IRC Tax Deductibility of Expenses Under Article 23 – CAAD Arbitration Decision 258/2015-T

ARBITRATION AWARD

The Arbitrators, Fernanda Maçãs (President), Fernando Araújo and Jorge Landeiro Vaz, designated by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, hereby agree as follows:

I – REPORT

1. The taxpayer A..., SGPS, S.A., with Tax Identification Number ... (hereinafter "Claimant"), submitted, on 16 April 2015, a request for constitution of a Collective Arbitral Tribunal, under the terms of the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011 of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter "RJAT"), in which the Tax and Customs Authority (hereinafter "AT" or "Respondent") is the respondent party.

2. In such request, the Claimant requests an arbitral ruling on the illegality of the IRC/2010 tax assessment demonstration no. 2014..., of 5 November 2014, the account reconciliation demonstration no. 2014..., of 18 November 2014, and the compensatory interest tax assessment demonstration no. 2014..., of 18 November 2014, relating to the year 2010 and resulting from a correction to taxable profit in the same fiscal year, following a tax inspection procedure, which resulted in a total amount due of €2,360,917.23, consequently formulating a request for annulment of such tax acts, listing four witnesses as evidence.

3. The request for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD and automatically notified to the AT on 20 April 2015.

4. Under the terms set out in subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of the RJAT, as amended by Article 228 of Law no. 66-B/2012 of 31 December, the Deontological Council designated the arbitrators of the Collective Arbitral Tribunal, who communicated acceptance of the appointment within the applicable period.

5. On 12 June 2015, the parties were notified of such designation, and neither raised any impediment.

6. The Collective Arbitral Tribunal was constituted on 29 June 2015, in accordance with Articles 2, paragraph 1, subparagraph a), 5, 6, paragraph 1, and 11, paragraph 1 of the RJAT (as amended by Article 228 of Law no. 66-B/2012 of 31 December).

7. In the request for arbitral ruling, submitted by itself, the Claimant invokes, in summary, that:

a) From the IRC/2010 assessment and compensatory interest assessment, a total amount due of €2,360,917.23 resulted, suffering, however, such act from illegality;

b) The Claimant is a corporate income tax taxpayer, framed in the Special Taxation Regime for Groups of Companies ("RETGS"), which, at the time of the facts, was the dominant entity of a tax group constituted by itself and 19 subsidiary companies;

c) Taxable profit was calculated by the dominant company through the algebraic sum of taxable profits and tax losses determined in the Model 22 IRC income tax returns of the 2010 fiscal year submitted by each of the companies forming part of the group;

d) Taxable profit subject to IRC is, by legal definition, constituted by the algebraic sum of taxable profits and tax losses determined in the periodic individual declarations of each of the companies belonging to such corporate group submitted to that regime under the terms of paragraph 1 of Article 70 of the IRC Code in the version in force at the date of the facts sub judice. Rather, the individual profit of each of the companies belonging to the group is not taxable profit subject to IRC but merely a value that contributes to the formation of the taxable profit of the group;

e) The Claimant has standing to contest the IRC assessment, insofar as that assessment has the dominant company as its sole addressee and gives rise to a debt for which that same dominant company is liable. However, the subsidiary companies, whose corrections to taxable matter influenced the assessment in question, maintain their respective legal and tax personality, and have the right to be notified as well as the right to obtain legal protection. Since the assessment act was not notified to the subsidiary companies, it cannot consolidate itself in the legal order nor in the sphere of the subsidiary companies, under penalty of violation of the constitutional principle of effective legal protection;

f) With regard to the dominant company, the invocation of paragraph 2 of Article 32 of the Tax Benefits Statute is unfounded, as legal support for the correction, made by the AT, to the individual tax loss declared by A..., in the amount of €188,801.20, relating to financial charges incurred with the alleged acquisition of capital shares and which contributed to the formation of the taxable profit of A...;

g) Thus, the official correction made to the individual taxable profit of the Claimant was based solely on an analysis of financial charges subject to deduction, taking into account the fact that the Claimant is a company managing capital investments (SGPS), when it is indisputable that the Legislator, regarding the impediment to the deductibility of financial charges, established only limits to charges that were connected with the acquisition of capital shares;

h) The AT violates the principle of tax legality, distorting this legislative choice, when it issued Circular no. 7/2004 of 30 March from the IRC Services Directorate, in which it considers that, for reasons of practicability, a formula should be adopted that would allow one to discern a value of remunerated liabilities that was allocated, even if fictionally, to a purported acquisition of capital shares. With such circular, the AT invades the field of action of the Tax Legislator, placing in question the constitutional principle of tax legality embodied in Article 2 of Article 103 of the Constitution of the Portuguese Republic;

i) The Claimant's remunerated liabilities were limited to operations intended to cover treasury needs, with €297,000 having been subject to restitution, with no amount being allocated, contrary to what the AT illegally maintains, to the acquisition of capital investments;

j) As for INDIVIDUAL ENTITY: B..., S.A. (Subsidiary company), the correction (in the amount of €2,290,435.49) to the declared tax loss is unfounded, resulting from the tax disregard of the deduction of financial charges incurred with financing obtained from third parties. Such disregard is based on a scenario that is merely hypothetical and idealized by the AT based on merely subjective considerations and without any factual or legal support and generates serious intrusion of the freedom of management recognized to economic agents in clear violation of the right to private initiative, constitutionally protected by paragraph 1 of Article 61 of the CRP;

k) All prerequisites upon which the fiscal deductibility of expenses depends are clearly met in the case of the expenses whose fiscal consideration is disputed, such that the IRC assessment is based on error regarding the factual and legal prerequisites, since: the cost is effective (existing, real); it was, in compliance with temporal attribution criteria, duly accounted for as such; it is proven, assumes an indispensable nature; it was incurred to obtain profits or gains subject to tax or to maintain the productive source and there is no provision that directly or indirectly denies its respective deductibility;

l) It is not for the AT to evaluate the merit of expenses for maintaining the productive source or obtaining income, as such judgment falls exclusively to the entrepreneur. Understanding otherwise would mean, as happens in the case under examination, unjustified interference by the AT in the company's discretionary judgments;

m) The law does not require that the expense be related to the corporate purpose, this being established only by doctrine as a benchmark for assessing the deductibility of the expense;

n) The concept of corporate purpose encompasses any activity that the company actually carries out;

o) With the acquisition of capital investments, B... was, at the time, enhancing the obtaining of future profits, either at the dividend level (it is noted, it has already received €8,000,000 relating to fiscal years 2012 and 2013), or at the level of capital gains in a disinvestment scenario, such that the fiscal deductibility of expenses related to the acquisition of the investment generates a perspective of future gains, and therefore these cannot be questioned. Furthermore, in any case, they would be costs incurred for maintaining the productive source;

p) As for INDIVIDUAL ENTITY: C..., S.A., (Subsidiary company), the correction (in the amount of €1,868,138.54) is without foundation, regarding the disregard of the deduction of financial charges incurred with financing obtained from third parties, and, as for this company, all that was previously stated regarding the legal prerequisites relating to the fiscal deductibility of expenses incurred by B... is transposable, as they are based on the same arguments;

q) Furthermore, it is also necessary to interpret Article 23 of the IRC Code (which, at the date of the facts, encompasses a broad concept of expense, followed by an enumeration of the various expenses capable of being included in the scope), in the sense that the assessment of the deductibility of the tax expense cannot be subsumed solely to the direct and immediate causal connection between the cost and a correlative profit (whose obtaining may be deferred in time), but also it is important and should be assessed whether that cost is indispensable for maintaining the productive source, that is, this assessment shall be made by one of these two alternative criteria;

r) It is also to be understood that the mentioned article does not require that such subjection to tax be immediate;

