CAAD Ruling 264/2014-T: IRS General Anti-Abuse Clause – Tax Arbitration Decision

ARBITRAL DECISION

Case No. 264/2014-T

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Prof. Nina Aguiar and Prof. Jorge Bacelar Gouveia appointed by the Ethics Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 21-05-2014, agree as follows:

1. Report

A, taxpayer No. ..., and B, taxpayer No. ..., both resident in ..., came, pursuant to the provisions of articles 2, no. 1, letter a), 3, no. 1, 5, no. 3, letter a), and 10, nos. 1, letter a), and 2, of Decree-Law No. 10/2011, of 20 January ("RJAT"), to request the constitution of an Arbitral Tribunal in tax matters, with the intervention of a collective of three arbitrators, with a view to the declaration of illegality of the additional PIT (Personal Income Tax) assessment No. 2013 ..., of 12-12-2013, relating to the year 2009, in the amount of € 174,828.53 (one hundred seventy-four thousand, eight hundred twenty-eight euros, fifty-three cents), of the assessment of compensatory interest No. 2013 ..., of 13-12-2013, relating to the period between 31-05-2010 and ..., in the amount of € 23,009.36 (twenty-three thousand, nine euros, thirty-six cents), and of the settlement of accounts dated 13-12-2013, relating to the year 2009, in the total amount of € 197,837.89 (one hundred ninety-seven thousand, eight hundred thirty-seven euros, eighty-nine cents), with the consequent annulment of these assessments and with the consequent reimbursement to the Applicants of the amount of tax unduly paid of € 167,166.00 (one hundred sixty-seven thousand, one hundred sixty-six euros), plus compensatory interest at the legal rate, counted from 18-12-2013 until the full reimbursement of this amount.

The respondent is the TAX AND CUSTOMS AUTHORITY.

The Applicants opted for non-appointment of an arbitrator.

Pursuant to the provisions of letter a) of no. 2 of article 6 and letter b) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the Ethics Council appointed as arbitrators of the collective arbitral tribunal Dr. Jorge Lopes de Sousa, Prof. Nina Aguiar and Prof. Jorge Bacelar Gouveia, who communicated their acceptance of the assignment within the applicable period.

The Parties were notified of this appointment, having manifested no intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, no. 1 letters a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

Thus, in accordance with the provisions of letter c) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 21-05-2014.

The Tax and Customs Authority submitted a response in which it defended the unfoundedness of the requests and sought its dismissal.

At a meeting on 15-07-2014, the Parties dispensed with witness testimony and it was agreed that the case would proceed with successive written submissions.

The Applicants submitted the following conclusions:

1. Article 63, no. 4, of the LGT (General Tax Law) establishes both a formal limit to inspection activity — a second external inspection — and also a substantive limit to the same — the re-examination of the facts contained in the external inspection analysis;

2. This substantive limit prevents the subject matter of an external inspection procedure already closed from being re-analyzed by the TA (Tax Authority), which becomes bound by the analysis and conclusions contained in the external inspection procedure;

3. The evident identity of inspection subject matter between inspection actions No. ... and No. ... prevents the procedural validity of the latter inspection action, from which resulted the application of the CGAA (General Anti-Abuse Clause) and subsequent additional PIT assessment;

4. There are no apparent new facts in the concrete case that would allow sustaining the regularity of inspection action No. ... and the repeatability of inspections;

5. The TA's conduct, in preparing the new inspection report and practicing subsequent acts, violates the Applicants' right not to see the legal situation altered, defined as a result of the first inspection report;

6. The re-analysis of elements provided and obtained within the scope of the previous tax inspection action, after the procedure has ended, implies violation of articles 36, nos. 2, 3 and 4, of the RCPIT (Supplementary Regime of Tax Inspection Procedure), and of 63, no. 4, of the LGT, understood not only with their procedural scope, but also of the Applicants' right to legal certainty:

7. The violation of these rules constitutes a defect of violation of law, which justifies the annulment of the procedural act, pursuant to article 135 of the CPA (Code of Administrative Procedure), applicable by virtue of the provisions of letter c) of article 2 of the LGT;

8. The annulment of such act of re-examination and re-analysis of the evidence elements repercutes in the consequent acts of PIT and compensatory interest assessment, which have as their premise that illegal conduct, since they are null acts as "acts consequent to previously annulled or revoked administrative acts", pursuant to the provisions of letter i) of no. 2 of article 133 of the CPA;

9. If this is not the Tribunal's understanding, which is only admitted out of mere caution in representation, without conceding, it will be said that the prerequisites, of fact and of law, on which the application of the CGAA depends are not met, the TA violating, by erroneous interpretation and application, article 38, no. 2, of the LGT, and articles 10, nos. 1, letter b), and 2, letter a), and 43, no. 4, letter b), of the CIRS (Personal Income Tax Code);

10. The transformation of the two limited liability companies into joint stock companies and the subsequent sale of the shares to the holdings management company were carried out within the scope of a corporate reorganization;

11. The transformation of the limited liability companies into joint stock companies — and the sale of shares — had the purpose of establishing a group company relationship:

12. The acts and legal transactions carried out by the Applicants are part of a structure of acts and transactions intended for the expansion of their commercial activity, as well as for the creation of a company group, materialized through the establishment of a holdings management company that will completely dominate the companies transformed in the meantime;

13. The taxpayer may organize his operations in order to reduce his tax burden;

14. The application of the CGAA depends on four requirements, also referred to as elements: result, means, intellectual and normative;

15. If we take as certain the premise that the Applicants opted for the transformation of the limited liability companies they were partners in into joint stock companies and subsequent sale of the shares in lieu of the sale of the quotas, it is indisputable that tax advantages were verified (result element):

16. Parallel to the simple and mere assignment of quotas of the companies of which they were partners, the Applicants also had available the option of exchange of partnership interests – regulated in article 9, no. 8, of the CIRS, in a neutral regime –, which is entirely devoid of effects;

17. Faced with, at least, three alternatives, of equivalent economic effects, two of which are non-taxed (transformation of the company type and sale of shares or neutral exchange of partnership interests), the Applicants' option for one of the most advantageous cannot be considered fiscally motivated – only if the comparison term were the assignment of quotas (which remains to be demonstrated) – could any kind of fiscal motivation be raised regarding the option for corporate transformation and subsequent sale of partnership interests (intellectual element);

18. Not questioning the TA the creation of a holdings management company and the contribution to it of the partnership interests held by the Applicants, it only matters to consider whether the transformation of the limited liability companies into joint stock companies can be considered an "abuse of legal forms";

19. The alleged artificial character of the acts of transformation of the company types collides with their express legal establishment – article 43, no. 4 (current no. 6) letter b), of the CIRS – as a privileged means of obtaining the tax advantage contained in article 10, no. 2, letter a), of the CIRS, in a solution that goes back to the initial version of the EBF;

20. By pointing the law to the path to be followed to obtain the tax savings, such path cannot, once undertaken by the taxpayer, be deemed abusive (means element);

21. The generality of doctrine — accompanied by the TA itself and by the arbitral jurisprudence of CAAD – defends the necessity of demonstrating a normative element to justify the application of the CGAA;

22. Part of the doctrine even considers that the demonstration of the fiscal system's rejection of the results obtained with a given planning structure is a prerequisite for its application;

23. The normative element performs an essential function in any general anti-abuse clause: the function of ensuring that the results of the application of the CGAA are teleologically and systematically considered and consistent;

24. It would hardly be considered in conformity with the Constitution of the Portuguese Republic the interpretation of that general clause in the sense that it dispenses with the demonstration of the normative element, given the principle of separation of powers and the right to tax planning;

25. It is not admissible that it could be the interpreter's role to preclude the areas of tax planning manifestly and expressly created by the tax legislator, substituting itself for the latter: a result in conformity with the fiscal system is not condemnable in the face of the CGAA;

