IRC Fair Value Adjustments Under Articles 18(9)(a) and 43(3) CIRC – CAAD Decision 25/2015-T

ARBITRAL DECISION

Process no. 25/15-T

Claimant/Applicant: a... – ... s.a.

Respondent: Tax and Customs Authority

Subject: CIT – Article 18, no. 9, paragraph a) and article 43, no. 3, of CIRC – adjustments for fair value

IMT - tax benefits utility tu

I - REPORT

1. On 13 January 2015, A... – ..., s.a. (Claimant), with TAX ID ... and domicile at Avenue ..., Plot ..., ....., ..., pursuant to the provisions of article 2, no. 1, of Decree-Law 10/2011, of 20 January, files a Request for establishment of a sole arbitral tribunal in tax matters and a request for arbitral pronouncement, aimed at the annulment of the assessment acts relating to Corporate Income Tax, for the tax year 2010, identified with the numbers …, …, … and …, and for the tax year 2011, identified with the numbers … and …, in the total amount of € 15,661.26 (fifteen thousand six hundred and sixty-one euros and twenty-six cents), as well as reimbursement of amounts already paid, increased by compensatory interest. In addition to the power of attorney and proof of payment of the initial fee, it attached 3 documents.

2. In the request for arbitral pronouncement, the Claimant chose not to appoint an arbitrator.

3. Pursuant to no. 1 of article 6 of RJAT, by decision of the President of the Deontological Council, Maria Manuela do Nascimento Roseiro, the undersigned, was appointed as sole arbitrator, and accepted the appointment within the legally stipulated deadline.

4. The parties having been notified and there being no rejection of such appointment (article 11, paragraphs a) and b) of RJAT and articles 6 and 7 of the Deontological Code), the arbitral tribunal became constituted on 25 March 2015, in accordance with the provision in paragraph c) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December.

5. On 4 May 2015, the Tax and Customs Authority (TA or Respondent) filed its Reply and attached the administrative file.

6. In accordance with the positions of the Parties, notified for this purpose, a ruling was issued on 23 June 2015 dispensing with the holding of the meeting provided for in article 18 of RJAT, and notifying the Parties to submit written pleadings within a period of ten days running successively, with the date of 24 September 2015 being set for communication of the arbitral decision. In the pleadings submitted, the Parties reiterated the arguments previously invoked.

7. Request for arbitral pronouncement

The Claimant invokes, in summary (our responsibility), that:

• Beyond its main activity of service provision and sales as operator of B, it holds a portfolio of publicly traded shares, having acquired quoted shares of C in 2009, with a view to their future appreciation in a merger or incorporation operation;

• In 2010, it acquired and sold shares of D, having recorded a loss of € 2,118.17;

• Its portfolio (account 142103) had a very high value (€ 813,611.86) relative to turnover, but on 31 December it had decreased to € 710,286.36, representing a depreciation of € 103,325.50, which, together with the loss of € 2,118.17 (D), totaled € 105,443.67;

• With the approval of SNC it began recording shares at their fair value, which contributed to the balance of account 68 for determining the taxable profit declared of € 52,351.32;

• A further adjustment with the value of the portfolio of shares of C resulted in the portfolio of securities having, on 31 December 2011, a value of € 509,734.72, that is, a loss of € 224,749.18, taken into account in that year and capable of influencing subsequent years;

• Although adjustments resulting from the application of fair value do not, in principle, contribute to the formation of taxable profit, being attributed as income or expenses at the moment of realization, the exception provided for in no. 9 of article 18 of CIRC for "financial instruments recognized at fair value through results, provided that, if they are equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a participation in capital exceeding 5% of the respective share capital", gives the possibility for the taxpayer to deduct the amounts resulting from the application of fair value;

• However, whereas the Claimant considers that, in the formation of taxable profit, adjustments, both positive and negative, contribute in accordance with articles 17, no. 1, 21, no. 1 and 24, no. 1, of CIRC, the TA considers that expenses in financial investments only contribute half of their value pursuant to no. 3 of article 45 of CIRC;

• It must be taken into account that the introduction of this rule (formerly, art. 42, no. 3, of CIRC), both initially with the State Budget for 2003, and as amended by the State Budget for 2006, aimed, as a mechanism to combat fraud and tax evasion, to expand the tax base of CIT, discouraging fraudulent behavior, and no. 9 of art. 18 of CIRC came to accept, for reasons of approximation between taxation and accounting, the application of the fair value model in financial instruments (...) in cases where the reliability of the determination of fair value is in principle assured;

• Unlike what happened before the introduction of SNC, where it was at the moment of realization, dependent on the voluntary action of the TP, that gains were determined, the expenses determined by application of no. 9 of article 18 of CIRC are not conditioned by the will of the taxpayer, because the value of financial instruments is objectively determined by equally objective criteria, without intervention of the TP in the formation of the price, not justifying the application of no. 3 of art. 45 of CIRC;

• None of the three situations to which this rule applies – "negative difference between gains and losses realized through onerous transfer of capital shares"; "other losses relating to capital shares or other components of own capital" and "other negative patrimonial variations relating to capital shares or other components of own capital, in particular supplementary contributions" – falls within the concept of expense provided for in art. 23 of CIRC;

• It only makes sense to apply no. 3 of art. 45 of CIRC in cases where the assessment of patrimonial variation is based on the principle of realization, in situations dependent on the voluntary action of the taxpayer, with the 50% limit intended to discourage taxpayers from taking certain decisions, placing themselves in disadvantageous positions to benefit in terms of formation of taxable profit and where the value of financial instruments was not objectively determined;

• In this sense, the Decision issued by CAAD (proc 108/2013-T), with this understanding reinforced by the repeal of article 45 of CIRC by Law no. 2/2014, of 16/1;

• The principles of equity, good faith and equality, and the prevalence of material substance over form, security, trust, proportionality would also be violated;

• Given the evolution of the portfolio value in the year of acquisition – appreciations and depreciations – an analysis of the situation as a whole reveals a final negative balance between acquisition and sale of - € 27,486.80;

• This Request should be considered well-founded, declaring the annulment of the assessment acts identified with nos. …, …, …, and …, for the tax year 2010 and nos. … and … for the tax year 2011, condemning the TA to return to the Claimant all amounts paid, increased by compensatory interest, from payment of the assessments until the actual reimbursement of the amounts owed.

