

xxxiii. The alleged participation of O... – and later of V... SGPS – in the restructuring of the H... group was never carried out: after acquiring, on 29/12/2005, the 10% of C... SGPS, this company held by the couple A... and B..., it did not again acquire or dispose of anything whatsoever, acting in fact as a mere "safe" for that social participation; it is incorrect to argue the possibility of appointing an administrator that possession of 10% of capital would provide, when it is known that A... has been a member of the Board of Directors of C... SGPS since its incorporation, being frequently cited for its interventions in the Minutes of General Assemblies, all the more so that it is undeniable that the objective of holding that percentage relates rather to the necessity of compliance with the requirements provided for in the former article 46 of the CIRC (in force at the time) so that O... could benefit from the elimination of the double economic taxation of dividends that C... SGPS would distribute in the future;

xxxiv. Recognising that the exclusion from taxation in the alienation of shares held for more than 12 months was a relevant aspect in the design of the operation, the taxpayers confirm that only that fiscal neutrality would permit the cancellation of its burden, whereby nothing more need be added; as to the credit that was granted by the shareholders to O... – and later, to V... SGPS – in the payment of the shares alienated, it need only be said that the taxpayers did not thereby achieve the supposed intent of "providing the company with conditions for maximisation of the investments realised, in view of the expected profit", since those companies of theirs never distributed any profits to them – here lies thus another of the essential pillars of the artificiality of these operations – that if they did, such income would be irremediably taxed under IRS in the sphere of the taxpayers; highlighting that V... SGPS amortised the debt to its shareholders in amounts lower than the dividends it received from C... SGPS, they seek to demonstrate the exercise of a real and effective activity on the part of this company – however, this is not so, because, as described in the IRA, the activity of O... (and especially of V... SGPS) is reduced to the holding of this participation and the payment of the respective debt, as it receives the dividends associated with the same.

xxxv. The Claimants, according to the TA, artificially created the obligation of repayment of a debt owed to them, by the company held and managed by them, O..., which they instrumentalised for the purpose. Should their purposes have been genuinely the valid economic reasons that they invoke, there would have been no need whatsoever to constitute any debt: the shares of C... SGPS could, purely and simply, have been delivered to realise a capital increase made in kind, of O..., or else, to realise the initial capital of V... SGPS.

xxxvi. But the objective of the taxpayers was obviously another – which they furthermore confess – was "to provide the shareholders with the financial means by which they had made possible (…) the acquisition of the social participations of C... SGPS", which is equivalent to saying, to cause the remuneration of the capital invested to flow to the investors – which, as is well known, can only operate by two means: through the payment of dividends or through the realisation of capital gains. The latter being out of the question, given that we are dealing with essential parts of capital of the H... group, which the family naturally intends to maintain, the first remained: distribution of profits generated.

xxxvii. According to the TA, we are not dealing with any repayment of goods delivered to the company – as would be the case with the constitution of Ancillary Contributions, or the performance/increase of capital – since A... and B... do not divest themselves of the parts of capital of that company, merely transfer them to another, held by them, with the intention of receiving the respective dividends without any taxation. The type of legal transaction chosen to materialise this transfer is what proved anomalous and artificial: had it been the normal one and adequate to the purposes they defend, it would generate no debt.

xxxviii. It was precisely the "chaining of the operations", their sequence and artificiality, that confirmed that the same were planned with a view to obtaining the intended fiscal result. We are here faced with the so-called step by step transactions, characterised by involving a succession of acts/transactions coordinated among themselves, even if they may occur at different points in time, with the common objective of achieving a tax advantage. Were that not their motive, the same would reveal themselves to possess economic rationality, which in fact was not verified.

xxxix. The TA concludes that there is no unconstitutionality whatsoever in the interpretation it makes of the legal rule.

xl. With regard to the errors raised by the Claimants in the ex officio assessment of IRS relating to the periods 2013 and 2014, notably as regards the default regime of taxation by withholding at source at the rate of 28%, and also the fact that the taxpayers can only combine the income by their express choice, the TA maintains the position it took in the IRA.

xli. According to the TA, it is safe to affirm that the legislator did not have in mind allowing the practice of a set of acts that resulted in a requalification of the payment of a debt artificially created by the shareholders with the company they control into dividends;

xlii. The analysis carried out allows to conclude, without doubt, that the requirements provided for in article 38(2) of the LGT are met, which imposed the application of the CGAA and the concretisation of the corrections for the purposes of assessment of the tax due.

