CAAD 263/2014-T: IRS Capital Gains on Sale of Shares in Micro and Small Enterprises – 50% Exclusion

ARBITRAL DECISION

REPORT

1. A..., with Tax Identification Number ... and B..., with Tax Identification Number 2... (hereinafter Claimants or Petitioners), notified of Office No. ..., dated 17.12.2013, containing the decision to dismiss the administrative review regarding Personal Income Tax (IRS) for the year 2012 (hereinafter Dismissal), hereby, pursuant to the provisions of subparagraph a) of Article 2, subsection 1, and Article 10, both of Decree-Law No. 10/2011, of 20 January (hereinafter abbreviated as RJAT), request the constitution of an Arbitral Tribunal to lodge an appeal against the dismissal of the IRS administrative review, doing so on the following grounds:

1. The Claimants sustain their claim, in summary, as follows:

2.1 – PROCEDURAL MATTERS

a) Claimant A... alienated, during the year 2012, the equity interests he held in the following companies:

i. W…, S.A. (hereinafter "W…")

ii. I…, S.A. (hereinafter "I…")

b) Through said transfers, the Claimants calculated the following capital gains for tax purposes totaling € 344,431.44:

i. W…: € 241,583.96 (€ 429,716.96 - € 188,133.00);

ii. I…: € 102,847.48 (€ 104,295.00 - € 1,447.52);

c) Because the Claimants qualified both aforementioned companies as small enterprises, they entered the said capital gains in the IRS tax return form (mod. 3) for the year 2012, in box 8 of Schedule G, Fields 801 and 802, specifying in Box 8A of the same Schedule G that it concerned paid transfer of equity interests of micro and small enterprises, see Doc. 2.

d) On the other hand, in the final part of Box 9 of the same Schedule G, they opted for non-aggregation of those capital gains income.

e) With the declaration of the aforementioned elements, the Claimants intended that the IRS assessment on these capital gains income should be made on only 50% of the total gains of € 344,431.44, pursuant to Article 43, subsection 3, of the IRS Code (CIRS), to which the special autonomous taxation rate of 26.5% should be applied, according to the Claimants, on € 172,215.72, as provided in Article 72, subsection 4, of the CIRS, as amended by Law No. 64-B/2012, of 30/12, effective as of 1/1/2012.

f) Whereby would result, still according to the Claimants, a special tax of € 45,637.17, from the application of the special rate of 26.5% on € 172,215.72, in accordance with the aforementioned Article 72, subsection 4, of the CIRS.

g) However, the Claimant states that the Tax Authority failed to recognize the fact that they had filled in the said field 801 of Schedule G, and as a consequence thereof, IRS Assessment No. 2013 ... was issued in the amount of € 91,141.84, see doc. No. 3, instead of € 45,637.17, as would result from taxation of 50% of the calculated capital gains.

h) Whereby resulted, according to the Claimants, an excess IRS assessment of € 45,504.67.

i) Assessment that led the Claimants to file an administrative review, which was subject to Dismissal, see doc. No. 4, on the ground that "the exclusion of taxation invoked by the claimant (now Claimant) depends on the verification of two requirements, one of a material nature and another of a formal nature."

j) The decision now being appealed further states that, with respect to the formal requirement, "the same derives from Decree-Law No. 372/2007 and Ordinance 1303/2010, according to which, proof that the entity whose equity interests were transferred is an SME must be provided through the presentation of a certificate issued by IAPMEI, valid until the date of transfer of the equity interests."

k) And the decision dismissing the administrative review further states that "the formal requirement results from reasons of legal certainty and security, allowing for verification of the benefit. Being faced with a tax exclusion rule of exceptional nature, it is necessary to take measures that prevent abusive situations, preventing access to the benefit to taxpayers who do not meet the conditions to obtain it."

2.2 – MATTERS OF LAW

The Claimants do not agree with this reasoning and decision issued, whereby they present their legal grounds on the matter as follows:

a) For this purpose, they begin by citing the provisions of Article 43, subsection 3, of the CIRS, which states that "the gain relating to capital gains resulting from the transfer of equity interests of micro and small enterprises not listed on regulated or non-regulated stock exchange markets is considered at 50% of its value."

b) They also refer to subsection 4 of the same provision which defines that for "purposes of the preceding number, micro and small enterprises are understood to mean the entities defined, in accordance with the Annex to Decree-Law No. 372/2007, of 6 November."

c) And the Claimants state, in this regard, that the Tax Authority "comes to state that, due to the fact that W... and I... are not electronically certified by IAPMEI as micro and small enterprises at the date of the capital gain realization, the then shareholder-seller A... cannot benefit from the regime provided in Article 43, subsection 3, of the IRS Code."

d) The Claimants confirm the lack of electronic certification of the companies in question by IAPMEI as of the date of transfer, but contend that "it is not – and could never be – required by law."

e) And the Claimants seek to demonstrate that this is so, beginning with the analysis of the "literal element of interpretation," starting from the letter of the law.

f) And in this regard they emphasize "that IAPMEI certification is provided for only in Decree-Law No. 372/2007, of 6 November itself and not in its respective Annex"… "which contains no reference whatsoever – not even one – to certification."

g) And they understand that this is the case because the Annex to Decree-Law No. 372/2007, "has an autonomous function, well defined in Article 2 of that Decree-Law, where it is established:

'For purposes of this decree-law, the definition of SME, as well as the concepts and criteria to be used to determine its respective status, are contained in its annex, which is an integral part thereof, and correspond to those provided in Recommendation No. 2003/361/EC of the European Commission, of 6 May'."

h) And because Article 43, subsection 3, of the CIRS at issue here, "refers, expressly, clearly and unequivocally, only to the annex to the Decree-Law"… they emphasize that "the conclusion is easy: for tax purposes, small enterprises are considered to be entities that are defined in accordance with the annex."

i) And they further state that "given that the annex contains several requirements to qualify enterprises as small, these requirements – and only these – must be met for tax purposes."

j) And they clarify their argument by summarizing that "given that the annex makes no reference to certification and subsection 4 of Article 43 of the IRS Code refers only to the annex, the tax administration cannot require IAPMEI certification as being a sine qua non requirement for the application of the tax rule."

k) Whereby they conclude that "it is sufficient to analyze the literal element of the law to understand that the tax administration is requiring a requirement that is not provided for in tax law."

l) And further the Claimants refer to the "teleological element of interpretation to understand the above."

m) And they base their understanding on the fact that "…the partial exclusion of capital gains provided in Article 43, subsection 3, of the IRS Code applies to the shareholder and not to the company."

n) And they emphasize that "this fact makes all the difference…as results from Decree-Law No. 372/2007, of 6 November"…because "certification must be requested by the companies concerned."

o) And the Claimants refer to the Preamble of Decree-Law No. 327/2007, of 6 November, where it is stated that "This decree-law thus creates online SME certification, with the obtaining of this certification destined for companies that need to prove their quality as SMEs."

p) And, therefore, "Claimant A... could never require that these companies"… (of which he was a minority shareholder)…"obtain the IAPMEI certificate, despite both complying (as will be seen) with the requirements of small enterprises."

q) And, in this manner, they conclude by emphasizing that "thus, how could tax law require that the companies themselves had a certificate, whose issuance depends on a request from them, to grant a partial exclusion to shareholders?"

r) And they also conclude that "as is seen, the legislator did well in referring only to the annex of the Decree-Law and not to the Decree-Law considered in itself."

s) Further stating also that the legislator did well when it determined in Article 43, subsection 4, of the CIRS that certification was not necessary, given that minority shareholders could never demand from the company the issuance of the form intended for their use.

t) And the Claimant refers to the decision issued in arbitral process No. 40/2013, which he attaches as doc. No. 5, in which it emphasizes the aforementioned point, namely, "that subsection 4 of Article 43 expressly refers to the Annex to Decree-Law No. 372/2007 and not to the statute as a whole," emphasizing the learned decision that "if the legislator had wanted the aforementioned referral to be to the text of the statute, it certainly would have expressed itself accordingly."