1. The Reply of the Respondent

The Respondent replied, in summary (our responsibility), that:

• In the years 2010 and 2011 the Claimant could only have considered half of the loss determined in financial investments for determining taxable profit, so € 52,721.84 must be added to the final taxable result of 2010, and € 112,374.59 to the final taxable result of 2011;

• Attention must be paid to paragraph a) of no. 1 of art. 23 of CIRC (expenses are those demonstrably necessary for obtaining income subject to tax or for maintenance of the income source, namely expenses resulting from fair value in financial instruments) and to no. 3 of art. 45 (limit to losses or patrimonial variations);

• Taking into account the changes introduced by the adoption of SNC (DL 158/2009) and to CIRC (DL 159/2009), tightening the link between accounting and taxation, with the admission of fair value measurement of investments in own capital instruments with publicly disclosed quotations (NCRF 27), the principle previously in force of realization (moment of alienation) remains, as a general rule, accepting the fair value model only when gains and losses are reflected in results;

• However, if such adjustment results in a loss, this only contributes to the formation of taxable profit in half of its value, and there is no reason not to apply no. 3 of art. 45 of CIRC, as admit authors such as André Vasconcelos, in "Fair value and the CIT Code";

• The same regime applies to situations framed within the transitional regime established in article 5, no. 1, of Decree-Law no. 159/2009, of 13 July – regarding the effects resulting from first-time adoption of NIC, relevant in terms of CIT, which are apportioned in equal parts in the first year and the four following;

• It should be noted that Decision no. 85/2010 of the Constitutional Court (which ruled on the constitutionality of the reduction to half of deductible losses) mentions that after the republication of CIRC by Decree-Law no. 159/2009, of 13/7, the solution remained unchanged, despite having been relocated to art. 45 through the renumbering carried out, that is, it may be concluded that the legislator made no changes because he wished to maintain the regime, previously in force, "for losses or negative patrimonial variations relating to capital shares or other components of own capital", of contributing half to the formation of taxable profit;

• The Claimant's argument that when paragraph a) of no. 1 of art. 18 of CIRC is applied the application of no. 3 of art. 45 ceases does not hold, because the expenses determined resulting from fair value are not conditioned by the taxpayer's will because this rule makes no distinction between losses relating to capital shares whose price is or is not formed in a regulated market.

• The Claimant's argument that it makes sense to apply no. 3 of art. 45 only in cases where the assessment of patrimonial variation is based on realization does not hold either, because the provision does not say that and, if that were the legislator's intention, it would have to say so, given the introduction of the wording of paragraph a) of no. 9 of art. 18;

• It is not for the interpreter to distinguish where the legislator did not distinguish, and it is certain that the wording enshrined in art. 45, no. 3 (created by the 2003 State Budget) had a historical evolution and emerged when transitional provisions for banks and insurers already enabled apportionment based on fair value, all suggesting that the rule covers all types of losses relating to capital shares, including potential losses;

• This interpretation does not violate constitutional principles such as taxpaying capacity, fiscal equality, justice of prevalence over form, trust, legal security and proportionality, just as other provisions of CIRC that limit deduction of costs or losses without suffering from unconstitutionality, as has been recognized by the Constitutional Court;

• The doctrine of the arbitral decision in process 108/2013-T is based on a partial and outdated interpretation of art. 45, no. 3, understanding it as a specific anti-abuse rule, whose application would depend on case-by-case appraisal of the abusive character of the operation in question;

• The amendments introduced in Law no. 2/2014 confirm that previously losses or negative patrimonial variations relating to capital shares or other components of own capital, namely adjustments resulting from the application of art. 18, no. 1, a), contributed to the formation of taxable profit in only half of their value – the Report explains the changes that occurred, including the repeal of art. 45, no. 3, as adaptation to the new regime, including rules on economic double taxation, and the limitation on deductibility provided for in no. 3 of art. 45 was eliminated, with this regime applying only after 1 January 2014;

• The request for a declaration of illegality as well as for compensatory interest should be considered unfounded.

1. Question to be decided

The question that arises in these proceedings is whether, in accordance with the provision in paragraph a) of no. 9 of article 18 of CIRC, as worded by Decree-Law no. 159/2009, of 13 July, losses resulting from the application of the fair value model in financial instruments, recognized through results in the years in question (2010 and 2011), are relevant for tax purposes in their entirety or only in 50%, pursuant to no. 3 of article 45 of the same Code.

1. Cleansing

The Tribunal is materially competent and is properly 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 legally represented, pursuant to articles 4 and 10, no. 2, of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings do not suffer from defects that would invalidate it.

Proceeding therefore to the decision on the merits.

II. REASONING

1. Established facts

11.1. The Claimant, whose main activity is "Retail trade equipment for telecommunications, special establishment", CAE code 47420, has as its corporate purpose other activities, such as provision of communication management consultancy services, wholesale and retail trade of machines, vehicles and industrial equipment, rental of vehicles and equipment with and without operator, industry and wholesale trade of precious and siderurgic metals, obtaining and first transformation of precious metals, purchase and sale of real property and resale of same acquired (articles 5 and 6 of the Reply).

11.2. The Claimant is agent of B…, SA with stores open in several locations, namely, ..., …, …, …, … (…), …, …, …, …, … and … (article 8 of the Request and article 7 of the Reply).

11.3. The Claimant was, between 24 and 25 November 2014, and under Service Orders 2014… and 2014… (Tax Inspection Services of the Finance Directorate of ...), subject to a tax inspection, originated by the situation arising from the activity code of IT … "Declaration control action" with general scope and concerning the years 2010 and 2011, which analyzed the movements of the portfolio of publicly traded shares held by the Claimant (PA, points II-1. and 2. of TIR).

11.4. During 2009, the Claimant acquired, through Banco Espírito Santo, shares of C (article 14 of the Request, article 8 of the Reply and PA).

11.5. The accounting of such amounts followed the accounting and financial reporting standard (NCRF) 27, there having been in 2010 a reclassification at fair value, whose changes were attributed to the income statement (article 9 of the Reply, point III. 1. of TIR).

11.6. In 2010, the Claimant acquired and sold shares of D, as per accounting extract from account 142101 SNC (), having determined a loss in value (accounts 142101 and 686201) of € 2,118.17 (articles 10 and 12 of the Reply).

11.7. Regarding shares of C the following values were determined: i) Value of portfolio registered in account 142103 SNC1 – 813,611.86€; ii) Value of portfolio on 31 December 2010 - 710,286.36€; iii) Calculation of loss from reduction in fair value of financial assets – 103,325.50€ (=710,286.36 - 813,611.86) – (article 17 and 18 of the Request and article 11 of the Reply).

11.8. A final expense in financial investments was determined in the amount of 105,443.67€ (=103,325.50€ + 2,118.17€), included in the final balance of account 68 (123,094.04€), as per trial balances (articles 19 and 20 of the Request and article 13 of the Reply).

11.9. The taxable result reported for 2010 was € 52,351.32 (article 22 of the Request).

11.10. The Claimant filed the CIT income statement form 22, on 19 May 2011, and the IES statement on 29 September 2011 (PA 4, pages 52 to 55 and 46 to 48).

11.11. In determining the taxable result of 2010 the amount of 123,094.04€ was recorded in field A5016 of table 03-A (p. 4) and in field A8093 of table 06 (p. 46) of the 2010 IES (article 14 of the Reply).

11.12. On 31 December 2010, the book value of the Claimant's portfolio of shares in C was € 734,483.90 (article 18 of the Request and article 16 of the Reply).

11.13. On 31 December 2011, the value of the securities portfolio (account 142103) by applying the fair value criterion was € 509,734.72 (article 17 of the Reply and point III.2. TIR).

11.14. The Claimant determined a loss in financial assets to be recorded in the accounts on 31 December 2011 in the amount of 224,749.18€ (=734,483.90 – 509,734.72). (Reply, article 18, and point III.2. TIR).

