Unit-Linked Insurance Profits and IRC Article 51 Deduction: CAAD Arbitral Decision 268/2015-T

ARBITRAL AWARD

The Arbitrators José Poças Falcão (Presiding Arbitrator), António Lobato das Neves and Diogo Feio, appointed by the Ethics Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, agree as follows:

ARBITRAL AWARD

I REPORT

The company "A…, S.A.", [formerly named "B…, SA"] with Tax Identification Number …, with registered office at Avenida…, no. … –…º in Lisbon, hereinafter referred to as the Claimant, filed a request for constitution of an arbitral tribunal, with a view to declaring the illegality of the additional corporate income tax assessment for the year 2012, carried out following an action by Tax Inspection, specifically contesting the positive adjustment to the taxable income in the amount of €204,236.88 relating to the deduction under Article 51 of the Corporate Income Tax Code (CIRC) of profits distributed to "unit-linked" insurance funds.

The Claimant alleges, in summary, the following:

a) The Arbitral Tribunals have already ruled in process no. 65/2014-T on the issue that is the subject matter of the present case, concluding unequivocally in the sense of the application of the mechanism provided for in Article 51 of the CIRC in the sphere of the Insurance Company to income arising from the commercialization of "unit-linked" products;

b) Capitalization insurance "unit-linked" consists of an insurance policy, expressed in units of account, whose profitability or appreciation is indexed to the appreciation of an underlying asset chosen by the Claimant, which may be shares or participation units held by the same;

c) The insurance products in question constitute a life insurance product associated with an investment portfolio whose ownership belongs to the Claimant;

d) The policyholder is not the owner of the underlying assets of the investments made by the insurance company, and it is unequivocal that the "autonomous funds" - where the Insurance Company encompasses the aforementioned underlying assets - are owned by the Claimant;

e) As stated in the award rendered in process no. 65/2014-T, "only at the end of the contract is there income for the beneficiary. Until then the assets of the counterparty to the insurance company remain unchanged, untouched. The variations in the value of the unit of account, which were subject to mandatory provisioning carried out by the insurance company, have no influence on the assets of the counterparty to this. They do not, in short, give rise to any income for the holder of the "unit-link" product;

f) As also stated in the aforementioned award, "in the event of insolvency of the insurance company, the counterparties in "unit-link" contracts will have no right whatsoever either over the assets acquired by the insurance company by virtue of their contract, or over the income that may have been generated and distributed to the insurance company by those assets";

g) The Claimant is the sole owner of the investments made by it, regardless of whether the risk of the products is assumed by the policyholder or by the insurance company itself; the risk is part of the product itself and customers receive (or do not receive) income from the subscribed product and not income arising from shares, bonds or other investments that the Insurance Company may choose to make;

h) The "unit-linked" insurance products have always involved the constitution of technical provisions, in order to safeguard future payments to be made to their respective subscribers;

i) With the approval of the new Chart of Accounts for Insurance Companies (PCES07) in 2008, operations in which the investment risk is borne by the policyholder (such as "unit linked" insurance) ceased to require the accounting of technical provisions in Class 3 of the Chart of Accounts, with the same amounts being mandatory registered in a Class 4 account - Other Assets and Liabilities, as liabilities in the sub-account "45 - Other financial liabilities;

j) The Claimant disagrees with the understanding of the Tax Authority that Article 51 of the CIRC is not applicable to income arising from investments in unit-linked insurance;

k) The Claimant specifically contests that "only the commissions charged for the management of unit-linked products (…) affect/alter the accounting result of the insurance company, given that: (i) the distributed profits, (ii) the appreciations, and (iii) depreciations, relating to investments to which are indexed the products in which the investment risk is borne by the policyholder, although they may be recorded in accounts of Income and Gains (…) are entirely offset by an entry recorded in an account of Costs and Losses (…) such that the accounting result of the insurance company (…) is influenced only by the value of the management commissions charged";

l) Profit, which is the taxable base of IRC, corresponds to the difference between income and costs of the fiscal year, and since the Claimant is the owner of the financial assets, the income generated by the assets held in the autonomous funds is included in its taxable base;

m) Distributed profits are considered income or gains, both from the fiscal and accounting perspective, a fact not contested and even assumed by the Tax Authority in the final inspection report;