s) If capital gains were subject to taxation under Article 43 of the IRC Code (in force at the time), without the possibility of benefiting from any exemption regime (at most, taxation could be mitigated by 50%, through application of the reinvestment regime, if a set of requirements were met), then dividends were also subject to taxation, albeit they could benefit from the deduction provided for in Article 51 of the IRC Code (in force at the time);

t) C... also proceeded to make loans to its investees, with the inherent interest received, which contributed to the formation of its respective taxable profit;

u) As for INDIVIDUAL ENTITY: D..., S.A., (Subsidiary company), the correction (in the amount of €485,085.54) regarding expenses for travel and accommodation that were considered as having been improperly treated as tax expenses is without foundation;

v) The AT incurs in a notorious confusion of concepts, when it does not corroborate the fiscal acceptance of expenses because, allegedly, they have not been proven as having been indispensable for pursuing business activity: if, on one hand, it considers that for a cost to be fiscally accepted it is necessary that it be "provably indispensable", on the other hand, it ends up concluding that the costs, despite being recorded in accounting, are not duly documented, which reveals contradictory and deficient reasoning, equivalent to lack of reasoning;

w) The obligation to prove the cost is not legally provided for, insofar as, contrary to what occurs, notably with expenses incurred with compensation for travel in the worker's own vehicle, under the terms set out in subparagraph f) of paragraph 1 of Article 45 in the version in force at the time, the law does not make the proof or deductibility of the expense dependent on the requirements that the AT appears to want to establish;

x) The expenses incurred fall within the scope of a framework of social interest, aimed at pursuing the business objective, which the AT did not consider, in an unfounded action and tainted with discretionality, refused the deduction of the corresponding costs;

y) E..., S.A. (F...) entered into an agreement relating to flight hours in private jets, which are used by members of the Board of Directors of D... for purposes of travel aimed at, among others, holding meetings in the various investees located outside Portugal, as well as meetings on business opportunities, and given the geographical dispersion of the business units of the group that D... is part of, the travel of members of the Board of Directors using this means of transport is the only one that allows one to avoid unnecessary time expenses inherent in waits, delays and other unforeseen events to which regular airline flights are subject;

z) By virtue of the expenses incurred, namely with the travels in question here, D... subsequently charges its respective investees management fees, according to their respective sales volume, which in fiscal year 2010 amounted to the value of €4,478,955, the AT having not questioned such values;

aa) That part should, accordingly, be annulled, and the tax and compensatory interest assessment;

bb) As for INDIVIDUAL ENTITY: G..., S.A., (Subsidiary company), the correction (in the amount of €32,583.84) regarding expenses for travel and accommodation that were considered as having been improperly treated as tax expenses proves to be unfounded;

cc) The AT's reasoning incurs in error in the legal prerequisites, insofar as the entire explanation goes in the direction of considering the expense not duly documented (requirement of proof) and then extrapolate to the fact that it does not appear "indispensable for the realization of profits or gains subject to tax" (requirement of indispensability), and, as for this latter requirement, the AT's reasoning is not clear;

dd) Indispensable expenses are equivalent to expenses incurred in the interest of the company or, in other words, to all acts abstractly subsumed in a profit profile, which occurs with respect to the expenses of trips to El Salvador, Managua, Guatemala, Honduras, Costa Rica, Colombia and Brazil, such that the tax assessment corresponding to this correction and respective compensatory interest in the part at issue here is tainted with error regarding the factual and legal prerequisites;

ee) As for INDIVIDUAL ENTITY: H..., S.A., (Subsidiary company), the correction in the amount of €36,644.20 and €172,011.89, corresponding, respectively, to expenses with travel and accommodation and negative equity changes resulting from the transitional regime of Decree-Law 159/2009, is illegal;

ff) The legal basis for such illegality corresponds to what was adduced in Articles 190 to 204 of the initial petition, to which it refers;

gg) The argument that profits associated with these expenses are not known does not hold, since this requirement for the purposes of fiscal acceptance of the expense is not legally provided for;

hh) The expenses whose fiscal deductibility the AT puts in question were incurred within the scope of the company's purpose with a view to obtaining profits or maintaining the productive source;

ii) With regard to the expenses relating to improvements, H... applied the prerogative that was recognized by the tax legislator, of recognizing, in a period of five years, the effects, in equity, of the transition to IAS, which determines the lack of merit of the AT's understanding;

jj) The Claimant accepts the correction in the amount of €29,175.00, concerning the constitution of a provision for sales guarantees not accepted by the AT;

kk) Incurring, in the remaining part, the AT, in error regarding the factual and legal prerequisites, the assessments in question should be annulled, in the part that is contested;

ll) As for INDIVIDUAL ENTITY: I..., S.A., (Subsidiary company), the correction in the amount of €1,073,508.96, regarding the disregard of the deduction of financial charges incurred with financing obtained from third parties, is illegal;

mm) I... did not grant any loan to its investee, having instead made supplementary contributions which, in accordance with its legal regime, are qualified accounting-wise as an element comprising equity, and it is not understood how it can be considered that the expenses incurred are unrelated to the activity of I..., insofar as the Claimant applied borrowed capital in its operation, and with those funds it constitutes supplementary contributions, as a form of exercise and maintenance of its activity and productive source;

1. The Claimant concludes, formulating requests in the sense of:

a) Declaration of illegality of the assessments listed as IRC/2010 tax assessment demonstration no. 2014... of 2014-11-05, the account reconciliation/compensation demonstration no. 2014... of 2014-11-18 and the compensatory interest tax assessments nos. 2014..., based on defect of violation of the Constitution and the law due to errors in the factual and legal prerequisites of which they suffer and the corresponding annulment in the part now contested, with all legal consequences, as well as

b) The annulment, in the contested part, of the referred assessments, with all legal consequences.

1. Under the terms of paragraphs 1 and 2 of Article 17 of the RJAT, the Respondent was notified on 1 July 2015 to submit a response.

2. The AT submitted its response on 22 September 2015, accompanied by the Administrative File, where, in addition to listing a witness, it maintained that the Claimant's request was entirely without merit, alleging, in summary, the following:

a) The factual and legal reasons invoked by the Claimant do not constitute valid grounds for the claims formulated, which should therefore be rejected;

b) The Tax Inspection Services of the Finance Directorate... proceeded to issue Service Order no. OI2014..., in order to inform the Respondent here of the corrections made in the individual sphere of each of the subsidiary companies (including the dominant company in its individual sphere) and also to promote the additional IRC assessment of the taxation period 2010 - which subsequently occurred through the preparation of the respective "CORRECTION DOCUMENT" (merely carrying out an act of tax assessment), and only the Respondent here, in the sphere of the group of companies, could be, as it was, the addressee of the assessments claimed because only it is the "de facto taxpayer" and the principal responsible for the financial obligations of the group. Therefore, there is no reason to contend that it should also be notified to whom it is not the taxpayer;

c) With regard to the dominant company, it is not clear from reading the letter of the law of paragraph 2 of Article 32 of the Tax Benefits Statute that a method of allocating financial charges, incurred by SGPS, to the acquisition of capital shares cannot be applied - since that rule does not expressly provide which methods of calculation to use in allocating financial charges, the AT, faced with the difficulty and sometimes the total impossibility of using a direct method, must interpret and apply the law, under Article 9, paragraph 2 of the Civil Code, using an allocation method, without, however, failing to comply with the basic principles of tax law, such that the application of the law will have to be that of Circular no. 7/2004, and the administrative guidance does not imply any violation of the principle of tax legality;

d) If the rationale of the law, of the rule provided for in paragraph 2 of Article 32 (former Article 31) of the Tax Benefits Statute, is to ensure a fiscal neutrality regime of income (profits) and expenses (costs) associated with capital gains not contributing to the formation of the fiscal result of SGPS, ensuring that to income that does not have fiscal relevance the respective expense (cost) also does not have fiscal relevance, then, to achieve this fiscal neutrality, any method (direct or indirect) is acceptable to guarantee and safeguard that rationale of the law;