11.15. This amount was registered in account 686301 SNC, contributing to the final balance of account 68 SNC in the value of 234,323.04€ whose value was recorded in field A5016 of table 03-A of the 2011 IES, thereby contributing to the determination of the taxable result of 2011 (Reply art. 19 and point III.2. TIR).

11.16. Regarding 2011, the Claimant filed, on 29 May 2012, the CIT income statement form 22, where it determined a tax loss of € 104,139.77 and, on 12 July 2012, delivered the IES statement (PA 4, pages 56 to 58 and 49 to 51).

11.17. The Claimant recorded in field A8092 of table 06 of the 2011 IES the amount of 224,749.18€ referring to expenses and losses from financial investments (article 20 of the Reply).

11.18. In determining the taxable profit of 2010 and 2011 the Claimant did not add half of the loss determined in financial investments to table 07 of Form 22 of 2010 and 2011 (article 22 of the Reply).

11.19. The Inspection Report made the following corrections:

2010 Tax Year

(I-1.4. of TIR)

2011 Tax Year

(I-1.4. of TIR)

(Art. 2 of Reply)

11.20. The TIR concluded that "as a result of non-compliance with the provision of no. 3 of article 45 of CIRC, the amount of 52,721.84€ must be added to the final taxable result of 2010" and that "the amount of 112,374.59€ must be added to the final taxable result of 2011" (TIR, III, 1. and 2. and Reply, article 23).

11.21. On 26 November 2014, the Claimant was notified of the draft corrections of the Tax Inspection Report through official letter no. … of the TIS of the Finance Directorate of ... (PA I, p. 2).

11.22. On 9 December 2014, the Claimant exercised its prior hearing right (Doc. 3 attached by the Claimant, pages 2 to 6).

11.23. Having rejected, in a memorandum of 10 December 2014, the interpretation defended by the Claimant in the prior hearing, the corrections proposed in the draft TIR were maintained, which obtained higher agreement and dispatch of the Finance Director of the same date (TIR and PA 1).

11.24. By mandate of the assistant finance director of the FD of ..., the letter no. … of 10/12/2014, and the Tax Inspection Report, were subject to personal notification to the legal representative of the Claimant of the TIR (PA 1, pages 7 to 9).

11.25. In December 2014, the Claimant was notified of the assessments for Corporate Income Tax for the years 2010 and 2011, with an amount determined of tax and compensatory interest of € 15,661.26 for 2010 (payable by 11-02-2015) and the amount to be reimbursed for 2011 of € 7,608.40 (cf. Article 9 of the Request and Doc. 1 and Doc. 2 attached thereto).

1. Unproven

The subject matter established as proven is sufficient for appraisal of the legal question, with no relevant unproven facts for the resolution of this dispute.

1. Reasoning of the evidence

The establishment of facts was made on the basis of facts alleged by the parties and not contested, as well as on the documentation attached to the proceedings, including the administrative file.

1. Application of law

14.1. The change in value of financial participations held by the Claimant and taxable profit

The Claimant was, in the years 2010 and 2011, holder of financial participations below 5% in companies C and D.

In 2010, shares of D suffered, by application of the accounting criterion of fair value, a depreciation of € 2,118.17 and shares of C suffered a loss of € 103,325.50, which amounted to a total loss of € 105,443.67, with the TA arguing that only half of this amount should be accounted for, that is, € 52,721.84.

In 2011, shares of C suffered a further reduction in value in the amount of € 224,749.18, and the TA made a correction adding half of this amount to the taxable result.

This is therefore about assessing in what terms the depreciation in the value of financial participations should contribute to the determination of the Claimant's taxable profit.

The accounting of the Claimant's financial participations in C and D in accordance with the fair value criterion is not questioned, nor that they were recognized through results, with the only matter in dispute being whether the accounting losses verified in the years 2010 and 2011, resulting from the depreciation of the quotation of such shares accounted for in accordance with the applicable fair value criterion, and recognized in results, should be taken into account in their entirety, or only in 50%, by application of article 45, no. 3, of CIRC which, in the years in question, provided: "The negative difference between gains and losses realized through the onerous transfer of capital shares, including their redemption and amortization with reduction of capital, as well as other losses or negative patrimonial variations relating to capital shares or other components of own capital, in particular supplementary contributions, contribute to the formation of taxable profit in only half of their value."

The TA argues that this rule applies to the case at hand in that it specifically provides that "other losses or negative patrimonial variations relating to capital shares or other components of own capital (...) contribute to the formation of taxable profit in only half of their value".

14.2. The provision of no. 3 of article 43 of CIRC – reasons and evolution

The provision corresponding to the rule in question in these proceedings, regarding the years 2010 and 2011, was introduced by Law 32-B/2002, of 30 December (State Budget for 2003) in the CIT Code, as no. 3 of article 42, which then provided: "The negative difference between gains and losses realized through the onerous transfer of capital shares, including their redemption and amortization with reduction of capital, contributes to the formation of taxable profit in only half of their value."

According to the Finance Ministry Report for the State Budget of 2003 (p. 33), the legislative intervention in the area in question (CIT) was guided by "two priorities, namely the fight against fraud and tax evasion and the expansion of the tax base", with the amendment of interest framed within the scope of "Expansion of the tax base and moralization and neutrality measures" (p. 51).

The rule, whose scope had subsequently raised some doubts, came to be amended by 60-A/2005, of 30 December, becoming: "The negative difference between gains and losses realized through the onerous transfer of capital shares, including their redemption and amortization with reduction of capital, as well as other losses or negative patrimonial variations relating to capital shares or other components of own capital, in particular supplementary contributions, contribute to the formation of taxable profit in only half of their value" (underlining ours).

The amendment was justified by the Finance Ministry as falling within the scope of "the fight against evasion and tax fraud and other measures aimed at budgetary consolidation" (report p. 31).

After the amendments and renumbering introduced by Decree-Law no. 159/2009, of 13 July, which carried out the adaptation of the Code to the new Accounting Normalization System, approved by Decree-Law no. 158/2009, of the same date, no. 2 of article 43 came to correspond to no. 3 of article 45 of CIRC, maintaining the same wording.

Article 45 of CIRC was repealed by art. 13 of Law no. 2/2014, of 16 January, which approved the Reform of the taxation of companies prepared in the previous year.

14.3. The fiscal treatment of gains in CIT

According to the CIT Code, "The taxable profit of legal entities and other entities mentioned in paragraph a) of no. 1 of article 3 consists of the algebraic sum of the net result of the year and the positive and negative patrimonial variations verified in the same period and not reflected in that result, determined on the basis of accounting and possibly corrected in accordance with this Code" (art. 17, no. 1).

Regarding the treatment of gains and losses and patrimonial variations, let us examine the situation before and after the adaptation of the provisions of CIRC to the new SNC.

Article 20 of CIRC only considered as income or gains the gains realized (paragraph f) of no. 1) as well as expenses and losses the losses realized.

As for positive patrimonial variations, art. 21, no. 1, provided:

"The following also contribute to the formation of taxable profit positive patrimonial variations not reflected in the net result of the tax period, except: (...)

b) Potential or latent gains, even if expressed in accounting, including revaluation reserves under fiscal legislation" (…)

And, regarding negative patrimonial variations, article 24, no. 1, stated: "Under the same conditions referred to for expenses, the following also contribute to the formation of taxable profit negative patrimonial variations not reflected in the net result of the tax period, except: (...) b) Potential or latent losses, even if expressed in accounting;".