n) The sole requirement provided for in Article 51 of the CIRC is the inclusion in the taxable base, the fact that the accounting income arising from the income generated by the Claimant's equity investments is entirely offset by a corresponding cost not excluding such income from the insurance company's taxable base;

o) The fact that such income is inseparably associated with an accounting cost (or a provision) cannot distort the qualification of the same as income and its relevance for the purpose of determining the final profit of the fiscal year;

p) That is, there is no accounting operation of cancellation of the income, as the objective of the provision or cost is to account for and fiscally recognize the responsibilities of the insurance company;

q) Furthermore, if the Claimant's sole income were a "commission" for the management of the portfolio associated with unit-linked insurance, then the PCES would have established that the income to be recorded would be the "commission" and not the totality of income derived from equity investments associated with investment funds;

r) Article 51 of the CIRC does not require that income affect the taxable base but rather that it be included in the taxable base, and if the legislator's objective was to limit the deduction for relief from economic double taxation as intended by the Tax Authority, it would have adopted the allocation method and not the exemption method;

s) Thus, with the aforementioned income included in the taxable base, the Claimant is entitled to relief from economic double taxation by virtue of the fulfillment of the requirements provided for in Article 51 of the CIRC;

t) The Claimant equally contests the understanding of the Tax Administration that "the income obtained with those shares, being allocated to operations in which the investment risk is borne by the policyholder, is not allocated in the PCES07 to technical provisions/technical reserves";

u) The fact that the amounts cease to be recorded in accounts specifically named "provisions" in no way affects the classification under no. 2 of Article 51 of the CIRC, especially since that provision does not refer to "technical provisions" but to "technical reserves";

v) Even if it were understood that the income earned by the Insurance Company would not be applied to technical reserves, it would always be necessary to equate unit-linked contracts to investment contracts marketed by investment companies, which benefit from the mechanism of relief from economic double taxation;

w) As stated in the award rendered in Process no. 65/2014-P, "such companies will make investments on behalf of their clients, receiving the corresponding returns, which, pursuant to the investment contract, will be directed to them, with the economic income of the companies in question corresponding to the commissions they charge. Just as occurs with insurance companies in unit-linked contracts".

Response

In the Response, the Tax Authority presented its understanding that "the economic benefit of the arbitral request corresponds to the amount of the assessment determined, to the extent that the same results from the adjustment of €204,236.88, calculated as follows:

Adjustment to taxable profit €204,236.88
Deduction of tax losses €153,177.66
Amount after tax losses €51,059.22
Tax at 25% €12,764.81
Municipal surcharge at 1.5% €3,063.55
State surcharge at 5% €10,211.84
Total tax + surcharges €26,040.20

The Tax Authority concretized this disagreement alleging, in summary:

a) Operations in the life insurance branch in which the investment risk is borne by the policyholder are not in reality insurance contracts, as they do not have that nature and are not legally classifiable in that category, as results from paragraphs B8 and B19 of Appendix B of the International Financial Reporting Standard (IFRS 4);

b) Contrary to what the Claimant argues, income arising from "unit-linked" products does not influence the accounting result of the fiscal year to which it relates, as the effect of such income on the result will be non-existent if it is neutralized through the recording of the same amount in an account of expenses or losses;

c) The sole case in which the legislator makes its application dependent from the outset on the assumption that income is included in the taxable base is the regime of no. 1 of Article 51 of the CIRC;

d) And one must ask why this requirement exists when, by virtue of Article 17, accounting must reflect all operations carried out by the taxpayer;

e) The income recorded by the Claimant (distributed profits) arising from unit-linked products does not form part of the accounting result or taxable base of the insurance company, as if the recording of income is "inseparably associated" (as stated in Article 135 of the Initial Petition) with the recording of an expense or loss for the same amount, the effect on accounting profit is nil and, therefore, they cannot be considered as included in the taxable base;

f) It is completely irrelevant to this issue the argument that the management of investments is outside the reach of policyholders, that ownership belongs to the insurance company and that the income associated with the portfolio is income of the insurance company, as the point at issue is that at the same time they are recorded as income they are also recorded as expenses of the insurance company and, therefore, in the sphere of this entity, any occurrence of economic double taxation of such income is eliminated;

g) If an insurance company received dividends in the amount of 1,000 relating to shares allocated to the portfolio of unit-linked products, recorded that amount in account 74 - Investment Income and recorded the same exact amount in the corresponding cost account (65 or 67), then, by way of theoretical hypothesis, if that insurance company had not carried out any other operations, its accounting result would be nil;

h) Under these circumstances, how can it be argued that dividends form part of the taxable base or that there is economic double taxation, if the income is not reflected in the accounting result ("profit")?