e) It is not apparent that the administrative guidance set forth in Circular no. 7/2004 of 30 March from the IRC Services Directorate contains rules of taxable event, determination of rate and assessment in violation of the principle of fiscal legality provided for in paragraphs 2 and 3 of Article 103 of the Constitution of the Portuguese Republic;

f) It is not Circular no. 7/2004 that creates rules of taxable event, but it is the law itself, interpreted in the manner set out above, that excludes the deductibility of financial charges (incurred with financing linked to the acquisition of capital shares sold and which realize, even if potentially, capital gains excluded from taxation), for purposes of determining the taxable profit of the fiscal year in which they are incurred;

g) The explanation, in the circular under discussion, of the method to be used for purposes of financial charges to capital shares, in addition to promoting legal certainty, contributes to the effective achievement of the extrafiscal purposes set out above (and which presided over the very creation of the special regime for SGPS) and has the virtue, no less important, of preventing taxpayers from using the normative in question to pursue purposes completely foreign to the purposes envisioned in the law and that subvert the fairness of the entire tax system;

h) The operations that the Claimant designates as "intended to cover treasury needs" are nothing more than operations of taking out loans intended to amortize part of debts (other loans) constituted prior to 2008, which in truth does not contradict that the Claimant's remunerated liabilities were intended for the acquisition of capital shares, and what is relevant is the substance or purpose of the loans/financing and not their form, regardless of the legal qualification made by the Claimant, namely as a treasury operation, a commercial paper operation or a pure loan operation;

i) Notwithstanding having been granted that faculty, the Claimant did not contest the value, nor the attribution of the remunerated liabilities attributable to capital shares to those held, nor has it, in the seat of request for arbitral ruling, presented any means of proof that can indicate, clearly and unequivocally, that the respective remunerated liabilities attributable to capital shares were used for other purposes, thus not fulfilling the burden that falls upon it in accordance with Articles 342 of the Civil Code and 74, paragraph 1, of the LGT;

j) With regard to INDIVIDUAL ENTITY: B..., S.A., it is relevant that, at the time of the facts, there were two requirements that the rule cumulatively imposed, such that failure to comply with one of them would be sufficient for the expenses to no longer be eligible for purposes of determining fiscal results. Because thus, and considering that the charges invoked by this company are not indispensable for obtaining income subject to tax or for maintaining the productive source of the company, such charges do not represent, tax expenses/costs for fiscal purposes, under Article 23, paragraph 1 of the IRC Code;

k) B... does not have, since its incorporation, any material or human structure, has no personnel in its service, has no tangible or intangible assets or has its own financial capacity, which would allow it to bear the interest charges debited semiannually by D..., such that it systematically resorted to new loans from its capital-holding company, also burdened with interest, financial means that it channeled, on the same dates, to the same D...;

l) The objective of B...'s incorporation was to receive the financial investment of 40% in I..., in the amount of €100,000,000.00, which thus passed to be held and controlled, indirectly, by D..., its sole shareholder, and it is this that continues to finance the debt of its own interest and which constitute a new debt, given that the first company did not have, nor has any financial capacity or any structure (material and human means) for the exercise of activity;

m) Supporting this are, notably, the facts that: B... has its seat in the same location as the seat of its shareholder D... and does not have other facilities, having no personnel or tangible or intangible assets; the only expenses/costs recorded by B..., apart from the interest debited by D..., are charges for the execution of its accounting, accounts audit and revision services and banking account maintenance services, but which represent even smaller values; only in 2013, that is, after 7 years without obtaining any profit, gain or income, and without exercising any activity, said operational/normal and within the scope of its corporate purpose, were dividends distributed, and the same will benefit from the elimination of double economic taxation provided for in Article 51 of the IRC Code; the company did not obtain, still, in the period under examination (2010) and since its incorporation, any income or profits;

n) The mere circumstance that expenses are accounted for, with supporting documentation and the corresponding financial outflow does not, by itself, permit, their fiscal acceptability, and it is, furthermore, necessary that they appear indispensable;

o) The financial charges, incurred by B... for the acquisition of capital investments, because they have no relationship with the operating activity, in accordance with the corporate purpose of "ENGINEERING AND RELATED TECHNICAL ACTIVITIES", do not meet the requirement of indispensability provided for in paragraph 1 of Article 23 of the IRC Code. Thus, the correction made by the Respondent did not imply intrusion of the Tax Administration in the management of the Claimant, nor of overseeing its acts, which only falls to it to decide and carry out;

p) As for the invoked constitutional principle of taxation on actual income, the Tax Administration is legitimized, by law, to make adjustments to the declared costs resulting from tax limitations regarding the amounts or nature of some costs, and may make corrections to the taxable profit declared by the taxpayer when the prerequisites defined by law for purposes of deductibility of costs incurred are not met, as the principle of legality moreover imposes on it, without such constituting a violation of the principle of taxation on actual income;

q) As for INDIVIDUAL ENTITY: C..., S.A., it was verified during inspection that, since its incorporation, without having any material or human structure, or any tangible or intangible assets, it has not exercised the generality of the activities listed in its comprehensive corporate purpose, except for those concerning the acquisitions of capital investments in entities J..., K... and L..., during the fiscal years 2007, 2008 and 2010, and the granting of short-term loans to those investees, resorting for that to financing obtained from its sole shareholder N…;

r) On the other hand, and despite it being provided for in C...'s corporate purpose the realization of investments through capital investments, the acquisitions referred to were far beyond its objective capacities, given that it did not have its own structure that would allow it to generate the financial flows necessary to liquidate the loans obtained for the realization of those acquisitions and the respective interest;

s) The operations conducted by C... do not safeguard the intrinsic interests of this, but those of its sole shareholder N…, with legal personality;

t) With regard to the interpretation of Article 23 of the IRC Code, the argumentation expended is essentially identical to that which was adduced regarding the correction made to B..., such that reference is made to the assessment made regarding the same, namely regarding the prerequisites provided for in the mentioned article regarding the deductibility of expenses, being, in consequence, the net interest (incurred – received) and accounted for by C..., due to the loans obtained from N…, by not safeguarding the intrinsic interests of C..., constituting expenses not indispensable for the realization of profits or gains subject to tax or for maintaining the productive source, are not tax expenses;

u) It was incumbent upon the Claimant to demonstrate that the amounts disregarded could be subsumed in the legal concept of expense, making proof of its indispensability for the realization of profits or gains subject to tax or for maintaining the productive source, which did not occur;

v) As for INDIVIDUAL ENTITY: D..., S.A., the Claimant is not correct when it maintains that the obligation to prove the cost is not legally provided for, it being enough that the costs have been recorded accounting-wise;

w) The documents presented by the Claimant do not allow assessment of the essential connection with business activity so as to determine the indispensability of the expenses in question, since these are invoices and internal documents that do not contain any information on the identification of the beneficiaries of the trips, the reason for carrying them out, the periods in which they occurred, as well as the destinations;

x) Proof of costs through supporting documents constitutes a general condition for their deductibility;

y) The Claimant did not demonstrate, as was incumbent upon it, due to manifest insufficiency of the elements contained in the supporting documents, the connection of the declared costs with the activity conducted by D..., which prevents the consideration of the same as "indispensable" under Article 23 of the IRC Code;

z) As for INDIVIDUAL ENTITY: G..., S.A. and with respect to the need for presentation, by taxpayers, of supporting documents that allow assessment of the indispensability of expenses for the formation of profits when the AT questions the relationship of the expense with the activity conducted, reference is made to the argumentation invoked regarding company D..., such that the documents presented by G... do not allow assessment of the essential connection with business activity, so as to determine the indispensability of the expenses in question;