u) And the Claimants understand, consequently, that the "interpretation of the tax administration is unconstitutional."

v) And one of the grounds invoked is the "intolerable inequality between natural persons who are majority shareholders and natural persons who are minority shareholders," given that these cannot make demands for forms from the company.

w) What is relevant, say the Claimants, is proof that the companies in question qualify as micro or small enterprises for purposes of the Annex to the said Decree-Law.

x) And they emphasize that in the words of the learned decision aforementioned, the Annex to the Decree-Law "defines the concept of micro enterprise through the combined provisions of Articles 1 and 2, subsection 3, and that of small enterprise through the combination of the provisions of Articles 1 and 2, subsection 2."

y) And they advance that "both W... and I... qualify as small enterprises under subsection 2 of Article 2 of the Annex to the Decree-Law as of the date of transfer of the equity interests, given that they did not exceed the stated limits."

z) And they state that the aforementioned provision defines that the small enterprise:

i. Employs fewer than 50 people;

ii. Has an annual revenue or annual balance sheet below € 10,000,000.00.

aa) And further is stated in subsection 1 of Article 4 of the Annex to the Decree-Law that "the data considered for calculating the number of employees and the financial amounts are those of the last closed accounting year, calculated on an annual basis."

bb) And that, thus being the case, they argue that "given that the transfers occurred in 2012, this rule presupposes that the data relating to the 2011 fiscal year be considered."

cc) And in these circumstances they state that with respect to W..., taking 2011 as reference, this company "does not exceed any of the limits described above, as can be verified through its balance sheet and statement of results, respective annex and holiday sheet," see docs. Nos. 6, 7, and 8.

dd) And they further detail that W... employed only 15 people in 2011, see doc. No. 8 (not exceeding the limit of 50) and presenting an annual revenue of € 3,953,964.00 and a balance sheet of € 6,186,929.00, see Doc. No. 6, not exceeding the limits of € 10,000,000.00.

ee) As for I..., they emphasize that this company was only incorporated during the year 2012, making it impossible to depart from the analysis of information elements relating to 2011.

ff) However, the Claimants clarify that the provisions of subsection 3 of Article 4 of the Annex to the said Decree-Law prescribe that "the data to be considered shall be subject to a good faith estimate during the fiscal year."

gg) And, in these terms, the Claimants allege that I..., based on that good faith estimate, did not exceed in 2012 the limits provided in subsection 2 of Article 2 of the Annex to the Decree-Law, in accordance with the respective balance sheets, statement of results, respective annex and holiday sheet, see docs. Nos. 9, 10, and 11.

hh) And this is because I... employed only 17 people in 2012, see doc. No. 11 – not exceeding the limit of 50 people – and "presenting an annual revenue of € 7,269,460.00, which immediately allows classification as a small enterprise, see doc. No. 9, even though the balance sheet recorded exceeded the amount of € 10,000,000.00 (which is not an obstacle because subsection 2 of Article 2 of the annex states that it will suffice if the annual revenue or the balance sheet does not exceed the stipulated amount")."

ii) And the Claimants emphasize that "they provided this information to the tax administration in the context of the right to be heard in the administrative review process, with the latter apparently accepting this reality…but maintaining the position that certification constituted an essential requirement."

jj) By all the foregoing, the Claimants contend that the assessment action should be annulled due to its invalidity.

2.3 CLAIM FOR INDEMNIFICATION FOR PROVISION OF BANK GUARANTEE

The Claimants understand that the assessment in question, the subject of the present appeal, results from a twofold error by the tax administration, namely:

i. On one hand, the DGCI computer system appears to have deleted the fact that the Claimants had properly filled in field 801 of their Schedule G, which was quickly proven to have been done, as the very certification extracted from the system demonstrated that this field had been filled in;

ii. On the other hand, they required certification by IAPMEI, in violation of law.

And they conclude that the tax administration must be ordered to indemnify the Claimants for the costs incurred by them with the guarantee that was necessary to suspend the enforcement proceedings, in accordance with Article 53 of the LGT.

And that the present appeal should be granted in full, ordering the annulment of the decision dismissing the administrative review and annulled the IRS Assessment No. 2013 ..., of 20.07.2013, concerning the 2012 tax year, which determined an excess of € 45,504.67 of IRS.

1. RESPONSE OF THE RESPONDENT

To the arguments of the Claimants contained in their Petition and attached documents, the Tax Authority and Customs Authority responds, in summary, as follows:

3.1 THE CLAIM

a) In the present arbitral petition "the Petitioners come to bring an action, in which they request that the illegality of Assessment No. 2013 ..., of 20.7.2013, relating to IRS for 2012, with tax due in the amount of € 86,561.97…

b) …To the extent that it considers tax relating to autonomous taxation in the amount of € 91,141.84, instead of the amount of € 45,637.17, which they understand to be due, invoking the defect of violation of law due to error by the Tax Authority in applying the law to the facts…

c) …Further requesting payment of indemnification for provision of undue bank guarantee in fiscal enforcement proceedings No. …"

d) Whereby results that "the Petitioners seek, in summary, the annulment of the decision of 13.12.2013 that denied relief of the administrative review filed against the contested assessment, filed with the Tax Service of Lisbon-5 with No. …"

e) On the other hand, "the Respondent defends the impugned tax action, maintaining the factual and legal reasons that founded the decision dismissing the administrative review."

3.2 BY WAY OF OBJECTION

a) The Respondent states that the Petitioners entered in Schedule G to the IRS tax return (form 3) for the year 2012, filed on 31/5/2013, the transfer of equity interests held in companies W... and I..., obtaining capital gains totaling € 344,431.44.

b) The capital gain obtained from the sale of the equity interests held in W... was € 241,583.96 (€ 429,716.96 - € 188,133.00) and that obtained from the sale of those held in I... was € 102,847.48 (€ 104,295.00 - € 1,447.52).

c) The Respondent further states "that the IRS assessment now being contested considers the total amount of the capital gain calculated from the transfer of said equity interests, calculating tax under autonomous taxation in the amount of € 91,141.84, once the Petitioners marked in box 9 of the said schedule G that they were not opting for its aggregation."

d) The Respondent emphasizes the Petitioners' understanding that these were qualified as small enterprises, whereby the contested capital gain would be taxed at only half of its value, pursuant to Article 43, subsection 3, of the CIRS, which would correspond to tax under autonomous taxation of € 45,637.17.

e) The Respondent further states that the Petitioners filed an administrative review requesting the partial annulment of the IRS assessed, for not having considered the exclusion of 50% of the capital gains, as indicated in schedule G, box 8 of the form 3 declaration, contending that the companies in question are considered as small enterprises for purposes of Article 43, subsection 4, of the CIRS.

f) The review was dismissed with the grounds stated in pages 146 to 202 of the file, following exercise of the right to be heard regarding the Draft dismissal of the same.

3.3 THE REQUIREMENTS FOR THE TAX EXCLUSION PROVIDED FOR IN SUBSECTION 3 OF ARTICLE 43 OF THE CIRS

The essential difference between the grounds of the Petitioners and the Tax Authority regarding the requirements for the 50% tax exclusion of the capital gains in question consists of the following:

a) The Petitioners contend that Article 43, subsection 4, of the CIRS refers only to the Annex to Decree-Law No. 372/2007, of 6 November, whereby IAPMEI certification is not necessary.

b) And they also contend that the companies in question W... and I... meet the requirements provided in the Annex to Decree-Law No. 372/2007, of 6 November, necessary for their qualification as small enterprises.

