CAAD 240/2014-T: Tax Inspection Deadlines and General Anti-Abuse Clause in IRS Withholding Tax

ARBITRAL DECISION

Claimant: A, S.A.

Respondent: Tax and Customs Authority

Subject Matter: Personal Income Tax – Time limits for tax inspection; general anti-abuse clause

The arbitrators, Jorge Lino Ribeiro Alves de Sousa, Henrique Nogueira Nunes and Eduardo Paz Ferreira, appointed by the Deontological Council of the Administrative Arbitration Center ("CAAD") to form the Arbitral Tribunal, hereby agree as follows:

1. REPORT

A, S.A., with the tax identification number … (hereinafter abbreviated as "Claimant"), requested the establishment of the Arbitral Tribunal pursuant to Article 2, No. 1, paragraph a) of Decree-Law No. 10/2011, of 20 January (hereinafter "RJAT").

The request for arbitral decision concerns the declaration of illegality of Assessment No. …, relating to the year 2009, which resulted in Personal Income Tax – Withholding Tax – payable in the amount of € 1,395,400.00.

The request for establishment of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority (hereinafter abbreviated as "TA") on 10 March 2014, with the above-mentioned arbitrators being appointed to the Collective Arbitral Tribunal, who accepted their appointment.

On 28 April 2014, the parties were duly notified of such appointment and expressed no objection to the appointment of the arbitrators, in accordance with Articles 11, No. 1, paragraphs a) and b) of RJAT and Articles 6 and 7 of the Deontological Code.

The Arbitral Tribunal was constituted on 14 May 2014.

To support its request, the Claimant alleges, in summary, the following:

(i) It raises a preliminary issue, namely that the tax inspection extended beyond the legal time limit and that such constitutes, in its view, a failure to observe essential formalities in the inspection procedure, constituting a defect giving rise to annulability of the assessment in question in this case (based on Article 135 of CPA).

(ii) Subsequently, it questions the requirements, which it does not consider to be met in this case, for the application of the general anti-abuse clause, provided for in No. 2 of Article 38 of the LGT, with regard to the operations in question in this case and which resulted in the tax disregard of the sale of shares of the majority shareholder and acquired by the Claimant.

(iii) It contests the operation recharacterized by the TA as a distribution of dividends.

(iv) It is its understanding that the value of the purchase and sale of shares in question in this case was established as if it were a transaction between independent entities, and there is therefore no reason for the Respondent to question the same.

(v) In relation to the application of GAAC, it contests the verification of its elements, beginning its analysis with the result element.

(vi) In its view, an operation of distribution of dividends and sale of corporate participation are not operations with similar outlines and, above all, similar effects, so the invocation of the result element falls away, and therefore it maintains, as a preliminary matter, that the entire procedure of application of GAAC in this case is invalid.

(vii) As to the means and intellectual elements, it states that it is not, and in any event could not be, as the Respondent alleges, faced with any tax benefit or privilege, inasmuch as the shares in question were not acquired by the majority shareholder at a low or attractive price in order, within a short/medium term, to sell them with capital gains, taking advantage of the tax benefit from holding them for more than twelve months, as it argues that, in this case, the tax benefit invoked did not even exist, since the shareholder in question had held the shares for more than twenty years.

(viii) As to the normative element, it argues that the evidence gathered by the Respondent does not permit objective support, in light of the rules of common experience, that its conduct was directed mainly to any tax advantage, and that the conclusion reached by the TA, upon which it based the decision to proceed with the application of GAAC to this case, is erroneous.

(ix) It alleges that the requirements for the application of GAAC have not been demonstrated to be met, which it maintains are cumulative, and therefore there cannot be application of the rule's provisions, leading to the ineffectiveness of the legal transactions in the tax context, contrary to the Respondent's claim.

(x) It maintains that the Respondent should have been required to present evidence that clearly and with minimal certainty would allow it to support the conclusion that the act of acquisition/sale of corporate participation in question in this case did not correspond to any contractual intention, characterizing it as a supposed illegitimate tax planning directed at obtaining a tax advantage for its majority shareholder.

