IRC Deductibility of Financial Charges on Supplementary Capital Contributions – CAAD Arbitration 264/2016-T

ARBITRATION AWARD

The Arbitrators Dr. Jorge Manuel Lopes de Sousa (Arbitrator-President), Prof. Doctor Paulo Jorge Nogueira da Costa and Dr. Pedro Galego (Arbitrator Members), designated by the Deontological Council of the Centre for Administrative Arbitration to constitute the Arbitral Tribunal, constituted on 14-07-2016, agree as follows:

1. REPORT

A…, SGPS, S.A. (hereinafter abbreviated as "Claimant" or "A…"), legal entity number …, registered at the Commercial Registry Office of Lisbon under the same number, with headquarters at Avenue …, no.…, in Lisbon, filed an application for the constitution of a collective arbitral tribunal, pursuant to article 2, no. 1, a) and 10, nos. 1 and 2, and 17-A of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter designated only as LRAT), in which the Tax and Customs Authority is the Respondent, with a view to the declaration of illegality and annulment of the act of rejection of the gracious complaint and the act of correction of the taxable amount of the Claimant relating to the tax year 2012 and the subsequent Corporate Income Tax (IRC) assessment no. 2015….

The application for constitution of the arbitral tribunal was accepted by the President of the Centre for Administrative Arbitration and automatically notified to the Tax and Customs Authority on 13-05-2016.

Pursuant to the provisions of article 2, no. 2, paragraph a) and article 11, no. 1, paragraph b) of the LRAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the mandate within the applicable deadline.

On 29-06-2016 the parties were duly notified of such designation, having manifested no intention to refuse the designation of the arbitrators, pursuant to the combined provisions of article 11, no. 1, paragraphs a) and b) of the LRAT and articles 6 and 7 of the Code of Ethics.

Thus, in accordance with the provisions of article 11, no. 1, paragraph c) of the LRAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 14-07-2016.

The Tax and Customs Authority responded, arguing that the application should be dismissed and that the value of the case should be corrected from €1,277,752.65 to €791,449.96.

By order of 30-09-2016, it was decided to dispense with the meeting provided for in article 18 of the LRAT and that the proceedings should continue with written pleadings.

The parties submitted written pleadings.

The arbitral tribunal was regularly constituted and is substantively competent, in light of the provisions of articles 2, no. 1, paragraph a), and 30, no. 1, of Decree-Law no. 10/2011, of 20 January.

The parties are duly represented and possess legal personality and capacity, are entitled to be parties and are represented (articles 4 and 10, no. 2, of the same decree and article 1 of Order no. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities and no exceptions have been raised.

Thus, there is no obstacle to the consideration of the merits of the case.

2. FACTS

2.1. Proven Facts

Based on the elements contained in the proceedings and the administrative proceedings attached to the file, the following facts are considered proven:

a) The Claimant is a holding company managing shareholdings;

b) The Claimant is the parent company of the group B…, subject to taxation pursuant to the special tax regime for groups of companies;

c) In the year 2012, the group B… comprised the following companies:

A… SGPS (parent company) - TIN …

C… SGPS - TIN …

D… - TIN …

E… SGPS - TIN …

F… - TIN …

G… SA - TIN …

H… - TIN …

I… - TIN …

J… SA - TIN …

K… SA - TIN …

L… SGPS - TIN …

M… SA - TIN …

d) A tax inspection was conducted on the Claimant, as parent company of the group, relating to the tax year 2012, regarding Corporate Income Tax, pursuant to Service Order no. Ol2014… (document no. 2 attached with the arbitration application, whose content is deemed reproduced);

e) In that inspection, corrections were made that were based on corrections to its individual taxable profit, made in the context of the inspection conducted pursuant to Service Order no. OI2014…, of 12-03-2014, as stated in document no. 2 attached with the arbitration application, whose content is deemed reproduced, in which the following is stated, among other matters:

III. 1.1. Corrections to the individual taxable profit of company "A…, SGPS, SA"

Pursuant to Service Order no. 012014… of 2014-03-12, an external inspection procedure was conducted for the 2012 period with respect to company A…SGPS. SA – TIN … .

The findings of the inspection action were communicated to the company in accordance with the grounds provided in no. 1 of article 77 of the General Tax Law and are contained in the tax inspection report prepared by the UGC on 2015-03-18, a copy of which is attached and which constitutes Annex A, with 50 pages, which was communicated to the taxpayer in accordance with office letter no. 1014 of 2013-03-23.

Following the aforementioned inspection action, corrections to the reported fiscal result were identified, made on an individual basis to the company mentioned above and totaling €6,181,604.54 (six million one hundred eighty-one thousand six hundred four euros and fifty-four cents), and relate to:

a) Financial charges not deductible pursuant to articles 32 of the Fiscal Benefits Act (EBF) and 23 of the Corporate Income Tax Code (CIRC):

The taxpayer did not fully add the amount relating to financial charges incurred in the acquisition of capital stakes, which, both pursuant to no. 2 of article 32 of the EBF and article 23 of the CIRC, do not contribute to the formation of taxable profit, whereby the amount of €6,084,536.41 was corrected.

Thus, the individual taxable profit was corrected with the grounds contained in points III.1.1. and IX.2 of the Inspection Report which is attached and forms an integral part of this Tax Inspection Report (pages 6 to 21 and 44 to 48 of the individual report - Annex A).

b) Undue deduction of autonomous taxation pursuant to no. 1 of article 45 of the CIRC:

(...)

III.2. Corrections to the calculation of group tax. II.2.1. Tax benefits

Group B… for purposes of applying the special tax regime for groups declared with reference to the 2012 tax period a fiscal loss in the amount of €94,425,762.98 whereby it did not determine Corporate Income Tax collection pursuant to no. 1 of article 90 of the CIRC. It should be noted that as a result of the correction proposed in point III.1.1 of this report, the group continues in a situation of fiscal loss.

(...)

f) In this inspection conducted pursuant to Service Order no. OI2014… the Tax Inspection Report was prepared which is contained in the annex to document no. 2 attached with the arbitration application, whose content is deemed reproduced, in which the following is stated, among other matters:

III - DESCRIPTION OF FACTS AND GROUNDS FOR CORRECTIONS THAT ARE MERELY ARITHMETIC IN NATURE TO THE TAXABLE AMOUNT

(...)

III.1. Corrections to the taxable amount of the Group

III.1.1. Financial charges not deductible: €6,084,536.41

(A) Description of the facts

From the analysis conducted, it was verified that the taxpayer recognized as an expense of the period, reflected in its accounting, through account "69 - Expenses and losses from financing" the total interest it incurred in the amount of €44,413,268.79.

For purposes of correctly determining the financial charges to be excluded, as stated below, supplementary contributions and accessory contributions with the same regime must be considered as capital stakes.

The taxpayer reflected in the line item "47 - Financial Investments," both the initial cost of the shares held in its subsidiaries and the cost corresponding to amounts paid as supplementary contributions (in the various forms they assume in the laws of the states where its subsidiaries are headquartered), valuing them using the equity method.

When it is observed that the company values the assets reflected in its financial investments account in subsidiaries using the equity method, and that such practice is validated as being in compliance with the Accounting Standards, namely by the Unqualified Statutory Audit Opinion, it is important to understand what such choice means.

Pursuant to "NCRF 13 - Interests in joint ventures and investments in associates" it is described in paragraph 4 the Equity Method as being "an accounting method by which the investment or interest is initially recognized at cost and subsequently adjusted based on changes occurring, after acquisition, in the investor's or entrepreneur's share in the net assets of the investee or jointly controlled entity. The results of the investor or entrepreneur include the portion corresponding to them in the results of the investee or jointly controlled entity", that is, by valuing using the equity method the portion of financial investments corresponding to supplementary contributions, the company is assuming in its accounting that these have characteristics of "capital stakes" in its associates.

Thus, in the absence of any change in the prevailing understanding, and with the situation remaining identical, in the present analysis relating to expenses incurred for capital contributions we will not distinguish supplementary contributions.