26. The unsystematic treatment of capital gains, with particular emphasis on capital gains from partnership interests, cannot fail to produce effects on the application of the CGAA;

27. The tax treatment of capital gains has been manifestly casuistic, a situation that did not undergo significant changes with the approval of the CIRS;

28. Although there being a single rule of incidence on capital gains for the generality of partnership interests, the legislator deliberately opted for exceptional and favorable treatment, excluding from taxation capital gains resulting from the alienation of partnership interests in the form of shares;

29. This situation of manifest privilege of capital gains from shares only ceased after twenty years of almost continuous application, and only for financial reasons, in 2010;

30. In privileging shares over quotas – therefore, a benefit in attention solely to the legal form of the partnership interests – the tax legislator is inducing a behavior of substitution on the part of taxpayers;

31. This inducement of behavior is especially evident in the wording of article 43, no. 4 (current no. 6), letter b) of the CIRS (article 35 of the original version of the EBF) – which, in the case of corporate transformation of a limited liability company into a joint stock company, refers the date of acquisition of the shares to the date of the quotas that gave rise to them;

32. One cannot conclude that the taxpayer is in fraud against the tax law when he behaves precisely as the tax legislator intended him to behave, transforming the limited liability companies into joint stock companies;

33. The fiscally less burdensome result is admitted, tolerated and stimulated by the law and/or by the fiscal system in general, so the acts and legal transactions carried out by the Applicants cannot be condemned and framed within the CGAA, due to the absence of fraud against the rules in question;

34. Doctrine identifies cases of favorable treatments as cases in which the CGAA is not applicable, given the anti-systematic results that would result therefrom.

35. Arbitral tax jurisprudence has unanimously inclined in the sense that the CGAA cannot be used to overcome or set aside the clear choices of the legislator in privileging the treatment of shares over quotas;

36. It is the TA itself that denotes some "discomfort" regarding the application of the CGAA to situations of transformation of limited liability companies into joint stock companies and subsequent sale of shares, when it does not include such a structure of tax planning in the lists of structures deemed "abusive or aggressive tax planning" in light of Decree-Law No. 29/2008, of 25 February;

37. The normative element of the CGAA is, therefore, absent from the structure adopted by the Applicants;

38. The prerequisites of fact and of law on which the application of the CGAA depends are not met;

39. The Respondent, TA, violated, by erroneous interpretation and application, articles 38, no. 2, of the LGT, 10, nos. 1, letter b), and 2, letter a), and 43, no. 4, letter a), of the CIRS;

40. The tax act suffers from a defect of violation of law, due to error regarding the prerequisites of fact and of law, which justifies its annulment, pursuant to article 135 of the CPA;

41. Consequently, the acts of additional PIT assessment and compensatory interest assessment (and the settlement of accounts operation) challenged should be annulled;

42. The TA should be condemned to pay to the Applicants the amount of tax unduly paid of € 167,166.00 (one hundred sixty-seven thousand, one hundred sixty-six euros), plus compensatory interest, counted from 18/12/2013 until the full reimbursement, pursuant to the provisions of articles 43 and 100 of the LGT, 61 of the CPPT (Code of Tax Procedure and Process), and 24, nos. 1, letter b), and 5, of the RJAT.

In these terms and in the further terms of applicable Law, having analyzed the matter of fact in accordance with the elements joined to the tax arbitral process, and having considered the legal values in confrontation, the request for declaration of illegality of acts of PIT assessment and compensatory interest (and of the "settlement of accounts" operation), relating to the year 2009, should be judged well-founded, as proven, and, consequently, the acts of assessment whose declaration of illegality is requested should be declared illegal, based on the reasons of fact and of law presented above, namely because the same acts suffer from a defect of violation of law, due to violation of procedural rules and of the Applicants' right to legal certainty, and, also, due to error regarding the prerequisites of fact and of law, since the prerequisites, of fact and of law, on which the application of the general anti-abuse clause, provided for in article 38, no. 2, of the General Tax Law, depends are not met, and, equally, the facts, objective and subjective, invoked by the Tax and Customs Authority for the application of the same anti-abuse provision do not exist, with the consequent annulment of all acts practiced within the scope of the tax inspection procedure initiated with the Service Order No. ... — from which resulted the assessment of PIT and compensatory interest as a result of the application of the general anti-abuse clause –, since such annulment will repercute on the consequent acts of PIT and compensatory interest assessment, which have as their premise that procedural act, the consequent annulment of the acts of PIT and compensatory interest assessment, with the recognition of the Applicants' right to reimbursement of the tax unduly paid, plus the respective compensatory interest, in accordance with what was requested and petitioned in the arbitral decision, with the further legal consequences.

The Tax and Customs Authority made counter-submissions, concluding as follows:

I. It is clear that the legal structuring of the sale of the partnership interests, intended by the Applicants, was the subject of a purpose-built planning, whose purpose can only be justified by the obtaining of a tax advantage, which otherwise would not be obtained at all.

II. Not succeeding in the alleged non-tax justifications for the operations, it is these legal acts, resulting solely from the will of the Applicant herein, that allow speaking of the verification of the (intertwined) means element and intellectual element.

III. What is not in question is the possible economic rationality of the establishment of the company group – this is absolutely irrelevant to the question to be decided in the present case.

IV. Because it is necessary to conclude – in view of the legal framework in force – that the transformation is absolutely unnecessary to this possibility of conforming the business group.

V. In this way, we have a chain of acts practiced that appears, at first sight, unnecessary, superfluous, excessive, and above all unjustified in its economic aspect, which only acquires meaning when perceived from the perspective of the tax purpose.

VI. Moreover, given the manifest lack of evidence capable of justifying the commercial or corporate motivation that was at the genesis of the transformation of the limited liability companies into joint stock companies, it is legitimate to state that the generic allegations made by the Applicant in that sense cannot succeed.

VII. Both with respect to those that are part of his request for arbitral decision, and those that had previously been part of his right to be heard.

VIII. It was the Applicant's burden to prove, pursuant to the provisions of article 74, no. 1 of the LGT, a burden that was not fulfilled.

IX. As well stated in the jurisprudence of the Arbitral Tribunal, handed down in case No. 47/2013-T:

"Ultimately, the fact that raises suspicion, and justifiably so, on the TA regarding the transaction is the (short) space of time that intervenes between the change of form and the sale. To this factor of suspicion is added the inability to present an economic justification that dispels this suspicion." (emphasis ours).

X. Because the form of joint stock company generally serves to attract external investment (potentially from many investors, a priori disinterested in management and focused on obtaining financial return for their participation, in the form of dividend or capital gains generated in subsequent alienation), thus potentiating the dispersal of capital.

XI. However, the present Applicant transformed the limited liability companies into joint stock companies while maintaining the totality of the holding, directly or indirectly, over their capital, as, moreover, was required by the intuitu personae franchise contract that shapes the operation of restaurants X, the exclusive corporate object of all the companies in question.

XII. Whereby the Applicant's conduct contradicts this inherent logic to the forms used and the reasons invoked by him for the corporate transformations do not convince.

XIII. All the fiscal engineering described, of an unusual, complex and artificial character, is found to be devoid of utility or immediate meaning from the economic point of view, aiming solely at one purpose: the exclusion from taxation of capital gains obtained by the Applicant.

XIV. As to the result element, this corresponds to the tax advantage, this had as its objective the elimination of taxation, in the context of PIT, in the year 2009, causing them to withdraw the maximum benefit from the structure used.

XV. In order for the exclusion from taxation to present itself as perfect and unsuspicious in terms of compliance with legal rules, the Applicant sought, through refinement in the structure of the sequential acts adopted to dispel any doubts that might be raised about the legality of the same.

XVI. If the Applicant had chosen the economically equivalent transaction to the one now in question, selling the quotas he held to the SGPS, he would have been taxed under income tax by the capital gains obtained with those sales of quotas, and the economic result would be identical to that of the transformation of the Ltd. into joint stock companies, followed by sale of the shares to the SGPS.