And article 18, relating to the apportionment of taxable profit, made explicit in its no. 9 that "Income or gains or expenses or losses, as well as any other patrimonial variations, recorded in accounting as a result of the use of the equity method do not contribute to the determination of taxable profit, and should be considered as income or gains for tax purposes the profits attributed in the year in which the right to them is verified".

The adaptation of CIRC to international accounting standards adopted by the EU and to the Accounting Normalization System (SNC), introduced several amendments, such as:

No. 9 of article 18 of the same Code now provides that:

"Adjustments resulting from the application of fair value do not contribute to the formation of taxable profit, being attributed as income or expenses in the tax period in which the elements or rights that gave rise to them are alienated, exercised, extinguished or liquidated, except when:

a) They relate to financial instruments recognized at fair value through results, provided that, in the case of equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a participation in capital exceeding 5% of the respective share capital; or

b) It is expressly provided in this Code."

Article 20, no. 1, provides: "Income is considered to be that resulting from operations of any nature, as a consequence of normal or occasional action, basic or merely accessory, namely: (...)

f) Income resulting from the application of fair value in financial instruments; (...)

h) Gains realized;".

And, according to article 23, no. 1: "Expenses are considered to be those demonstrably necessary for obtaining income subject to tax or for maintenance of the income source, namely: (...)

i) Expenses resulting from the application of fair value in financial instruments; (...)

l) Losses realized;".

And article 46/1 of the same Code states:

"Gains or losses realized are considered to be gains obtained or losses suffered through onerous transfer, whatever the title by which it operates and, as well, those resulting from accidents or those resulting from permanent allocation to purposes other than the activity exercised, relating to: (...)

b) Financial instruments, with the exception of those recognized at fair value in accordance with paragraphs a) and b) of no. 9 of article 18"

The question is, therefore, how these rules are articulated with no. 3 of article 45 of CIRC, which the Claimant considers inapplicable to its case.

14.4. The case law invoked in these proceedings

The Claimant cites in favor of its position the Decision issued within the scope of CAAD, on 25/11/2013, in process no. 108/2013-T.

The said decision considered it decisive to identify the reasons that led to the inclusion in no. 9 of article 18 of CIRC the acceptance of the application of the fair value model in financial instruments, whose counterpart is recognized through results, in cases where the reliability of the determination of fair value is in principle assured by being a price formed in a regulated market. Having regard to this framing[2], it considered: «the acceptance of the application of the fair value model in financial instruments, effected by Decree-Law 159/2009, of 13 July, introduced, in the part covered, a radically different model, both in terms of valuation and of tax relevance of patrimonial variations relating to the holding of such instruments. Indeed, the intention of the legislator upon the adoption of the fair value model, properly evidenced, was, assumed and expressly, to maintain "the application of the principle of realization regarding financial instruments measured at fair value whose counterpart is recognized in own capital, as well as capital shares corresponding to more than 5% of share capital, even if recognized at fair value through results". Whereas regarding "financial instruments" corresponding to less "than 5% of share capital", "whose counterpart is recognized through results, (...) in cases where the reliability of the determination of fair value is in principle assured", the legislative intention was to accept "the application of the fair value model", excluding the principle of realization".»

Thus, although article 18, no. 9, of CIRC provides that, as a general rule (...) «adjustments resulting from the application of fair value do not contribute to the formation of taxable profit, being attributed as income or expenses in the tax period in which the elements or rights that gave rise to them are alienated, exercised, extinguished or liquidated" (evident and deliberate surfacing of the assumed principle of realization), paragraph a) establishes the exception to this regime, assuming that when "income or expenses (...) Relate to financial instruments recognized at fair value", "contribute to the formation of taxable profit" "provided that: a. "They are recognized "through results"; b. "They relate to" equity instruments"; c. "have a price formed in a regulated market"; and d. "the taxpayer does not hold, directly or indirectly, a participation in capital exceeding 5% of the respective share capital.".

"Having satisfied these conditions, income resulting from the application of fair value in financial instruments is considered (article 20/1/f) of CIRC), and expenses resulting from the application of fair value in financial instruments are considered (article 23/1/i) d). "Where previously there was a single tax relevance (one-off), at the time of the transaction of such instruments, there is now a continued tax relevance because income or expenses resulting from the application of fair value to these now bear directly on the formation of taxable profit (articles 20/1/f) and 23/1/i) of CIRC) of the very year in which they occur, once determined conditions provided for in article 18/9 of CIRC are met (including formation of price in a regulated market) and the patrimonial variations verified as gains or losses are not taxed (article 46/1/b) of CIRC)".

In this framework, the decision issued in process no. 108/2013-T considered that there cease to exist any needs relating to the fight against fraud and tax evasion, not only insofar as the tax relevance of patrimonial variations ceases to be conditioned by an act of will of the taxpayer, but also insofar as the valuation is objectively fixed, equally lacking in meaning any measure conditioning the will of the taxpayer, in the sense of favoring economically more "desirable" behaviors and, as such, in line with the interests of expanding the tax base and budgetary consolidation.

And, considering the fact that, despite all the amendments introduced by Decree-Law 159/2009, of 13 July, the former article 42, 3, of CIRC remains in force, renumbered to article 45, no. 3, but with the wording unchanged, the decision came to consider that the rule does not apply to depreciations relating to financial instruments that contribute to the formation of taxable profit, in accordance with article 18/9/a) of CIRC.

Because, in summary:

Article 45, no. 3, includes three types of situations: a) "The negative difference between gains and losses realized through the onerous transfer of capital shares"; b) "other losses (...) relating to capital shares or other components of own capital"; c) "other (...) negative patrimonial variations relating to capital shares or other components of own capital".

The first is not applicable to cases where there is no onerous transfer and the other two use concepts - "losses" and "other negative patrimonial variations" - that have to be traced to the previous wording of articles 23 and 24 of CIRC, whose terminology allows identifying three types of situations: expenses, losses and negative patrimonial variations not reflected in the net result of the year.

The expression "other losses or negative patrimonial variations" used in the current article 45/3 of CIRC does not have an indiscriminately comprehensive meaning, but rather a precise meaning, defined in those articles 23 and 24, which results from the very fact that the legislator employed the same distinction.

Thus, "losses" are only facts qualifiable as such under CIRC, not including those qualifiable as "expenses" under CIRC, even if referring to capital shares or other components of own capital, and by "negative patrimonial variations" should only be understood those not reflected in the net result of the year (as defined in article 24).

Covering only the losses provided for in article 23 (paragraph i) of no. 1), it follows that this rule does not refer to the amounts provided for in no. 3 of art. 45 as losses but as expenses, so they should not be recorded as losses in the CIT form 22 statement.