In this sense it is important to emphasize from the outset that the Corporate Income Tax Code does not prescribe any method of valuing capital stakes, which means that fiscal relevance is given to the accounting treatment given, if in compliance with the Accounting Standards System (SNC).

In determining the taxable profit of the period, the taxpayer added to the accounting result, pursuant to article 17 of the CIRC, the amount of €17,934,708.94 relating to financial charges associated with the acquisition of capital stakes not deductible as expenses by application of the provisions of article 32 of the Fiscal Benefits Act (EBF) - the taxpayer submitted the calculation schedules, which are attached - see Annex no. 1, pages 2 of 2 of this report.

From the combination of what was stated above it results that the company considered as fiscally eligible expenses financial charges incurred in the amount of €26,478,559.85 with loans obtained which, in light of the provisions of no. 1 of article 23 of the Corporate Income Tax Code and as article 32 of the EBF is also applicable to it as a result of A… being a Holding Company managing shareholdings (SGPS), it is important to analyze here.

(B) Interpretation of the provision of article 32 of the EBF

The legal regime of SGPS, provided for in Decree-Law no. 495/88, of 30 December, defines that the object of such companies is "the management of shareholdings as an indirect form of exercise of economic activity" (see no. 1 of article 1 of that regulation).

No. 2 of the same article adds, as amended by article 1 of Decree-Law no. 318/94, of 24 December, that participation in a company is considered an indirect form of exercise of that company's economic activity when it does not have an incidental character and reaches, at least, 10% of the capital with voting rights of the participating company, either alone or together with participations of other companies in which the SGPS is dominant.

Thus the legislation sought to limit the activity of SGPS to the management of stable shareholdings, preventing them from serving as a means of securities speculation or tax evasion on capital gains.

Law no. 32-B/2002 of 30 December (State Budget Law for 2003) came with its article 38 to introduce a significant change to the tax regime applicable to the activity that constitutes the typical object of SGPS through the amendment it made to article 31 (now article 32) of the EBF.

This amendment consists of the fact that both income associated with the holding of capital stakes, such as dividends and capital gains, and expenses, such as financial charges incurred in financing intended for the holding of capital stakes, do not contribute to the determination of taxable profit. In summary, the activity typified in article 1 of the SGPS regime is, as a rule, excluded from taxation.

This is embodied in no. 2 of article 32 of the EBF which establishes that "The capital gains and capital losses realized by SGPS, (...) of capital stakes of which they are holders, provided they are held for a period not less than one year, and likewise, the financial charges incurred in their acquisition do not contribute to the formation of the taxable profit of these companies."

This regime consists of the attribution of a benefit which, however, was offset by the non-contribution, for purposes of determining taxable profit, of financial charges incurred, creating an environment of neutrality between gains from certain financial assets and expenses associated with the debt necessary for the acquisition and maintenance of those assets. Assets that in the future generate, in their entirety, gains excluded from taxation.

Thus, article 32 establishes the existence of a link between the acquisition and holding of capital stakes over a given minimum period and the fiscal relevance of financial charges incurred in their acquisition and maintenance.

The disregard as expenses of financial charges for purposes of determining taxable profit, established in no. 2 of article 32 of the EBF, constitutes a corollary of the general principle of indispensability of expenses according to which fiscal deduction is conditioned by its connection with the obtaining of income subject to tax and from which it follows that "if certain expenses are related to income not subject to tax they are not fiscally deductible", principle established in the provisions of no. 1 of article 23 of the Corporate Income Tax Code.

From the analysis of the elements presented by the company to demonstrate the calculations of financial charges not accepted as expenses by article 32 EBF it is concluded that A… used a formula to determine the portion of financial charges incurred that relate to the acquisition of financial investments in subsidiaries, however, considering only as relevant for these calculations the cost of the shareholdings held, the acquisition value of the shares of the companies in which it participates.

That is, the company did not consider in its calculation formula the value recorded in accounting as financial investments that relate to supplementary contributions and accessory contributions.

In this conformity and having as reference the ratio legis of article 32 of the EBF, it is important to demonstrate that the concept of capital stakes for purposes of this rule encompasses capital stock and supplementary contributions, as well as accessory contributions under the same regime.

It should be noted, however, that this equation to "capital stakes" only encompasses supplementary contributions and accessory contributions under the supplementary contributions regime that are demonstrably subject to a regime identical to that established in article 210 and following of the Commercial Societies Code, of which it seems important to highlight the following essential aspects:

1. they are not remunerated;

2. their restitution cannot occur if it results that the company's net worth falls below the sum of capital and legal reserve;

3. their restitution depends on a resolution by the shareholders;

4. they cannot be restituted after the company is declared bankrupt.

(C) Capital stakes and accessory contributions subject to the supplementary contributions regime

Given the particular interests of taxation, it becomes evident that the meaning and conceptual scope of the expression capital stakes will be broader than that of mere participation in capital stock.

i. In light of the role played in the beneficiary company:

In fact, supplementary contributions perform throughout their useful life a function of support to permanent capital, similar to capital stock, and consequently have, as a rule, high permanence in the company, whereby substantively they are encompassed by the concept of capital stakes and subject to the regime of capital gains and losses for tax purposes.

Supplementary contributions, a paradigmatic example of equity financing, consist of deliveries made by shareholders to strengthen those, at a given moment in a company's life, assuming the form of additional capital. Thus, and although supplementary contributions present distinctions from capital stock, they do not cease to have with this, for what matters here, a similar nature.

In this regard, João Antunes argues in "Supplementary contributions, accessory contributions and additional contributions," Vida Económica. "Supplementary capital contributions have a dual function: the capitalization of the company, that is, to adjust equity to social needs or it can also function as a guarantee to creditors, because they cannot be restituted if equity falls below the sum of capital and legal reserve, that is, it is a guarantee for creditors and that is one of the functions of equity in a company."

This is also the understanding supported by Sofia Gouveia Pereira in "Supplementary contributions in Portuguese Corporate Law," page 245, Principia Publishers, January 2004 edition, where she states that "...as to legal nature we opted to consider supplementary contributions a premium (subsequent), or "share overprice" bringing them closer to capital stock and distancing them from shareholder loans, as to their function, it may be, as we have seen, whether strengthening capital stock, acting as an "unnamed" or "second line" capital stock (...).

In the same sense, Gonçalves da Silva and Estevas Pereira consider that supplementary contributions are justified by two concurrent reasons:

• Because it is not always possible to predict what capital is necessary for the development of corporate business, at least in certain periods;

• Because, "although they do not constitute a capital increase, being equivalent to it, exempting compliance with the respective legal formalities and expenditure of inherent costs (...) further adding that "In reality, supplementary contributions constitute additional capital, distinct from nominal capital, occupying a middle position between this and proper reserves, whereby they must be taken to a specific account of additional net equity, precisely with the following code and title: '53 - Supplementary Contributions'" (our emphasis).

It is jurisprudence itself that follows such orientation in the interpretation of tax rules, adopting the principle of substance over form. See, in this context, among others, Decision no. 523/05 of 3 May 2005 of the Central Administrative Court South (CCA South), stating that, "to tax law what matters above all is the real configuration of factual situations, 'the economic reality, the factual reality', 'the economic relationship'".

Thus, given that supplementary contributions throughout their permanence in the company fulfill a function of strengthening permanent capital, and their reimbursement obeys certain conditions. In this sense, see Information no. 2026/10 of DSIRC7 (points 13, 14, 31 and 32), which reaches the same conclusion.

(...)

ii. In light of accounting classification:

In accordance with no. 2 of article 11 of the General Tax Law "Whenever, in tax rules, terms proper to other areas of law are used, they must be interpreted in the same sense as they have there, unless otherwise directly provided by law."

As considered by Casalta Nabais, in "Tax Law," 5th Edition, Almedina Editions, page 165, "given the important and close relationships maintained with various areas of commercial law, it is understandable that such a segment of tax law should have particular concerns of harmonization. This means, namely, that the Personal Income Tax Code and the Corporate Income Tax Code must take due account of the discipline contained in the Commercial Societies Code, Accounting Standards, Securities Code, etc., as well as these should not disregard the discipline contained in those codes".