XVII. Because, with the sale of the quotas, the SGPS would come to hold, in the same way, 100% of the capital of the limited liability companies, simply, they would have to pay tax, in the amount of 167,166.00 €.

XVIII. Thus, only because of the exclusion from taxation, the Applicant acted as he acted, contrary to the spirit of the law.

XIX. With what has been said, the intellectual element is likewise demonstrated, which corresponds to the taxpayer's motivation, characterized by the alteration of priorities that should move him.

XXIII. As regards the normative element, understood as the non-conformity of the result obtained through the abusive act with the ratio legis, spirit or purpose of the law and the principles of the fiscal system.

XXIV. It is in this non-conformity between the end aimed at by the norm and the concrete end aimed at in the use of the norm (and of the legal form) by the taxpayer, that resides the unlawful, or censurable, or, in the more widespread language, the normative element.

XXV. Contrary to the Applicant's understanding, the provisions of articles 10, no. 2, letter a) and 43, no. 4, letters a) and b) of the CIRS cannot be read in isolation, but rather in conjunction with article 38, no. 2 of the LGT, as well as with the norms of the Constitution.

XXVI. At the genesis of the tax exclusion was, as we have seen above, the idea of stimulating lasting and effective business investment, by attributing a more favorable tax treatment to non-speculative capital gains, that is, benefiting "long-term capital gains", and therefore excluding from taxation only gains from securities held for more than 12 months.

XXVII. Not directing itself at all to those who continue to manage the joint stock companies as the previous limited liability companies, namely because they are bound in practice by the intuitu personae franchise contracts

XXVIII. Merely taking advantage of the legislator's ineptness in foreseeing all the situations in which abusive planning can occur, as verified in the case sub judice.

XXIX. The intention of the law itself should be adequate to the legal principles that inform the fiscal system, whether constitutional or ordinary.

XXX. Since the fiscal system, according to article 103, no. 1 of the CRP (Constitution of the Portuguese Republic) "aims at satisfying the financial needs of the State and other public entities and a fair distribution of income and wealth", the general anti-abuse clause (CGAA), emerges as a means of control and reaction, decisive for ensuring the achievement of these objectives.

XXXI. The application of the CGAA, therefore emerges as a safety valve that allows the conduct of taxpayers to be analyzed in accordance with the requirements underlying its application.

XXXII. In its light, it is allowed that taxpayers choose, under their freedom of choice, the less burdensome legal transactions, however, their conduct must be appreciated in light of the principle of fair distribution of burdens, so as to combat abuses and fraudulent conduct that justified the creation of the CGAA institute.

XXXIII. To which it is added that the principle of fiscal equality embedded in the Fundamental Law – articles 13 and 104 of the CRP – prohibits the existence of privileges in taxation, rather it imposes that all who have contributive capacity are obliged to pay taxes, the distribution of the fiscal burden among taxpayers being based on a general and homogeneous criterion: contributive capacity.

XXXIV. Only with these assumptions of equality and justice in mind can the legal framework convoked for the decision of the case sub judice be understood and interpreted.

XXXV. Not aiming at the exclusion of the taxation in question to provide a means of tax savings.

XXXVI. If the transformations were carried out with exclusively fiscal purposes, they were effected in abuse of right because, while apparently moving within the law, they do not serve the extra-fiscal purpose aimed at by the law, and it is manifest that the legislator did not exclude from taxation capital gains from the alienation of shares to provide some with tax savings.

XXXVII. To grant this advantage – tax benefit – simply to provide a means of tax savings, satisfying particular, individual interests – for some only, those who would know how to create the conditions for its application, artificially – is, it is reiterated, non-conforming with the coherent whole of the tax legal system.

XXXVIII. And such would be in flagrant non-conformity with the aforementioned constitutional principles, as well as with the principle of legality, provided for in no. 2 of article 103 of the CRP, and also with the principle of indisponibility of the tax credit, deriving from the aforementioned principles of legality and equality.

XXXIX. For all the foregoing there are no doubts that the said corporate transformations were motivated, principally or solely by the exclusion from taxation provided for the alienation of shares held for more than 12 months.

XL. It is certain that taxpayers can and should choose, from among the legal instruments placed at their disposal, those that suit them best and that, naturally, they do not have to choose the fiscally most burdensome option, they must, however, prove, in a clear and unequivocal manner, that the concrete corporate option or the business policy chosen had as its starting point a true and legitimate economic substrate, having to demonstrate that it would have been, primarily, that exact economic motive that drove them to take this or that business option, which, all told, proved to be fiscally much more advantageous.

XLI. However, as already alluded to, the Applicants did not make such proof, when it was their burden to prove, pursuant to article 74 of the LGT.

XLII. The rights of freedom of enterprise and economic initiative are not, therefore, absolute rights and cannot, at any moment, be exercised in an abusive manner, in order to subvert the spirit of the rules of taxation and the granting of tax benefits, and, in this way, achieve a result contrary to Law.

XLIII. To permit the exclusion from taxation, obtained as it was artificially and in abuse of right and of legal forms, would mean violating the tax law, as well as the constitutional principles of legality, equality and contributive capacity and, by inherence, the norms of the CRP that enshrine them.

XLIV. All considered, the conduct assumed by the Applicant was unlawful, contrary to the spirit of the very norms invoked in his favor, deserving the total normative-systematic disapproval regarding the advantage that he abusively obtained.

XLV. Reason why it was necessary – and is necessary – to apply to the case sub judice article 38, no. 2 of the LGT, resulting in the correction made to the taxable matter of the present Applicants.

XLVI. It should, in the sequence and in conformity with what was argued above, the present requests be entirely unfounded.

In these terms and in the further terms of applicable Law which Your Excellencies will knowingly supply, the present request for arbitral decision should be judged entirely unfounded, as unproven, acquitting the respondent Entity of the requests, as is right and just!

The Arbitral Tribunal was regularly constituted and is competent.

The parties enjoy legal capacity and standing and are legitimate (articles 4 and 10, no. 2, of the same diploma and article 1 of Ordinance No. 112-A/2011, of 22 March).

The case does not suffer from nullities.

2. Matter of Fact

2.1. Established Facts

The following facts are considered established:

a) Following Service Order OI..., dated 04-02-2013, an inspection action was determined to control the elements declared by the Applicants in the Model 3 Declaration of PIT, relating to the year 2009, namely in relation to capital gains obtained from the alienation of shares representing the capital of the companies "COMPANY 1", in the amount of € 698,600.00, and "COMPANY 2", in the amount of € 1,198,600.00 to the purchaser "COMPANY 3 SGPS";

b) Within the scope of that inspection action, letter No. ... was sent to the present Applicants on 06-02-2013, a copy of which constitutes document No. 25 attached to the initial petition, whose content is given as reproduced, which states, inter alia, the following:

Pursuant to no. 4 of article 59 of the General Tax Law and articles 28 and 48 of the Supplementary Regime of Tax Inspection Procedure, submission to this Service, in writing, to the consideration of the aforementioned technician or, alternatively, electronically to ..., martins@at.gov.pt, within a maximum period of 5 (five) days, of the elements or clarifications listed below, making mention of the data contained in Our Reference:

1. Copy of the receipts relating to the alienation of the shares of the companies "COMPANY 1", NIPC ... and "COMPANY 2" - NIPC ...

Warning is given that the failure to send the requested Information within the set period will be considered a tax contravention punishable by fine, pursuant to article 117 of the General Regime of Tax Infractions;

c) In response to the letter referred to in the previous letter, the Applicants sent the letter, a copy of which is contained in document No. 26 attached to the initial petition, whose content is given as reproduced, in which it states, inter alia, the following:

Distinguished Sirs,

In compliance with what was requested by Your Excellencies in the Letter in reference, A, NIF ... and wife, B, NIF ..., resident in ..., hereby inform you of the following:

1. Pursuant to number two of the first clause of the deed of purchase and sale of shares executed on 29 December 2009 with "COMPANY 3 SGPS", NIPC ..., copies of which are hereby attached, the payment of the agreed and stipulated price is paid to the undersigned declarants as the treasury availability of that company permits, without accrual of interest.