And, it is considered in the decision in question, this interpretation would be confirmed by the absence of amendment to the wording of article 45, no. 3, because if the legislator had intended to cover the situations listed in article 18/9/a) of CIRC, it would have, at the time of entry into force of Decree-Law 159/2009, of 13 December, included "Expenses resulting from the application of fair value in financial instruments", not in article 23, but in article 24 of CIRC or referred to such situations as "losses resulting from the application of fair value in financial instruments" and not as "expenses".

And it concluded that:

• Decree-Law 159/2009, of 13 July, introduced, regarding the part covered by the acceptance of the application of the fair value model in financial instruments, a special regime of relevance for the computation of taxable profit, justified by its own objectivity and by the intention of approximation of accounting to taxation.

• The wording of articles 20/1/f) and h), 23/1/i) and l), and especially 46/1/b), evidence the intention of the legislator to remove adjustments resulting from the application of the fair value criterion in financial instruments, in the terms recognized by CIRC, from the regime of gains and losses.

• The regime resulting from the conjunction of articles 45/3 and 46 of CIRS only makes sense from the perspective of the admissibility of the patrimonial variations in question under the prism of the said principle of realization.

• In the regime for which the rule of article 45/3 was thought and instituted, the realization of losses, and other situations listed was dependent on a voluntary action corresponding to the realization of the same, justifying mechanisms to discourage conduct susceptible of being considered as undesirable, in the case the realization of losses or other negative patrimonial variations, providing that such situations would only be relevant in 50% of the accounted amount, thereby preventing the inflation of such situations

• In situations covered by article 18/9/a), these are adjustments resulting from the accounting of fair value, determined by objective criteria (with "a price formed in a regulated market"), with no doubt or intervention of the taxpayer's will in the occurrence of the negative or positive patrimonial adjustment, that is, these will or will not occur, regardless of the conduct and will of the taxpayer, and the taxpayer should not be penalized in these cases with a disregard of 50% of the expense incurred, which would be entirely unjustified, either from an economic or a legal point of view.

14.5. The accounting of values - some considerations on fair value

In the appraisal of the situation controversial in these proceedings there is need to identify as backdrop the very broad questions of measurement in accounting and the relationship between accounting and the legal order.

"The theoretical dispute about the main objective that should guide accounting (valuation of entities or any other purposes) is rooted in the standard of valuation or measurement of patrimonial elements to adopt, integrating the already long-standing dispute of historical cost versus fair value (…)"[3].

Fair value is increasingly a valuation benchmark accepted by various national and international accounting standards but is not free from criticism, being pointed out to it, in particular, the risk of discretion and the limitations of the market reference[4].

But as to the relationship between accounting and tax law, recognized in the law itself - CIT is a tax with an accounting base (cf. arts. 3, 17, 123 of CIRC), the rules for determining taxable profit are inscribed in a context of partial dependence of taxation on accounting (recognized since the initial wording of the CIT Code, as per point 10 of the preamble) - it cannot be ignored that accounting and tax law have distinct purposes, with the latter having to attend to specific needs of determining the tax base, namely in terms of objectivity and uniform treatment of taxpayers or preservation of the purpose of obtaining tax revenue.

Or, quoting again Ana Maria Rodrigues, "In the recent adaptation of CIRC to the new accounting standards (IASB-EU standards and SNC) there was a clear option for the maintenance of the model of partial dependence of Tax Law, which determines, when its own tax rules are not established, the adoption of the accounting treatment resulting from the new accounting benchmarks. Tax law can deviate from accounting rules, even if in exceptional terms, when accounting does not adequately safeguard the fiscal interest. Accounting and tax law have distinct interests. Whenever the obtaining of public revenue is put at risk, the tax legislator may not follow, in whole or in part, the accounting guidelines"[5].

With respect to financial instruments paragraph 11 of NCRF 27 obliges derivatives and financial instruments held for trading to be, whenever publicly traded or when fair value can be reliably obtained, accounted for at fair value with changes to it being recognized in the income statement, on each reporting date[6].

"From 2010, no. 9 of art. 18 of CIRC came to permit that some income or expenses, even if not realized, may contribute to the formation of taxable profit, namely those provided for, directly or indirectly, in paragraphs a) and b) of that provision"[7].

But, as the Author we have been citing says, "the tax legislator came to limit the changes in fair value to be recognized as expenses or income for the purposes of determining taxable profit, admitting them only for own capital instruments that do not exceed 5% of the value of the capital of that entity. It is important, however, to understand what type of investments the legislator aimed to cover in said provision"[8].

The legislator having maintained the principle of realization regarding financial instruments in capital shares, whenever these correspond to more than 5% of share capital, even though their variations are recognized at fair value through results, seems to have intended to contemplate only small investments, but will have overlooked that those 5% can be realized in large entities involving very high amounts, and whose changes can significantly penalize the results of the period by increasing or reducing them by the effect of those fair value variations, even though the same may relate to investments of a permanent nature[9].

This reason contributed to the submission of a proposal by the CIT Reform Commission in 2013, for reduction of the capital percentage to 2%[10], which ultimately was not enshrined in Law no. 2/2014.

14.6. Doubts about the scope of no. 3 of article 45, after adaptation to SNC

Given the characteristics above recalled of the relationship between accounting and taxation and some criticisms or perplexities raised by paragraph a) itself of no. 9 of article 18 of CIRC, we do not consider evident either the Claimant's thesis, nor the learned considerations and conclusions of the CAAD decision in process 108/2013-T.

That is, we do not find fully demonstrated that despite the legislator having provided, in paragraph a) of no. 9 of article 18 of CIRC, that "income or expenses" that "(...) relate to financial instruments recognized at fair value" "contribute to the formation of taxable profit" without reservations or limitations, "provided that" they are recognized "through results"; they are "equity instruments"; they "have a price formed in a regulated market"; and "the taxpayer does not hold, directly or indirectly, a participation in capital exceeding 5% of the respective share capital", it intended in that case to put an end to the unequal treatment of positive and negative variations, provided for in no. 3 of article 45 of CIRC.

For regardless of a judgment of equity or rationality of fiscal policy pursued on the maintenance of such a rule, justification can be found for the legislator to maintain such inequality of treatment.

From the outset, the maintenance of the wording of the provision cannot be undervalued, without any reservation, when many other rules underwent amendments, including the addition of paragraph b) of no. 1 of article 45 of the Code of CIRC.

But let us examine other doubts that may explain the maintenance of such treatment, extending to the case of paragraph a) of no. 9 of art. 18 of CIRC.

One of the weighty arguments indicated in favor of non-application of the provision of no. 3 of article 45 of CIRC is that this rule was provided for situations where gains were determined at the moment of realization, that moment being dependent on the voluntary action of the TP, whereas after adaptation to SNC, the expenses determined by application of no. 9 of article 18 of CIRC are not conditioned by the taxpayer's will since the value of financial instruments is objectively determined without the intervention of the taxpayer in the formation of the price. The application of no. 3 of art. 45 of CIRC would only make sense in cases where the assessment of patrimonial variation is based on the principle of realization, in situations dependent on the voluntary action of the taxpayer, with the 50% limit intended to discourage taxpayers from taking certain decisions, placing themselves in disadvantageous positions to benefit in terms of formation of taxable profit and where the value of financial instruments was not objectively determined.