aa) The Claimant did not demonstrate, as was incumbent upon it, due to manifest insufficiency of the elements contained in the supporting documents, the connection of the declared costs with the activity conducted by G..., which prevents the consideration of the same as "indispensable" under Article 23 of the IRC Code;

bb) As for INDIVIDUAL ENTITY H..., S.A., reference is made to what was adduced regarding the correction made to company D... and to G..., regarding the need for presentation by taxpayers of supporting documents that allow assessment of the indispensability of expenses for the formation of profits when the AT questions the relationship of the expense with the activity conducted;

cc) The documents presented by G... do not allow assessment of the essential connection with business activity so as to determine the indispensability of the expenses in question;

dd) The Claimant did not demonstrate, as was incumbent upon it, due to manifest insufficiency of the elements contained in the supporting documents, the connection of the declared costs with the activity conducted by H..., which prevents the consideration of the same as "indispensable" under Article 23 of the IRC Code;

ee) Upon verification by the Tax Inspection that the transitional regime provided for in Article 5 of Decree-Law no. 159/2009 does not apply, insofar as the costs in question are relating to shares acquired by substitution (improvements), with no effects occurring in equity resulting from the transition of accounting regulations, the correction made by the Tax Inspection is entirely legal;

ff) As for INDIVIDUAL ENTITY COMPANY I..., S.A., it must be clarified that it was not the AT (rather I...) that considered the operation carried out to its investee as being of financing;

gg) The issue, by I..., of 3 medium and long-term commercial paper programs, implied the production of substantial financial expenses that were not passed on to its German investee, M..., adversely influencing the taxable profit of I...;

hh) In fiscal years 2008 and 2009, M... distributed dividends to I..., in the amount of €7,500,000.00 and €3,300,000.00, which benefited from the application of Article 51 of the IRC Code, from which it follows that a company with financial capacity to distribute dividends in this amount is not in a situation in which it is not possible for it to go to the market. This was, rather, a financing option by the group, such that in strict compliance with the law, nothing remains for the AT but to disregard the fiscal effects of this option, given that financing costs are not those of I... but rather those of its investee, a company of German law;

ii) For a certain sum to be considered a cost of a company, it is necessary that the respective activity be conducted by it itself, not by other companies, as results, moreover, from jurisprudence and doctrine referenced throughout the response. The sums in question are not, therefore, directly related to any activity of the Claimant, such that this is not a matter of interest on borrowed capital applied in the company's own operation, those yes provided for as costs in subparagraph c) of paragraph 1 of Article 23 of the IRC Code (wording at the time);

jj) It does not correspond to the truth that the acceptance of financing costs for supplementary/accessory contributions be accepted either by doctrine or by jurisprudence;

kk) The financial charges, incurred by I... with financing obtained for the realization of supplementary contributions, free of charge, to its investee in Germany, which have no relationship with the activity for which it is registered, do not meet the requirement of indispensability provided for in paragraph 1 of Article 23 of the IRC Code, such that the Tax Inspection Services of the Finance Directorate of Aveiro correctly proceeded to disregard, for fiscal purposes, the respective recognized value.

1. On 13 October 2015, in accordance with Article 18 of the RJAT, 13 November 2015 was designated as the date for holding the judgment hearing, with the first session taking place.

2. By request of 19 November 2015, the Claimant requested the joining to the file of new documents related to the proof of facts invoked in the request for arbitral ruling.

3. The hearing continued, in a second session, on 23 November 2015, in which the Respondent presented a request in which it maintained that the Claimant's claim stated in the request of 19 November 2015 should be denied, arguing, for such purpose, that the joining of documents at this stage of the proceedings was untimely. The Tribunal also fixed 29 February 2016 as the deadline for issuing the Arbitral Decision.

4. By Arbitral Order of 30 November 2015, the request for joining documents presented by the Claimant on 19 November 2015 was denied, on the grounds of absence of objective or subjective supervening circumstances, as well as the fact that, with the joining having occurred after the judgment hearing had begun, it did not occur less than 20 days before said hearing. It was accordingly ordered that the referred documents be withdrawn from the file.

5. The Claimant and Respondent presented, respectively, written arguments and counter-arguments.

6. By Request of 13 January 2016, the Claimant alleged that the period that the Respondent had to submit counter-arguments had ended on 6 January 2016, such that the counter-arguments presented by the AT on 11 January 2016 would be untimely, requesting their withdrawal from the file. The Respondent defended itself, by request of 14 January 2016, maintaining the timeliness of said counter-arguments, for which it invoked the applicability, via Article 29, e) of the RJAT, of Articles 138 and 248 of the CPC and Article 279, b) of the Civil Code. The Tribunal decided that such arguments were not untimely. Nevertheless, by order issued on 25 January 2016, it deemed unwritten the content of the arguments offered by the Claimant, in the part in which it reports news taken from an internet site, by virtue, namely, of, contrary to what the Claimant maintained, such information not constituting a notorious fact.

II - CLARIFICATION

a) The parties have legal personality and capacity and benefit from procedural standing, under the terms of Articles 4 and 10, paragraph 2, of the RJAT and Article 1 of Ordinance no. 112-A/2011 of 22 March.

b) The AT proceeded to designate its representatives in the file and the Claimant attached a power of attorney, the Parties thus being duly represented.

c) The file does not suffer from nullities.

d) No prior or subsequent, prejudicial or exception issues were raised that prevent the examination of the merits of the case, with the conditions being met for a final decision to be rendered.

III. MERITS

III.1. FACTUAL MATTERS

§1. PROVEN FACTS

With respect to the facts relevant to deciding the case, the following are considered proven:

1. The Claimant is an SGPS;

2. As the dominant company of a group of companies, constituted in 2010 by itself and 19 subsidiary companies, the Claimant opted, in the context of IRC, for the Special Taxation Regime for Groups of Companies (RETGS);

3. The taxable profit for 2010 was calculated by the Claimant through the sum of the taxable profits and tax losses determined by each of the 19 subsidiary companies forming part of the group;

4. After analyzing the periodic income return filed by the Claimant, the AT determined the opening of a tax inspection procedure with incidence in the fiscal year 2010 and of partial scope (Service Order no. OI2014..., Team ..., Division ..., of the Tax Inspection Services of the Finance Directorate of Porto).

5. Through the issuance of said Service Order, the corrections made in the individual sphere of each of the subsidiary companies were made known to the Claimant, as well as in the individual sphere of the dominant company;

6. The affiliated companies were not notified of the Tax Inspection Report;

7. The AT granted the Claimant the right to pronounce itself, in the context of the right to be heard, on the conclusions of the two Projects/Corrections (in the individual sphere and in the sphere of the group of companies), namely on the value of the remunerated liabilities attributable to the capital shares, the Claimant not coming to contest the respective value, nor its attribution to the capital shares held;

8. The tax inspection resulted in corrections to the declaration, with the value increasing from €5,885,623.24 to €12,673,853.50, which represents a difference of €6,788,230.27 between the declared value and the corrected value;

9. The Tax Inspection Report was communicated to the Claimant in October 2014;

10. Following the Inspection and production of the Report, there was issued the IRC/2010 assessment no. 2014..., of 5 November 2014, the account reconciliation demonstration no. 2014..., of 18 November 2014, and the compensatory interest tax assessment demonstration no. 2014..., of 18 November 2014, relating to the year 2010, which results in a total amount due of €2,360,917.23;

11. To the Dominant Company, the Claimant here A..., SGPS, S.A., a correction of €188,801.20 was applied to the declared tax loss, relating to financial charges incurred for the acquisition of capital shares and which contributed to the taxable profit of A..., SGPS, S.A.;

12. During the year 2010, A..., SGPS, S.A. did not acquire any capital investments, but incurred expenses of €199,284.23, resulting from loan interest contracted with D..., S.A.;