2. Matter of Fact

With regard to the matter of fact, the Tribunal does not have to pronounce on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and discriminate between the proven and unproven matter (cfr. articles 123(2) of the Code of Tax Procedure and Process (CPPT) and 607(3) of the Code of Civil Procedure (CPC), applicable ex vi article 29(1), subparagraphs a) and e), of the RJAT). Thus, the facts pertinent to the judgment of the case are chosen and delineated as a function of their legal relevance, which is established having regard to the various plausible solutions of the question(s) of law (cfr. previous article 511(1) of the CPC, corresponding to the current article 596, applicable ex vi article 29(1), subparagraph e), of the RJAT).

Thus, having regard to the positions taken by the parties, in light of article 110(7) of the CPPT, the documentary evidence and the IRA attached to the file, as well as the testimonial evidence adduced, the following facts below listed were considered proven with relevance for the decision.

2.1. Proven Facts

1. On 31 December 1993 the incorporation of the company designated C..., SGPS, S.A., with share capital of € 11,057,395.00, represented by 2,211,479.00 shares with a nominal value of € 5.00 each, was registered in the Commercial Registry Office of..., and its corporate purpose consisted in the management of equity participations in other companies, as an indirect form of exercise of economic activities, this company being regulated by Decree-Law no. 495/88, of 30 December.

2. As of this date, the shareholding structure of this company was summarised as follows:

1. At the origin of the incorporation of company C..., SGPS, S.A. there was an intention to restructure the H... Group structure, initiated precisely in 1993, and which included, in addition to the incorporation of this holding, the creation of a sub-holding, designated I..., SGPS, S.A., for control of a specific area of activity.

2. In addition to this company, which held 89.99%, C..., SGPS, S.A. also came to hold 90% of the share capital of J..., S.A., 90% of the share capital of K..., S.A., 90% of L... and 90% of M..., S.A.:

3. The share capital of company C..., SGPS, S.A. remained unchanged from its origin until 26 February 2016, the date on which it was increased, coming to amount to € 14,529,635.00.

4. On 12 June 1991, the incorporation of the limited liability company then designated N..., LDA., with share capital of € 9,975.96, represented by two equal quotas, one belonging to A... and the other belonging to B..., was registered in the Commercial Registry Office of..., and it had, from its incorporation, as its activity the trade in cosmetic and perfume products.

5. On 4 June 2007, the incorporated company – which, in 2005, ceased its activity of trading in cosmetic and perfume products and adopted the designation O..., S.A. and dedicated itself to the activity of buying and selling real estate and resale of property acquired for that purpose and real estate investments, and, as an ancillary activity, to the leasing of real estate and the provision of services related to the availability of real estate – saw its share capital increased to € 50,000.00, an increase entirely made in cash and subscribed, in the amount of € 38,774.04, by shareholders A... and B..., and, in the amount of € 1,250.00, by four new shareholders: the three children of the couple, P..., Q... and R..., and the mother of A..., S...

6. Simultaneously, the company was converted into a joint-stock company, with its shareholding structure summarised as follows:

1. It became an objective of the Claimants to concentrate in a single company the participations that each one held in company C... SGPS, S.A. – as well as others in which they might invest in the future.

2. There was executed on 29 December 2005 a Deed of Settlement and Contract for the Purchase and Sale of Shares, whereby the Claimants here transferred to the company owned by them – O..., S.A. – the 221,148 shares of which they were holders in company C..., SGPS, S.A. – representing 10% of its share capital –, for the price of € 5,490,285.35 (corresponding to € 24.83 per share).

3. The objective was to concentrate in a single company the participations that each one held in company C... SGPS, S.A. – as well as others in which they might invest in the future –, allowing already an effect of sharing of the same (albeit indirectly) with their three children. With a view to this objective, there was executed on 29 December 2005 a Deed of Settlement and Contract for the Purchase and Sale of Shares, whereby the Claimants here transferred to the company owned by them – O..., S.A. – the 221,148 shares of which they were holders in company C..., SGPS, S.A. – representing 10% of its share capital –, for the price of € 5,490,285.35 (corresponding to € 24.83 per share).

4. This value was determined on the basis of the equity of the company in question as of the date of transfer.

5. The acquisition was also envisaged in view of the necessity for unification of the social participations of the Claimants and their transfer to the ownership of a company that would better ensure their protection against eventual disputes of a family nature, particularly given the existence of an action for recognition of paternity brought in 2006 by U... against the father of the Claimant.

6. The same objective underlay the conversion of the company into a joint-stock company, which took place in 2007.

7. On 27 June 2018, a framework agreement relating to the restructuring of the H... Group was executed, executed between the members of the second generation of the T... family – a group in which U... was not included –, signed at the National Notary Office of ... and a deed of partition inter vivos, so as to include therein the author of the said action, the deed of which was executed on 30 June 2016.