2. The payments have thus been made spontaneously and periodically to the bank account of the undersigned declarants with the IBAN 0032 0179 00204256952 46, having to date received the sum of 646,000.00€, with the taxpayers having no documentary proof of the same.

Without further matter at present, remaining at your disposal for whatever you deem proper to request.

d) On 06-02-2013, within the scope of the aforementioned inspection process, letter No. ... was sent by the Tax and Customs Authority to company ... – SGPS, SA, a copy of which constitutes document No. 27 attached to the initial petition, whose content is given as reproduced, in which it states, inter alia, the following:

Pursuant to no. 4 of article 53 of the General Tax Law and articles 28 to 48 of the Supplementary Regime of Tax Inspection Procedure, submission to this Service, in writing, to the consideration of the aforementioned technician or, alternatively, electronically to ....martins@at.gov.pt, within a maximum period of 5 (five) days, of the elements or clarifications listed below, making mention of the data contained in Our Reference:

1. Copy of the receipts relating to the acquisition of the shares of the companies "COMPANY 1" - ... S.A., NIPC ... and "COMPANY 2" -... S.A, NIPC ... .

2. Accounting records relating to the aforementioned acquisition as well as copy of the documents supporting the same records.

Warning is given that the failure to send the information requested within the set period will be considered a tax contravention punishable by fine, pursuant to article 117 of the General Regime of Tax Infractions.

e) By letter of 13-02-2013, the company "COMPANY 3 SGPS" Investimentos – SGPS, SA responded to the letter referred to in the previous letter, in the terms contained in document No. 28 attached to the initial petition, whose content is given as reproduced, in which it states, inter alia, the following:

Distinguished Sirs,

In compliance with what was requested by Your Excellencies in the Letter in reference, "Company 3 SGPS" comes, a company with the single registration number and legal person number NIPC ..., with registered office at Rua de ... nº ... Cascais, to inform you of the following;

1. Pursuant to number two of the first clause of the deed of purchase and sale of shares executed on 29 December 2009, copies of which are hereby attached, the payment of the agreed and stipulated price is paid to the sellers as the treasury availability of that company permits, without accrual of interest.

2. The payments have thus been made spontaneously and periodically to the bank account of the sellers in accordance with copy of the documents supporting the accounting records that are hereby attached as well as the respective records, as requested.

Without further matter at present, remaining at your disposal for whatever you deem proper to request.

f) In view of the analysis of the elements existing in the Services, the Tax Inspection of the Financial Directorate of ..., proceeded to determine the value of the shares alienated, in accordance with article 15 of the Stamp Tax Code, concluding that there were no corrections to be made in the context of PIT on the sphere of taxpayers A and B, whereby it was determined, by dispatch dated 29-05-2013, the closure of the inspection action;

g) By letter No. 9383, dated 30-05-2013, with reference to Service Order OI..., the Tax Inspection Services of the Financial Directorate of Faro notified the present Applicants, in the terms contained in document No. 4 attached to the initial petition, whose content is given as reproduced in which it states, inter alia, that the Applicants are hereby notified, "in accordance with article 62 of the RCPIT, that from the inspection action carried out by this Service, under the aforementioned Service Order, there result no tax acts or matters of a tax nature that are unfavorable to them"

h) Pursuant to Service Order No. OI..., of 26-08-2013, the Tax Inspection of the Financial Directorate of Faro carried out an internal inspection action, of partial scope to the PIT of the year 2009, initiated on 27-08-2013 and concluded on 18-09-2013, in the scope of which facts and legal acts carried out by the taxpayers in the year 2009 were analyzed, essentially or mainly directed by artificial means and with abuse of legal forms to the elimination of PIT that would be due as a result of facts or acts of identical economic purpose, having concluded by the existence of grounds for the application of the anti-abuse provision provided for in no. 2 of article 38 of the LGT;

i) Consequently, the procedure provided for in article 63 of the CPPT was initiated, with the Tax Inspection sending the project to the Director General of the Tax and Customs Authority so that authorization would be given for the application of the general anti-abuse clause to the operations analyzed and described in the inspection report projects;

j) In the Tax Inspection Report sent to the Director General of the Tax and Customs Authority, which is part of the administrative file, whose content is given as reproduced, it states, inter alia, the following:

III.1. Description of relevant facts

The taxpayers alienated, on 22-12-2009, the partnership interests held in the companies "Company 2" – ..., SA, NIF: … ("Company 2") and "Company 1" – ..., SA, NIF: … ("Company 1"), in favor of "Company 3 SGPS", NIF: … ("COMPANY 3 SGPS", or SGPS). The exclusive corporate object of companies "Company 2" and "Company 1" is the operation, operation and management of restaurants of the international chain "X" under the franchising regime, located in …, respectively.

The operation of these restaurants was obtained by assignment of the contractual position of the franchisee: the taxpayer A, with authorization from X Restaurants Systems (X Portugal), to the companies "Company 2" and "Company 1"; subject to certain conditions, namely that taxpayer A holds 99% of the capital of these companies, that he be their sole manager/administrator, that he remain personally and jointly liable to X Portugal and third parties for the full, unconditional and faithful performance of all obligations and covenants provided for in the franchise contract.

The aforementioned obligations arise from the "intuitu personae" quality of the franchise contract celebrated based on the personal responsibility of the contracting parties.

The main legal acts carried out in the three companies in the year 2009 are presented in the following points:

III.1.1. "Company 2" – ..., S.A.

"Company 2" was established as a limited liability company on 14-09-1999, with capital stock of € 125,000.00 divided between two partners, married under the regime of common property of acquired assets:

• Taxpayer A, with a quota of € 123,750.00;

• Taxpayer B, with a quota of € 1,250.00.

On 16-12-2009, after division of the quota of € 1,250.00, the following were transmitted:

• C, NIF: … a quota of € 100.00;

• "COMPANY 3 SGPS" Investimentos – SGPS S A, NIF: … a quota of € 100.00;

• D, NIF: …, a quota of € 100.00.

This company, on 16-12-2009, is transformed into a joint stock company with the capital stock in the possession of the partners:

• Taxpayer A, 123,750 registered shares in the global value of 6 123,750.00;

• Taxpayer B, 950 registered shares in the global value of € 950.00;

• C, 100 registered shares in the global value of € 100.00;

• "COMPANY 3 SGPS", 100 registered shares in the global value of € 100.00:

• D, 100 registered shares in the global value of € 100.00.

On 22-12-2009, the taxpayers sell their registered shares to "COMPANY 3 SGPS";

• Taxpayer A, 123,750 registered shares for the global value of € 1,189,330.00;

• Taxpayer B, 950 registered shares for the global value of € 8,730.00.

III.1.2. "Company 1"-..., S.A..

"Company 1" was established as a limited liability company on 16-06-2006, with capital stock of € 100,000.00 divided between two partners, married under the regime of common property of acquired assets:

• Taxpayer A, with a quota of € 99,000.00;

• Taxpayer B, with a quota of € 1,000.00.

On 16-12-2009, after division of the quota of € 1,000.00, the following were transmitted:

• C, NIF: … a quota of € 100.00;

• "COMPANY 3 SGPS" – SGPS S A, NIF: ... a quota of € 100.00;

• D, NIF: ..., a quota of € 100.00.

This company, on 16-12-2009, is transformed into a joint stock company with the capital stock in the possession of

• Taxpayer A, 99,000 registered shares in the global value of € 99,000.00;

• Taxpayer B, 700 registered shares in the global value of € 700.00;

• C, 100 registered shares in the global value of € 100.00;

• "COMPANY 3 SGPS", 100 registered shares in the global value of € 100.00;

• D, 100 registered shares in the global value of € 100.00.