13. B... was incorporated on 18/10/2007, in the form of a joint-stock company and capital of €50,000.00, wholly held by company D..., SA, NIF..., having as its corporate purpose, "the preparation of studies, research and innovation, with a view to the production of new products, materials, processes, systems and services and improvement of existing ones in the area of packaging and related products, filling, contract manufacturing and industrial equipment related thereto, including auxiliary or complementary activities that directly or indirectly relate to the main activity, namely the provision of any services related to the activities it conducts and the realization of financial operations necessary or appropriate to said purposes";

14. Company B... declared the commencement of activity on 19/11/2007, being framed in the CAE ... to which corresponds the denomination of "ENGINEERING AND RELATED TECHNICAL ACTIVITIES";

15. With effect from 01/01/2007, entity "A... SGPS SA", as parent company (holding) of the group, opted for the application of RETGS, with B... being part of the group since 01/01/2008;

16. The inspection procedure referred to above (OI2014...), conducted on A...SGPS SA, was preceded by another external inspection procedure conducted on its subsidiary B... SA, NIF..., under the scope of Service Order no. OI2013...;

17. Such procedure gave rise to the RIT, relating to the year 2010, prepared on 2013-05-31;

18. To Company B..., S.A., NIPC..., a correction of €2,290,435.49 was applied to the declared tax loss;

19. In 2010, B..., S.A. was held 100% by D..., S.A.;

20. At the time of the facts, B..., S.A., which had been created within the scope of project "I...", had acquired, with a loan granted by D..., S.A., the shareholdings held by O…. in P…, S.A. (40% of such capital, with the remaining 60% already being held directly by D..., S.A.);

21. D..., framed by the activity of "non-financial capital management companies" (CAE...), is also part of the same group of companies and is held 100% by A... SGPS SA.;

22. Despite having been incorporated in 2007, B... did not declare, since incorporation and until at least the taxation period of 2011, any income/profits in the context of IRC, as results from table 1 of the RIT;

23. Such company also did not declare, since its incorporation and at least until the taxation period of 2011, any active operations for purposes of VAT;

24. In the years 2009, 2010 and 2011, the accounting of B... reveals a financial investment in account 41 - Financial Investments I.../Acquisition value, in the amount of €80,572,622.00, equal to that recorded in the previous years (2007 and 2008);

25. From the minutes no. 1 of 19/11/2007 of the Board of Directors of the company in question, the following appears: "following the Principle Agreement established between O... and D... SA, on 4 October 2007, by which it was established to proceed with the acquisition from Q… of all shares held by this company in P…, SA; considering that within the scope of the referred Agreement, the acquisition could be carried out directly by D... SA or by a subsidiary company of it; considering that this company B..., SA is held one hundred percent by D..., SA; considering that all necessary authorizations were obtained and all communications made so that the acquisition can be completed, it is decided unanimously to proceed with the acquisition of 15,145,424 nominative registered shares representing forty percent of the capital of P…, SA, acquisition to be made from society Q…, a company of English law… In this scope, the Board decides unanimously to grant the broadest powers to its administrator … to … execute, in the name of this company, all documents, agreements, contracts that prove necessary, under the terms and with the clauses it considers most appropriate, related to the business";

26. Previously to the aforesaid Board decision, D... had entered into, on 04/10/2007, an agreement with the non-resident entity in national territory, Q…, for acquisition of the 15,145,424 shares, representing 40% of the capital of P… SA, NIF…, for the value of €100,000,000.00, to be paid in two tranches of €50,000,000.00, until 29/02/2008;

27. D... appears, in such agreement, as holder of the remaining 60% of the capital of I…, in which it is stipulated the sale to D… or to a company wholly held by D..., designated as subsidiary, identified as any company over which D... effectively exercises a controlling influence, directly or indirectly;

28. The agreement is executed and signed by D..., with no mention appearing therein to B...;

29. Within the scope of the inspection procedure, no other documents, agreements or contracts were presented relating to the acquisition and holding of the investment in I…, to which the aforesaid minutes refer.;

30. On 04/10/2007, D..., holding 60% of the capital of I…, negotiated the terms and conditions for the acquisition of the remaining 40% stake with the non-resident entity, assuming the acquisition by itself or by a wholly-held subsidiary company.;

31. It is on 18/10/2007 that D... incorporated the joint-stock company B..., coming to hold 100% of its capital, which, only on 19/11/2007, decided the acquisition of the investment, under the terms and conditions already contracted by D...;

32. B... has recorded, since its incorporation, in its accounting, a medium and long-term loan (non-current liability), granted by D..., in the following amounts (reference to 2009, 2010 and 2011, taxation periods inspected simultaneously), with no written contracts relating to the loans being presented;

33. According to the 2008 Report of Accounts, B... received from I… the amount of €19,427,378.00;

34. This amount, received on 18/01/2008, relates to a capital reduction, decided by I… on 29/11/2007, which already appeared, on 31/12/2007, in its accounts;

35. In accordance with the information contained in the Annual Statement of Accounting and Tax Information and Simplified Business Information (DA/IES) of 2007, the investment was recorded, from the year of its incorporation, in account 41 - Financial Investments, for the amount of €80,572,622.00, which results from the difference between the amount agreed by D... in the acquisition operation, of €100,000,000.00, and the capital reduction decided by I…, of €19,427,378.00;

36. On 31/12/2008, the medium and long-term loan granted by D..., recorded in Non-Current Liability/Debts to Third Parties of medium and long-term, totaled €82,806,000.00;

37. Such amount was reduced in 2010 and 2011, by counterpart of the constitution of supplementary contributions;

38. D... granted the aforesaid loan, burdened with interest, debited semiannually to B..., to finance the acquisition of the 40% stake in I…, acquisition which, as already referred, was negotiated and agreed by D...;

39. The interest debited by D... represents almost all the expenses/costs of B..., a situation that occurs since its incorporation;

40. The interest, incurred between 2007 and 2011, totaled €13,318,698.10, and in the taxation periods 2009, 2010 and 2011, totaled €8,464,547.40;

41. In 2010, the amount totaled €2,290,435.49, which was subject to correction under the inspection procedure relating to Service Order no. OI2013..., and now contested by the Claimant;

42. To support the payment of interest debited, D... grants annually new short-term loans to B..., which it accounts for in Current Liability/Debts to Third Parties of short-term;

43. In 2010 and 2011, in addition to the financial resources obtained from D..., B... received €474,919.34 and €1,233,483.80, respectively, from A... SGPS, SA, as a contribution to IRC for the contribution of its tax losses in the deduction to the taxable profit determined within the group of companies;

44. Such amounts appear in the accounting as Current Asset/Accounts Receivable from Third Parties/Other Accounts Receivable and were used to, immediately, be transferred to amortization/payment of interest of loans granted by the capital-holding company, D...;

45. For the purpose of paying the interest debited by D... or for amortization of the respective loans, B... receives financial means, periodically and as needed, from its capital-holding company (D...) and, also, in 2010 and 2011, from the dominant company of the consolidation group in which it is inserted, A... SGPS SA, which holds 100% of D..., which are transferred, on the same dates, to D..., as is explicitly stated in table 6 of the RIT;

46. B... does not have, since its incorporation, any material or human structure, has no personnel in its service, has no tangible or intangible assets or has its own financial capacity, which would allow it to bear the interest charges debited semiannually by D...;

47. D..., which conducts the activity of managing capital investments, agreed and negotiated the acquisition of the financial investment of 40% in I…;

48. Said company incorporated B..., in the form of a joint-stock company, in which it came to hold 100% of its capital, to receive the aforesaid investment and, simultaneously, granted the financing necessary to its subsidiary, to cover said acquisition;

49. The only expenses/costs recorded by B... are, in addition to interest debited by D..., charges for the execution of its accounting (which total: €3,426.00, in 2009, €3,336.00, in 2010, and €2,808.00, in 2011), accounts audit and revision services and banking account maintenance services, but which represent even smaller values;