8. The concentration, in a single company, of the 7% held by Claimant A... and the 3% held by Claimant B..., would assure it (the acquiring company) ownership of shares representing 10% of the share capital of C... SGPS, S.A.

9. The capital gain achieved by the Claimants following this operation benefited from the exclusion from taxation provided for in subparagraph a) of article 10(2) of the IRS Code, which exempted from IRS taxation capital gains derived from the alienation of shares held by their shareholders for more than twelve months.

10. The price agreed for the transaction was not immediately paid to the Claimants, it being recorded in the accounting of O..., S.A. a debt in their favour, in that amount.

11. Between 29 December 2005 and 24 May 2011, that amount was reduced by € 1,039,704.08, coming to amount to € 4,450,581.27

12. V... SGPS, S.A. was incorporated in 2011, by way of the carving out and transfer, for the constitution of its capital, of a social participation relating to 10% of the share capital of company C..., SGPS, S.A., with the accounting value of € 5,490,285.35, through a legal operation of demerger-incorporation, in accordance with the modality provided for in subparagraph a) of article 118(1) of the Commercial Companies Code (CSC): the property of the company was demerged, without the dissolution thereof being verified, and the separated segment was used for the incorporation of another company, V... SGPS, S.A..

13. A bank deposit on demand in the amount of € 50,000.00 was also transferred to V... SGPS, S.A.; and a liability relating to the debt existing by virtue of the acquisition of the social participation transferred in the amount of € 4,450,581.27, previously held by O..., S.A..

14. Until the year 2010, V... SGPS, S.A. received the amount of € 1,020,102.52 by way of dividends and the amortisations of shareholder loans were € 143,908.04.

15. In the same period, the shareholders reinforced the loans to the company in the amount of € 48,157.50.

16. The dividends received by V... SGPS, S.A. totalled € 3,364,271.32 and the amortisations the amount of € 2,580,726.08.

17. The TA carried out an external inspection action against the claimants relating to the tax years 2013, 2014 and 2015, which occurred between 06-09-2017 and 12-09-2017, and was credentialed by Service Orders nos. OI2017..., OI2017... and OI2017...,

18. The claimants were notified, through letter no...., of 18-09-2017, of the draft Tax Inspection Report for the purposes of the right to a hearing, under article 60 of the LGT and article 60 of the RCPITA, having exercised this right on 12-10-2017.

19. The Tax Inspection Report, of 16-10-2017, which is hereby reproduced in full for all legal purposes, merited a concordant order from the Financial Director of..., of 17-11-2017, and was notified to the claimants through letter no...., of 27-12-2017.

20. The Tax Inspection Report, on the basis of the facts described, applied the provision of article 38(2) of the LGT and article 63 of the CPPT and considered ineffective that the dividends distributed by C..., SGPS to V..., SGPS, in the years 2013, 2014 and 2015, in the amount respectively of € 177,566.44, € 217,388.48 and € 1,053,770.22, were not taxed, in accordance with article 51 of the CIRC, with taxation to occur, in accordance with article 5(2) subparagraph h) of the CIRS.

21. The corrections to the assessable matter of the Claimants, proposed in the Tax Inspection Report, resulted in the acts of assessment of IRS nos. 2018..., 2018... and 2018... and of assessment of compensatory interest nos. 2018..., 2018... and 2018..., relating to the tax years 2013, 2014 and 2015, in the total amount of € 578,011.90.

22. Due to the voluntary payment of the amounts relating to the assessments identified in the previous point not being made, tax enforcement proceedings nos. ...2018..., ...2018... and ...2018... were initiated, in the meantime attached, which are proceeding in their normal course at the Finance Service of..., with the Claimants having presented on 09-04-2018 a bank guarantee from DD..., up to the amount of € 732,420.76, for the purposes of articles 169 and 170 of the CPPT and article 52 of the LGT.

2.2. Unproven Facts and Reasoning for the Fixing of the Matter of Fact

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

The proven facts are based on the documents submitted by the Claimants with the request for arbitral decision, as well as the elements of the IRA, position of the parties set out in the respective documents.

The testimonial evidence was relevant for the clarification of the following facts:

The witness EE..., lawyer and friend of the Claimants' family, especially of the father of the Claimant woman. Showed direct knowledge of the facts to which he testified and, above all, direct participation, although more as a friend than as a lawyer with regard to the family question underlying the corporate movements that the family brought about considering the possible – but which ultimately took place – recognition of a daughter of the father of the Claimant woman.

In fact, the witness declared that he had knowledge, from the father of the Claimant, still in the late 1990s of the alleged and later demonstrated existence of a daughter of the latter – of which the family