In this sense, emphasize the express intention of the legislator when in the preamble of Decree-Law no. 159/2009 states that «maintenance of the partial dependence model determines, from the outset, that, whenever tax rules are not established, the accounting treatment is adopted, as well as the terminology that derives from it».

Furthermore, the determination of taxable profit, and consequently of Corporate Income Tax to be levied, is based on the accounting result, so it is natural that historically the concepts prescribed at accounting level are considered in framing the term for tax purposes.

Thus, it is important to evaluate whether in light of accounting rules supplementary contributions are considered capital stakes.

In accordance with the Accounting Standards System (SNC) supplementary contributions must be recorded, by the beneficiary, in account "53 - Other own capital instruments". The explanatory note states that "This account will be used to recognize supplementary contributions or any other financial instruments (or their components) that do not fall within the definition of financial liability. In situations where financial instruments (or their components) are identified with financial liabilities, an appropriate line item of accounts '25 - Financing obtained' or '26 - Shareholders/Partners' should be used".

From the perspective of the contributing entity, it was already verified that in the previous accounting framework, the Opinion of the Accounting Standards Commission (CNC) no. 8/97, of 29 January 1997, states that supplementary contributions must be classified "in a specific subdivision of the appropriate sub-account of account '411 - Capital Stakes'", such understanding being equally applicable to accessory contributions that are subject to the same legal regime.

With the entry into force of the Accounting Standards System, supplementary contributions granted continue to be included in account "41 - Financial Investments," similar to what occurred under the previous framework, taking into account their economic substance.

iii. In light of the coherence of the tax system:

Issues relating to the tax regime applicable to supplementary contributions were already subject to analysis by the Tax Authority (then Directorate General of Taxation) in Opinions no. 53/09, of 30 July, no. 14/2010, of 24 February, and no. 19/2010, of 15 March, and no. 33/2010, of 21 May, all from the Tax Studies Center, "in which it was concluded, namely, that: i) supplementary contributions (...) which, by resolution of the shareholders, are agreed to apply a regime identical to that established in article 213 of the Commercial Societies Code must be qualified as contributions with the nature of own capital, and, fundamentally (...) that ii) these accessory contributions must, equally, be considered for all purposes (...) as forming part of the concept of 'capital stakes'."

(...)

In fact, as neither dividends nor capital gains from the sale of capital stakes are taxed, such income will be integrated into the SGPS's asset base, increasing its tax-paying capacity. If, in parallel, it were permitted to SGPS to proceed with the deduction of expenses - whether financial charges incurred in the acquisition of capital stakes or those incurred with the granting of supplementary contributions, which aim to obtain expansion of the activity of the subsidiary - associated with this income, the provisions of no. 2 of article 104 of the Constitution would be violated, as the available income, relevant for determining the tax-paying capacity underlying its taxation, would not in fact be considered.

It follows, then, that financial charges incurred in the acquisition of capital interests or granting of supplementary contributions - which could potentially benefit from the tax exclusion regime - cannot influence the determination of taxable profit, that is, if gains are not taxed, the corresponding expenses that are linked to such income cannot equally be considered for purposes of determining taxable profit.

In light of the above, the financial charges incurred with the acquisition of capital interests or the granting of supplementary contributions are excluded for purposes of determining taxable profit, in light of what is established in article 32 of the EBF.

(D) Determination of financial charges

For purposes of determining financial charges, the Tax Authority, interpreting and applying the law, issued Circular no. 7/2004, of 30 March of DSIRC, which sanctions the following understanding:

• Scope of temporal application: "it is applicable to financial charges incurred in tax periods beginning after 1 January 2003, even if they relate to financing obtained before that date," as indeed follows from no. 5 of article 38 of Law 32-B/2002, of 30 December, which establishes that the (new) regime provided for in article 31 of the EBF (now article 32) is applicable "to capital gains and losses realized in periods beginning after 1 January 2003".

In fact, the aforementioned provision does not establish any transitional regime applicable to financial expenses incurred after 1 January 2003, relating to financing obtained until 31 December 2002. Reason for which all financial charges incurred and recognized in the financial statements for the 2003 and subsequent tax years should be considered reached by article 32 of the EBF, regardless of the date on which the loans that originated them were contracted.

• Tax year in which corrections of financial charges should be made: "With respect to the tax year in which financial charges should be disregarded as costs, for tax purposes, corrections should be made, in the year to which they pertain, to the financial charges incurred in the acquisition of interests that are susceptible of benefiting from the special regime established in no. 2 of article 32 of the EBF, regardless of whether all conditions for application of the special tax regime for capital gains have already been met. If it is concluded, at the time of sale of the interests, that not all requirements for application of that regime are met, then, in that year, the financial charges that were not considered as a cost in earlier years should be considered as a tax cost".

Now, given that a Holding Company managing shareholdings has as its contractual object the management of stakes in other entities as an indirect form of exercise of economic activity, when the participation is held for a period exceeding one year and corresponds to at least 10% of the capital with voting rights, and also given that SGPS are generally prohibited from disposing of or encumbering shareholdings held before one year from their acquisition, it seems appropriate to conclude that all shareholdings held by SGPS should, at the time of their respective disposal, verify the requirements necessary for the applicability of the special regime in question, thus, the adjustment of taxable profit relating to financial charges incurred in the acquisition of shareholdings that are susceptible of benefiting from the special regime established in no. 2 of article 32 of the EBF should be proceeded.

«Method to be used for purposes of allocation of financial charges: "(...) given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that it would allow, such allocation should be made on the basis of a formula that takes into account the following: the remunerated liabilities of SGPS and Capital-Risk Companies should be allocated, in the first place, to remunerated loans granted by these to the invested companies and to other interest-generating investments, with the remainder being allocated to the remaining assets, namely capital stakes, proportionally to their respective acquisition cost".

This calculation option is therefore associated with the fungibility that applies to financial means and, concomitantly, the difficulty in establishing a direct relationship between loans obtained and financed assets, and the method prescribed in the circular does not conflict with the content of the rule in question.

Finally, it is important to emphasize that the said Circular merely establishes the methodology to be observed in calculating the financial charges allocable to capital stakes for, by that means, to operationalize the application of what is established in no. 2 of article 32 of the Fiscal Benefits Act.

Nothing in the letter of no. 2 of article 32 of the EBF prevents the application of the indirect method in said allocation of financial charges, given the characteristic of the fungibility of money, with the consequent impossibility of determining the specific application of obtained capital.

Thus, in order to implement what is provided for in no. 2 of article 32 of the EBF and in accordance with the methodology established by Circular no. 7/2004, the financial charges incurred with liabilities intended to finance capital stock, supplementary contributions and accessory contributions with the supplementary contributions regime are excluded for purposes of determining taxable profit, since the expression capital stakes encompasses, according to what has been demonstrated, these realities.

It is important to note that the taxpayer used in determining financial charges not deductible for tax purposes the methodology prescribed by Circular no. 7/2004, having adopted for determining non-deductible financial charges on a monthly basis - see Annex no. 1 - methodology also followed by the Tax Authority in its calculations as it is considered to be the one that best reflects the reality that the rule aims to tax given the financial information produced by the company.

That is, the divergence existing between the calculations considered by A… and those proposed by the Tax and Customs Authority results from the company's non-consideration of the portion of financial investments corresponding to supplementary contributions as forming part of the concept of "capital stakes" subject to the limitations of article 32 of the EBF, which as already demonstrated does not respect the ratio legis of that rule.

Thus, the most appropriate solution consists in allocating the remunerated liabilities of SGPS, in the first place to remunerated loans granted by it to the invested companies and other interest-generating investments, with the remainder being allocated to the remaining assets, namely capital stakes, proportionally to their respective acquisition cost.

From the calculation made to determine the financial charges to exclude, for purposes of determining taxable profit, considering that supplementary contributions and similar, are encompassed by the concept of capital stakes, a total of non-deductible financial charges was determined in the amount of €24,019,245.35 - see Annex no. 1, pages 1 of 2.