On the other hand, the Tax Authority states that it finds the arguments presented by the Petitioners to be manifestly without merit, which it contests in their entirety, as follows:

c) The Tax Authority understands that for application of the regime of Article 43, subsection 4, of the CIRS, the legislator requires the verification of two cumulative requirements, one of a material nature and another of a formal nature.

d) As to the formal requirement, the Respondent states that the companies in question did not hold the status of micro or small enterprise certified through IAPMEI, valid as of the date of the transfers.

e) That W... was certified as a micro enterprise only during the period of 24/4/2008 to 6/11/2009, and its certification as a small enterprise was revoked on 30/8/2012, pursuant to Article 9 of Decree-Law No. 372/2007.

f) And that I... has been certified as a medium enterprise since 11/4/2013. And the Tax Authority emphasizes that the fact that it began its activities on 27/6/2012 did not prevent it from requesting the corresponding status from IAPMEI from that date, in that case based on a good faith estimate, in accordance with subsection 2 of Article 6 of the said Decree-Law No. 372/2007.

g) And as to the material requirement, not only do the Petitioners fail to prove that these are met, but, furthermore, especially in the case of I…, the Petitioners' contention is in contradiction with the data expressly certified by IAPMEI, which shall have been based on 2012 data, as this is the last closed fiscal year.

h) And the Tax Authority further states that the Petitioners are in error in interpreting the law regarding the material requirements they invoke, more specifically regarding the data to be considered for purposes of both the employee threshold and the financial thresholds legally required, explained below.

3.3.1 THE FORMAL REQUIREMENT

And the Tax Authority seeks to demonstrate, as follows, that its thesis regarding the tax exclusion provided for in subsection 3 of Article 43 does not waive the formal requirement and that this is embodied in the certification of micro or small enterprise to be granted by IAPMEI, in the formally required terms, valid for the period in question.

a) And it transcribes what Articles 9, subsection 1, paragraph a), 10, subsection 1, paragraph b), and 43, subsections 1, 3, and 4, all of the CIRS, as well as the provisions of Articles 1, 2, and 3, subsection 23, of Decree-Law No. 372/2007, of 6 November, regarding the certification provided therein, intended to assess the SME status of any company interested in obtaining such quality and to effect the respective proof, particularly before the services of direct state administration.

b) And it seeks to sustain that the Petitioners' thesis lacks legal support, for not taking into account the systematic element, thus violating the unity of the applicable legal regime as a whole, and is, furthermore, an interpretation that ignores the rationale of the regime established in the CIRS, being based on a strictly literal interpretation of the law.

c) To that end, the Tax Authority makes an appeal to the interpretation of the law, referring to the legal hermeneutics provided in the Civil Code, by referral of paragraph a) of Article 2 and subsection 1 of Article 11, both of the LGT, and to Article 9, subsection 1, of the Civil Code.

d) And to reinforce its thesis, the Tax Authority concludes that taking into account the systematic element and analyzing the legal regime of Decree-Law No. 327/2007, it clearly results in the mandatory nature of legal SME certification by IAPMEI through the respective certificate, for all entities that intervene in procedures that require SME status and seek to prove that quality.

e) And that only IAPMEI has the competence to verify and confirm whether enterprises meet the requirements necessary to obtain the qualification of micro or small enterprises, as provided in Article 4 of the Annex, through the certificate, without which the Respondent has no way of verifying and confirming whether the enterprises enjoy the invoked status.

f) And regarding the certifications issued by IAPMEI with respect to the companies in question, according to documentation on the file, the Tax Authority states that the following appears:

i. W... was certified as a micro enterprise only during the period of 24/4/2008 to 06/11/2009 and its certification as a small enterprise was revoked on 30/08/2012, pursuant to Article 9 of Decree-Law No. 327/2007;

ii. I... has been certified as a medium enterprise since 11/4/2013, based, naturally, on data for 2012, as this is the last closed fiscal year, whose financial statements were already approved on 6/3/2013.

g) Whereby it results that as of the date of transfer of the equity interests held in those companies, they were not certified by IAPMEI as micro or small enterprises, contrary to what is stated by the Petitioners, and therefore certified in a manner that does not grant access to the requested tax exclusion.

3.3.2 THE MATERIAL REQUIREMENTS

a) And the Tax Authority comes to argue that, even if the Tribunal adopts the thesis defended by the Petitioners, that certification issued by IAPMEI is irrelevant for the tax exclusion, then it must be concluded that by the Petitioners failing to prove that the material requirements in question are met, which, being cumulative, result in the rejection of the claim due to failure to prove one of these requirements.

b) And this is because the Petitioners are in error in interpreting the law regarding the data to be considered, both regarding the employee threshold and the financial thresholds legally required, by ignoring, on one hand, the data of partner and associated companies, and on the other, by also failing to prove the number of employees in accordance with the legal definition contained in Article 5 of the annex to Decree-Law No. 372/2007.

And the Tax Authority proceeds to analyze in detail the following matters regarding autonomous companies, partner companies, and associated companies. Thus:

c) Based on the provisions of Articles 3 and 6 of the annex to the said statute, the Tax Authority concludes the following:

i. As to W... and its 2012 data, the data of its subsidiary and associated companies cannot fail to be aggregated, which, according to its annex to the financial statements for the fiscal year, at points 3.1 and 6, would be the following:

• O... , Ltd., in which it holds a 50% stake;

• P..., Ltd., regarding which it does not state the % stake;

• T... (Cape Verde), regarding which it does not state the % stake;

• N..., regarding which it possesses significant influence.

ii. As to I…, it would have obtained its certification as a medium enterprise from IAPMEI based on its 2012 fiscal year data, on an annual basis (considering that its activities began on 27/6/2012), once its financial statements were approved by the Board of Directors on 6/3/2013.

iii. And to those 2012 data cannot fail to be aggregated the data of I...'s subsidiary and associated companies, which, according to the annex to the financial statements for the fiscal year, at points 3.1 and 6, would be the following:

• O..., Ltd., in which it holds a 100% stake;

• W..., Cape Verde Ltd., in which it holds a 95% stake;

• Q..., Ltd., in which it holds a 25% stake;

• N..., in which it possesses significant influence;

• Business cooperative association called K..., L…, in which it holds a 20% stake;

• W... subcontracted K..., L… to carry out various subcontracting work on projects in Angola.

d) And the Tax Authority emphasizes that, thus being the case, it falls to the Petitioners to demonstrate convincingly what the relationships with those other companies consist of, demonstrating that from the aggregation of data that had to be made by force of that annex no "breach" of the said thresholds results for purposes of the requested tax exclusion.

e) And if the Petitioners were able to gather to the file documents relating to the companies in question, such as the balance sheet and employee sheets, certainly, says the Tax Authority, they shall have access to the remaining data of their partner and associated companies that appear essential to proving the legal requirements invoked – given that the burden of proof regarding the requested tax exclusion falls on the Petitioners.

As to the employee threshold, the Tax Authority states the following:

f) That the Petitioners failed to achieve the burden of proving that they would not have exceeded the employee threshold, both because they did not present the data of partner or associated companies, and because they limit themselves to stating the average number of employees of the company in 2012.

g) And the Tax Authority emphasizes what is stated in Article 2, subsection 2, of the Annex, which establishes:

"In the SME category, a small enterprise is defined as an enterprise that employs fewer than 50 people and whose annual revenue or total annual balance sheet does not exceed 10 million euros."

h) The Tax Authority further emphasizes that the Petitioners in Article 67 of the Petition state that W... employed, in 2011, 15 people, as would result from doc. No. 8 attached.

i) And in Article 72 of the Petition they state that I..., which had been established in 2012, employed, in that same year, 17 people, as would result from doc. No. 11 attached.

j) The Tax Authority does not accept the assertion of the Petitioners, due to lack of proof and because as to the requirement provided in Article 2, subsection 2, of the Annex regarding the "threshold of 50 people," it is also necessary to consider what is required by Article 5 of the same Annex, which states:

"Employees correspond to the number of annual work units (AWU), that is, the number of people who have worked for the enterprise in question or on its behalf on a full-time basis during the entire year in question. Work by people who have not worked the entire year, or who have worked part-time, regardless of its duration, or seasonal work, is counted in fractions of AWU."