On 22-12-2009 the taxpayers sell their registered shares to "COMPANY 3 SGPS":

• Taxpayer A, 99,000 registered shares for the global value of € 693,700.00;

• Taxpayer B, 700 registered shares for the global value of € 4,900.00.

III.1.3. "Company 3 SGPS"

"COMPANY 3 SGPS" was established as a joint stock company on 02-12-2009, with capital stock of € 125,000.00 (representing 125,000 registered shares) subscribed by five shareholders:

• Taxpayer A;

• Taxpayer B;

• C;

• D;

• E.

The majority partner, taxpayer A, holds 124,996 registered shares, in the value of € 124,996.00; the remaining partners subscribed and realized € 1.00 each (value representative of one registered share). In the partnership agreement, the minority partners agree to establish a usufruct in favor of the majority partner of their shares.

Its exclusive corporate object is the management of partnership interests of other companies, as an indirect form of exercise of economic activities, specifically of companies "Company 2" and "Company 1".

In the document prepared by taxpayer A, in July 2009, in order to obtain the consent of X Portugal for the transformation of the two limited liability companies into joint stock companies and the establishment of a SGPS that holds 100% of the capital stock of these two companies, it is assumed that taxpayer A will hold 99.996% of the capital stock of the SGPS.

In the same document it is assumed by taxpayer A the celebration of a parasocial agreement with a clause of promise to buy and sell by the minority partners in his favor.

III.2. Grounds for application of the anti-abuse provision

III.2.1. The anti-abuse provision

The General Tax Law in its no. 2 of article 38 (transcribed below) prescribes the ineffectiveness within the tax sphere of legal acts and/or transactions practiced with evident abuse of legal forms that lead to the total or partial elimination, or to the temporal deferral of taxes that would otherwise be due.

2 – The acts or legal transactions that are essentially or mainly directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, totally or partially, without use of these means, are ineffective within the tax sphere, taxation then being carried out in accordance with the applicable rules in their absence and the aforementioned tax advantages not being produced.

III.2.2 Application of the anti-abuse provision

III.2.2.1. Legal act performed and act of identical economic purpose – letter a) no. 3 of article 63 of the CPPT

The taxpayers, on 22-12-2009, alienate the partnership interests they held in the companies "Company 2" and "Company 1" for the realization values already indicated in II.3.1, III.1.1, and III.1.2.

This onerous alienation was declared by the taxpayers in annex G1 of the income declaration as untaxed capital gain (see II.3.1).

Annex G1 is intended to declare untaxed capital gains, namely those that are excluded from taxation in PIT, by no. 2 of article 10 of the CIRS, obtained in the alienations of shares held by their owner for more than 12 months.

The taxpayers, in proceeding, on 16-12-2009 – 6 days before the alienation –, to the transformation of the limited liability companies: "Company 2" and "Company 1", into joint stock companies intended to have recognized the provision of letter b) of no. 4 of article 43 of the CIRS that defines as the date of acquisition of shares resulting from the transformation of limited liability companies into joint stock companies the date of acquisition of the quotas that gave rise to them.

If they had not opted for the transformation of the company type and simply proceeded to the onerous alienation of the quotas of the companies "Company 2" and "Company 1", the capital gains obtained would be taxed at the special rate of 10% provided for in no. 4 of article 72 of the CIRS.

III.2.2.2. Demonstration that the celebration of the legal act was essential in the elimination of tax due – letter b) no. 3 of article 63 of the CPPT.

In the document prepared by taxpayer A, in July 2009, in order to obtain the consent of X Portugal for the establishment of a SGPS that holds 100% of the capital stock of "Company 2" and "Company 1" the transformation of the limited liability companies into joint stock companies is justified by:

– The financial synergies within the group (SGPS);

– The obligation of the adoption of accounting standards and audit procedures, to which joint stock companies are obligated, which offer greater credibility and security to third parties.

The diploma that regulates SGPSs – Decree-Law No. 495/88, of 30 December – does not distinguish limited liability companies from joint stock companies either as to the type of company that the SGPSs themselves can adopt, or as to the partnership interests that these can come to acquire or to hold.

Whereby the justifications presented in order to guarantee the rationalization of economic and human resources and the financial synergies, there being no legal impediment for the SGPS to hold the capital stock of the two limited liability companies, are not in themselves sufficient since the same ends would be achievable with the maintenance of the limited liability companies.

As for the justification for the adoption of more demanding accounting standards and audit procedures, inherent to the legal obligations of joint stock companies is not plausible, because as sole administrator of these companies he could have them implemented, even if optionally, in the limited liability companies.

In the appreciation of the facts it is worth keeping in mind that taxpayer A, within the scope of the franchise contracts, with the "intuitu personae" quality, celebrated with X Portugal is by imposition:

• The sole administrator of the SGPS, "Company 2" and "Company 1";

• The majority partner (99% minimum) in the SGPS which in turn holds 100% of the capital stock of "Company 2" and "Company 1";

• For all purposes jointly and severally responsible to X Portugal and third parties, although having assigned the contractual position of franchisee to "Company 2" and "Company 1".

The aforementioned conditions arising from the franchise contracts celebrated between taxpayer A and X Portugal prevent the two companies transformed into joint stock companies, as well as the SGPS itself, from fully enjoying the advantages inherent to this company type, as opposed to limited liability companies, such as the attraction and dispersal of capital.

Whereby the rational justification for the realization of the transformation of the limited liability companies into joint stock companies (legal act performed) shall have to be sought in the obtaining of tax advantages, the taxpayers by performing this legal act, with the prior request for consent to X Portugal, seek to benefit from the exclusion for shares held for more than 12 months, in the combined reading of no. 2 of article 10 and letter b) of no. 4 of article 43, both of the CIRS.

That is, the taxpayers with the act of transformation of the limited liability companies into joint stock companies seek in a premeditated and artificial manner – through a sequence of acts conducive to the transformation of the companies "Company 2" and "Company 1" limited liability into joint stock before the alienation –, and with abuse of legal forms – the option for the figure of joint stock companies in detriment of the maintenance of limited liability companies reveals itself to be unnecessary to the transaction and to the company form itself given the conditions of the franchise contracts –, to exclude capital gains from taxation in PIT.

Exclusion that would not happen if, in a simpler manner (without the transformation of the company type), they alienated the limited liability companies – an act of identical economic purpose – subjecting them to taxation in the context of PIT.

III.4. Proposed correction

In view of the foregoing in the preceding chapters the transformation of the limited liability companies into joint stock companies is considered ineffective in the sphere of the taxpayers for purposes of taxation in the context of PIT, proposing that taxation fall on the act of identical purpose, that is the sale of the partnership interests, subject to taxation, while quotas.

The subjection to PIT of the act of identical economic purpose results in a total capital gain of € 1,671,660.00, in accordance with letter b) of no. 1 of article 10 of the CIRS, with PIT due in the amount of € 167,165.00, by the application of the special rate of 10%, in accordance with no. 4 of article 72 of the CIRS, as demonstrated in the following tables.

In these tables are calculated the value of capital gain and the respective tax by taxpayer and sold company.

k) The transformation of "Company 2" into a joint stock company was preceded by the "Justificatory Report on the Transformation of Company "Company 2" into a Joint Stock Company" a copy of which constitutes document No. 10 attached to the initial petition, whose content is given as reproduced, which states, inter alia, the following:

1. Reasons and objectives of the transformation

It is necessary that the legal-corporate structure be suitable to meet the real needs of the company. The company type by "quotas" is especially geared toward the organization of companies with low investment volume, showing little flexibility with regard to decision-making and the company's ability to respond to new situations. I consider it better suited to the expected reality for the Company, the existence of a corporate structure of the type joint stock company, in which the capital is divided into shares represented by securities, giving it an independence that allows it to follow its strategic options in a flexible manner, both in terms of capital and in terms of corporate object.