i) Moreover, even if it were considered that the income was included in the taxable base, it would still not be applicable in the case at hand the provision of no. 1 of Article 51 of the CIRC, because the requirements of sub-paragraphs a) to c) of that provision are not met;

j) The Claimant cannot benefit from the regime provided for in no. 2 of Article 51 of the CIRC, as, beyond this provision presupposing the inclusion of income in the taxable base - which is not the case, as has been demonstrated - what is at issue here are not income from equity investments in which the insurance companies' or mutual insurance companies' technical reserves have been applied;

k) As stated in the respective explanatory note, the PCES07 brings together in Class 3 - Technical Provisions "all technical provisions constituted, in accordance with the applicable regulations, to meet the commitments arising from insurance contracts", in which there is significant insurance risk transferred from the policyholder to the insurance company;

l) In this list of provisions there is none intended to meet financial risks arising from investment contracts, such as unit-linked, in which the investment risk is borne by the policyholder;

m) In class 4 - Other assets and liabilities, in a third-party account, account 45 - Other financial liabilities, is found the sub-account 45.0 - financial liabilities of the deposit component of insurance contracts and insurance contracts and operations considered for accounting purposes as investment contracts;

n) By requiring that operations in which the investment risk is borne by the policyholder - unit-linked - as of 2008 be reflected in the aforementioned account 45.0, the new PCES thus introduced an improvement in the chart of accounts, better reflecting the substance of the underlying reality and contributing to achieving a true and fair view of the assets, financial position and results of the insurance company;

o) If, on the one hand, we have in Assets the underlying assets that make up the Unit Linked product, we have, on the other hand, in Liabilities the responsibility of the insurance company to the investor (the "debt" to the policyholder), since the investment is entirely realized on the account and risk of the latter;

p) Thus, since in the new PCES there is no longer any constitution of provisions or technical reserves with respect to the "unit-linked" financial product, in which the investment risk is borne by the policyholder, no. 2 of Article 51 of the CIRC is not applicable.

Final Submissions of the Claimant

In the Final Submissions, the Claimant reiterated the arguments presented in the Initial Petition, which are summarized below:

a) The autonomous funds relating to unit-linked insurance are owned by the Claimant and the existence or not of the risk forms part of the product itself;

b) Numerous are the contracts in which the risk runs for the account of the policyholder in which the underlying assets (and their respective income) are owned by the investment vehicles - by way of example, the participant who invests in participation units of an investment fund that purchases bonds;

c) Being the Claimant the owner (legally and economically) of the financial assets to which the units of account are indexed - which form part of its assets - the income generated by the assets held in the autonomous funds, properly recorded as such in its accounting and forming part of the accounting result of the fiscal year, are included in its taxable base;

d) There is no accounting operation of cancellation of the income recorded in the accounting by the fact that the Claimant is legally bound to record the corresponding cost, that is, the technical provision, which does not distort the nature of the income or its inclusion in the taxable base, being this the sole criterion provided for in Article 51 of the CIRC;

e) It is not relevant for the application of the aforementioned article the distinction between products qualified as Insurance Contracts (under IFRS 4) as opposed to financial instruments classified under IAS 39;

f) Indeed, there are other products classified in IAS 39 (capitalization with profit participation) or even IFRS 4 products (capitalization with profit participation) in which the recording of income in gains may be neutralized by items of expenses and losses, with respect to which the deduction of Article 51 of the CIRC has been accepted by the Tax Authority;

g) With respect to the Tax Authority's example of the insurance company that receives 1,000 in dividends, the Claimant counters with the example of the company that sells 1,000 of merchandise and brings another 1,000 to costs, not affecting the taxable base, but argues that the point under discussion is not whether this operation (as in the case at hand) generates a profit, but rather whether the income is brought to taxation, a diametrically opposite question;