(xi) It concludes in favor of the approval of its request due to violation of law by error regarding the factual and legal requirements, which justifies the annulment of the assessment in question in this case, with the reimbursement of the tax paid, plus interest from the date of payment until full reimbursement.

The TA responded, arguing that the request should be judged unfounded, alleging briefly as follows:

(xii) As to the preliminary issue raised by the Claimant, it argues that the extension of the time limit for inspection beyond its legal time limit is not capable of leading to annulability of the assessment act in question in this case.

(xiii) In fact, it states that this issue has been the subject of extensive case law, which is unanimous in considering that the violation of the time limit for inspection provided for in Article 36 of RCPIT only relates to the cessation of the suspensive effect of the inspection, bearing in mind that such time limit does not constitute a peremptory time limit, but merely a disciplinary one.

(xiv) As to the verification of the elements of GAAC, it begins by assessing the result element, stating that, in this case, the valuation of the company, followed by the transfer of shares carried out, had as its objective the withdrawal of dividends from the Claimant and the transformation of these into the reimbursement of the credit generated with the transfer.

(xv) Resulting, it says, in the elimination of taxation under Personal Income Tax, since, without these acts, the majority shareholder of the Claimant would not benefit from the exclusion of taxation, remaining such flow subject to tax as income of category E of Personal Income Tax.

(xvi) As to the "means" element, it argues that the acts/transactions carried out by the Claimant allowed the transformation of a financial flow that, without the alienation operation in question, would reach the majority shareholder in the form of a dividend and would be income subject to Personal Income Tax.

(xvii) It further alleges that, with the acts performed by the Claimant, such financial flow was paid to the majority shareholder in the form of reimbursement of credit generated by the capital gain resulting from the sale of shares held by its holder for more than 12 months, taking advantage of the exclusion of taxation provided for in the wording at the time of paragraph a) of No. 2 of Article 10 of CIRS (in the wording prior to that given by Article 2 of Law No. 15/2010, of 26 July).

(xviii) Thus achieving the desired tax objective, therefore ensuring the intended economic effect, namely the receipt by the majority shareholder of dividends without any taxation.

(xix) As to the intellectual element, it argues that in the present case, there is no doubt that the acquisition of own shares by the majority shareholder aimed, in the first instance, at achieving the tax result, that is, the distribution of dividends.

(xx) Verifying itself in the case under analysis, it maintains, the existence of a preponderant tax motivation that manifested itself in the forms adopted and which makes the tax purpose of the transaction prevail over the non-tax purpose.

(xxi) Finally, as to the normative element, it states that there was merely a change from direct legal ownership to indirect ownership, since the majority shareholder continued to hold effective control over the Claimant, achieving through this "artifice" – its expression – an essentially tax purpose.

(xxii) Being, in its view, faced with a set of operations aimed at, if not exclusively, at least predominantly, the objective of evading taxation on income which is itself within the scope of application of the Personal Income Tax Code – Article 5/2, h).

(xxiii) It states that the fact that the Claimant chose a complex, artificial and unusual structure – not listed in Article 5/2 of CIRS – with the aim of obtaining an economic result analogous to what it would obtain if it adopted the legal form normally chosen to achieve it, a situation in which the tax regime would be more burdensome, does not represent a sufficient reason to disregard the rule of taxable scope that taxes in substance the act of distributing dividends.

(xxiv) It concludes by stating that all elements of GAAC have been proved, as it alleges that there were sequential, logical and planned acts or transactions by the Claimant, organized with a view to achieving the desired tax objective, thus ensuring the intended economic effect, namely the receipt by the majority shareholder of the Claimant of dividends without any taxation.

(xxv) It states that the crux of the problem is not about the value attributed to the operation, but rather a set of acts of tax avoidance which, in its view, should generate the ineffectiveness of the same from a tax perspective, inasmuch as the legal form adopted, being abusive, aimed at the elimination of the tax that would have applied to the value of the "advance" – its expression.