The transformation also aims at increasing the value and efficiency of the company, through a corporate structure capable of meeting the challenges of the market.

l) The transformation of "Company 1" – ..., Ltd. into a joint stock company was preceded by the "Justificatory Report on the Transformation of Company "Company 1" into a Joint Stock Company" a copy of which constitutes document No. 11 attached to the initial petition, whose content is given as reproduced, which states, inter alia the following:

1. Reasons and objectives of the transformation

It is necessary that the legal-corporate structure be suitable to meet the real needs of the company. The company type by "quotas" is especially geared toward the organization of companies with low investment volume, showing little flexibility with regard to decision-making and the company's ability to respond to new situations. I consider it better suited to the expected reality for the Company, the existence of a corporate structure of the type joint stock company, in which the capital is divided into shares represented by securities, giving it an independence that allows it to follow its strategic options in a flexible manner, both in terms of capital and in terms of corporate object.

The transformation also aims at increasing the value and efficiency of the company, through a corporate structure capable of meeting the challenges of the market.

m) Following the presentation of the draft Tax Inspection Report, the Applicants exercised their right to be heard, in the terms contained in the administrative file, whose content is given as reproduced, their position having been appreciated in the Tax Inspection Report, stating, inter alia, the following:

Regarding the allegation that the application of the general anti-abuse clause was not substantiated factually and legally we reiterate that the transformation of the limited liability company into a joint stock company solely aimed at obtaining tax savings. Within the scope of the franchise contracts, with the "intuitu personae" quality, celebrated between the taxpayer and X Portugal it is by imposition:

• The sole administrator of "COMPANY 3 SGPS" SGPS, "Company 2" and "Company 1";

• The majority partner (99% minimum) in the SGPS which in turn holds 100% of the capital stock of "Company 2" and "Company 1";

• For all purposes jointly and severally responsible to X Portugal and third parties, although having assigned the contractual position of franchisee to "Company 2" and "Company 1".

These conditions arising from the franchise contracts celebrated between taxpayer A and X Portugal prevent the two companies transformed into joint stock companies, as well as the SGPS itself, from fully enjoying the advantages inherent to this company type such as the attraction and dispersal of capital. Whereby the rational justification for the realization of the transformation of the limited liability companies into joint stock companies (legal act performed) is found in the obtaining of tax advantages, the taxpayers by performing this legal act, with the prior request for consent to X Portugal, seek to benefit from the exclusion from taxation of capital gains for shares held for more than 12 months, provided for by the combined reading of no. 2 of article 10 and letter b) of no. of article 43, both of the CIRS. The presentation made by the taxpayers, in a total of 61 pages, completely omit the "intuitu personae" quality of the contracts celebrated between taxpayer A and X Portugal, highlighting a set of economic advantages that do not take into account the conditions of the contracts already mentioned.

(...)

In view of the foregoing the proposed corrections are maintained, proposing the sending of the project to the Director General of this Tax Authority so that he may give authorization for the application of the general anti-abuse clause provided for in no. 2 of article 38 of the LGT.

n) By dispatch of 22-11-2013, the Director-General of the Tax and Customs Authority authorized the application of the general anti-abuse clause, expressing agreement with the Tax Inspection Report (sheets 10 of document "PA1.pdf";

o) Following the aforementioned corrections to the income of the Applicants, the following acts were practiced by the Tax and Customs Authority:

– additional PIT assessment No. 2013 ..., of 12-12-2013, relating to the year 2009, in the amount of € 174,828.53 (one hundred seventy-four thousand, eight hundred twenty-eight euros, fifty-three cents);

– assessment of compensatory interest No. 2013 ..., of 13-12-2013, relating to the period between 31-05-2010 and ..., in the amount of € 23,009.36 (twenty-three thousand, nine euros, thirty-six cents);

– settlement of accounts dated 13-12-2013, relating to the year 2009, in the total amount of € 197,837.89 (one hundred ninety-seven thousand, eight hundred thirty-seven euros, eighty-nine cents);

p) On 18-12-2013, the Applicants made payment of the amount of € 167,166.00 (one hundred sixty-seven thousand, one hundred sixty-six euros), corresponding to the capital of the tax debt assessed, in compliance with the copy of the Collection Document (and proof of payment) attached to the initial petition with document No. 6, whose content is given as reproduced;

q) The Applicants paid the assessed amount with waiver of payment of compensatory interest, in the total amount of € 23,009.36 (twenty-three thousand, nine euros, thirty-six cents), as they made payment under the exceptional regime of regularization of debts of a fiscal and social security nature, approved by Decree-Law No. 151-A/2013, of 31 October (article 2, no. 1, of Decree-Law No. 151-A/2013, of 31 October, and Documents Nos. 1, 2, 3 and 6, attached to the initial petition, whose contents are given as reproduced);

r) On 15-03-2014, the Applicants filed the request for constitution of the arbitral tribunal that gave rise to the present case.

2.2. Unestablished Facts

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

2.3. Grounds for decision of the matter of fact

The facts were established based on the Tax Inspection Report and on the documents contained in the administrative file and attached to the initial petition.

3. Matter of Law

In the first place, the Applicants impute to the challenged acts violation of the provision of article 63, no. 4, of the LGT, which they understand to establish both a formal limit to inspection activity — a second external inspection — and also a substantive limit to the same — the re-examination of the facts contained in the external inspection analysis.

Subsidiarily, the Applicants defend that the prerequisites, of fact and of law, on which the application of the CGAA depends are not met, the Tax and Customs Authority violating, by erroneous interpretation and application, article 38, no. 2, of the LGT, and articles 10, nos. 1, letter b), and 2, letter a), and 43, no. 4, letter b), of the CIRS.

The possibility of arguing for defects of the challenged act according to a relation of subsidiarity is expressly provided for in articles 101 and 124, no. 1, letter b), of the CPPT, applicable to tax arbitral processes by force of the provision of article 29, no. 1, letter c), of the RJAT.

In harmony with the provision of article 554, no. 1, of the CPC (Code of Civil Procedure), the subsidiary request will only be considered in the event that the priority request does not succeed.

3.1. Question of the violation of the principle of legality and of articles 36, nos. 2, and 3 4, of the RCPIT and 63, no. 4, of the LGT

3.1.1. Summary of the question

As results from the matter of fact established, a tax inspection was carried out, following Service Order No. OI..., with a view to controlling the elements declared by the Applicants in the Model 3 Declaration of PIT, relating to the year 2009, namely in relation to capital gains obtained from the alienation of shares representing the capital of the companies "COMPANY 1", in the amount of € 698,600.00, and "COMPANY 2", in the amount of € 1,198,600.00 to the purchaser "COMPANY 3 SGPS".

Within the scope of that inspection action, clarifications and documents were requested from the Applicants. These provided the clarifications and stated they did not have documents, as the payments had been made directly to their bank account.

Also in the same inspection action, the Tax and Customs Authority requested from the company "COMPANY 3 SGPS" Investimentos – SGPS, SA copies of the receipts relating to the acquisition of the shares of the companies "COMPANY 1" and "COMPANY 2", and of the accounting records relating to the aforementioned acquisition as well as copy of the documents supporting the same records.

The inspection referred to Service Order No. OI... was declared closed by dispatch of 29-05-2013, as the Tax and Customs Authority understood that there were no corrections to be made in the context of PIT on the sphere of taxpayers A and B, a dispatch that was notified to the Applicants.

Subsequently, the Tax and Customs Authority carried out a new tax inspection, following Service Order OI..., of 26-08-2013, in which it came to understand that the general anti-abuse clause is to be applied to the aforementioned alienation of the shares.