Having demonstrated the non-conformity of the taxpayer's actions with the applicable legal framework, it is proposed, given the amount of financial charges with financing directed to the acquisition of capital stakes, including the provision of supplementary contributions, determined by the tax inspection and the amount already added by the taxpayer to taxable profit, the correction by the difference which is embodied in the amount of €6,084,536.41.

(E) The provision of article 23 of the CIRC

Even if, as a working hypothesis, supplementary contributions are not subject to the special regime provided for in article 32 of the EBF, then it will always have to be ascertained whether these charges are deductible in light of article 23 of the Corporate Income Tax Code.

Financial charges incurred by an entity - whether or not a SGPS - in obtaining funds which are intended to be granted on an unremunerative basis by that same entity to a subsidiary, are not considered tax expenses in light of the provision of no. 1 of article 23 of the CIRC.

This article establishes the general principle relating to the fiscal deductibility of expenses incurred by entities subject to this tax. It establishes in its no. 1, paragraph c) (heading "expenses"), that "Expenses are those that are proven to be indispensable for the realization of income or gains subject to tax or for the maintenance of the producing source", subsequently listing a list of expenses that includes "Financial charges such as interest on foreign capital applied in operations, discounts, premiums, transfers, exchange differences, expenses with credit operations, collection of debts and issuance of shares, bonds and other securities and redemption premiums".

It is thus considered that the deduction of interest and other charges must obey the same rules that are generically applicable to other expenses incurred by companies, being therefore their deductibility conditioned by the observance of the basic principle according to which they will only be fiscally deductible when they are proven to be indispensable for the realization of income or gains subject to tax or for the maintenance of the producing source of the respective taxpayer.

In fact, the capital obtained, generating financial charges, by financing non-remunerated supplementary contributions, and therefore not connected with the taxable income of the company, are removed from the operations of this, seeing that, instead, they are used in the activity of the beneficiary.

(...)

(F) Conclusion

In light of all that has been stated above, it cannot but be concluded that the application of the discipline of no. 2 of article 32 of the EBF to the factuality under analysis - which is subsumable in that rule as, according to what has been demonstrated above, supplementary contributions fall thereunder - leads to the exclusion of financial charges incurred with the granting of said supplementary contributions for purposes of determining taxable profit. On the other hand, the content of article 23 of the CIRC prevents the fiscal deductibility of those financial charges insofar as they are not connected with the company's own activity nor associated with remunerated assets.

In this context, the correction is made of the total amount of €6,084,536.41 corresponding to the difference between the value of non-deductible financial charges (€24,019,245.35) and the amount added by the taxpayer (€17,934,708.94).

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IX - RIGHT TO BE HEARD

In compliance with the provisions of articles 60 of the General Tax Law (GTL), approved by Decree-Law no. 398/98, of 17 December and the Supplementary Regime of Tax Inspection Procedure (SRCIT), approved by Decree-Law no. 413/98, of 31 December, the taxpayer was notified, on 2015-01-02, by registered mail, of the Draft Tax Inspection Report, relating to the 2012 period, through office letter no. … of 2014-12-31, to exercise the right to be heard in advance within a legal period of fifteen days.

The taxpayer exercised the right to be heard, in writing, according to the document received in these services on 2015-01-16, to which entry no. … was assigned.

Herein A… challenges the corrections shown in the draft report in the following terms and arguments which are summarized and evaluated below, following the order indicated. Thus:

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IX.2 - Corrections to the taxable amount - Corporate Income Tax - Non-deductible financial charges

The taxpayer disagreed with the proposed correction regarding Corporate Income Tax of €6,989,205.47 relating to financial charges, arguing that such understanding contradicts "various arbitral and judicial decisions" from which the following is extracted:

i. that "supplementary contributions are not confused with capital stakes (cf. proceedings no. 9/2012-T, 69/2012-T, 12/2013-T, 39/2013-T, 69/2073-T, 80/2013-T and 113/2013-T of the Centre for Administrative Arbitration, decision in proceedings no. 623/04.9BELSB of the Tax Court of Lisbon, and decision of the Supreme Administrative Court of 8 March 2006 handed down in proceedings no. 0719/05)";

ii. that "financial charges of SGPS related to supplementary contributions are fiscally deductible (cf. proceedings no. 69/2012-T, 72/2073-T, 39/2013-T, 80/2013-T and 113/2013-T of the Centre for Administrative Arbitration)";

iii. that the formula (contained in Circular no. 7/2004) chosen by the Tax Authority and applied by the Tax Authority in the correction (...) is "unconstitutional" (cf. proceedings no. 24/2012-T of the Centre for Administrative Arbitration).

Additionally it invokes a 'contradiction between the Tax Authority concluding that, on one hand, one is faced with an instrument that does not generate income/returns, and on the other, concluding that the provisions of article 32 of the EBF apply to supplementary contributions.

It further considers that it is entitled to the reversal of the increase to taxable profit of financial charges related to supplementary contributions in the last three tax years, since with respect to those supplementary contributions "it is not possible to consider the applicability of any exemption while alleged capital stakes.

Finally, the taxpayer argues, in points 19 to 27 of the presentation, that article 23 of the CIRC provides for the "fiscal deductibility of all expenses related to the realization of income", since investments in invested companies are "profit-producing".

On the presentation submitted, the following must be informed:

a) Correction is permitted that the amount of the correction relating to financial charges is not €6,989,205.47 as referred to by the taxpayer in the presentation, but rather that presented in the draft report in the amount of €6,084,536.41.

b) On what is stated, it begins by stating that the exercise of the right to be heard with the indication of the existence of decisions in a sense different from that proposed in the inspection in progress does not by itself constitute argumentation against the position founded in the inspection report draft.

c) But in this context, it is clarified that the Tax Authority does not in any way devalue the importance of taking into account the judicial decisions issued by the competent bodies in forming its decision on a given matter. Instead, and similar to the taxpayer, the Tax Authority emphasizes the conclusions that support the understanding deferred by it.

d) Further, it is added that the decisions handed down by the Centre for Administrative Arbitration relate to specific proceedings, based on the evidence that is considered demonstrated in the appropriate forum.

e) In that sense, it cannot but be emphasized that the Centre for Administrative Arbitration in those decisions does not pronounce on the coherence of what is advocated by the Tax Authority in the fiscal treatment of supplementary contributions in subsidiaries in light of constitutional principles of taxation by actual income (CRP, article 104.2) and as well as the principle of equality (CRP, article 13).

f) But it is important to state here that the understanding of the Tax and Customs Authority (Tax Authority) on the matter discussed is supported by Information no. 2026/10, issued by DSIRC, sanctioned by Despatch of the Deputy Director General of Taxes of 7 October 2010 (in legal substitution of the Director-General), which, in its point 31 states: "Pursuant to no. 2 of article 32 of the EBF, capital gains and capital losses realized by SGPS, Capital-Risk Companies and Individual Investment Companies of capital stakes in which they are holders do not contribute to the formation of taxable profit, as do not the financial charges incurred in the acquisition of those capital stakes, in which supplementary contributions and accessory contributions under the supplementary contributions regime are included, as well as the financial charges incurred with the acquisition of those capital stakes"

g) In the specific context of the matter of article 32 of the EBF, the said information was based on elements that permitted drawing conclusions with a high degree of certainty, leaving no room for doubt, as can be ascertained by the content of its point 32, when concluding, in peremptory terms, that "supplementary contributions (...) for purposes of application of the method contained in Circular 7/2004 must have the treatment provided there for "capital stakes" (...).

h) No "unconstitutionality" is recognized here, as full compliance is given to the principle of legality enshrined in articles 266 of the Constitution of the Portuguese Republic (CRP) and 55 of the General Tax Law when applying the provisions of article 32 of the EBF.

i) There is no defect of violation of law since, being bound powers in question, the principle of legality supersedes any other principles; in addition, when it is required of the Tax Authority, as an enforcement body of the law, a bound action in fixing the content of the normative concept, making appeal to parameters and rules of a technical-economic character, the administrative doctrine sanctioned by the identified Despatch of the State Secretary for Finance contributes to a unity of just solution in the application of the provisions of article 32 of the EBF to specific cases.