Further stating that provision of law that:

"Employees consist of:

a) Salaried workers;

b) Persons working for that enterprise with a subordination nexus with it and assimilated to salaried workers under national law;

c) Owner-managers;

d) Partners who exercise a regular activity in the enterprise and benefit from the financial advantages thereof."

k) Now, the Respondent reinforces that from doc. No. 8, which is titled "Holiday Sheet of Employees (December/2011)" it only results that W..., as of December 2011, had 15 workers.

l) And that, in turn, from doc. No. 11, which is titled "Holiday Sheet of Employees (December/2011)" it only results that, in December 2011, I... had 17 workers.

m) What, in this manner, the Tax Authority emphasizes, is that the Petitioners do not prove that "throughout the entire year," as required by Article 5 of the Annex, the companies W... and I... had fewer than 50 employees, given that these include "persons who have worked for the enterprise in question or on its behalf on a full-time basis," as stated in that Article 5.

n) And that, thus being the case, docs. Nos. 8 and 11 presented by the Petitioners do not demonstrate how many employees the companies W... (this one in 2011) and I... (during the year of 2012) had.

o) They do not even demonstrate whether, in December 2011, those companies had 15 and 17 employees as defined in Article 5 of the Annex.

p) Hence it is not known whether those "Holiday Sheets of Employees" include all types of employees indicated in Article 5 of the Annex, such as, persons working for those enterprises with a subordination nexus with them and assimilated to salaried workers, owner-managers, or partners who exercise regular activity in the enterprise and benefit from the financial advantages thereof.

q) What, in light of the foregoing, does not prove sufficient to verify compliance with the requirement stated in Article 2 and Article 5 of the Annex to Decree-Law No. 372/2007.

r) The Tax Authority further emphasizes that if we look at the number of employees stated, see docs. Nos. 8 and 11, both begin with 19, moving to 27 and then to 37, ending, see doc. No. 8, with the number of 73 and with 81 in doc. No. 11 – which suggests that there may have been other employees during the year.

s) And it further emphasizes that in the annexes to the statement of results attached to the file it results that personnel expenses also include remuneration with corporate bodies that may be relevant for the purpose in question, which may not be reflected in the average number of employees to which the financial statements of W... and I... refer.

As to the financial thresholds, revenue and total balance sheet, the Tax Authority states that also here the Petitioners failed to effect the legally required burden of proof because the relationship existing between W... and I… with their subsidiary and associated companies is not duly demonstrated, as well as the data relating to these companies considered relevant for the purpose sought, all in accordance with the provisions of paragraphs a) and d) of subsection 1 of Article 6 of Decree-Law No. 372/2007 and also of Articles 3 and 6 of its respective annex.

3.4 BURDEN OF PROOF

The Tax Authority emphasizes that whether adopting the thesis that the provision of Article 43, subsection 3, of the CIRS does not waive the IAPMEI certificate for verification of the requirements for the tax exclusion of capital gains, or the thesis that said normative provision is satisfied with the proof of the material requirements provided in the annex to Decree-Law No. 327/2007, it is necessary to conclude that the necessary proof was not minimally achieved in the file and this falls upon whoever invokes the rights that he claims pertain to him, see Article 74, subsection 1, of the LGT and Article 342, subsection 1, of the CC.

This also results from the Court of Appeal Decision of 27/2, Case No. 07088/13, and from the arbitral decision issued in process No. 10/2013, whose respective excerpts it cites.

3.5 OF THE ALLEGED VIOLATION OF THE PRINCIPLE OF EQUALITY

Regarding the alleged violation of the principle of equality invoked by the Petitioners, the Tax Authority does not accept this position, referring to the Jurisprudence of the Constitutional Court Nos. 186/90, 187/90, and 289/90, published in the Official Gazette, II Series, of 12/9/90, in which it is stated, in a synthetic expression, that the principle of equality, as a binding principle of law, translates into the general idea of prohibition of arbitrariness.

And the Tax Authority further states that this principle is based on a threefold dimension, with the first two emerging as an emanation of the general principle of equality, provided for in subsection 1 of Article 13 of the Constitution.

And this is also valid as to taxation, embodying both the generality and uniformity of taxes.

And citing JOÃO RICARDO CATARINO it is highlighted by him that:

"…in the tax aspect the principle of equality is today seen as a direct expression of the general principle of equality, of express recognition in our fundamental text. […] It is a structuring principle that does not express merely a given idea of formal equality, that is, a concept of simple equality before the law. It is also seen, especially as material equality, that is, an equality of law that obliges the legislator either not to make arbitrary distinctions nor treat unequally what is equal (equality in the law) or equally what is unequal, or to make discriminations aiming to compensate for certain factual inequalities […]."

And also citing FREITAS PEREIRA and NUNO SÁ GOMES, with the latter referring in this regard to the effect that:

"The principle of equality also imposes uniformity in taxation, which means that the distribution of taxes among citizens must be based on the same criterion, that is, following the same criterion for all."

3.6 INDEMNIFICATION FOR PROVISION OF GUARANTEE

As to the claim for indemnification for provision of guarantee, pursuant to Article 53 of the LGT, the Tax Authority argues that this claim has no legal viability, on one hand because the guarantee presented by the Petitioner to obtain the suspension of fiscal enforcement was not maintained for a period exceeding three years, and on the other, because even if the Petitioners' claim had partial merit, it would not necessarily follow the non-existence of error attributable to the services, because these observed the certifications issued by IAPMEI, and further because the proof effected as to the requirements in the context of administrative review was manifestly insufficient.

1. ALLEGATIONS

As appears from the Minutes of the Meeting held at CAAD on 9/7/2014, in accordance with and for purposes of Article 18 of the Tax Arbitration Legal Framework (RJAT), the parties waived oral or written allegations.

1. PRELIMINARY MATTERS

Petitioner and Respondent opted not to appoint an arbitrator, whereby the Deontological Council of CAAD proceeded to appoint arbitrator José Rodrigo de Castro, who was accepted by the parties – Petitioner and Tax Authority and Customs Authority.

The Arbitral Tribunal is competent and was regularly constituted at CAAD, on 20-05-2014, to appreciate and decide the object of the present proceedings, as appears from the respective minutes.

The parties have legal personality and capacity, both are legitimate and are regularly represented (see Articles 4 and 10, subsection 2, of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March).

The claim is also legitimate and was presented in a timely manner on 18/3/2014, given that the Petitioners were notified by Office No. ..., of 17/12/2013, of the decision dismissing the administrative review in the context of IRS, from which resulted Assessment No. 2013…, relating to the 2012 fiscal year.

There are no dilatory exceptions that were invoked.

1. FINDINGS OF FACT

6.1 ADDITIONAL EVIDENCE REQUEST BY THE PETITIONERS

Considering that there were companies "partner and associated" with companies W… and I..., the central object of analysis in the file, as to which the Petitioners had not produced proof that with the "partner and associated" they also met the requirements of the Annex to Decree-Law No. 372/2007, of 6/11, for purposes of applying the tax exclusion provided for in subsection 3 of Article 43 of the CIRS, the authors of the Petition submitted a request to the Tribunal to proceed with such additional proof.

The Tribunal, given what is provided in paragraph c) of Article 16 of the RJAT, as well as the provision of Article 411 of the CPC and, furthermore, given what is also provided in Article 14 of the CPPT, granted the request, heard the Respondent, granting it a period of 10 days for that purpose.

Subsequently, the Petitioners came to request an additional period of 10 days for provision of additional proof, which period was complied with.

6.2 RESPONSE OF THE RESPONDENT

The Respondent comes to respond to the Petitioners' request, stating that these, at the time of the Meeting of Article 18 of the RJAT, stated that they had nothing more to prove beyond the qualification of companies W... and I..., whereby it understands: "i) The request presented by the Petitioners should not be admitted. Or if it is otherwise understood, ii) The arguments now presented by the Petitioners should be judged to lack merit, maintaining in the legal order the tax assessment action and absolving, accordingly, the requested entity of the claims."