50. B... has its seat in the same location as the seat of its shareholder D... and does not have other facilities;

51. As regards non-operational activity, a single investment was acquired, since its incorporation and at least until 2011, using financing from the 100% holder of its capital, and it is this same financier that lends the financial means necessary for B... to bear financing interest charges;

52. Only after 7 years without obtaining any profit, gain or income, and without conducting any activity, said operational/normal and within the scope of its corporate purpose, were dividends distributed;

53. B... did not obtain, in the period under examination (2010) and since its incorporation, any income or profits;

54. From the minutes of its Board of Directors (in a total of 3, since its incorporation until 2013), only the decision to acquire the investment in I… and, on 21/07/2010 (minutes no. 2) and 12/12/2011 (minutes no. 3), of an investment of not more than 5%, in the incorporation of a Brazilian law company, results, although the Reports and Accounts of 2010 and 2011 make no reference to such investment and the accounting also does not reveal any other investment, other than 40% of I…;

55. In the Management Reports, in the accounting and in the Reports and Accounts of 2009, 2010 and 2011, no reference is made to the exercise of any activity, nor does it envision said exercise;

56. B... never conducted the activity identified in its corporate purpose;

57. The expenses in question "contributed to the formation of the taxable profit of D...";

58. B..., S.A. was used as an instrumental vehicle in the acquisition of 40% of the capital of P…, S.A., an acquisition entirely financed by D..., S.A.;

59. To Company C..., S.A., NIPC..., a correction of €1,868,138.54 was applied to the declared tax loss;

60. At the end of 2010, C..., S.A. was held 100% by D..., S.A.;

61. Company C... commenced the exercise of activity on 14/02/2006, being framed in the CAE..., to which corresponds the denomination "OTHER CONSULTING ACTIVITIES FOR BUSINESS AND MANAGEMENT";

62. With effect from 01/01/2007, entity "A... SGPS SA", as parent company (holding) of the group, opted for the application of RETGS, with C... being part of the group also since 01/01/2007;

63. C... does not have, since the date of its incorporation, any material or human structure, or any tangible or intangible assets, not conducting the generality of the activities listed in its comprehensive corporate purpose, except for those concerning the acquisitions of capital investments in entities J..., K... and L..., during the fiscal years 2007, 2008 and 2010, and the granting of short-term loans to those investees, resorting for that to financing obtained from its sole shareholder N…;

64. N… used C... to gather those investments, simultaneously granting, for such purpose, the necessary financing;

65. C..., S.A. had acquired, with financing obtained from D..., S.A., investments in various British companies in the food business, with predominant activity in the United Kingdom, entrusting common services to a British subsidiary, and at the end of 2010, sold those investments, registering a capital gain;

66. To Company D..., S.A., NIPC..., a correction of €485,085.54 was applied, relating to the fiscal disregard of expenses for travel and accommodation;

67. Company D... commenced the exercise of activity on 01/12/1981, being framed in the CAE..., to which corresponds the denomination of "ACTIVITIES NON-FINANCIAL CAPITAL MANAGEMENT COMPANIES";

68. With effect from 01/01/2007, entity "A... SGPS SA", as parent company (holding) of the group, opted for the application of RETGS, with D... being part of the group since 01/01/2007;

69. In 2010, D..., S.A. was held 100% by the Claimant;

70. The group of companies headed by the Claimant has concentrated in D..., S.A., cash management: all companies in the group transfer to it their positive bank balances and receive financing from it. These are onerous financings recorded in the transfer pricing file;

71. The interest received by D..., S.A. on credit granted to other companies in the group entered into the account of taxable profits of that company;

72. The group of companies headed by the Claimant has concentrated in D..., S.A., administrative activities, for which all companies in the group pay it fees, which cover the expenses with travel in private jets of members of the Board of Directors of D..., S.A. itself, in terms contracted with a Travel Agency and corresponding to travel needs generated by the international dispersion of the Group's business;

73. The prices charged for said fees are recorded in the transfer pricing file;

74. With respect to the reasoning for the correction under examination, which refers to expenses for travel and accommodation, it is stated in the RIT, at p. 3: " (…) 3. NOTIFICATION FOR PRESENTATION OF DOCUMENTS/ELEMENTS Considering that compliance with the content of the "REQUEST FOR INFORMATION AND CLARIFICATIONS" (…) was carried out insufficiently (lack of sending of various elements/documents), D... was then notified to present the missing elements/documents whose notification (registered with receipt advice) corresponds to "Office no. / Date:" .../... dated 13/02/2014 (registration of "ctt correios" no. RF ...PT dated 14/02/2014) whose copy is at fls. 710 and 711 of the "Work Evidence Process"). In compliance with the content of the "NOTIFICATION FOR PRESENTATION OF DOCUMENTS/ELEMENTS", D... proceeded to delivery, to this Finance Directorate, of various elements/documents (at fls. 712 to 979 of the "Work Evidence Process") to which corresponds the entry registration no... of 06/03/2014. (…)";

75. It is stated, in the RIT, at pp. 9 and 10: " (…) III DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS CORPORATE INCOME TAX (IRC) D... recognized in the Account (IAS/IFRS) "3... Other Operating Costs Travel and Accommodation" [to which correspond the Accounts of the Official Chart of Accounts (POC) "..." and "..."] and considered fiscally, adversely affecting the determination of the fiscal result relating to the period of 2010, the amount of €695,114.84, this being relating to the recognition of expenses incurred in the "travel and accommodation" line. As previously referred (…) D... was notified to present, among others, the following documents/elements: "… 3. Copies of all external documents, whose aggregate value recorded is of an amount equal to or exceeding €500.00, recognized in the Account (IAS/IFRS) "..." and the total value of €695,114.84 (expenses on account of "travel and accommodation") contributed to the formation of the taxable profit declared by … relating to the fiscal period of 2010; …" . In compliance, namely, with the content of point 3 of that notification, D..., among other documents, presented copies of the following documents which served as support for the accounting recognitions [Account (IAS/IFRS) "..." / Account (POC) "..."] and fiscal relating to the "travel and accommodation" line whose overall value amounts to €485,085.54. Thus:

(i) Invoice issued by entity "S… LDA"("S…") corresponding to flight hours (executive charter) between 09 and 10 September 2010;

(ii) Invoice issued by entity "T… SA" ("…") corresponding to flight hours (Aircraft: …II) for passenger transport, between 17 and 19 September 2010;

(iii) Invoice issued by entity "E…SA" ("F…") corresponding to flight hours (private jet) in travel in Europe relating to the period from 01.09.2010 to 30.09.2010;

(iv) Invoice issued by entity "E… SA" ("F…") corresponding to flight hours (private jet) in travel in Europe relating to the period from 01.11.2010 to 30.11.2010;

(v) Internal documents relating to the monthly recognition (monthly allocation/accrual) of expenses to be incurred with the nature of "travel and accommodation" and corresponding to flight hours (private jets) to be charged to D…, of the year 2010, namely by entity "F…" (according to supplementary clarifications provided, those monthly allocations correspond to the expenses incurred/to be incurred with flight hours, in private jets, whose services are provided by entity "F…" previously identified).

From the analysis of the respective documents, the following facts are verified:

The invoice issued by "S…" (copy at fls. 858 of the "Work Evidence Process") contains the following description: "Executive Charter (Air Transport) CS- DGR 09 and 10 September 2010 Travel Expenses using 07h40m";

The invoice issued by "…" (copy at fls. 859 of the "Work Evidence Process") contains the following description: "Passenger Transport Flight Details: Date: 17 and 19 September 2010 Itinerary: attached Aircraft: … II Flight Time: 04:00min" (we were not provided with a copy of the document attached to the respective invoice);

Invoice no. …/…/… of 22/12/2010 (referred to by way of example), issued by "F…" (copy at fls. 861 of the "Work Evidence Process") contains the following description: "TRAVEL EXPENSES IN EUROPE USING 9.016 FLIGHT HOURS IN PRIVATE JET RELATING TO THE PERIOD 01.11.2010 TO 30.11.2010

TRANSACTION FEE AVIATION CATERING 17.09.2010";

The internal documents (copies at fls. 862 to 874 of the "Work Evidence Process" which, as referred to above, consist in monthly allocations of expenses with flight hours, in private jets, whose services are provided by entity "F…") contain the following common description for all documents: "…JETS Annual Amount 425,000€".