(xxvi) Given the framework and factuality presented by it, it concludes that the requirements of the theory of tax law fraud, as well as abuse of legal forms, are met in this case, which, in summary, justifies, in its view, the application of No. 2 of Article 38 of the LGT, arguing for the dismissal of the Claimant's request and the maintenance of the tax assessment act in question in this case.

On 30 June 2014, at 14:00, a meeting of the Collective Arbitral Tribunal took place at the headquarters of CAAD, which waived the examination of the witnesses called, considering that the issues to be resolved in this case are purely matters of law. No exceptions were identified, and there was likewise no need for the presentation of further arguments, considering that both parties had thoroughly substantiated their positions in fact and in law.

On 3 November 2014, given the temporary inability of the President Arbitrator to exercise his functions, it was decided, pursuant to No. 2 of Article 21 of RJAT, to extend by 2 months the time limit for delivering the arbitral decision.

1. SANITATION

The Tribunal is materially competent and is duly constituted, pursuant to Articles 2, No. 1, paragraph a), 5, No. 2, and 6, No. 1, of RJAT.

The parties have legal personality and capacity, are legitimate and are duly represented, pursuant to Articles 4 and 10, No. 2, of RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March.

The case does not suffer from any nullities and no issues were raised that prevent the examination of the merits of the case, beyond that mentioned in point 4 of this Decision.

1. FACTUAL MATTER

A) PROVEN FACTS

Based on the facts alleged by the parties and not contested, as well as on the extensive documentation attached to the case, including the administrative process ("AP"), the following relevant facts are established:

• With regard to the administrative procedure that led to the assessment in question in the present case, the following facts are identified:

The Claimant was subject to a tax inspection, of partial scope, for the fiscal year 2009, carried out through Service Order No. …, with a view to monitoring abusive tax planning schemes and initiated on 07/09/2012 (see Document No. 1 attached by the Claimant with its initial petition and AP attached by the Respondent).

Such inspection action was initially extended until 07/06/2013, by order notified to the Claimant dated 11/02/2013 and subsequently extended again until 07/09/2013, by order dated 13/05/2013 (see Documents Nos. 2 and 3 attached by the Claimant with its initial petition and AP attached by the Respondent).

Such extensions had as their main reason the fact that it was a "tax situation of special complexity" (see Documents Nos. 2 and 3 attached by the Claimant with its initial petition and AP attached by the Respondent).

The inspection procedure ended on 01/11/2013 (see Document No. 1 attached by the Claimant with its initial petition and AP attached by the Respondent).

The Claimant was notified to exercise its right to prior hearing on the Respondent's proposal for application of GAAC, and chose to exercise the same, arguing for non-activation of GAAC (see AP attached by the Respondent to the case).

In compliance with the orders of the Director-General of the TA and the Deputy Director-General for the area of Tax and Customs Inspection, dated respectively 28/10/2013 and 15/10/2013, the application of GAAC to the Claimant was authorized (see AP attached by the Respondent in the case).

The Claimant was notified of the Tax Inspection Report on 07/11/2013 (see AP attached by the Respondent to the case).

• As to the factual situation relating to the organization and activity developed by the Claimant, the following facts were identified as relevant to the case:

The Claimant is a commercial company whose object is the carrying out of investments in any form of movable or immovable property, with share capital of € 90,000.00, represented by 1,800 bearer shares with a nominal value of € 50.00 each (see AP attached by the Respondent).

The Claimant is registered for the exercise of "activities of companies managing non-financial corporate participations", …, being the principal shareholder of several companies that make up the Group … (see AP attached by the Respondent).

On 31/12/2008 the Claimant had the following corporate structure:

• As to the operation of purchase and sale of shares challenged by the TA, the following facts were established:

Through a General Meeting held on 2009-09-08 (Minutes No. 67), it was unanimously resolved that the Claimant acquire from its shareholder (and administrator) Ms. D. 27 shares, representing 1.5% of the share capital of the Claimant itself for the amount of € 6,977,000.00 (see AP attached by the Respondent).