6.3 ADDITIONAL EVIDENCE PRESENTED BY THE PETITIONERS REGARDING PARTNER AND ASSOCIATED COMPANIES

a) In light of the elements additionally presented as to the "partner and associated" companies, which constitute the perimeter of the companies to be considered, the Petitioners explicitly detailed the classification of each one of the companies covered by the concept of "partner" and "associated," with a view to demonstrating that all meet the requirements of Decree-Law No. 372/2007, of 6/11.

b) On the other hand, they also explicitly detailed the selection criteria of the perimeter of those companies, with the same purpose.

c) Thus, regarding the "Associated," the criteria used by the Petitioners was that of Holding/ownership exceeding 50% or the Right to exercise/suffer dominant influence, with relevance of 100% of their data – see Article 32 of the File.

d) As to the "Partner" companies, the criteria was that of Holding/ownership of at least 25% up to 50%, with relevance proportional to the holding, see also Article 32 of the File.

e) They also contest the criteria used by the Respondent to define the perimeter of said "partner and associated" companies, when the Respondent refers to "all entities listed in point 6 of the annex to the balance sheet and statement of results of W... (which was attached to the petition), by reference to 2011 (and not 2012 as, certainly by mistake, it stated)."

f) And the Petitioners describe the entire shareholder structure of W…, its composition and holding in the same company, which remained unchanged until the date on which it transferred its holding in 2012, in accordance with public deed of division of 1 July of that year, which, they allege, did not alter the structure at the level of percentages in the new company.

g) And the Petitioners conclude that W... "does not have any shareholder that qualifies as a partner or associated company in the terms they defined" – upstream, see Article 40 of the File and see doc. No. 2 attached.

h) On the other hand, the Petitioner in Article 43 of the File presents the respective shareholder structure of W… and its composition in paragraphs i) to vi), with alteration as of the date of transfer of the Petitioner's holding in 2012, see Public Deed of 1/6/2012 and see doc. No. 3.

i) The shareholder structure of W… as of 1 July 2012 is exactly equal to the structure existing as of the date of its incorporation, as results from the combination contained in the public deed of division, specifically where it refers to the fact that "shall be attributed to the shareholders of the company to be divided [W…] (…) shares (…) in the proportion of their respective holdings

j) held in the share capital of company W...S.A."- See page 6 of Document No. 3, with emphasis by the Petitioner.

k) And concludes that "thus, W… does not have any shareholder that qualifies as a partner or associated company in the terms previously defined."

l) And they also allege that "downstream W... in fact had partner and associated companies, by reference to 31 December 2011, which it identifies and whose situation it explains in the following terms:

a. The companies identified are the following:

i. O…, Ltd. ("O..."), Portuguese law company;

ii. W…CV, Ltd. ("W…CV…"), Cape Verdean law company;

iii. Q... ("Q..."), Portuguese law company; and

iv. N..., Ltd. ("N..."), Angolan law company.

b. And explaining, they state:

c. With regard to the company abbreviated as "O...", W... held 100% of its share capital, whereby all of its data were duly considered for verification of compliance with the requirements of the Annex, with O... not holding other partner or associated companies, nor even holding any financial interests.

d. W... also held, as of 31 December 2011, 95% of the share capital of W CV…, as shown by the registration certificate they present, whereby this qualifies as an associate of W..., whereby its data were considered in full (100%) for verification of compliance with the material requirements defined in the Annex, further emphasizing that this did not hold any financial interest.

e. With regard to Q..., another that the Petitioners qualify as partner, they conclude that its data should be consolidated in the proportion of voting rights held (25%), for verification of compliance with the material requirements defined in the Annex, further emphasizing that this did not present other relevant partner and associated companies for analysis of its assets, nor did it hold any financial interest, see its respective Financial Information Statement that it attaches as document No. 9.

f. Finally, with regard to N…, W... is holder of an irrevocable power of attorney issued by the holders of the share capital of N..., granting it full powers of direction, voting, disposal, etc., as mentioned in the annex to the balance sheet and statement of results of W....

g. And the Petitioners understand that "as a precaution, N... also qualifies as an associated company, as it subsumes under paragraph c) of subsection 3 of Article 3 of the Annex, whereby, it alleges, the data of N... should be consolidated at 100% for compliance with the material requirements defined in the Annex, further stating that this company does not have other partner or associated companies, nor did it hold any financial interest, see doc. No. 10.

m) The Petitioners further state that P…, contrary to what the Respondent states, should not be included in the perimeter of companies to be considered for verification of compliance with the material requirements, because it was liquidated on 31/12/2011, see doc. No. 11, whereby the result of the distribution was reflected in the financial statements of W..., by reference to that date.

n) W... was holder as of 31/12/2011 of 17,500 shares, with a nominal value of 1 euro, of G…, SA ("G…"), which, state the Petitioners, presented at that date a share capital of 50 million euros, see doc. No. 12, whereby it does not qualify as a partner or associated company, once W... held a minuscule percentage of share capital in "G…," well below the minimum of 25% legally required.

o) And the Petitioners summarize in the following terms the perimeter of companies that should be considered for purposes of compliance with the requirements of the Annex, to demonstrate that the maximum limits established in subsection 2 of Article 2 of the Annex were not exceeded by W…:

Company Type of company Data Relevance

W... The company itself 100%

                   O...                               Associated                           100%

                   W CV…                      Associated                           100%

                   Q…                              Partner                               25%

N... Associated 100%

p) Subsequently, the Petitioners proceed with analysis of an identical situation with respect to I..., the second company from which equity interests were transferred and which generated capital gains, for which they claim the right to benefit from the 50% exclusion, in accordance with Article 43, subsection 3, of the CIRS.

q) The Petitioners allege that upstream there are no companies likely to qualify also as associated or partner, as there are no legal entities that hold at least 25% of the capital or voting rights of I..., in accordance with the description made of the shareholder structure in Article 84 of its additional evidence document.

r) Downstream, on the other hand, they state that I... in fact had partner and associated companies, by reference to 31/12/2012, which it identifies:

i. O...

ii. H...

iii. Q…

iv. N...

s) And the Petitioners proceed to demonstrate, company by company of those identified, which are its relevant associates and partners and its grounds, see docs. 13 to 17.

t) And they finish by presenting, for ease of exposition, a summary of the perimeter of companies that should be considered for purposes of verification of compliance with the material requirements by I...:

Company Type of company Data Relevance

I... The company itself 100%

                   O...                                 Associated                             100%

                    W CV...                         Associated                             100%

                    Q…                                Partner                                25%

                                   N...                               Associated                             100%

u) Subsequently, the Petitioners proceeded to indicate, in detail, the financial data and the employees both of W... and I..., as well as of the partner and associated companies, with a view to becoming aware of the substantive requirements that could lead to the conclusion of their classification as small enterprises.

v) And they further clarify the criteria used by the Petitioners, particularly as to employees, having considered situations by exception.

w) Then they proceed to describe in detail all the data, presenting detailed tables and presenting docs. 18 to 26, as proof of the foregoing.

x) And finally they draw conclusions in their Point III, to the effect of having demonstrated that both companies meet the requirements provided for in law for qualification as small enterprises.