j) Thus, with the Tax Authority bound to criteria exclusively of a fiscal nature and not of a financial nature, and in respect for the fundamental principles provided for in no. 2 of article 266 of the CRP and by force of the principle of legality enshrined in article 55 of the General Tax Law, whose legal provisions impose on administrative bodies and officials bound action to the Constitution and law, it cannot but apply the understanding sanctioned by the cited Despatch of the State Secretary for Finance no. 536/2004-XVI which, it is reaffirmed, remains in force in the 2009 tax year as well as in the year under analysis.

k) Nevertheless, and centering the discussion on the framing of supplementary contributions in the provision of article 32 of the EBF, it is important to emphasize here that the concept of capital stakes inherent in the cited article encompasses not only portions of capital stock, but also other components of own capital, such as supplementary contributions and accessory contributions with the supplementary contributions regime.

l) Given the particular interests of taxation, the fact is that, for the fiscal legislator, the meaning and conceptual scope of the expression capital stakes is broader than that of mere participation in capital stock, as is demonstrated below.

m) In fact, it is because supplementary contributions perform throughout their useful life a function of support to permanent capital, similar to capital stock, and consequently have high permanence in the company, that substantively they are encompassed by the concept of capital stakes and legally subject to the regime of capital gains and losses for tax purposes.

n) Supplementary contributions, a paradigmatic example of equity financing, consist of deliveries made by shareholders to strengthen those at a given moment in a company's life, assuming the form of additional capital. Thus, and although supplementary contributions present distinctions from capital stock, they do not cease to have, for what interests us, a similar nature.

o) In the same line of reasoning, see the Decision of the Central Administrative Court North, Proceedings no. 467/07.68EBRG, with Decision date of 17 November 2011, already referenced in the draft report, where it is concluded that "supplementary capital contributions aim at objectives identical to those of capital increase, without involving the formalism and responsibility of this and hence that, just as the capital increase (...) was considered (...) in determining the acquisition value, so should the said supplementary contributions".

p) The taxpayer considers that the jurisprudence cited in the draft report (PRIT) points to the non-deductibility of financial charges relating to supplementary contributions, when the same result from liberalities of a shareholder/partner and not followed by the other holders of capital stock, and as this is not the case with A…SGPS, such understanding cannot be extended to it.

q) This conclusion results from the taxpayer's interpretation and does not result from the content of those decisions in which in their grounds there is no reference to verification of the presupposition of liberality in supplementary contributions.

r) Agreement cannot thus be granted with A…'s position regarding the jurisprudence cited in PRIT.

s) In other situations, the legislator itself expressly determines such identity of treatment. See, by way of example, the provision of no. 1 of article 21 of the CIRC, where, as far as positive patrimonial variations are concerned, one can read that "also contribute to the formation of taxable profit the positive patrimonial variations not reflected in the net result of the tax period, except:

a) Capital inputs, including share issuance premiums, loss coverage, in any manner, made by capital holders, as well as other positive patrimonial variations that result from operations on own capital instruments of the issuing entity, including those resulting from the attribution of derivative financial instruments that must be recognized as own capital instruments;"

t) The same identity of treatment is also evident in paragraph c) of no. 1 of article 24 of the CIRC. Now, it will surely not be because we are faced with the issue of qualification and subsumption of facts to a rule provided for in the EBF that the reasons for identity between the two figures (and which led the legislator to establish said normative solutions) disappear, whereby it is not seen as reasonable to now assign them different treatment.

u) Paraphrasing Pitta and Cunha, "(...) to the concept of 'capital inputs', as adopted in paragraph a) of article 21 of the CIRC, is not granted the rigorous delineation that in commercial law is given to the obligation of input, here configured as the principal performance of shareholders as opposed to accessory contributions. For the fiscal legislator understood by capital inputs not only values corresponding to the formal predial contribution of shareholders to the company's capital in the proper sense, but also other contributions by shareholders, which there is no reason to exclude those made in the form of accessory contributions" Thus, "(...) fiscal law is manifestly adopting an elastic concept of 'capital inputs', in which other realities cannot but be included."

v) It is the "(...) fiscal relevance of these financial investments, such as supplementary contributions or accessory contributions under the supplementary contributions regime" that "implies their integration and/or equation to capital stakes pursuant to article 42, no. 2 of the CIRC"

w) In light of the above we can firmly conclude that supplementary contributions follow in alienation the regime of capital gains and losses, being concomitantly encompassed by the regime inherent in article 32 of the EBF, and that the financial charges incurred in their financing do not contribute to the determination of taxable profit.

x) In its line of thinking, the taxpayer suggests the reversal of increase of financial charges related to supplementary contributions determined by the Tax Authority in the last three tax years, in the portion corresponding to the amount reimbursed of supplementary contributions.

y) Considering that said contributions were applied in the free financing of an associated company of the taxpayer, its reimbursement is in practice a return of capital, generating no capital gain income that could come to form part of taxable profit formation by virtue of such reimbursement not occurring any change in the participation held or in the rights inherent to it.

z) Consequently, there is no occasion here for any reversal of the financial charges considered non-deductible in earlier periods in which they were incurred.

aa) The claim now made by the company (points 15 to 18) is equivalent to granting to the revocation of the tax regime of SGPS occurred in 2014 its application in the 2012 period and that, as is obvious, has no legal framework whatsoever.

bb) According to evaluation of the tax regime of SGPS rendered by Decision no. 42/2014, of 11 February, of the Constitutional Court, «(...) The Constitution does not make it imperative that the taxation of company income always follows, at the time and in accordance with accounting for positive and negative financial flows, the gains, costs and losses realized or incurred in each tax period. Being actual income a normatively modeled concept, it does not violate the principle contained in no. 2 of article 104 of the Constitution the tax regime that, in favor of fiscal neutrality - the gain not being taxed, the cost linked to it should not be taxed either - establishes the non-deductibility of a cost based on the susceptibility of the realization of capital gains exempt from taxation, whose future realization is considered probable and expectable.»

cc) The uncertainty as to the realization of capital gains exempt from taxation by the tax regime of SGPS presents no justification whatsoever and therefore the company considered (and rightly so) that the participations acquired in the 2012 period are subject to the regime of article 32 of the EBF, applicable to capital stakes held in 2012 by SGPS, independent of the minimum holding period to enjoy the fiscal benefit of non-taxation of capital gains in the sale not yet being verified.

dd) The referenced Decision no. 41/2014 considers that the regime does not appear excessive which makes the non-deduction of financial charges act in each tax period in which they are incurred, having regard to the preservation of the possibility of effective and future realization of capital gains, all the more so as the applicable legislation in force does not exclude the possibility of correction of non-deducted costs in earlier tax periods, if the disposal of capital interests does not meet the requirements for application of the special regime of exemption of capital gains.

ee) It is emphasized that the correction considered in PRIT in no way alters the calculations presented by the taxpayer in the inspection procedure, which evidence the capital stakes recorded in accounting, including naturally those acquired throughout 2012, in the companies F…, N…, L… and M….

ff) Further it should be noted that as of 31 December 2012, the acquisition of capital stakes in these companies was one of continuity, as is confirmed by their accounting as a financial investment, which indicates their holding for a period exceeding one year.

gg) In this context, the requirements for the applicability of article 32 of the EBF were met.

hh) It is thus considered that the taxpayer has no reason for correction of the increase of financial charges made by the Tax Authority of the portion corresponding to capital stakes acquired in the period.

ii) In light of the above, the correction is maintained as proposed in point III.1.1 of this report.

g) Following the inspection relating to group B…, the Tax and Customs Authority issued Corporate Income Tax Assessment no. 2015…, of 15-07-2015, whose content is deemed reproduced, relating to the 2012 tax year, in which it applied the correction referred to in the Tax Inspection Report;

h) The Claimant filed a gracious complaint against the assessment, which was rejected by despatch of the Director of the Large Taxpayers Unit of 10-02-2016, in which manifests agreement with information contained in document no. 1 attached with the arbitration application, whose content is deemed reproduced, in which the following is stated, among other matters:

§ II.1. Non-deductible financial charges

§ II.1.1. Arguments of the Complainant

1. The Complainant, in summary, alleges nothing truly new, but merely limits itself to reinforcing what was already emphasized in the initial petition, through the enumeration of judicial and arbitral decisions favorable to the Complainant's position in this matter, both with regard to the non-classification of supplementary contributions as capital stakes, as to the fiscal deductibility of charges incurred with their acquisition in SGPS, and finally, as to the acceptance of a direct allocation method in calculating financial charges incurred.