But this assessment of the situation is incapable of imposing itself unconditionally because, namely:

• The certainty and objectivity of the value found in the market, even if regulated, is not entirely immune to manipulation, as is proved by episodes that the international press has reported;

• The 5% limit on holding of participations provided for consideration of fair value allows application of the provision to substantial investments, with unpredictable consequences for tax revenues, namely in a period of financial and stock market crisis[11];

• Situations are maintained, even in cases of application of values considered objectively determined in the market, in which the solution of unequal treatment of negative and positive results provided for in art. 45, no. 3, applies, such as that of situations of alienation in a regulated market, where losses are reflected in taxable profit only at the moment of realization, as in cases of participation exceeding 5% or the choice not to apply NCRF 27 (cf. note 9).

As for the argument based on the "expenses" and "losses" dichotomy, it seems to rest on an unjustified overvaluation of the distinction of these concepts.

For in the process of adaptation to the new SNC concepts, it is possible to identify several terminological imprecisions[12].

Ana Maria Rodrigues gives account of attempts to overcome these imprecisions and hesitations regarding solutions for fear of increasing disturbance in the legal order. As an example, it cites the headings of articles 20 and 23 of CIRC. As for the first, currently "income and gains", it considers that it should be only entitled "income", a concept that involves income and gains and as for the second, "expenses and losses", observes that expenses is a concept that, in accounting, already includes losses[13].

It should also be noted that, regarding the measurement of the value of financial instruments, the legislator, in the Reform of CIT in force from Law no. 2/2014, replaced the concept "expenses", previously used in paragraph i) of no. 2 of article 23 by that of "losses" (cf. paragraph j) of no. 2 of art. 23)[14].

14.7. The application of article 45, no. 3, after adaptation to SNC

In a text written shortly after publication of Decrees-Laws nos. 158/2009 and 159/2009, both of 13 July, André Vasconcelos identified questions posed by the application of rules transferred to CIRC for computation for determination of taxable profit of adjustments regarding financial instruments recognized at fair value through results, provided that, in the case of equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a participation in capital exceeding 5% of the respective share capital. He considers that losses determined with fair value adjustments do not fall within the concept of losses and that the main question arises in the framing in no. 3 of (then) art. 42, concluding, despite admitting doubts about the legislator's intention, that «in reading that provision, and given its broad scope, we are led to conclude that all losses relating to capital shares, where the financial assets now under analysis are included, will only be relevant for tax purposes in half of their value».[15]

The position of the Tax Administration came to be set out in the Binding Ruling in process no. …/2011, issued in a request submitted by a company, and decided by Dispatch of the Director-General of 24/2/2011, to the effect that: «As the reductions in fair value of these capital shares are qualified as losses they should be considered, in accordance with the said article 45, no. 3, of CIRC, in 50% of their value».

It should also be noted that, currently, no appreciable controversy is detectible regarding the orientation advocated by the TA at that time[16].

In the same sense of the interpretation disclosed, Luísa Anacoreta Correia, in an article written in the 2nd quarter of 2011, in the Journal of the Association of Official Accounts Auditors[17], states: «As mentioned above, the current CIRC provides, in paragraph a) of no. 9 of article 18, the taxation regime for the variation in fair value, for shares with quoted, when held in 5% or less and when recognized accounting at fair value through results. Based on this provision, it might be concluded that, for those shares, both gains resulting from increases in fair value (whether in the year of sale or in previous years) and losses resulting from decreases in fair value would be considered fiscally. Nevertheless, no. 3 of article 45[18] provides that 50% of such value losses will not be accepted fiscally». (bold in original).

And, further on: «It should be noted, in this context, that in cases where the entity holding the shares in question uses IAS 39 in its accounting recognition, whether because it chose the IASB standard or whether because it chose IAS 32, 39 and IFRS 7, alternatively to NCRF 27, the fiscal regime of fair value will be removed in the vast majority of cases, it being sufficient that the shares are recognized at fair value through own capital»[19].

It should further be noted, as very significant, the interpretation expressed in a publication, which embodies the collective participation of consultant E…, SA, subscribed by five partners, with comments and suggestions during the preparation of the recent CIT Reform that led to the approval of Law no. 2/2014[20].

There, with the title, "Elimination of the restriction on fiscal deductibility of losses and gains associated with capital shares under certain conditions", the following is commented on and suggested: «The imposition of this type of restrictions in CIRC results from a concern of the legislator with the carrying out of operations aimed at tax evasion and which rest, in most cases, on a manipulation of the value at which the capital shares are transacted. However, it is not understood that this rule is applied comprehensively and that the State taxes, in a general manner, companies when they determine gains and does not allow them to record, for tax purposes, the losses or losses they determine in the transfers of capital shares. The principle of symmetry is thus violated. In cases where capital shares have a price formed in a regulated market and in which, consequently, there can be no doubts about the value established for the operations, an exception to the rule of acceptance of only half of the negative balance between gains and losses fiscal or other losses determined in each year, provided for in no. 3 of art. 45 of CIRC, should be established. This change will also make it possible to prevent fair value losses in capital shares, recognized in results, that have a price formed in a regulated market and the taxpayer does not hold directly or indirectly a participation in capital exceeding 5% of the respective share capital from being accepted only 50% for tax purposes, even though they represent potential losses. Whereas the gains in fair value determined in these financial instruments, including those relating to reversions of those losses, are currently taxed in their entirety, which generates a double taxation that urgently needs to be corrected».

And, it is said further on, commenting on the draft proposal submitted: «The discrimination currently suffered by fair value losses in capital shares, recognized in results, which have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a participation in capital exceeding 55 of the respective share capital (the draft Reform proposes that this participation limit be reduced to 2%) will also be eliminated. With the proposed amendments, these losses will be considered fiscally deductible in their entirety (currently they are only accepted for tax purposes in 50%». [21]

Thus, in the framework of measures proposed by E, the suggestion to "establish an exception to the deduction of only 50% of losses and losses of capital shares when they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a participation in capital exceeding 5% of the respective share capital", has as comment "received in full", in that, it is said, "the losses, except in the case of liquidation, cease to be relevant, eliminating the provision of no. 3 of art. 45 of CIRC."[22]

That is, even though proposing a legislative amendment, there is no appearance of any prior controversy over the legal refutation of the interpretation of the Binding Ruling disclosed by the TA and cited above.