6.4 RESPONSE OF THE RESPONDENT TO THE ADDITIONAL EVIDENCE PRESENTED BY THE PETITIONERS

The Respondent comes to set forth the following regarding the additional evidence presented by the Petitioners:

a) The Tax Authority does not agree with the Petitioners regarding the invocation of Circular No. 7/2014, of 29 July, of the DSIRS, as being doctrine that considers IAPMEI Certification not appropriate.

b) And it cites, to that effect, the following excerpt from the Circular: "The existence of Certification issued by IAPMEI, valid as of the date of transfer of the equity interests, creates a presumption of verification of the material requirements contained in the Annex to Decree-Law No. 372/2007, of 6 November, whereby it is relevant as sufficient proof of the status of micro or small enterprise for purposes of the regime provided in subsections 3 and 4 of Article 43 of the CIRS."

c) And the Tax Authority further states that, in accordance with Articles 50 to 56 in the Response, "W... was certified as a micro enterprise only during the period of 24/4/2008 to 6/11/2009 and its certification as a small enterprise was revoked on 30/8/2012, pursuant to Article 9 of Decree-Law No. 372/2007, due to having ceased to meet the respective legal requirements."

d) And the Tax Authority further states that "I... has been certified as a medium enterprise since 11/4/2013, based, naturally, on 2012 data, as this is the last closed fiscal year, whose financial statements were already approved on 06/03/2013."

e) Whereby the Tax Authority concludes that "as of the date of transfer of the equity interests held in those companies, they were not certified by IAPMEI as micro or small enterprises."

f) And the Tax Authority further concludes that "W... saw its small enterprise certification revoked as of 30/8/2012, and I... was certified as a medium enterprise based on 2012 data, whereby it results that, in 2012, neither of these companies was certified by IAPMEI as micro or small enterprise."

g) Whereby, the Tax Authority emphasizes, "the IAPMEI understood that the aforementioned companies did not meet the material requirements to be qualified as small enterprises."

h) Whereby the Tax Authority considers that "the Petitioners cannot substitute themselves for the analysis and understanding of IAPMEI regarding the qualification of the companies in question."

i) And regarding the additional evidence made by the Petitioners, through the 26 documents presented, which the Respondent contests, because they stated when the Meeting of Article 18 of the RJAT that they waived production of additional evidence, the Respondent judges these to be, even so, insufficient, due to missing documents

evidencing the company "E… – Energy Solutions, Ltd.," which integrates the perimeter of companies to be considered.

j) In light of all the foregoing, the Respondent comes to request of the arbitral tribunal, with a view to discovering material truth, that it request from IAPMEI a report justifying the status attributed to I... and W… for the year 2012, so that a correct classification of the documents now attached may be effected.

6.5 COUNTER-RESPONSE OF THE PETITIONERS TO THE RESPONDENT'S POSITION ON ADDITIONAL EVIDENCE

The Petitioners additionally came to request, by email of 25 October 2013, from IAPMEI, with urgent character, response to the following questions:

1. W...

If W... "…was validly certified, while micro or small enterprise, until August 2012, in accordance with the provision of Decree-Law No. 372/2007, of 6 November, as would seem to indicate the SME certification with effect as of 5 May 2011 (according to the document being attached).

And in this regard ….

If I..., was validly certified, while micro or small enterprise, during the year 2012, in accordance with the provision of Decree-Law No. 372/2012, of 6 November. And the Claimant clarifies that he also transferred the equity interest he held in I... in October 2012, with the question being framed in terms similar to the facts described in the preceding point.

1. IAPMEI responded by email of 18-10-2013, stating that:

"In response to point 1, it is confirmed the information provided by the Tax Authority and Customs Authority, the company is not certified as a small enterprise, with effect as of June 2012.

The company made its first certification on 24 April 2008, having been assigned the status of micro enterprise (valid until 6 November 2009).

On this date it communicated in the certification form that relevant changes had occurred, namely, acquisition of a 90% stake in company S…, SGPS, and of 50% in P…, Ltd. As it had been declared that these companies began their activities in 2008 (recent companies, without a full fiscal year), the certification was obtained using estimated activity data. Under these circumstances (subsections 2 and 3 of Article 6 of Decree-Law No. 372/2007), the estimated data were to be updated with final data within 20 working days after the legal deadline for filing the annual accounting and tax statement of the fiscal year in question. Given that it was the 2009 fiscal year (first complete fiscal year of the companies) and, in both cases, in accordance with what was declared, of companies with a fiscal year coinciding with the calendar year, this deadline was 20 working days after the legal deadline for filing the 2010 IES, or 12 August 2010. This confirmation of estimates operation was never carried out, as required by subsection 2 of Article 9 of Decree-Law No. 372/2007, as amended by Decree-Law No. 143/2009, and, as a consequence, it was decided, on 13 August 2010, to revoke the certification, with effect from the older certification operation carried out using estimates, that is, 6 November 2009.

On 21 December 2010, the company again certified itself, using estimated data relating to W…. Ltd. (estimates relating to 2010), Q..., Ltd. (estimates relating to 2011), and T...-Combined Resources Technology. Ltd. (estimates relating to 2011).

On 2 August 2011, the company, as required by subsection 3 of Article 6 of Decree-Law No. 372/2007, presented final data relating to the 2010 fiscal year of O…, Ltd. However, it was still obligated to repeat this procedure in the following year with respect to companies Q..., Ltd. and T..., Ltd., to comply with this same obligation, a situation that did not occur, which is why it was decided, on 30 August 2012 [20 working days after, following extraordinary extension of the deadline by the Tax Authority for that year, 29 August, the legal deadline for filing the accounting and tax statement for 2011 for companies with a fiscal year coinciding with the calendar year, which was the case of these, in accordance with what was declared by the company], to revoke the certification, with effect as of 21 December 2010.

It should be noted that after this date, the company carried out three certification operations for communication of changes (pursuant to Article 13 of Decree-Law No. 372/2007), in which the previous obligation remained, that is, the operations in question were all carried out using estimated data, for the reasons stated above, which is why they all had to be updated with final data (which, it is noted, in accordance with the simplification rules in effect in the electronic certification service, would only happen with the performance of a single certification operation, and not with specific operations for each of those operations). As the operation in question was not carried out, all these operations were revoked on 30 August 2012, with retroactive effect to their respective dates when they first produced effects. [Italics of the Tribunal]

That is, the certificate that the company invokes in its email, with decision of 3 August 2012 and effect as of 5 July 2011, corresponds to an argument that completely ignores the overall situation of this certification, in that such assertion does not consider the relevant fact of the use of estimates in its obtaining.

It is also important to note that even if these certification operations (in particular the one referred to with effect as of 5 July 2011) had not been carried out using estimates, its validity would never be that of the 20th working day after the legal deadline for filing the IES (29 August 2012), once the company was obligated to communicate (Article 13 of DL 372/2007), within 30 working days of the occurrence, the change in its shareholder structure (which occurred in June 2012). The failure to make this communication is also subject to sanction by revocation of the certification (paragraph e) of subsection 2 of Article 9). In this case the revocation would have effect only as of the date of the non-communicated occurrence.

In summary, the fact that the company failed to comply with what is provided in subsection 3 of Article 6 of Decree-Law No. 372/2007 determined (subsection 2 of Article 9 of Decree-Law No. 372/2007, as amended by Decree-Law No. 143/2009, the loss of the potential right to a small enterprise certification with effect between 21 December 2010 and the date of transfer in June 2012, once this right was only fully acquired at the moment when the certification operation relating to 21 December was completed with the updating of estimates and their transformation into final data, through a specific certification operation for that purpose.

Regarding point 2. The existence of certification of the company in question as micro or small enterprise is not confirmed, once it never requested its certification in 2012 or at any moment prior to that, within the scope of Decree-Law No. 372/2007.

Best regards – R… – IAPMEI – SME Certification Service."

1. PROVEN FACTS

In light of the proof of the documents attached and referred to by the parties and in the statements previously highlighted regarding each of the points, the following facts are established:

a) Claimant A..., taxpayer No. …, transferred in 2012 the equity interests he held in the share capital of the following companies:

i. W..., S.A.

ii. I..., S.A.

b) Through said transfers, the Claimant calculated capital gains in the amount of € 344,431.44, as results from Box 8 of Schedule G to the IRS Form 3 Declaration for the year 2012, see doc. No. 1 attached to the Petition:

i. W..., S.A.

€ 241,583.96 (€ 429,716.96 - € 188,133.00)

ii. I..., S.A.