Such acquisition was carried out through a contract for the purchase and sale of shares dated 15/09/2009, with the shares being transferred fully subscribed and paid up, free of any liens, encumbrances or liabilities and with all rights inherent to them (see AP attached by the Respondent).

The Certified Public Accountant of the Claimant, at the request of the respective board of directors, submitted on 04/09/2009 a report and opinion, for the purposes of No. 2 of Article 397 of the Commercial Companies Code ("CSC"), on the draft share acquisition to be carried out, concluding that the stipulated value for the operation was appropriate and giving a favorable opinion to the operation (see AP attached by the Respondent to the case).

The sale of the corporate participation took place on 15/09/2009, with the total price agreed of € 6,977,000.00, which was paid in full on that date, with the said shareholder giving the respective receipt by the said contract – check No. …, drawn on account No. ... of Bank … (see AP attached by the Respondent).

As a result of the above operation, the Claimant came to hold 10% of its own capital and the shareholder, Ms. D. B, came to hold 65% of the capital of the Claimant.

The shareholder, Ms. D. B, had held the 27 shares in question in the present case since at least 15/09/1987 (see Document No. 7 attached by the Claimant with its initial petition).

The assessment in question in the present case had its motivation in the Tax Inspection Report, authorized by the order dated 28/10/2013 of the Director-General of the TA, which, by understanding that the necessary requirements were met, authorized the application of the general anti-abuse clause, provided for in No. 2 of Article 38 of the LGT, concluding that the sale of shares by the shareholder, Ms. D. A, acquired by the Claimant, now in question in this case, should be disregarded for tax purposes (see AP attached by the Respondent).

And characterizing the operation as a distribution of dividends, taxed in accordance with paragraph h) of No. 2 of Article 5 and paragraph c) of No. 3 of Article 71, both of the Personal Income Tax Code, the Respondent issued the additional tax assessment No. …, dated 14/11/2013, in the amount of € 1,395,400.00, relating to withholding tax not withheld by the Claimant under Personal Income Tax (see Document No. 10 attached by the Claimant and AP attached by the Respondent).

The Claimant made the payment within the voluntary period of the assessment in question in this case, having paid it on 06/12/2013 (see Document No. 10 attached by the Respondent).

B) UNPROVEN FACTS

There are no other facts relevant to the decision on the merits that have not been proven.

C) REASONING OF THE DECISION ON FACTUAL MATTER

As to the essential facts, the agreed matter is formed in an identical manner by both parties and the Tribunal's conviction was formed on the basis of the documentary (official) elements attached to the case and discriminated above, whose authenticity and veracity were not questioned by any of the parties.

1. PRELIMINARY QUESTION

The Arbitral Tribunal decided to raise the issue of a case decided by non-challenge of a severable act, which warranted a response from the Claimant in its petition dated 15/07/2014 attached to the case and which did not warrant any response from the Respondent, despite being notified to do so.

Given the arguments presented by the Claimant, the Tribunal, after examining the petition presented, considers that, in this case, a situation of res judicata does not exist, thus adhering to the argument presented by the Claimant.

1. QUESTIONS TO BE DECIDED

The Claimant seeks a decision on the following questions:

• Failure to observe essential formality in the tax inspection procedure;

• Fulfillment of the verification of the requirements for application of GAAC provided for in No. 2 of Article 38 of the LGT;

• Legality of the additional tax assessment contested in this case.

1. LAW

Having addressed the facts, let us now consider the law.

A) Failure to observe essential formality in the Tax Inspection Procedure – As to the observance of the time limit for tax inspection.

The Claimant alleges that since the inspection procedure began on 07/09/2012, its conclusion, even if the extensions presented by the TA are accepted as valid, should have occurred on 07/09/2013.