1. Final appraisal of the situation

Based on the above, it is concluded that:

• From a point of view of equity or adequacy of the fiscal policy pursued, one may question whether the legislator should not have already from the wording of CIRC in force from 2010 repealed the limits on the deductibility of losses or patrimonial variations associated with capital shares, but, regardless of the response to this question (which is not considered evident insofar as one would have to attend to the situation of financial crisis and restrictive budgetary measures already existing at that time), it falls to this tribunal to judge according to the "law as constituted" at the time of the situation under consideration in this case;

• In view of the provision of various provisions of CIRC in force in 2010 and 2011, the tribunal does not consider convincing the arguments put forward in the sense of the non-application of no. 3 of article 45 of the same Code to cases of losses resulting from adjustments arising from variations in fair value of capital shares;

• Nor does it appear that, in the period in question, doubts arose in the doctrine about the continuation of application of said no. 3 of art. 45 of CIRC to all cases of losses or negative patrimonial variations, with precisely opinions in the sense of such interpretation, even if expressing doubts and/or criticisms about the objectives of the policy pursued (cf. point 14.7.);

• While recognizing the brilliance of the reasoning of the decision issued in process 108/2013-T, within the scope of CAAD, some of its premises give us serious doubts (as set out in 14.6.);

• This tribunal does not consider confirmed the existence of an option by the legislator in the sense of granting different treatment to cases of losses in own capital instruments with value found in a regulated market, either by the uncertainties that remain regarding the way such value reflects economic reality, or by the uncertainty as to the repercussion of such solution on tax revenues[23];

• The argument based on an overvaluation of the dichotomy of the terms "expenses" and "losses" also raises doubts, given the frequent terminological imprecision, of which an example is precisely the oscillation in the use of the referred concepts of losses and expenses (above 14.6., and notes 11 and 12);

• Having regard to the fact that, by virtue of the conjunction of paragraph a) of no. 9 of art. 18 with the provision of paragraph f) of no. 1 of art. 20 and paragraph i) of no. 1 of art. 23 of CIRC, gains and losses resulting from the application of the fair value criterion through results contribute to the taxable profit of each year, the coexistence of these provisions with the wording of no. 3 of art. 45 leads to the conclusion that, when introducing them into the CIT Code, if the legislator had intended to give different treatment to losses resulting from the application of fair value, it could not have failed to amend the wording of the rule in conformity, evidencing its intention, as it also did not do at the time of the creation of similar regimes for entities in the banking and insurance sectors (referred to above, note 1);

• For the inapplicability of no. 3 of article 45 of the CIT Code defended by the Claimant would result in more unfavorable treatment granted to situations where, in the valuation of capital shares, the cost method applied or, in the case of choice of IAS39 (cf. §55, b)) gains or losses resulting from changes in fair value are recognized directly in own capital, since losses verified in their alienation would only be deducted by half, whereas losses recorded in capital shares measured at fair value, solely because their accounting recognition was made in a piecemeal manner, according to the variations verified in each year in fair value, and not just in a single year, would not suffer any limitation, being fully deducted for the purposes of determining taxable profit;

• It seems much more fitting that the legislator intended to maintain uniform treatment of losses or patrimonial variations associated with capital shares, regardless of the level of participation that such shares represented in the capital and the valuation criterion adopted, since, as mentioned, cases remained where loss in value, despite verified in own capital instruments with price formed in a regulated market (such as situations where the taxpayer holds more than 5% of the capital or where holds less than 5% but opts for accounting of adjustments resulting from changes in fair value in own capital accounts), the 50% limitation of deductibility of losses continued to apply.

• That is, it is understood that the legislator will have given prevalence to the principle of neutrality in the tax treatment of losses or patrimonial variations associated with capital shares, regardless of the method of measurement, while safeguarding, at the same time, the unpredictability of possible negative effects on tax revenues, resulting from fluctuations in market quotations.

For these reasons, it is considered that the interpretation of the TA is not undermined in these proceedings and that, before the amendments introduced to the CIT Code by Law no. 2/2014, of 16 January, no. 3 of art. 45 was applicable to adjustments resulting from the measurement at fair value of financial instruments with the requirements defined in paragraph a) of no. 9 of art. 18, so that the Respondent should have considered, in the years in question in these proceedings, that the loss reflected in results in the accounting could only be deducted for tax purposes in half of its value.

Thus, the Request for pronouncement is considered unfounded, as the illegality of the assessment has not been demonstrated.

16. Decision

With the grounds set out above, the arbitral tribunal decides:

a) To judge unfounded the request for arbitral pronouncement for declaration of illegality of the assessment acts identified with the numbers …, …, …, and …, for the tax year 2010, and … and …, for the tax year 2011, relating to Corporate Income Tax, in the total amount of € 15,661.26 (fifteen thousand six hundred and sixty-one euros and twenty-six cents), there being no therefore any amounts to be refunded by the Respondent.

b) To judge unfounded the request for payment of compensatory interest.

c) To condemn the Claimant in costs.

17. Value of the proceedings

In accordance with the provision of no. 2 of article 315 of CPC, paragraph a) of no. 1 of article 97-A of CPPT and also of no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is set at € 15,661.26 (fifteen thousand six hundred and sixty-one euros and twenty-six cents).

18. Costs

For the purposes of the provision of no. 2 of article 12 and no. 4 of article 22 of RJAT and no. 4 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is set at € 918.00, in accordance with Table I attached to said Regulation, to be borne entirely by the Claimant.

Let notification be made.

Lisbon, 24 September 2015.

The Arbitrator

(Maria Manuela Roseiro)

[1] It is not, however, an entirely novel regime - the wording now included in paragraph a) of no. 9 of art. 18 is the same used in the provisions integrated in the transitional regimes created for banking entities and insurance entities, respectively by Law no. 53-A/2006, of 29/12 (paragraph a) of no. 2 of art. 57) and Decree-Law no. 237/2008, of 15/12 (paragraph a) of no. 2 of art. 2). Compare "Report of the working group created by dispatch of 23 January 2006 of the Secretary of State for Tax Affairs, Fiscal Impact of the Adoption of International Accounting Standards, published in the Notebook of C.T.F., no. 200 (2006), pp. 99-100.

[2] In analyzing the evolution of the regime it retained that:

• Assets covered by the regime of gains and losses for tax purposes are identified as tangible fixed assets, intangible assets, investment properties, financial instruments, with the exception of those where adjustments resulting from the application of fair value contribute to the formation of taxable profit in the tax period (no. 9 of art. 18 and paragraphs f) and i) of number 1 of articles 20 and 24 of CIRC, and paragraph b) of no. 1 of article 46);

• Where previously it spoke of income and gains (article 20), it came to speak of income, and where previously it spoke of expenses or losses (article 23), it came to speak of expenses;

• The adoption of the application of fair value as an accounting valuation criterion with tax relevance corresponds to a Copernican shift in the regime of taxation of income or expenses resulting from the acquisition of financial instruments; previously, patrimonial variations relating to financial instruments were irrelevant from the point of view of forming the taxable profit of each period (art. 21/1/b) of CIRC) - only at the moment of realization of gain or loss would the patrimonial variation verified assume tax relevance - it was a taxation occurring only once throughout the entire period of holding of financial instruments; was dependent on a voluntary action of the taxpayer insofar as the transaction of instruments generating the patrimonial variation, condition of its tax relevance, would only occur if and when the taxpayer so wished; the valuation of the patrimonial variation was fixed based on the specific transaction that triggered its tax relevance;

• As the conjunction of the characteristics referred to favored accounting and tax manipulations, the taxpayer being able to choose to trigger tax relevance at the moment and terms most fiscally advantageous for it, the law (through art. 42, no. 3, subsequently 45, no. 3), the law sought (with the justification of fighting fraud and tax evasion and expanding the tax base, all leading to budgetary consolidation of public accounts), to condition the taxpayer's will so that it preferred the realization of gains over the realization of losses;

• The exclusion of own capital instruments that do not have a price formed in a regulated market is maintained, maintaining the application of the principle of realization regarding financial instruments measured at fair value whose counterpart is recognized in own capital, as well as capital shares corresponding to more than 5% of share capital, even if recognized at fair value through results (...)" (preamble to Decree-Law no. 159/2009, of 13 July).