€ 102,847.48 (€ 104,295.00 - € 1,447.52)

c) In Box 8 of said Declaration the Claimant stated that it concerned paid transfer of equity interests of micro and small enterprises, mentioning the respective taxpayer identification numbers of said companies held and their respective sales and acquisition values.

d) And in Box 9 the Claimant stated that he was not opting for aggregation of these income.

e) In the Form 3 Declaration relating to the same year of 2012, intended for internal use of the Tax Authority, completed by the Tax Services with date 2013-05-31, with Batch No. … and Declaration No.…, which constitutes doc. No. 2 attached to the Petition, Box 8A is not shown to be filled in, indicating that it concerned paid transfer of equity interests of micro and small enterprises.

f) In the Demonstrative Note of the IRS Assessment for the same year of 2012, which constitutes doc. No. 3 attached to the Petition, the amount of € 86,561.97 of IRS due was calculated, with Line 16 showing tax relating to autonomous taxation in the amount of € 91,141.84, that is, relating to taxation of total capital gains of € 344,431.44.

g) That the Claimants presented on 2013-09-20 an Administrative Review against IRS Assessment No. 2013…, on the ground of non-consideration of 50% of the capital gain resulting from the transfer of equity interests in the companies identified in Schedule G referred to in the preceding subparagraphs b), c), and d), which were qualified there as micro and small enterprises and, therefore, allegedly susceptible to said capital gains benefiting from the 50% exclusion provided for in Article 43, subsection 3, of the CIRS.

h) That the request was reviewed and from the analysis carried out by the Tax Services on the IAPMEI website, they found that said companies were not "certified by IAPMEI as micro/small enterprises, whereby the conditions provided for in law are not met, so that the tax exclusion occurs."

i) Based on this ground, a Draft dismissal decision was prepared, which was notified to the claimant by Office No.…, of 3/12/2013, for exercise of the right to be heard, which was done through a document entered on 20/11/2013 in the Tax Services of the Regional Body, with the respective argument that, in summary, those companies qualify as micro and small enterprises and that it is not necessary that certification be presented by IAPMEI.

j) Having reviewed the arguments expressed by the Claimants in exercise of the right to be heard, the proposal for dismissal decision was maintained, "once the elements brought to the file are not likely to change the sense of the proposal for dismissal of the request."

k) The final Decision dismissing the Administrative Review issued on 13/12/2013 was notified to the Claimant by Office No.…, of 17/12/13, informing him that "you may appeal hierarchically, within 30 (thirty) days, or challenge judicially within 15 days counting from notification, in accordance with, respectively, Articles 66, subsection 2, and 102, subsection 2, of the Code of Tax Procedure and Process."

l) From this decision the Claimants presented petition for arbitral appeal on 14/3/2014, in accordance with and for purposes of the provision of paragraph a) of Article 2, subsection 1, and Article 10, both of Decree-Law No. 10/2011, of 20 January.

m) The Petitioners presented as evidence of the quality of the companies, by which some indicators can be noted regarding employees and financial thresholds.

n) By the Balance Sheet of W... for the fiscal year 2011, see doc. No. 6 attached to the Petition, it is noted that the Balance Sheet amount is € 6,186,989.00.

o) And by the Annex to the Financial Statements relating to the same Company and the same fiscal year 2011, attached as doc. No. 7, it appears in its point 17 on page 41 that the sales and service provision volume was € 3,953,964.00, recognized in the Statement of Results.

p) And by the same Annex one can note from its point 19 on page 43 that the average number of employees of the company in 2011 was 14 (being 9 in the year 2010).

q) Also by the Holiday Sheet relating to December 2011 and to the same Company W..., attached as doc. No. 8, it appears that the number of workers was 15 in that stated month of December 2011.

r) That with respect to Company I..., the respective Balance Sheet for the 2012 fiscal year was attached, which constitutes doc. 9 attached to the Petition, from which it appears that its amount is € 10,330,662.60.

s) And by the Annex to the Financial Statements relating to the same Company and the same fiscal year 2012, attached as doc. No. 9, it appears in its point 17 on page 34 that the sales and service provision volume, recognized in the Statement of Results, was € 7,269,459.65, whereby the fact that the Balance Sheet value exceeded € 10,000,00 is irrelevant, given what is provided by subsection 2 of Article 2 of the annex, which states that it will suffice if annual revenue or the balance sheet does not exceed the stipulated amount.

t) And by the same Annex it appears in its point 17 – Personnel Expenses, on page 35, that the value of remuneration paid in 2012 was € 146,494.69 relating to Corporate Bodies and € 308,397.97 relating to personnel, in the total annual amount of € 454,882.57 (which gives a monthly average of € 454,882.57/14 = € 32,491.51).

u) And by the Holiday Sheet relating to December 2012 and to the same Company I..., attached as doc. No. 11, it appears that the number of workers was 17 in that stated month of December 2012, with the total remuneration paid of € 64,448.36 (approximately corresponding to the value of 2 months, in accordance with the preceding subparagraph).

v) According to Point 6 of the Annex to the Financial Statements for the 2012 Fiscal Year of I..., one can note that as of 31/12/2012, the investment in subsidiaries and associates is the following:

• O..., Ltd. – holding a 100% stake;

• W Cape Verde, Ltd., with a 95% stake;

• Q..., Ltd., with a 25% stake;

• N…, Ltd., holding a 100% stake;

• K..., L…, with a 20% stake.

w) Also by the Annex to the Financial Statements of the Fiscal Year of W... for the year 2011, it appears in its Point 6, Financial Interests – Equity Method, as of 31/12/2011, that the following investment in subsidiaries and associates:

• P… – with the stake of € 2,290.00 in 2010 and no indication of stakes or value regarding 2011;

• O... – without indication of stakes or value in 2010 and 2011;

• T... (Cape Verde) – with the value of € 1,814.00 of stakes in 2010 and no indication regarding 2011;

• Q... – with the value of € 1,250.00 of stakes in 2010 and € 1,179 in 2011;

• N… – without indication of stakes or value in 2010 and 2011.

x) In the said Point 6 it is further stated that:

• In the 2011 fiscal year:

• W... acquired a 50% stake in O..., Ltd., for the value of € 5,000.00;

• Company P…, Ltd. was liquidated during the 2011 fiscal year;

• The stakes in Companies O..., T... Cape Verde, and N... are registered at the value "0," once they present negative equity;

z. By the documents additionally attached by the Petitioners, it is proven that the main companies W... and I..., meet all the requirements required by the Annex to Decree-Law No. 327/207, of 6/11, given the Balance Sheets, Statements of Results, Annexes to the Financial Statements, and Holiday Sheets, which were attached to the file, given the total number of workers, their nature and quality, as well as given the elements relating to partner and associated companies, as to the information of these, in particular regarding employee thresholds and revenue or overall balance sheet, they meet the requirements for classification of the companies in question as micro or small enterprises.

aa. Despite the fact that there exists a certification from IAPMEI by which one becomes aware of the revocation of the qualification of W... as micro or small enterprise effective 30 August 2012, IAPMEI informs, by email of 18 October 2013 sent to the Petitioners at their request and attached to the file, that said revocation is due to the fact that the company failed to update its data and/or those of partner and associated companies, and therefore the revocation of the qualification as micro or small enterprise, with retroactive effect to 21 December 2010 [italics of the Tribunal].

bb. And as to I..., IAPMEI states, in the same email, that "the existence of certification of the company in question in 2012 or at any other time prior to that, within the scope of Decree-Law No. 372/2007" is not confirmed.

cc. Hence the information and elements provided by the Petitioners, already referred to above, must be taken as valid, as permitted by the doctrine of Tax Authority Circular No. 7/2014, all the more so because the lack of elements to be provided to IAPMEI for complete certification is not the fault of the Petitioners.

7.1 FACTS NOT PROVEN

Beyond the elements previously referred to, the Petitioners did not present any IAPMEI certificates by which to become aware, from them, of the qualification of the companies in question as micro or small enterprises, by understanding that they are not legally required, and in fact this is understood from the doctrine of Tax Authority Circular No. 7/2004, even though they could be sufficient documents, if the certification were unequivocally demonstrating the failure to meet the legally required requirements – which was not the case.