Having occurred on 01/11/2013, it maintains that it extended beyond the time period provided for in Article 36 of RCPIT, and therefore this failure to observe essential formality constitutes, in its view, a defect giving rise to annulability of the additional assessment issued by the Respondent and in question in the present case, basing this on the provision of Article 135 of CPA.

The Respondent, in turn, argues that the extension of the time limit for inspection is not capable of producing the legal effect alleged by the Claimant, justifying its position by extensive case law of the Courts, which point unanimously to the conclusion that the violation of the time limit for inspection provided for in Article 36 of RCPIT only relates to the cessation of the suspensive effect of the inspection, bearing in mind that such time limit does not constitute a peremptory time limit, but merely a disciplinary one.

And it seems to us that the Respondent is correct.

In fact, the violation of the time limit for inspection that, in this case, occurred, only has as its consequence that which results from No. 1 of Article 46 of the LGT, that is, the time limit for prescription, which was suspended, ceases that effect, and the time limit is counted from its beginning, meaning everything proceeds as if the inspection had not been conducted and the time limit for prescription runs continuously and without any suspension.

In this same sense, see the Decision of TCAS No. 06580/13, dated 30-04-2014.

The failure to comply with the time limits legally fixed for inspection only has direct relevance in terms of prescription of the assessment, not offending such interpretation of the constitutional principles of legality, proportionality and impartiality (In this same sense, see Decision of STA No. 2961/09, dated 12/05/2009).

Therefore, the violation of the above-mentioned time limit does not give rise to illegality of the tax assessment itself issued, but only to the cessation of the suspensive effect of the inspection itself, and therefore the time limit for prescription of the assessment runs from the beginning.

It should be further noted that the procedure for authorization of application of GAAC provided for in Article 63 of CPPT proceeded in accordance with the law and, with the necessary authorization of the Director-General of the TA granted and the Claimant heard, the corrections made sustained the additional Personal Income Tax assessment in question in this case, and it was, indeed, notified to the Claimant still in the course of the year 2013, with observance, consequently, of the time limit for prescription (provided for in Nos. 1 and 4 of Article 45 of the LGT).

Thus, the Claimant's claim that the tax assessment in question in this case is affected by annulability due to violation of the time limit for conducting the tax inspection provided for in Article 36 of RCPIT does not merit approval.

B) As to the requirements for application of GAAC provided for in No. 2 of Article 38 of the LGT

• The positions in conflict

At issue in this case is the application of No. 2 of Article 38 of the LGT, which provides, in the current wording introduced by Law No. 30-G/2000, of 29/12:

"Acts or legal transactions that are essentially or mainly directed, by artificial or fraudulent means and by abuse of legal forms, at the reduction, elimination or deferment in time of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or at obtaining tax advantages that would not be achieved, wholly or partially, without the use of such means, shall be ineffective in the tax context, the taxation then being effected in accordance with the rules applicable in the absence thereof and the said tax advantages not being produced."

Both the Claimant and the Respondent recognize that this rule contains an anti-abuse clause and accept the doctrine that decomposes it into five elements, four of which – the means, result, intellectual and normative elements – relate to the requirements of application, and the fifth – the sanctionary element – to the implementation of the clause.

However, regarding the verification or otherwise of the requirements for application of GAAC, they hold opposing positions, extensively expressed throughout the tax procedure and in the context of the present arbitral process.

The Claimant considers that the requirements for the application of GAAC are not (and have not been proved to be) met, and therefore maintains that the rule's provisions leading to the ineffectiveness of legal transactions in the tax context cannot be applied.

Maintaining that the act of sale of the corporate participations in question in this case corresponds to an effective contractual intention of both parties and was not motivated exclusively by tax considerations.

The TA, for its part, considers that the said requirements are met, alleging that all elements of application of GAAC are fulfilled, arguing in summary that the means element, which it defines as the avenue used to obtain the desired tax gain or advantage, is completely fulfilled, as stated in the Final Inspection Report; that the result element, which it defines as corresponding to the tax advantage and economic equivalence obtained, is completely fulfilled, as stated in the Final Inspection Report; that the intellectual element, which it defines as corresponding to the exclusive or predominantly tax motivation of the taxpayer, is completely fulfilled, as stated in the Final Inspection Report; and that the normative element, which it defines as representing the normative-systemic disapproval of the advantage obtained, is completely fulfilled, as stated in the Final Inspection Report.