§ II.1.II. Evaluation

1. As mentioned, the Complainant brings nothing new to the proceedings since it had already made mention of various decisions of the judicial and arbitral instances favorable to its position on the matter, only this time it appears to have undertaken an exhaustive exercise on all decisions of these same instances favorable to its claim.

2. Now, it should be stated from the outset that the Large Taxpayers Unit of the Tax Authority already had knowledge of the position taken by some courts and by the Centre for Administrative Arbitration (CAAD) on various issues related to no. 2 of article 32 of the Fiscal Benefits Act (EBF) and Circular no. 7/2004.

3. These decisions, although contrary to what is the position of the Tax Authority, produce their effects only in the judged case and bind the administration pursuant to article 100 of the General Tax Law in that case only.

4. Regardless of the number of favorable or unfavorable decisions to a given legal position, referred to in jargon as "jurisprudential current," even if univocal, it should be noted that this is not the case, these do not make law, always having their effects limited to the judged case, except for the exceptional case of a declaration of unconstitutionality or illegality with binding general effect by the Constitutional Court, but that only because the Portuguese Republic's Constitution itself provides for it", such is the national legal architecture.

5. In the draft decision that precedes, a series of decisions favorable to the Tax Authority's position was timely indicated which the Complainant, insofar as is perceptible to us, tends to ignore, both with respect to the non-deductibility of financial charges, whether in accordance with article 32, no. 2, of the EBF, or pursuant to article 23 of the Corporate Income Tax Code.

6. Recognizing that the issue is not easy, despite all that has already been stated in the initial petition and in the request constituting the right to be heard, we maintain the position assumed, in that this is the one that best harmonizes with the regime established by the legislator in the treatment to be given to this type of expenses, without failing to allude, again, that the Large Taxpayers Unit as an organizational unit of the Tax Authority is, pursuant to article 68-A, bound by general administrative guidelines such as Circular no. 7/2004.

§ III. CONCLUSION

In accordance with what has been stated above and having examined all the elements of the file, in particular our previous "Draft Decision" and the procedural documents submitted by the Complainant, namely the initial petition and its right to be heard request, since it is shown to be prevented to this Large Taxpayers Unit other understanding than that referred to above, it seems to us to dismiss the request contained in the file, in accordance with the content of the "summary table" mentioned in the introduction of our Information, with all legal consequences, namely, where applicable, as far as the provisions of article 163 of the Code of Administrative Procedure are concerned, and as well as, compliance with what is determined by article 100 of the General Tax Law.

More is informed that, in case of Higher Agreement, the notification of the Complainant be promoted, through official letter to be sent under registered mail, pursuant to the provided in articles 35 to 41, all of the Code of Procedure and Tax Process, with all legal consequences.

i) On 10-05-2016, the Claimant filed the application for constitution of the arbitral tribunal that gave rise to the present proceedings.

2.2. Unproven Facts

There are no facts with relevance for the consideration of the merits of the case that have not been proven.

2.3. Grounds for the Establishment of Facts

The proven facts are based on the Tax Inspection Report and on the documents attached with the arbitration application, with no controversy over them.

The Tax and Customs Authority did not attach administrative proceedings.

3. LAW

Following a tax inspection, the Tax and Customs Authority made corrections to the taxable amount for the 2012 tax year of group B…, of which the Claimant is the parent company.

Among the corrections made is one in the amount of €6,084,536.41, relating to "non-deductible financial charges in light of the provisions of articles 32 of the Fiscal Benefits Act and 23 of the CIRC: The taxpayer did not fully add the amount relating to financial charges incurred in the acquisition of capital stakes, which either pursuant to no. 2 of article 32 of the Fiscal Benefits Act or article 23 of the CIRC do not contribute to the formation of taxable profit".

This correction was made in relation to the individual taxable profit of the Claimant, with the corresponding adjustment being made to the group's taxable profit, in accordance with the provisions of article 70, no. 1, of the CIRC.

The correction referred to relates to financial charges incurred by the Claimant in making supplementary contributions (or accessory contributions with the same regime) to its subsidiaries, which were considered in determining taxable profit.

The tax arbitration process, as an alternative means to the judicial challenge process (no. 2 of article 124 of Law no. 3-B/2010, of 28 April), is, like this, a procedural means of mere legality, in which the aim is to declare the illegality of acts of the types indicated in article 2 of the Legal Regime of Arbitration in Tax Matters and to eliminate the legal effects produced by them, annulling them or declaring their nullity or non-existence [articles 99 and 124 of the Code of Tax Procedure and Process, applicable by force of the provision of article 29, no. 1, paragraph a), thereof].

Therefore, as the object of the Arbitral Tribunal's consideration is the act practiced, its legality must be assessed in light of its content, as it was practiced, the tribunal being unable, upon finding that an illegal ground was invoked in support of the administrative decision, to assess whether its action could be based on other grounds.

The Tax and Customs Authority, in the Tax Inspection Report in which it analyzed the individual taxable profit of the Claimant, understood, in summary, the following:

– the Claimant did not consider in its calculation formula the value recorded in accounting as financial investments that relate to supplementary contributions and accessory contributions;

– supplementary contributions should be considered as "capital stakes" being subject to the regime of article 32, no. 2, of the Fiscal Benefits Act, in force in the year 2012;

– the disregard as expenses of financial charges for purposes of determining taxable profit, established in no. 2 of article 32 of the Fiscal Benefits Act, constitutes a corollary of the general principle of indispensability of expenses according to which fiscal deduction is conditioned by its connection with the obtaining of income subject to tax;

– for purposes of determining the financial charges to be allocated to capital stakes, the criterion indicated by the Tax Authority in Circular no. 7/2004, of 30 March of DSIRC, should be applied, which was indeed applied by the Claimant;

– "the divergence existing between the calculations considered by A… and those proposed by the Tax and Customs Authority results from the company's non-consideration of the portion of financial investments corresponding to supplementary contributions as forming part of the concept of 'capital stakes' subject to the limitations of article 32 of the Fiscal Benefits Act";

– "even if, as a working hypothesis, supplementary contributions are not subject to the special regime provided for in article 32 of the Fiscal Benefits Act, then it will always have to be ascertained whether these charges are deductible in light of article 23 of the Corporate Income Tax Code";

– "financial charges incurred by an entity - whether or not a SGPS - in obtaining funds which are intended to be granted on an unremunerative basis by that same entity to a subsidiary, are not considered tax expenses in light of the provision of no. 1 of article 23 of the CIRC".

It is the assessment of the legality of these corrections, with this grounds, that constitutes the object of the present proceedings.

As the grounds invoked by the Tax and Customs Authority for considering that financial charges incurred with supplementary contributions are not relevant for determining taxable profit are autonomous, each with the potential to support the corrections made, they will be assessed separately, without prejudice to the fact that, if it is concluded that one of them provides legal support for the decision taken, the consideration of the other will be made unnecessary, as it would be of no use.

In fact, as the Supreme Administrative Court has been understanding, when an administrative act has more than one ground, each with the potential to, by itself, ensure the legality of a tax act (or administrative act) it is irrelevant that one of them be illegal, as "the court, to annul or declare the nullity of the questioned decision, issued in the exercise of bound activity of the Administration, cannot be satisfied with the finding of the insubsistence of one of the invoked grounds, as only after verification of the failure of all of them is the court enabled to invalidate the act".

3.1. Issue of Qualification of Supplementary Contributions as "Capital Stakes" for Purposes of Article 32, No. 2, of the Fiscal Benefits Act, in the Wording in Force in 2012

Article 32, no. 2, of the Fiscal Benefits Act, in the wording in force in 2012, introduced by Law no. 64-B/2011, of 30 December, establishes the following:

2 - The capital gains and capital losses realized by SGPS of capital stakes of which they are holders, provided they are held for a period not less than one year, and likewise, the financial charges incurred in their acquisition do not contribute to the formation of the taxable profit of these companies.