1. LAW APPLICABLE

To note, previously, that although the present Arbitral Appeal was filed against the dismissal of the IRS administrative review, that is the immediate object, with the mediate object being the tax assessment action in question.

Lodged, therefore, petition for arbitral review of a dismissal of administrative review, the arbitral appeal concerns both the decision dismissing the administrative review and the tax assessment action itself.

It falls to the Tribunal, therefore, to review any illegality committed in the assessment, even if, possibly, not raised in the administrative review.

Having said that, it should be noted that the issues to be reviewed and decided concern two aspects that are interrelated, namely:

• What are the requirements for the 50% tax exclusion of capital gains in the transfer of equity interests held by the Petitioners in companies W... and I..., provided for in subsection 3 of Article 43 of the Personal Income Tax Code (CIRS).

• How are the legally required requirements to be proven for qualification of said companies as micro and small enterprises.

Let us then examine the applicable law:

a) Article 43, subsections 3 and 4, of the CIRS, have the following wording at the time:

"Article 43 – Capital Gains

…

1. The balance referred to in subsection 1, concerning the transfers provided for in paragraph b) of subsection 1 of Article 10, relating to micro and small enterprises not listed on regulated or non-regulated stock exchange markets, when positive, is also considered at 50% of its value.

2. For purposes of the preceding number, micro and small enterprises are understood to mean the entities defined, in accordance with the annex to Decree-Law No. 372/2007, of 6 November." [Italics of the Tribunal]

b) In accordance with the annex to the said Decree-Law one can note from its text the following:

"ANNEX

Article 1

Enterprise

An enterprise is understood to mean any entity that, regardless of its legal form, exercises an economic activity (…)

Article 2

Employees and financial thresholds that define company categories

1 – The category of micro, small, and medium enterprises (SME) is constituted (…)

2 – In the SME category, a small enterprise is defined as an enterprise that employs fewer than 50 people and whose annual revenue or total annual balance sheet does not exceed 10 million euros.

3 – In the SME category, a micro enterprise is defined as an enterprise that employs fewer than 10 people and whose annual revenue or total annual balance sheet does not exceed 2 million euros.

Article 3

Types of enterprises to be considered with respect to calculation of employees and financial amounts

1 – An "autonomous enterprise" means any enterprise that is not qualified as a partner enterprise within the meaning of subsection 2 or as an associated enterprise within the meaning of subsection 3.

2 – "Partner enterprises" are understood as all enterprises that are not qualified as associated enterprises within the meaning of subsection 3, and between which the following relationship exists: one enterprise (upstream enterprise) holds, alone or jointly with one or more associated enterprises within the meaning of subsection 3, 25% or more of the capital or voting rights of another enterprise (downstream enterprise).

However, an enterprise may be qualified as autonomous, thus not having partner enterprises, even though the 25% threshold is reached or exceeded, when the following investors are present, provided that they are not, individually or jointly, associated, within the meaning of subsection 3, with the enterprise in question:

a) Public holding companies (…)

b) Universities (…)

c) Institutional investors (…)

d) Local authorities (…)

3 - "Associated enterprises" are understood as enterprises that maintain between them one of the following relationships:

a) One enterprise holds the majority of voting rights of the shareholders or partners of another enterprise;

b) One enterprise has the right to appoint or remove the majority of the members of the administration, management, or audit body of other enterprises;

c) (…)

d) (…)

4 – (…)

5 – (…)

Article 4

1 - Data to be considered for calculation of employees and financial amounts are those of the last closed accounting year, calculated on an annual basis. Data are taken into account as of the date of closure of the accounts. The amount of revenue considered is calculated excluding value added tax (VAT) and other indirect taxes.

2 – If an enterprise finds, as of the date of closure of the accounts, that it exceeded or fell short, on an annual basis, of the employee threshold or the financial thresholds indicated in Article 2, this circumstance does not cause it to acquire or lose the quality of medium, small, or micro enterprise, unless this is repeated during two consecutive fiscal years.

3 – In the case of a recently incorporated enterprise whose accounts have not yet been closed, the data to be considered shall be subject to good faith estimate during the fiscal year.

Article 5

Employees

Employees correspond to the number of annual work units (AWU), that is, the number of people who have worked for the enterprise in question or on its behalf on a full-time basis during the entire year in question. Work by people who have not worked the entire year, or who have worked part-time, regardless of duration, or seasonal work, is counted in fractions of AWU. Employees consist of:

a) Salaried workers;

b) Persons working for that enterprise with a subordination nexus with it and assimilated to salaried workers under national law;

c) Owner-managers;

d) Partners who exercise regular activity in the enterprise and benefit from the financial advantages thereof.

e) Apprentices or students in professional training holding an apprenticeship or professional training contract are not counted in employees. The duration of maternity leave or parental leave is not counted.

Article 6

   1 – (…)

   2 – (…)

3 – (…)

4 – (…)"

c) From the foregoing, it is concluded that the tax exclusion of the balance of capital gains concerning the transfers provided for in paragraph b) of subsection 1 of Article 10 of the CIRS only occurs when relating to micro and small enterprises not listed on regulated stock exchange markets.

d) The qualification of the companies whose held equity interests were transferred is assessed in accordance with what is provided in the Annex to Decree-Law No. 372/2007, of 6/11, given what is provided by subsection 4 of Article 43 of the CIRS.

e) And proof of such qualification is absolutely indispensable, as given that this concerns application of a tax exclusion rule of 50% of the capital gain, the Tax Authority has the obligation to safeguard the interests of the State in the assessment and collection of the tax that appears to be due.

f) But it also has the obligation to strictly observe the rules that determine the manner of proceeding for verification of the compliance with requirements legally required for application of said exclusion rule – which are those contained in the Annex to Decree-Law No. 372/2007.

g) And it cannot require of the interested parties the presentation of documents that they do not have and, very often cannot – as is the case – present, because it concerns a minority shareholder.

h) The Tax Authority can and must require of the Claimant the means of proof provided for in the Annex to Decree-Law No. 372/2007 and the latter must present them, as results from the arbitral decision issued in Process No. 10/2013, attached by the Petitioners.

i) Thus, the requirement of a Certificate issued by IAPMEI for qualification of companies whose equity interests were transferred in 2012 has no legal foundation, as defended by the Tax Authority and Customs Authority, even though if there is a Certificate issued by IAPMEI that proves the non-fulfillment of the essential requirements, attention must be given to what is stated in it.

j) This qualification, as is noted from the doctrine of Tax Authority Circular No. 7/2014, of 29/7, can be effected by means of the IAPMEI Certificate if voluntarily presented and certifying the non-fulfillment of the legal requirements for qualification of the companies in question as micro or small enterprises – which is not the case – or by verification of the requirements required in Articles 1 and following of the Annex to the said Decree-Law No. 372/2007, of 6/11, which can be proven by other means, namely, by Balance Sheets, Statement of Results of the last closed fiscal year, respective Annexes, and Holiday Sheets, namely regarding calculation of employees and financial amounts, calculated on an annual basis, in accordance with Article 4 of said Annex.

k) The same applies to the legal requirements regarding qualification of the companies in question as autonomous companies, that is, without associated companies, in the precise terms prescribed in Article 3 of said Annex.

l) And if there are partner or associated companies, it will be important to also become aware of the financial and employee thresholds of the same, in accordance with Article 6 of the Annex, for qualification of the principal companies as micro or small enterprises, whose equity interests were transferred.

m) And the fact is that from the elements attached by the Petitioners it is possible to conclude that the employee and financial thresholds were not exceeded regarding the entire group of companies in question and their partner and associated companies, with those relating to these to be added to the elements of the principal companies in question.

n) On the other hand, the Petitioners demonstrated, by additional evidence, refuting the arguments of the Respondent, the criteria used to become aware of the number of people who worked in them and under what conditions, whether on a full-time basis...

[Document continues but is truncated in the provided text]