In summary, the TA considers that in this case there are before it legal acts that were predominantly directed at achieving the complete elimination of the tax that would be due, as it maintains that the set of transactions carried out by the Claimant prevented taxation through the substitution of a taxable transaction – the distribution of dividends – for another excluded from taxation – the sale of shares held for more than 12 months.

For the Respondent and we quote point 55 on page 12 of the Tax Inspection Report attached to the case, its position is anchored in the following: "The Tax Inspection understood that the main purpose of carrying out all the facts mentioned above was nothing more than the execution of artificial means and abuse of legal forms, aimed at reducing taxes that would be due without the use of these same means, since, bearing in mind that the heart of the problem does not concern the value attributed to the operation[1] but rather a set of tax avoidance acts which, before the tax administration, should generate their ineffectiveness from a tax perspective, inasmuch as the legal form adopted, being abusive, aimed at the elimination of the tax that would have applied to the value of the 'advance'."

It is important to note that for the Respondent itself the essential question to be decided in this case concerns not the valuation of the corporate participations, but rather the application of GAAC and the necessary verification of its requirements of application.

And it is precisely in that light, thus delimited by the Respondent itself in the tax inspection report, but also by the Claimant, that the Tribunal will assess the present case.

As is known, the application of Article 38, No. 2, of the LGT depends on the cumulative fulfillment of five requirements: (1) the means element; (2) the result element; (3) the intellectual element; (4) the normative element; and (5) the implementation of the Clause: the sanctionary element.

Result Element

Let us begin with the result element, as both the Claimant in its petition and the Respondent in its response refer to it first.

As defined by prevailing doctrine on the application of GAAC, the result element is expressed in the reduction, elimination or deferment in time of taxes that would normally be due if there were no pre-planning of acts or transactions by the taxpayer.

As GUSTAVO LOPES COURINHA states, General Anti-Abuse Clause in Tax Law, page 172, tax advantage should be understood as any situation in which, by virtue of the performance of a certain act, a more favorable tax burden is achieved for the taxpayer than that which would result from the performance of normal acts with equivalent economic effect, subject to taxation.

That is, in other words, the Tax Administration must prove the existence of fiscally advantageous results that would not exist if the taxpayer chose the performance of a different act or transaction, but necessarily equivalent in terms of economic effect.

The Respondent states in the Tax Inspection Report and we quote page 18:

"In the present case, the valuation of the company, followed by the transfer of shares carried out, had as its objective the withdrawal of dividends from 'A' and the transformation of these into the reimbursement of the credit generated by the transfer, resulting in the elimination of taxation under Personal Income Tax, since, without these acts, it would not benefit from the exclusion of taxation, remaining such flow subject to tax as income of category E of Personal Income Tax."

(...)

"If this amount had been paid to the majority shareholder in the form of dividends, without the acts used, it would be subject to taxation in accordance with the provisions of paragraph h) of No. 2 of Article 5 of the Personal Income Tax Code (CIRS)."

The Respondent invokes that with the operation in question in this case, the Claimant remunerated the majority shareholder in the amount of € 6,977,000.00, paid in full, whereas if that same amount had been paid to the said shareholder in the form of dividends, that same amount would be subject to taxation as income of Category E of Personal Income Tax at a rate of 20%.

Concluding that the result element is evidenced by the fact that, with the operation of purchase of shares, the Claimant remunerated the majority shareholder in the amount of € 6,977,000.00, on pain that, without the acts used, such income would be subject to taxation in accordance with the provisions of paragraph h) of No. 2 of Article 5 of the Personal Income Tax Code (CIRS).