[3] Ana Maria Gomes Rodrigues, "Fair Value a critical and multidisciplinary perspective", text included in publication of IDET – Institute of Business and Labor Law, no. 7 of Miscellanies, Almedina, 2011, p. 72/73.

[4] Idem, ibidem, pp. 72 to 80.

[5] In "Fair Value a critical and multidisciplinary perspective", pp. 101 and 102.

[6] Idem, ibidem, pp. 87 and 88. The Author adds: "The quotations in active markets are understood as the maximum exponent of the concept or standard of fair value. They are, however, and in most cases, very volatile values, not proving adequate measurement bases for assets or liabilities that are held by business entities for longer periods".

[7] Ana Maria Gomes Rodrigues, Legal-accounting aspects in the recent CIT reform, in "The CIT Reform, from the political decision process to the revision of the Code", work coordinated by António Carlos Santos and André Ventura, Vida Económica, 2014, p. 205.

[8] Emphasizing that the ratio of the tax legislator regarding the valuation of financial instruments at fair value involves only cases where verifiability and reliability in its determination is in principle assured and if, cumulatively, such investments do not exceed 5% of the entity's capital, it calls attention to the emergence of many other questions regarding such instruments with a price formed in a regulated market, namely the objective associated with holding such instruments by the taxpayer and the period of permanence that characterizes them, in "Legal-accounting aspects in the recent CIT reform, "Fair Value a critical and multidisciplinary perspective", ed. cit. p. 109.

[9] The Author further observes that "the holding of 5% of the capital of a company with values admitted to quotation is not, in the generality of cases, a mere trading operation, but rather a participation that assumes the nature of a financial investment" and that "the oscillations of quotations of instruments in organized markets (whether shares, bonds, commercial paper, or other mixed instruments, such as for example bonds convertible into shares), that are to be classified as investments, should not penalize the results of the period in which such changes in fair value occurred, and should be recognized in own capital, similarly to surpluses from revaluation of tangible and intangible fixed assets (…), in compliance with the principle of realization dominant in tax law". Cf., "Fair Value a critical and multidisciplinary perspective", ed. cit. pp. 111 and 112.

[10] Ana Maria Gomes Rodrigues, in "Legal-accounting aspects in the recent CIT reform", p. 208 et seq. In addition to "other complex issues", the Author points out situations of lack of fiscal neutrality, such as that resulting from, even though paragraph a) of no. 9 of art. 18 CIRC only admits tax effects to variations in fair value recognized in results, NCRF 27 which regulates the matter permits application of the international standard directly in the preparation of financial statements (paragraph 2). In that case, the entity recognizes the variations of its fair values in own capital and not in results by direct application of paragraph b) of paragraph 55 of IAS 39, "with the variations being taxed upon desrecognition of such participations and not in all accounting periods where variations in fair value occur" (cf. ibidem, pp 206 and 207).

[11] Recall that in August 2007, the financial crisis erupted in the US (see e.g. George Soros, "The New Paradigm of Financial Markets", The 2008 Financial Crisis and Its Meaning, Almedina), with successive crises recorded in many other countries.

[12] For example, in SNS, negative variations in fair value are recorded in account 66 - Losses from fair value reduction and positive variations are recorded in account 77 - Gains from fair value increase.

[13] In "Legal-accounting aspects in the recent CIT reform", p. 201, note 219. The adaptation to SNC is characterized as a difficult task even because of criticisms that accounting concepts themselves may raise, with it being observed also how accounting language is increasingly esoteric, far from the canons of the general legal order, marked by appeal to economic substance and questionable English translations (ibidem, note 218).

[14] In sum, with the wording given by DL 159/2009, article 23, with the heading "expenses", provided: «Expenses are considered to be those demonstrably necessary for obtaining income subject to tax or for the maintenance of the income source, namely, "Expenses resulting from the application of fair value in financial instruments"» (no. 1, paragraph j), and now, with the heading "expenses and losses", it says: «For determining taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or guarantee income subject to CIT are deductible», covering "Losses from reductions in fair value in financial instruments" (no. 1 and paragraph j) of 2 of art. 23). That is, it will have been intended to correct terminological imprecision and adopt the designation of accounts 66 and 77 of SNC. This amendment seems to confirm the fragility of argument based on the previous conceptual distinction.

[15] In "Fair value and the CIT Code", Journal of Public Finance and Tax Law, Year 3, Number 4, Winter, page 202. The author poses the doubt whether in not altering the wording of article 42, no. 3, the legislator did so to prevent situations existing at the time of its insertion in the Code and now excluded, or if on the contrary maintained it because he understood that it responds, as stated in the preamble to DL 159/2009, "to the needs of preserving the interests and perspectives proper to taxation", related to the new reality, emphasizing that: «Being this a case in which "manipulation" of fiscal results is found to be remote, as defended above, it would not be surprising if it had been the legislator's intention to accept the fiscal acceptance of accounting results resulting from the application of the fair value method for these cases, although this lacks confirmation or clarification by the tax authorities, given the uncertainty of the subject» (ibidem, p. 203).

[16] Various tax information websites available on the Internet, contemporary to this Binding Ruling, limit themselves to transcribing the Ruling (such cases e.g. "Cuatre Casas, Gonçalves Pereira, newsletter of April 2011", IINFOCOTAB no. 83, of 11/5/2011, Accounting & Companies, May/June 2011) or, in some cases, the legislative option is criticized, but without questioning the interpretation of the law (cf. opinion article by Óscar Veloso, Official Accounts Auditor, in Business Journal, of 21 April 2011).

[17] Journal of Auditors and Reviewers, no. 53, pp. 34/35.

[18] The text refers to art. 46 but this is an evident lapse.

[19] And adds: «In the case of SGPs, we will see below that this solution can be even more attractive given that this choice may translate into the inclusion of capital shares in the specific regime of article 32 of EBF. For the remaining companies, such options may also have interest insofar as the shares in question, in addition to becoming recognized at cost (updatable by coefficient) for tax purposes, will begin to benefit from the reinvestment regime provided for in article 48 of CIRC. Indeed, the CIT Code removes (paragraph b) of no. 1 of article 46) from the concept of gains and losses, the gains and losses generated with the shares recognized fiscally at fair value. From this provision it follows that, not only are such shares excluded from the regime of article 32 of EBF, but also are not eligible for reinvestment provided for in article 48 of CIRC, nor benefit from the application of the monetary updating coefficient provided for in article 47 of CIRC».

[20] Cf. "The new CIT", Ernst & Young, Almedina, 2013, p. 50.

[21] Ibidem, p. 53.

[22] Cf. ibidem, table of pp. 10 and 11.

[23] It may even be ventured whether despite the recognition of the possibility of fiscal accounting of accounting at fair value, the legislator did not intend, due to the dangers of uncertainty in regulated markets, to encourage or, at least, not to discourage the choice of accounting at historical costs (cf. point 14.6., and notes 10 and 19).