From the final part of this provision it results that financial charges incurred in the acquisition of capital stakes do not contribute to the formation of taxable profit of SGPS.

In the case in question, the financial charges in question were incurred by the Claimant in making supplementary contributions (or accessory contributions with the same regime) to its subsidiaries, whereby the applicability of this provision to the situation depends on the qualification of these contributions as "capital stakes".

"In determining the meaning of tax provisions and in qualifying facts to which they apply, the general rules and principles of interpretation and application of laws are observed" (article 11, no. 1, of the General Tax Law), which constitutes a referral to article 9 of the Civil Code.

In no. 2 of the same article 11 it is established that "whenever, in tax provisions, terms proper to other areas of law are used, they must be interpreted in the same sense as they have there, unless otherwise directly provided by law".

From this provision it results that, although the rule is that terms used in tax provisions should be interpreted with the same scope they have in other areas of law, there is an exception, which is that it directly results from tax law that the meaning of the term used in tax law is different from that which it has in other areas of law.

In fact, this exception is in line with another general interpretative rule, which is that special law takes preference over general law in its specific domain of application. That is, if it directly results from a tax provision, special for the situation it regulates, the meaning of a certain term, nor will it matter to know if that meaning corresponds or not to that used in general law, as that meaning directly resulting from law for a specific situation will necessarily have to be the one that must be adopted, with the preterition of the meaning with which the concept is used in any provision that does not have the nature of special law for the referred situation.

In any case, from no. 2 of article 11 of the Fiscal Benefits Act it results that, in good hermeneutics, the first task of the interpreter of tax law to ascertain the scope of a term used therein is to ascertain if the tax law directly provides the meaning of that term.

Only if one is not faced with a situation of this type, could one appeal to the meaning of terms used in other areas of law.

Now, in the case in question, for clarification of the question of whether supplementary contributions are encompassed in the concept of "capital stakes" there is a provision from which directly results that those are not encompassed in this concept, which is no. 3 of article 45 of the CIRC, in the wording of Decree-Law no. 159/2009, of 13 July, in force in the year 2011.

Article 45, no. 3 of the CIRC establishes the following:

3 – The negative difference between the capital gains and capital losses realized through the onerous transmission of capital stakes, including their redemption and amortization with capital reduction, as well as other losses or negative patrimonial variations relating to capital stakes or other components of own capital, namely supplementary contributions, contribute to the formation of taxable profit in only half of their value.

Two concepts are used in this provision: that of "capital stakes" and that of "other components of own capital".

"Capital stakes" are also "components of own capital", as can be inferred from the word "other", but the scope of "capital stakes" is necessarily more restricted than that of "own capital", which will encompass, in addition to "capital stakes" also "the other components".

As the provision is worded, supplementary contributions will be encompassed in the concept of "other components of own capital" and not in "capital stakes", as the reference to those appears following this last concept and not to the first.

In fact, if it were understood, for this purpose, that supplementary contributions were integrated in the concept of "capital stakes", it is obvious that the reference to them would be included following this concept and not following the concept of "own capital": that is, it would be stated "(...) losses or negative patrimonial variations relating to capital stakes, namely supplementary contributions, or other components of own capital contribute to the formation of taxable profit in only half of their value".

That reference to supplementary contributions did not exist in the wording of article 42 of the CIRC of Law no. 32-B/2002, of 30 December, only being made in the wording introduced by Law no. 60-A/2005, of 30 December, whereby the legislative amendment was made with the intention of clarifying the scope of fiscal concepts used, namely the concept of "capital stakes", showing that this, in the perspective of the CIRC legislator, did not encompass supplementary contributions.

Being an amendment with a clarifying scope, it is to be presumed reinforcedly that the legislator knew how to implement in adequate terms that objective (article 9, no. 3, of the Civil Code), and if intended to make explicit that supplementary contributions, for purposes of Corporation Tax, fall among "other components of own capital" and not in "capital stakes".

This delimitation of the concept of "capital stakes" which is extracted from the referred no. 2 of article 45 is made for purposes of determining capital losses, which is included in the matter dealt with by article 32, no. 2, of the Fiscal Benefits Act (it is a provision that removes, with respect to SGPS, the fiscal relevance generally provided for in the CIRC for capital gains and losses) whereby, having to presume that the legislator expressed his thinking in adequate terms (pursuant to the referred article 9, no. 3, of the Civil Code), it is justified the conclusion that in the special provision was used the same concept of "capital stakes" that was used in the provision that provides for the general fiscal relevance of capital gains and losses.

Furthermore, the provision of article 32, no. 2, of the Fiscal Benefits Act was reformulated by Law no. 64-B/2011, of 30 December, already after the amendment introduced by Law no. 60-A/2005 in article 45 of the CIRC and the new wording of that provision maintains the reference only to "capital stakes" without any allusion to "other components of own capital" to which article 45, no. 2 alludes.

This conclusion, extracted from the literal content of article 32, no. 2, of the Fiscal Benefits Act, combined with article 45, no. 2, is confirmed by the reason for the special regime for capital gains and losses realized by SGPS, which does not apply with respect to supplementary contributions, as is proficiently explained in the decision of the Centre for Administrative Arbitration rendered in proceedings no. 12/2013-T, in these terms:

"in general, the regime for capital gains aims to grant a special favorable regime to tangible and financial immobilized assets (shares and quotas) of companies, as a means of combating the lock-in effect – phenomenon that in the fiscal system of realization conditions the rational economic flow of assets (purchase and sale) by reasons relating to constraints (tax payment). In essence, to avoid the scenario of a subject who does not sell an asset (share or quota) that they are holder of – and all economic reasons would advise them to – only because they will pay in that moment a high tax (because taxation is only discharged with the sale of the asset and not in the cadence of its annual appreciation). It is this reason that justifies the infra-taxation of tangible and financial assets (shares and quotas), embodied in a special tax regime for capital gains.

And nothing of this occurs with supplementary contributions. They are returned, at par, according to the rules of commercial law. There is no, nor is one trying to force the existence of, a (secondary) market of voluminous transactions of supplementary contributions. And it is not credible that the sparse holders of supplementary contributions below par would not want to receive their nominal value, with fear or dread of the payment of associated tax; or that this be an economic obstacle such that it justifies creating or inserting them in the special regime of capital gains and losses."

Thus, it is concluded that article 32, no. 2, of the Fiscal Benefits Act, in the wording in force in 2012, by establishing, reporting to "capital stakes", that "do not contribute to the formation of taxable profit" of SGPS the "financial charges incurred in their acquisition", does not remove the relevance for the formation of taxable profit of financial charges incurred with supplementary contributions, as these do not fall within the concept of "capital stakes", at least for this fiscal purpose.

Therefore, the corrections made do not have legal support in article 32, no. 2, of the Fiscal Benefits Act.

3.3. Issue of Indispensability of Financial Charges Incurred with Supplementary Contributions to Subsidiaries for the Formation of Taxable Profit of the Claimant

The non-consideration by the Tax and Customs Authority, for the formation of taxable profit of the Claimant, of the said financial charges with supplementary contributions to subsidiaries was also based on the understanding that such expenses cannot be considered indispensable for such formation.

This issue has already been assessed, with the same factual and legal presuppositions, in the proceedings of the Centre for Administrative Arbitration nos. 39/2013-T, 734/2014-T and 570/2015-T, with whose decision it is in agreement, whereby its grounds will be followed.

3.3.1. The Interpretation of the Concept of Indispensability of Costs or Losses

The interpretation of the concept of indispensability contained in article 23 of the CIRC has, in Portuguese tax law doctrine, in TOMÁS TAVARES and ANTÓNIO PORTUGAL, authors of seminal works regarding the elucidation of such concept.