The Claimant, in turn, contests this argument of the TA by pointing out that acts or legal transactions must be guided by identical economic purpose and that to verify the result element, beyond a tax advantage, an equivalence of result and effects must also be evidenced between the two transactions or acts.

And it seems to us that the Claimant is entirely correct in the argument presented.

In fact, in the case before us there is an evident error of principle in the entire reasoning of the Respondent, as the legal act of purchase and sale of corporate participations and the legal act of a distribution of dividends cannot be configured as legal acts of identical economic purpose, as with the purchase the Claimant acquired a property (shares) paying for them, and indeed, a certain amount, whereas the distribution of dividends is a unilateral act by which the Claimant, if it chose to do so, would receive nothing as consideration.

On the other hand, with the sale of 1.5% of the capital of the Claimant, the majority shareholder unquestionably relinquished a greater capacity for intervention in all future acts in the life of the Claimant, such as distributions of dividends, deliberative acts, etc.

As PAULO OLAVO CUNHA states, Law of Commercial Companies, 2nd edition, page 275, the share can, and should, be understood as a social participation, that is, as the measure of the position of the partner in the joint-stock company, characterizing the legal complex in which that participation is expressed and, especially a certain and determined legal situation."

The Claimant, with the option taken, did not engage in any substitute behavior, in the sense that, in fact, the acts in question in this case do not have an identical or equivalent economic effect.

Therefore, the result element is not verified.

Considering that the application of GAAC presupposes the cumulative verification of all of its elements, the failure to observe one of them is grounds sufficient for the application of GAAC to this case to be prevented.

Therefore, the examination of the remaining elements is precluded by the fact that, in this case, there is an error regarding the factual and legal requirements in the application of GAAC by the Respondent, in understanding that a legal act of purchase and sale of corporate participations is identical from an economic point of view to a distribution of dividends.

In these terms, given the material interpretation advocated, the examination and assessment of the other elements of GAAC is precluded.

As stated in the Commentary to the Code of Procedure in Administrative Courts, Almedina, 2005, by Mário Aroso de Almeida and Carlos Cadilha, in a note to Article 95 of that instrument, p. 483 (applicable by reference from Article 2, paragraph c) of CPPT and Article 29, No. 1, paragraphs a) and c) of RJAT): "If the court judgment on the main claim, the court's jurisdiction as to a subsidiary or alternative claim is foreclosed; and in the same manner, if the decision given regarding one issue consumes or leaves other aspects of the case with which it is correlated prejudiced."

Nonetheless, this Tribunal considers it should note that GAAC cannot prevent the choices of taxpayers who, faced with the choice between dividends (distributable or merely potential) and capital gains, opt, even if for tax reasons, for the achievement of capital gains.

In truth, the tax disregard of such a choice would be a disregard of the very choice of the legislator, which deliberately and for more than 20 years promoted precisely that legal formula, maximizing to the fullest the tax advantage associated with capital gains by means of their simple and straightforward non-taxation (Article 10, No. 2, paragraph a) of the Personal Income Tax Code, with the wording in force at the time), in stark contrast with the taxation at the rate of 20% of dividends.

When the legislator takes such a clear position as the one here at issue, it is not justified for the TA to construct an application solution that achieves a result that flagrantly contradicts the intent of the law, which, from the outset, would render impossible the verification of the normative element of GAAC.

As GUSTAVO LOPES COURINHA asserts, the application of GAAC should be rejected in cases where "by virtue of a choice of legislative policy, certain areas conducive to obtaining significant tax advantages are left outside the scope of taxation."[2] In such cases, there is no evidence whatsoever of Tax Law Fraud.

Finally, it is the Tax Authority itself that expresses reservations in this regard, somewhat implicitly in the fact that, in the list issued by it in 2010, containing abusive tax planning schemes exemplifying the use of GAAC – the 13 categories of operations most flagrantly abusive, identified in light of Decree-Law No. 29/2008, of 25 February – does not include the choice of taxpayers to alienate shares as an alternative means to the distribution of distributable or merely future dividends that they carry.