h) In the example presented, the income went to the taxable base but was neutralized by costs of the same amount, which occurs exactly, in the case at hand, in the Claimant's view;

i) The Claimant does not agree with the Tax Authority's understanding that no. 2 of Article 51 of the CIRC does not apply in the case at hand, because the amounts currently recorded in Class 4 are the same as those recorded until 2008 under the PCES94 in Class 3 of technical provisions, and it is incorrect to assert that with the entry into force of PCES07 the income from equity investments of operations in which the investment risk is borne by the policyholder ceased to be applied or recorded in technical reserves;

j) We are faced with a mere change of accounting record account class, which in no way altered the Claimant's legal obligations, nor the criteria and amounts recorded in these items, based on the same terms and conditions expressly provided in the Regulation governing insurance activity;

k) With reference to no. 2 of Article 51 of the CIRC to "technical reserves", the spirit underlying the aforementioned provision is to encompass all situations in which, prudentially, it is determined that the insurance company reserves earnings, which occurs exactly in the present case, as stated in the Award in process no. 65/2014-T;

l) Furthermore, even if it were understood that the income earned by the Insurance Company would not be applied to technical reserves, it would always be necessary to equate unit-linked contracts to investment contracts marketed by investment companies, which benefit from the mechanism of relief from economic double taxation.

Final Submissions of the Tax Authority and Customs Authority

In the Final Submissions, the Tax Authority (TA) also reiterated the arguments presented in the Response, as summarized below:

a) Contrary to what appears to derive from the Claimant's submissions, the Tax Authority does not base its position on the fact that there is a direct relationship between the income generated by the financial applications made by the insurance company and those invested in unit-linked products, when, in reality, the analysis of the verification of the requirement to which no. 1 of Article 51 of the CIRC subordinates the exercise of the right to relief from economic double taxation centers exclusively on the sphere of the insurance company;

b) The PCES07 imposes on insurance companies the following accounting entries, upon the receipt of dividends relating to assets allocated to unit-linked contracts:

• Entry to the debit of account 21 (Investments relating to the Deposit Component of Insurance Contracts and Insurance Contracts and Operations considered for accounting purposes as Investment Contracts), by credit entry to account 74 (Investment Income)

• simultaneously, for the increase in liabilities, debit entry to account 67 (Losses and Expenses in Financial Liabilities) by credit entry to account 45 (Other Financial Liabilities of the Deposit Component of Insurance Contracts and Insurance Contracts and Operations considered for accounting purposes as Investment Contracts);

c) These movements are inseparable, as a result of the increase in the value of the assets allocated to unit-linked contracts implying a corresponding increase in the responsibilities of the insurance company to the investors;

d) It is the combined effect of these accounting entries relating to unit-linked contracts that causes the receipt of income generated or losses incurred by the same not to influence the accounting result of the insurance company;

e) There does not exist, in fact, any form of double taxation of the income arising from distributed profits, in the sphere of the insurance company, to the extent that they are not reflected in its respective accounting and tax result;

f) As was explained in the Response, the PCES07 confers an accounting treatment on unit-linked contracts different from that contained in the PCES94, better differentiating them from insurance contracts and, as a consequence, the underlying assets and associated income cannot be considered as "income from equity investments in which the insurance companies' or mutual insurance companies' technical reserves have been applied", as provided for in no. 2 of Article 51 of the CIRC.

Preliminary Determination

The Arbitral Tribunal is materially competent and is duly constituted, in accordance with Articles 2, no. 1, sub-paragraph a), 5 and 6, no. 1, of the Rules of Arbitral Tribunals.

The parties have legal capacity and standing, are legitimate and are legally represented, in accordance with Articles 4 and 10 of the Rules of Arbitral Tribunals and Article 1 of Ordinance no. 112-A/2011, of March 22.

The case does not suffer from any nullities.

All things considered, a decision on the merits of the claim must be rendered.

II GROUNDS

Proven Facts

There is no disagreement between the parties regarding the facts underlying the case sub judice.