The Applicants understand, in sum, that the act of re-analysis of the tax effects of the transmissions of partnership interests referred to in the established matter of fact, carried out within the scope of the second inspection, violates the principle of legality, violating article 36, nos. 2, 3 and 4, of the Supplementary Regime of Tax Inspection Procedure ("RCPIT"), and of article 63, no. 4, of the LGT, understood not only with their procedural scope, but also of the Applicants' right to certainty of the legal situation defined as a result of the first inspection report.

The Tax and Customs Authority understands, in sum, that the first inspection is of the nature of an internal inspection and that there is no obstacle to a new inspection also of an internal nature being carried out following an internal inspection.

3.1.2. Concepts of internal and external inspection procedure

Article 63, no. 4, of the LGT, in the wording of Law No. 37/2010, of 2 September, establishes the following:

4 – The inspection procedure and the duties of cooperation are appropriate and proportionate to the objectives to be pursued, there being able to be more than one external inspection procedure concerning the same taxpayer or obliged party, tax and taxation period only through decision, substantiated on the basis of new facts, of the highest official of the service, except if the inspection aims solely at confirming the assumptions of rights that the taxpayer invokes before the tax administration and without prejudice to the ascertainment of the taxation situation of the taxpayer through inspection or inspections directed to third parties with whom they maintain economic relations.

The rationale for the limitation on the practice of external procedures established in this no. 4 of article 63 of the LGT is connected, on the one hand, with the inconveniences that the conduct of an external inspection results for those affected by their acts, as appears from the initial reference to "duties of cooperation" with which the limitation is connected. And, on the other hand, as is concluded from the non-extension of the prohibition on new inspection to cases where it is based on "new facts", the prohibition has as its underlying rationale, beyond the convenience of the taxpayers of the tributes, the concomitant consideration of the diligence duties that are required of the Tax and Customs Authority, admitting that the taxpayer be obliged to bear the inconveniences of a new inspection, in cases where, in conducting the first, the Tax Administration does not have the possibility of becoming aware of facts whose awareness comes to it later.

That is, it is admitted that the Tax and Customs Authority causes inconveniences to taxpayers only to the extent that is tolerable in terms of proportionality (principle to which no. 4 of article 63 alludes and whose observance is globally imposed by articles 266, no. 2, of the CRP and 55 of the LGT), not admitting new inspection in cases where the Tax Administration in the first inspection had access to all facts relevant to define its position on the taxation situation of those, which has obvious justification, for if the Tax Administration is not sufficiently diligent in the fulfillment of its duties, the inspected party should not bear the inconveniences of that lack of diligence.

It is with this teleological perspective that the concepts of internal and external procedures that are provided by article 13 of the RCPIT have to be delimited.

The criterion of distinction between internal and external inspection procedures is extracted from article 13 of the Supplementary Regime of Tax Inspection Procedure, in which it is clarified that the procedure is internal "when inspection acts are carried out exclusively in the services of the tax administration through formal and consistency analysis of documents" and is external "when inspection acts are carried out, totally or partially, in facilities or dependencies of taxpayers or other obliged parties, third parties with whom they maintain economic relations or in any other place to which the administration has access".

The criterion of distinction between internal and external inspection procedures is thus based on the existence or absence of acts practiced outside the services of the Tax Administration to obtain the relevant elements: if the acts were practiced exclusively in those services, one is faced with an internal procedure; if some or some acts necessary to determine the tax facts were practiced outside those services, "totally or partially", one is faced with an external procedure.

However, the definitions of internal and external inspection procedure provided by this article 13, do not permit, in their literal wording, to qualify all possible types of procedures, as they do not cover procedures in which the acts practiced are not limited to "formal and consistency analysis of documents", nor are carried out totally or partially in facilities or dependencies or places outside the services of the Tax Administration.

However, from a teleological perspective, which bears in mind the reason for the limitation contained in article 63, no. 4, one must conclude, in harmony with the definition of "internal procedure", that all inspections that are not limited to "formal and consistency analysis of documents", carried out without the imposition of any duty on the taxpayer, shall be qualified as external, for purposes of article 63, no. 4.

In this light, the first inspection procedure referred to in the established matter of fact, carried out on the basis of Service Order OI..., must be qualified as external, as it was not limited to "formal and consistency analysis of documents", there having been practiced external acts of gathering information from the taxpayers and a third party.

In the face of the referred criterion of distinction between internal and external inspection procedure, the second procedure shall have the nature of internal, as there was no practice of any act outside the services of the Tax and Customs Authority, there being only re-analysis of the elements collected during the external inspection procedure.

3.1.3. The inspection procedure carried out following Service Order OI...

No. 4 of article 63 of the LGT, in its literal wording, does not prohibit the conduct of an internal inspection procedure, after completion of an external inspection procedure.

However, the Applicants argue that the opening of a new procedure, based on the evidence elements collected in the external inspection procedure, amounts to a reopening of the inspection procedure relating to the year 2009, not being permitted by articles 36 and 53 of the RCPIT, which establish the rules of continuity and limitation of the duration of the inspection procedure.

Article 36, no. 2, of the RCPIT establishes that "the inspection procedure is continuous and must be concluded within a maximum period of six months from the notification of its initiation". The rule is reaffirmed in article 53 of the same diploma, in which it is established that "the practice of inspection acts is continuous, only being able to be suspended in case of exceptional and unavoidable priorities of the tax administration recognized in a reasoned dispatch of the service head", but without prejudice to the legal periods for conclusion of the procedure provided for in that diploma (nos. 2 and 3 of this article 53.).

That period of the inspection procedure "may be extended" by two more periods of three months each, in the circumstances described in no. 3 of that article 36.

But, as the term itself indicates, the extension does not prejudice the rule of continuity, having that to be decided before the procedure terminates. The extension must be a "prorogation" and not a reopening or renewal of an already completed procedure. Indeed, no. 4 of the same article, in which it is established that "the prorogation of the inspection action is notified to the inspected entity with the indication of the foreseeable date of the end of the procedure", confirms that this is the meaning of that possibility of extension.

The analysis of the elements collected during the external inspection action is integrated within the scope of the inspection procedure, as it must culminate with a report in which the facts detected and their legal-tax classification must be identified and systematized, including the "description of the factually tax-relevant facts that alter the declared or to be declared values subject to taxation, with mention and attachment of the means of proof and legal grounds supporting the corrections made" [article 62, nos. 2 and 3 letter i), of the RCPIT, relating to "conclusion of the inspection procedure"].

That report is the appropriate procedural moment to appreciate all the probative elements determined, including those provided by the taxpayer in the exercise of the right to be heard that procedurally precedes it.

Thus, the aforementioned conduct of the Tax Administration implies violation of the provision of article 36, nos. 2, 3 and 4, of the RCPIT, which establish the rule of continuity of inspection and rigorously establish periods for conclusion of the procedure and its prorogation and establish exhaustively the circumstances in which this can occur.

Indeed, these rules cannot but be considered as having an imperative nature, for only thus do they assume any utility.

In truth, the admissibility of the conduct of a new internal procedure, after conclusion of the external procedure, would be reduced to that, contrary to such imperative nature of those rules, the observance of such periods and conditions of prorogation would be merely facultative, as the Tax Administration would always be in time to, after the procedure was completed and such periods had elapsed, proceed to the analysis that it should have done and did not do before the conclusion of the procedure and within the periods provided for in the law, conducting a new procedure whose only objective is to complete the analysis of the facts collected in the inspection that was not adequately and timely conducted at the moment of the preparation of the report.

It is concluded, thus, that, although article 63, no. 4, of the LGT only refers to the prohibition of a second external procedure, the aforementioned rules of the RCPIT impose that there cannot be a new inspection nor reopening of the previous nor preparation of a new report after the conclusion of the procedure.