And in the case before us such situation is even more evident inasmuch as the majority shareholder, Ms. D. B, was the holder of the shares in question in this case for more than twenty years (as can be verified by Document No. 7 attached by the Claimant in this case), a fact that was not contested by the Respondent, which means that such capital gains would have been outside the scope of Personal Income Tax by application of Article 5 of Decree-Law No. 442-A/88, of 30/11, combined with the provisions of Decree-Law No. 46373, which approved the previous and now repealed Capital Gains Tax Code.

• Conclusion

The factual and legal requirements on which the application of GAAC depends not being met, the Respondent violated, through erroneous interpretation and application, No. 2 of Article 38 of the LGT.

And, consequently, the claim submitted by the Claimant for a declaration of illegality of the additional tax assessment No. …, dated 14/11/2013, in the amount of € 1,395,400.00, relating to withholding tax/Personal Income Tax, is well-founded, for suffering from a defect of violation of law by error regarding the factual and legal requirements, which justifies its annulment.

• Reimbursement of the amount paid and request for compensatory interest

The Claimant requests reimbursement of the amount paid pursuant to the assessment in question in this case, plus compensatory interest for the wrongful payment of that amount.

In the case before us, it is manifest that, as a consequence of the illegality of the assessment, for the reasons better explained in this decision, there is ground for reimbursement of the tax paid by the Claimant, by virtue of the provisions of Articles 24, No. 1, paragraph b) of RJAT and 100 of the LGT, as such is essential to "restore the situation that would have existed if the tax act in question in the arbitral decision had not been performed."

As regards compensatory interest, it is also clear in this case that the illegality of the tax assessment contested is directly attributable to the Respondent, which, of its own initiative, performed it without legal support, being based on an erroneous interpretation (and consequently application) of the requirements for application of GAAC.

Consequently, the Claimant is entitled to receive compensatory interest, in accordance with the provisions of Articles 43, No. 1 of the LGT and 61 of CPPT.

The compensatory interest shall be paid to the Claimant from the date on which it made the respective payment of the tax in question in this case until the full reimbursement of the amount paid, at the legal rate.

In these terms, the Claimant's claim is well-founded.

1. DECISION

In view of the foregoing, this Arbitral Tribunal agrees as follows:

• To rule that the claim for declaration of illegality and annulment of the withholding tax assessment under Personal Income Tax, better identified under the document issued with the number …, dated 14/11/2013, in the amount of € 1,395,400.00, is well-founded;

• To rule that the claim for an order that the Respondent reimburse the Claimant the amount paid as tax, plus compensatory interest in accordance with legal provisions, from the date on which such payment was made until the date of full reimbursement thereof, is well-founded.

The value of the case is set at Euro 1,395,400.00, in accordance with the provisions of Articles 3, No. 2 of the Rules for Costs in Tax Arbitration Procedures (RCPAT), 97-A, No. 1, paragraph a) of CPPT and 306 of CPC.

The amount of costs, in accordance with the provisions of Article 22, No. 4 of RJAT and Table I annexed to RCPAT, shall be borne exclusively by the Tax and Customs Authority, in accordance with the provisions of Articles 12, No. 2 of RJAT and 4, No. 4 of RCPAT.

Let notification be made.

Lisbon, 3 January 2015

The Arbitrators,

Dr. Jorge Lino Ribeiro Alves de Sousa (President)

Dr. Henrique Nogueira Nunes (Member)

Professor Doctor Eduardo Paz Ferreira (Member)

Text prepared by computer in accordance with Article 131, No. 5 of CPC, applicable by reference from Article 29, No. 1, paragraph e) of Decree-Law No. 10/2011, of 20 January, with blank lines and revised.

The wording of this arbitral decision is governed by the orthography prior to the 1990 Orthographic Agreement.

[1] Of purchase and sale of shares

[2] In The General Anti-Abuse Clause in Tax Law: contributions to its understanding, reprint of the 1st edition, Almedina, Coimbra, 2009, page 196.