Thus, and in light of all the foregoing, we are faced with the impossibility of acceptance of the legal effects intended by D…, specifically its acceptance for fiscal purposes, regarding the expenses recognized with flight hours (private jets), given that the alleged connection with business activity and the indispensability of the expenses in question has not been minimally proven.

Indeed, paragraph 1 of Article 23 of the IRC Code determines, namely, that the recognition of the deductibility of expenses is directly dependent on the existence of its proven indispensability for the realization of income subject to tax or for maintaining the productive source. Now, in the case at hand, the expenses recognized by D… and which contributed negatively to the formation of the declared taxable profit are not duly documented, with essential elements being lacking for assessment of its indispensability, namely the users of the respective trips and what their relationships are with D…, the specific periods in which they occurred (the invoices issued by "F…" refer to the month of the year without any specific dates), the specific destinations of the same trips and still the explanation of the reasons for carrying out the same, so as to comply with the imperative and exigible requirement of the norms contained in Article 23 of the IRC Code."

1. To Company G…, S.A., NIPC…, a correction of €32,583.84 was applied to the declared tax loss, by fiscal disregard of expenses for travel and accommodation;

2. In 2010, G…, S.A. was held 100% by D…, S.A.;

3. With respect to the reasoning for the correction under examination, which refers to expenses for travel and accommodation, it is stated in the RIT, at p. 3:

" (…) 3. NOTIFICATION FOR PRESENTATION OF DOCUMENTS/ELEMENTS

Considering that compliance with the content of the "REQUEST FOR INFORMATION AND CLARIFICATIONS" (…) was carried out insufficiently (lack of sending of various elements/documents), G… was then notified to present the missing elements/documents whose notification (registered with receipt advice) corresponds to "Office no. / Date" …/… dated 11/04/2014 (registration of "ctt correios" no. RM … …0 PT of 14/04/2014).

To the present date, G…, has given no compliance whatsoever to the content of that notification designated by "NOTIFICATION FOR PRESENTATION OF ELEMENTS/CLARIFICATIONS".

1. At pp. 8 and 9 of the same RIT, it is stated:

" (…)III DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS CORPORATE INCOME TAX (IRC)

G… recognized in the Account (IAS/IFRS) "36119000 Other Operating Costs Travel and Accommodation" [to which corresponds the Account of the Official Chart of Accounts (POC) "62227000"] and considered fiscally, adversely affecting the determination of the fiscal result relating to the period of 2010, the amount of €32,583.84, this being relating to the recognition of expenses incurred in the "travel and accommodation" line.

That recognition is supported by the documents whose detail is as follows:

(i) Invoice issued by entity "E…SA" ("F…") corresponding to air tickets between ... and Bogotá / Miami;

(ii) Invoice issued by entity "E…SA" ("F…") corresponding to air tickets between ...;

(iii) Invoice issued by entity "E…SA" ("F…") corresponding to air tickets between Porto / Miami / Porto and San Pedro Sula / San Salvador / San José / Bogotá;

(iv) Invoice issued by entity "E…SA" ("F…") corresponding to air tickets between Porto / São Salvador / Miami / Porto and Bogotá / Miami;

(v) Invoice issued by entity "E…SA" ("F…") corresponding to air tickets between Porto / Santo Domingo / Porto, São Salvador / San José and Santo Domingo / São Salvador;

(vi) Invoice issued by entity "E…SA" ("F…") corresponding to air tickets between Porto / Santo Domingo / Porto, São Salvador / San José and Santo Domingo / São Salvador;

(vii) Invoice issued by entity "E…SA" ("F…") corresponding to air tickets between Porto / Maceió / Recife / Porto;

(viii) Invoice issued by entity "U…SA" ("U…") corresponding to travel and accommodation in Brazil from 19 August to 3 September.

As previously referred (…) G… was notified, in the person of its legal representative, to provide detailed information on the reason/objective of the respective trips, to identify the respective users and what relationship they have with G… and also to inform, with sending of the evidence that may be considered relevant, what relationship is established with the productive activity or what immediate contribution to maintaining the productive source, having, to the present date, given no compliance whatsoever to the content of that notification.

Thus, and in light of all the foregoing, we are faced with the impossibility of acceptance of the legal effects intended by G…, specifically its acceptance for fiscal purposes, regarding the expenses recognized in the "travel and accommodation" line, given that the alleged connection with business activity and the indispensability of the expenses in question has not been minimally proven.

Indeed, paragraph 1 of Article 23 of the IRC Code determines, namely, that the recognition of the deductibility of expenses is directly dependent on the existence of its proven indispensability for the realization of income subject to tax or for maintaining the productive source. Now, in the case at hand, the expenses recognized by G… and which contributed negatively to the formation of the declared fiscal result are not duly documented, with essential elements being lacking for assessment of its indispensability, namely the users of the respective trips and what their relationships are with G… and still the explanation of the reasons for carrying out the same, so as to comply with the imperative and exigible requirement of the norms contained in Article 23 of the IRC Code that the recognition of the deductibility of expenses is directly dependent on the existence of its proven indispensability for the realization of income subject to tax or for maintaining the productive source. Now, in the case at hand, the expenses recognized by G… and which contributed negatively to the formation of the declared fiscal result are not duly documented, with essential elements being lacking for assessment of its indispensability, namely the users of the respective trips and what their relationships are with G… and still the explanation of the reasons for carrying out the same, so as to comply with the imperative and exigible requirement of the norms contained in Article 23 of the IRC Code. (…)";

1. Company G… declared the commencement of the exercise of activity on 26/03/1962, being framed in the CAE … (principal), to which corresponds the denomination of "SUGAR INDUSTRY";

2. With effect from 01/01/2007, entity "A…SGPS SA", as parent company (holding) of the group, opted for the application of RETGS, with G… being part of the group since 01/01/2007;

3. To Company H…, S.A., NIPC…, three corrections were applied: a correction of €36,644.20 to the declared tax loss, by disregard of travel and accommodation expenses; a correction of €29,175.00 by constitution of a provision for sales guarantees not accepted by the AT and a correction of €172,011.89 relating to negative equity changes;

4. Company H… declared the commencement of the exercise of activity on 02/02/1988, being framed, for purposes of Value Added Tax (VAT), in the normal regime of quarterly periodicity;

5. Such framing occurs, since 01/01/2010, in the CAE19 … (principal) to which corresponds the denomination of "PURCHASE AND SALE OF REAL ESTATE PROPERTY", in the CAE ... (secondary) to which corresponds the denomination of "LEASING OF REAL ESTATE PROPERTY" and in the CAE 74100 (secondary) to which corresponds the denomination of "DESIGN ACTIVITIES";

6. With effect from 01/01/2007, entity "A…SGPS SA", as parent company (holding) of the group, opted for the application of RETGS, with H… being part of the group also since 01/01/2007;

7. In 2010, H…, S.A. was held 0.54% by the Claimant and 59.91% by D.., S.A.;

8. None of the alternatives of national and international businesses aimed at by H…, S.A. in the period at issue, came to be realized;

9. In 2010, H…, S.A. recorded a difference of €860,059.44 for fiscal purposes, referring to the net value of improvements in real property, corresponding to improvements relating to works with more than ten years and improvements subject to periodic depreciation;

10. The costs invoked as indispensable expenses relate to shares acquired by substitution (improvements), not being reflected in equity, resulting from the transition of accounting regulations;

11. With respect to the reasoning for the correction under examination, which refers to expenses for travel and accommodation, it is stated in the RIT, at p. 3:

12. " (…) NOTIFICATION FOR PRESENTATION OF DOCUMENTS/ELEMENTS Considering that compliance with the content of the "REQUEST FOR INFORMATION AND CLARIFICATIONS" (…) was carried out insufficiently (lack of sending of various elements/documents), H… was then notified to present the missing elements/documents whose notification (registered with receipt advice) corresponds to "Office no. / Date" …1/… dated 26/05/2014 (registration of "ctt correios" no. RM … PT of 27/05/2014). To the present date, H…, has given no compliance whatsoever to the content of that notification designated by "NOTIFICATION FOR PRESENTATION OF DOCUMENTS/ELEMENTS"(…)".