That is, combining article 63, no. 4, of the LGT with the rules of article 36, nos. 2 and 3, of the RCPIT, in which it is established that "the inspection procedure is continuous and must be concluded within a maximum period of six months from the notification of its initiation" and can only be extended by two more periods of three months each, in the circumstances exhaustively indicated there (without prejudice to suspension in the cases provided for), it is concluded that the effects of that prohibition of, without "new facts", conducting a new external inspection procedure concerning the same taxpayer or obliged party, tax and taxation period, are amplified, as from the totality of this legal regime results a guarantee for the taxpayer that the legal definition of his situation effected following the conclusion of the external inspection procedure cannot be altered, based on facts that were determined by the Tax Administration during the inspection.

This regime is imposed also for reasons of legal certainty, as was understood in the judgment of 29-06-2012, handed down in the arbitral case No. 14/2012-T of CAAD.

3.1.4. Application of these rules to the case at hand

In the case at hand, however, there is not a situation in which only the elements collected in the first inspection have been valued.

In truth, as is seen from the administrative file, new documents were joined to the file, namely relating to the franchise contracts and assignment of the contractual position in franchise contracts and to the reasons for the transformation of companies that it was not demonstrated were in the possession of the Tax and Customs Authority when it prepared the report of the procedure opened following Service Order OI....

For this reason, as the corrections made following the procedure opened with Service Order OI... are based on facts that were not known to the Tax and Customs Authority at the moment the first inspection report was prepared, violation of the aforementioned articles 63, no. 4, of the LGT and 36 of the RCPIT cannot be considered demonstrated.

The first defect invoked by the Applicants thus fails, whereby we shall proceed to appreciate what is invoked subsidiarily.

4. Question of the violation of the prerequisites for the application of the general anti-abuse clause.

Article 38, no. 2, of the General Tax Law establishes a general anti-abuse clause, whereby "the acts or legal transactions that are essentially or mainly directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, totally or partially, without use of these means, are ineffective within the tax sphere, taxation then being carried out in accordance with the applicable rules in their absence and the aforementioned tax advantages not being produced"

In the case at hand, the Tax Administration decided to apply the general anti-abuse clause considering that the legal transactions of transformation of the limited liability companies "COMPANY 1" and "COMPANY 2" into joint stock companies should be disregarded for purposes of taxation in PIT, because the Applicants aimed with that transformation to benefit from the non-taxation of capital gains that, at the time, was applicable to the transmission of shares of commercial companies, but not to the transmission of quotas.

The Tax and Customs Authority understood, in sum, that the Applicants:

– in proceeding, on 16-12-2009 – 6 days before the alienation of the partnership interests, to the transformation of the limited liability companies "Company 2" and "Company 1" into joint stock companies,

– intended to have recognized the provision of letter b) of no. 4 of article 43 of the CIRS that defines as the date of acquisition of shares resulting from the transformation of limited liability companies into joint stock companies the date of acquisition of the quotas that gave rise to them;

– if they had not opted for the transformation of the company type and simply proceeded to the onerous alienation of the quotas of the companies "Company 2" and "Company 1", the capital gains obtained would be taxed at the special rate of 10% provided for in no. 4 of article 72 of the CIRS;

– the conditions arising from the franchise contracts celebrated between Applicant A and X Portugal prevent the two companies transformed into joint stock companies, as well as the SGPS itself, from fully enjoying the advantages inherent to this company type, as opposed to limited liability companies, such as the attraction and dispersal of capital;

– whereby the rational justification for the realization of the transformation of the limited liability companies into joint stock companies (legal act performed) shall have to be sought in the obtaining of the aforementioned tax advantages;

– that is, the taxpayers with the act of transformation of the limited liability companies into joint stock companies seek in a premeditated and artificial manner – through a sequence of acts conducive to the transformation of the companies "Company 2" and "Company 1" limited liability into joint stock before the alienation –, and with abuse of legal forms – the option for the figure of joint stock companies in detriment of the maintenance of limited liability companies reveals itself to be unnecessary to the transaction and to the company form itself given the conditions of the franchise contracts –, to exclude capital gains from taxation in PIT;

– exclusion that would not happen if, in a simpler manner (without the transformation of the company type), they alienated the limited liability companies – an act of identical economic purpose – subjecting them to taxation in the context of PIT.

4.1. Legitimate and illegitimate tax planning

In the definitions elaborated by Saldanha Sanches: legitimate tax planning "consists in a technique of reduction of the tax burden through which the taxpayer renounces a certain conduct for this being linked to a tax obligation or chooses, among the various solutions that are provided to him by the legal order, the one that, by intentional action or omission of the tax legislator, is accompanied by fewer tax burdens"; while illegitimate tax planning "consists in any conduct of undue reduction, by contradicting principles or rules of the tax-legal order, of the tax burdens of a given taxpayer".

Within the framework of tax planning we can thus distinguish the situations in which the taxpayer acts contra legem, extra legem and intra legem.

When he acts contra legem, his conduct is frontal and unequivocally illicit, as it directly infringes the tax law, and configures tax fraud capable, including, of being subject to counter-ordination or criminal censure.

Conduct extra legem occurs when the taxpayer abusively takes advantage of the law to achieve a more favorable tax result, although this does not directly violate it. He adopts "a conduct that has as its sole or main purpose to circumvent one or several fiscal-legal rules, in order to achieve the reduction or suppression of the tax burden" This conduct is commonly referred to as "fraud against tax law" but, as Saldanha Sanches warns, seeking to better illustrate and distinguish these situations from those of tax fraud, also referred to as "abusive avoidance of tax burdens", "abusive tax avoidance" or "tax evasion"

Only conduct intra legem appears to be legitimate – and, thus, legitimate tax planning or non-abusive – to be legitimate. Indeed, the obtaining of a tax savings does not constitute conduct prohibited by law, provided the conduct does not fall within the aforementioned extra legem conduct.

Sub judice, succinctly, the Applicants contest that the transformation of a limited liability company into a joint stock company constitutes abusive tax planning, as they understand that there is no abuse of legal forms and that the legislator deliberately chose a treatment of exception and favor of capital gains from alienation of partnership interests in joint stock companies, excluding them from taxation, and that the fiscally less burdensome result is admitted, tolerated and stimulated by the law and/or by the fiscal system in general, whereby the acts and legal transactions carried out by the Applicants cannot be condemnable and framed within the CGAA, due to the absence of fraud against the rules in question.

The Tax and Customs Authority understands that that conduct constitutes abusive tax planning, in that, through that transformation into a joint stock company, which it considers unnecessary and fiscally motivated, and subsequent sale of shares (instead of quotas), the Applicants avoid the taxation of capital gains in the context of PIT.

Thus being, the question raised to this tribunal, following the procedure for application of the general anti-abuse clause — one of the legal mechanisms to which the legislator resorts to respond to abusive tax planning behaviors —, lies in knowing whether the taxpayer's conduct is situated intra or extra legem, that is, whether the tax planning it adopted is legitimate or illegitimate, whether it is non-abusive or abusive.

4.2. Elements of the general anti-abuse clause

Under the heading "Ineffectiveness of acts and legal transactions", article 38, no. 2 of the LGT is disposed regarding the denominated general anti-abuse clause (CGAA) in tax law.

The language enshrined by Law No. 30-G/2000, of 29 December, became the following:

"The acts or legal transactions that are essentially or mainly directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, totally or partially, without use of these means, are ineffective within the tax sphere, taxation then being carried out in accordance with the applicable rules in their absence and the aforementioned tax advantages not being produced".

This rule is complemented by the extensive article 63 of the CPPT, which contains a set of provisions that concretize the parameters shaping the procedure for application of the anti-abuse provisions.

Doctrine and jurisprudence have been deconstructing the language of the rule by pointing out five elements contained in it. Corresponding one of the elements to the enactment of the rule, the remaining four appear to be cumulative requirements that allow assessing – as if it were a test – the verification of an activity characterizable as abusive tax planning.

These elements, around which both parties moreover construct their argumentation, consist:

– of the means element, which concerns the freely chosen path – act or legal transaction, isolated or part of a structure of sequential, logical and planned acts or legal transactions, organized in a manner

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