For the first of these authors: "The legal notion of indispensability is delineated, therefore, from an economic-business perspective, by direct or indirect filling of the ultimate motivation for obtaining profit. Indispensable costs are equivalent to expenses incurred in the interest of the company or, in other words, in all acts abstractly subsumible in a profit-making profile."

And continues: "(…) Indispensability is subsumed to any and every act performed in the interest of the company… The legal notion of indispensability represses, therefore, acts that do not conform to the company's purpose, not insertable in the social interest, above all because they do not aim at profit".

The second author, regarding the question of what is the best interpretation of the concept of indispensability, expresses the following position:

"The solution adopted among us (at least in doctrine), in the wake of understandings advocated by Italian doctrine, has been to interpret indispensability in function of the corporate object. This position is present from the outset in the writings of Vítor Faveiro, who reconducts the indispensability of the expense to its assessment as an act of management in function of the concrete corporate object, refusing that this indispensability can be assessed freely from any subjective judgment of the law applier".

These works sustain, therefore, that any economic decline (expense) that has a relationship with the corporate object, whether incurred within the scope of activity, or evidences a business purpose, will fulfill the requirement of indispensability.

On the plane of jurisprudence, and especially regarding the deductibility of expenses relating to interest incurred by companies that apply borrowed capital in financing subsidiaries, the Decision of the Supreme Administrative Court of 07-02-2007, rendered in proceedings no. 1046/05, deserves prominence, in which it is stated:

"It results from this that the costs provided therein cannot but respect, from the outset, the contributing taxpayer company itself.

That is, for a certain amount to be considered a cost of that company it is necessary that the respective activity be developed by it itself, not by other companies.

Not being the case this way, how could the exercise of the activity of another with which it had some relationship be attributed to a company.

The contested amounts correspond to interest on bank loans and stamp tax incurred by the appellant and applied in the free financing of an associated company of theirs.

Such amounts are not, therefore, directly related to any activity of the taxpayer inscribed in its corporate object, which is undertakings and management of immovable property and not the management of shareholdings or financing of risk companies, nor do they even relate, albeit indirectly, to its activity."

Also here the notion of activity or social interest reveals itself as the striking feature in the fiscal admissibility of expenses, when assessed by article 23 of the CIRC. And in the jurisprudence cited by the Claimant and by the Tax and Customs Authority predominantly, as was to be expected, the question of connection of the fiscal admissibility of financial expenses in function of considering whether or not the financing entity carries out its own activity in these operations.

Now, in light of what was stated, it is clear that, both on the doctrinal plane and in the sphere of jurisprudence, the connection to activity will be the nuclear element of the interpretative key of the concept of indispensability. Thus, and for the case in question, the analysis of what is meant by "activity" of companies, particularly of a SGPS, reveals itself as essential.

Let us see then, in a general plane, what we understand by activity of corporate entities; and then, in the case in question, what should be understood by own activity of a SGPS.

3.3.2. The Activity of Companies

The activity of a corporate entity consists of the operations resulting from the use and management of its resources. Such resources are, in the first place, the assets that are part of its property.

From the notion of "asset" that the accounting regulation establishes, it can be concluded that activity will be as much the management of a tangible fixed asset, as of an intangible one, as of a financial asset, or any service provision.

Thus, suppose that company ALFA participates in company BETA in the proportion of 100%. The first is therefore holder of a financial asset. What "activity" results in the sphere of ALFA from the participation that this holds in BETA?

The first can intervene in the second, controlling its financial and operational policies so as to obtain benefits from it, determining the production of new goods or services, the minimization of expenses, or other measures that increase its future economic benefits.

But it is also clear that ALFA could intervene in BETA in the plane of financial operations. Either by increasing BETA's capital in order to increase its investment capacity, or providing it with financial means that strengthen BETA's treasury in order to increase its investment capacity, or provide it with financial means that strengthen its treasury.

The entity ALFA, in the exercise of its own activity, administers and makes decisions concerning a financial asset, which results from said participation. Such constitutes activity of ALFA and not of BETA. This benefits from such activity, suffers the effects of ALFA's decisions, but does not develop the activity of managing the participation.

Should the managers of ALFA execute operations that affect the financing of BETA they are not developing activity of third parties. They are developing own activity of ALFA, directly derived from the management of the financial asset translated in the participation in BETA. Company BETA has the nature of invested entity, which grants to the decisions of the investor the qualification of own activity, inherent to its purpose: the management of such participation. And such management can involve financing operations that form part of the activity of the investor.

The invested company is not any strange entity to the activity and interests of the investor. There is not an expense in the sphere of the latter that has nothing to do with its corporate interest. The expense with interest incurred with capital obtained and subsequently brought to the invested company, is made in the interest of the investor, in a direct consequence of its activity of managing an asset that emerges from a participation, which is real or potentially a producer of income.

3.3.3. The Activity of SGPS and the Deductibility of the Financial Charges in Question

In accordance with the provision of article 1 of Decree-Law no. 495/88, of 30 December, holding companies managing shareholdings (SGPS) have as their sole contractual object the management of shareholdings of other companies, as an indirect form of exercise of economic activities, participation in a company being considered an indirect form of exercise of that company's economic activity when it does not have an incidental character and reaches at least 10% of the capital with voting rights of the invested company, either alone or through participations of other companies in which the SGPS is dominant.

The participation in a company is considered an indirect form of exercise of that company's economic activity when it does not have an incidental character and reaches at least 10% of the capital with voting rights of the invested company, either alone, or jointly with participations of other companies in which the SGPS is dominant.

In light of the foregoing, it becomes clear that the activity of SGPS – a concept essential to ascertain the indispensability of expenses incurred by these – consists, essentially, of the active management of shareholdings held in other companies. This management consists of the intervention in the decisions of policy of these invested companies, for the purpose of obtaining benefits from these.

But such management can, and according to general practice, does involve the practice of financial operations aimed at the invested company. In particular, capital increases intended to strengthen its solvency or liquidity position, or to provide it with means for expansion, are common financial operations, which can be described as part of the management activity of an SGPS.

Interest paid on capital taken as a loan intended to finance such capital increases, constitutes, therefore, an expense incurred in the exercise of the management activity of the SGPS and in the achievement of its corporate purpose, the management of shareholdings as an indirect form of exercise of economic activity.

In conclusion, it is necessary to affirm that the financial charges incurred by an SGPS to finance supplementary contributions made to its subsidiaries, are incurred in the exercise of its management activity of financial assets (the shareholdings) and are connected to its corporate purpose, constitute therefore expenses incurred in the interest of the company and accordingly meet the requirement of indispensability established in article 23 of the CIRC.

Therefore, the corrections made based on article 23 of the CIRC have no legal support.

4. DECISION

Based on all the foregoing and, considering:

1. That the Arbitral Tribunal has jurisdiction to know of the present proceedings;

2. That the corrections made by the Tax and Customs Authority to the taxable amount of the Claimant for the 2012 tax year in the amount of €6,084,536.41, relating to non-deductible financial charges, lack legal support in article 32, no. 2, of the Fiscal Benefits Act, as the supplementary contributions at issue do not fall within the concept of "capital stakes" established in said provision;

3. That the corrections made lack legal support in article 23 of the Corporate Income Tax Code, as the financial charges incurred by the Claimant with supplementary contributions to its subsidiaries constitute expenses incurred in the exercise of its management activity, meeting the requirement of indispensability;

4. That the Corporate Income Tax Assessment no. 2015… should be annulled insofar as it incorporates said corrections, with the consequent reversal of the increase to taxable profit of the amounts corresponding to those corrections;

The Arbitral Tribunal decides:

To grant the application filed by A…, SGPS, S.A. and to annul the acts of rejection of the gracious complaint and the act of correction of the taxable amount, as well as the Corporate Income Tax Assessment no. 2015…, with the consequent reversal of the increase to taxable profit in the amount of €6,084,536.41.

The costs are borne by the Tax and Customs Authority.

Thus decided and signed in the city of Lisbon on …2016.

The Arbitrator-President,

Dr. Jorge Manuel Lopes de Sousa

The Arbitrator-Member,

Prof. Doctor Paulo Jorge Nogueira da Costa

The Arbitrator-Member,

Dr. Pedro Galego