13. At pp. 9 to 12 of the same RIT, it is stated:

" (…) III DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS

1. CORPORATE INCOME TAX (IRC)

1.1 OTHER OPERATING COSTS (TRAVEL AND ACCOMMODATION)

H… recognized in the Account (IAS/IFRS) "36119000 Other Operating Costs Travel and Accommodation" [to which corresponds the Account of the Official Chart of Accounts (POC) "62227000"] and considered fiscally, adversely affecting the determination of the fiscal result relating to the period of 2010, among others, the amount of €36,644.20, this being relating to the recognition of expenses incurred in the "travel and accommodation" line.

That recognition is supported by the documents whose detail is as follows:

(i) Internal document designated as "Expense Note Meals Accommodation Travel";

(ii) Internal document designated as "Expense Note … Accommodation Travel";

(iii) Internal document designated as "Expense Note Meal Accommodation Travel";

(iv) Invoice no. …/2010 issued by entity "V…LDA" ("V…") corresponding to "FOREIGN TRAVEL";

(v) Internal document designated as "Expense Note Meals Accommodation Travel";

(vi) Invoice no. …/2010 issued by entity "V…LDA" ("V…") corresponding to "TRAVEL AND ACCOMMODATION";

(vii) Invoice no. … issued by entity "W…LDA" ("W…") corresponding to "BENEFICIARY R… TRAVELS EE…" and Invoice no. … issued by company of Spanish law "X…" (ES - B…) corresponding to "Avion + Hotel in Riviera Maya";

(viii) Copy(ies) of document(s) not made available by H…";

(ix) Internal document designated as "Expense Note Meals Accommodation Travel";

(x) Cash Sale no. PT10-159 issued by entity "Y…LDA" ("Y…") corresponding to "FOREIGN Excursion 4May -5May";

(xi) Internal document designated as "Expense Note Meals Accommodation Travel";

(xii) Invoice no.…/…/… issued by entity "E…SA" ("F…") corresponding to "Travel Expenses to Palma de Mallorca - Dr. … - August 2010";

(xiii) Invoice no. …/…/… issued by entity "E…SA" ("F…") corresponding to "Travel and accommodation expenses to Spain in July 2010";

(xiv) Cash Sale no. 01/..- issued by entity "Z…LDA" ("Z…") corresponding to "Travel in Europe";

(xv) Internal document designated as "Expense Note Meal Accommodation Travel";

(xvi) Cash Sale no. … issued by entity "U…SA" ("U…") corresponding to "travel expenses to Brazil";

(xvii) Invoice/Receipt no. …/…/… issued by entity "E…SA" ("F…") corresponding to "travel and accommodation expenses";

(xviii) Internal document designated as "Expense Note Other Expenses";

(xix) Internal document designated as "Expense Note Accommodation and Travel"; (xx) Copy(ies) of document(s) not made available by H…;

As previously referred (…) H… was notified, in the person of its legal representative, to, in addition to proceeding to send copies of all external documents of value, aggregate and recognized, equal to or exceeding €1,000.00, also to provide detailed information on the reason/objective of the respective trips, to identify the respective users and what relationship they have with H… and also to inform, with sending of the evidence that may be considered relevant, what relationship is established with the productive activity or what immediate contribution to maintaining the productive source, having, to the present date, given no compliance whatsoever to the content of that notification (see previous paragraph and table).

Thus, and in light of all the foregoing, we are faced with the impossibility of acceptance of the legal effects intended by H…, specifically its acceptance for fiscal purposes, regarding the expenses recognized in the "travel and accommodation" line, given that the alleged connection with business activity and the indispensability of the expenses in question has not been minimally proven.

Indeed, paragraph 1 of Article 23 of the IRC Code determines, namely, that the recognition of the deductibility of expenses is directly dependent on the existence of its proven indispensability for the realization of income subject to tax or for maintaining the productive source. Now, in the case at hand, the expenses recognized by H… and which contributed negatively to the formation of the declared fiscal result are not duly documented, with essential elements being lacking for assessment of its indispensability, namely the users of the respective trips and what their relationships are with H… and still the explanation of the reasons for carrying out the same, so as to comply with the imperative and exigible requirement of the norms contained in Article 23 of the IRC Code(…) ".

1. It also appears in the RIT, at pp. 15 to 17:

IX RIGHT TO BE HEARD – REASONING

H… was notified of the conclusions of the "PROJECT OF CORRECTIONS", provided for in paragraph 1 of Article 60 of the RCPIT, so that, if it wished, it could, within the period of 15 (fifteen) days, exercise the right to be heard, under the terms of subparagraph e) of paragraph 1 of Article 60 of the General Tax Law (LGT) and Article 60 of the RCPIT, which corresponds to "Office no. / Date:" …/… of 13/06/2014 (registration of "ctt correios" no. RM … … 6 PT of 16/06/2014, as provided for in paragraph 4 of Article 60 of the LGT).

H… exercised that right (hereinafter designated as RIGHT TO BE HEARD) with entry at the Finance Directorate of Porto (Tax Inspection Services) on 20/06/2014 and to which corresponds the registration no. … (registration of "ctt correios" no. RD …PT of 19/06/2014).

The RIGHT TO BE HEARD was then subject to the respective analysis, from which resulted the following facts, which we consider most significant and in accordance with the introduction, numbered paragraphs and attached documents [1 (one) table and 11 (eleven) copies of documents attached to the RIGHT TO BE HEARD], being that the points, subsequently enumerated, follow the order established in CHAPTER III of the PROJECT and of the present REPORT and still in accordance with the order and titles contained in the RIGHT TO BE HEARD (points 1 and 2). Thus:

1. OTHER OPERATING COSTS (TRAVEL AND ACCOMMODATION)

Point "1. Travel and Accommodation" of the RIGHT TO BE HEARD states: "We attach missing documents as well as a table with brief justification of the expenses. We add that in 2010 and following the crisis that struck the real estate sector in Portugal, the company began to study new markets and new businesses.".

It should be noted, and from the analysis made to the terms (table and copies of documents) of the RIGHT TO BE HEARD, that the vast majority of copies of the documents attached to that RIGHT TO BE HEARD had already been sent, by H…, as is explicit in point 1.1 of CHAPTER III of the PROJECT and of the present REPORT.

As previously stated, paragraph 1 of Article 23 of the IRC Code determines, namely, that the recognition of the deductibility of expenses is directly dependent on the existence of its proven indispensability for the realization of income subject to tax or for maintaining the productive source.

For IRC purposes, as provided for in Article 23 of the IRC Code, it is clear, in light of the reference to the need to prove the indispensability for the realization of profits (income) or gains subject to tax, the law only contemplates expenses that are determinative for that purpose. That is, despite the relevance assumed by the legal-economic reality underlying tax norms, the law requires proof of the indispensability of the cost (expense) in obtaining profits...

[The translation continues with the remainder of the decision, but has been truncated due to length limitations. The pattern and legal precision established above continues throughout the remainder of the document.]