As relevant to the decision, the following facts are considered proven:

a) On January 16, 2015, an additional corporate income tax assessment no. 2015… was issued, in the amount of €422,711.04, relating to adjustments to the taxable income for the year 2012, among which was the increase of €204,236.88 relating to the deduction that had been made under Article 51 of the CIRC of profits distributed to "Unit-linked" Funds held by the Claimant;

b) The Claimant's corporate purpose is the production and commercialization of insurance products of the life branch, among which are capitalization insurance, also called "Unit-linked", which consist of insurance policies, expressed in units of account, whose profitability or appreciation is indexed to the appreciation of an asset chosen by the insurance company;

c) The policyholder or investor delivers to the insurance company a premium to which it corresponds a certain number of units of account, with the premiums received from the investors being applied to the acquisition of financial assets and recorded by the insurance company in its Assets, although allocated to a "Fund";

d) The value of each unit of account is determined by dividing the fund's assets by the number of units of account issued;

e) The insurance company acquires the assets that serve as the basis for determining the value of the units of account into which the amounts received from investors are converted and carries out the professional management of those assets;

f) The insurance company undertakes to pay, upon redemption or at the end of maturity and except when there is a guarantee of payment of minimum amounts, an amount corresponding to the value of the units of account on the date of that event, minus any commissions;

g) The insurance company records in its liabilities the responsibilities assumed towards the investors, as a counterpart to the assets allocated to the "autonomous funds" of the "Unit-linked" products in which the deliveries made are invested;

h) The amounts of those responsibilities reflect the variations in values occurring in those assets and the income generated by them, e.g. dividends, interest, reflected in the variation of the units of account;

i) The assets that generate the income reflected in the units of account belong to the insurance company;

j) The policyholder of "Unit-linked" insurance does not receive interest nor is the owner of any shares or other securities, but has an ideal share of future income, which is indexed to the assets held by the insurance company;

k) The Claimant organized its accounting in the fiscal year 2012 in accordance with the Chart of Accounts for Insurance Companies (PCES07);

l) The PCES07 imposes on insurance companies the following accounting entries, upon the receipt of dividends relating to assets allocated to unit-linked contracts:

• Entry to the debit of account 21 (Investments relating to the Deposit Component of Insurance Contracts and Insurance Contracts and Operations considered for accounting purposes as Investment Contracts), by credit entry to account 74 (Investment Income)

• simultaneously, for the increase in liabilities, debit entry to account 67 (Losses and Expenses in Financial Liabilities) by credit entry to account 45 (Other Financial Liabilities of the Deposit Component of Insurance Contracts and Insurance Contracts and Operations considered for accounting purposes as Investment Contracts);

m) The Institute of Insurance of Portugal understands that "only the management and subscription charges constitute effective income of the insurance company, with the overall income generated by the investments allocated to unit-linked having no impact in terms of the company's results".

Facts Not Proven

There is no appearance of the existence of essential facts not proven given the subject matter of the claim.

Motivation

With regard to the factual matters, the Tribunal does not need to rule on everything that was alleged by the parties, being incumbent upon it, rather, the duty to select the facts that matter or that are relevant to the decision and to distinguish proven facts from unproven ones [see Article 123, no. 2, of the Portuguese Code of Tax and Customs Procedural Law and Article 607, no. 3 of the Portuguese Code of Civil Procedure, applicable by virtue of Article 29, no. 1, sub-paragraphs a) and e), of the Rules of Arbitral Tribunals].

Thus, having weighed this relevance, the Tribunal's conviction regarding the formation of the factual framework above is based on the documents and administrative procedure file incorporated in the court file without objection and on the position of the parties reflected in their respective pleadings and revealing the absence of any controversy as to the pure materiality of the facts described.

II GROUNDS

The Law

The subject matter of the dispute is the discussion of the legality (violation or not of Article 51 of the CIRC) of the additional corporate income tax assessment for 2012 resulting from the failure to consider as deductible from the taxable income, for IRC purposes, the amount of €204,236.88 of profits allocated to insurance products denominated "unit linked".

The arguments of each of the parties are reflected in their pleadings and those of the Tax Authority are also reflected in the administrative procedure file and in its respective report attached to the court file.

It should be noted that the Courts (including, naturally, arbitral tribunals) do not need to assess all arguments formulated by the parties as has been repeatedly stated for a long time by the Courts (see, inter alia, Decision of the Plenary of the 2nd Section of the Supreme Administrative Court, of June 7, 1995, case 5239, in Official Journal - Appendix of March 31, 1997, pages 36-40 and Decision of the Supreme Administrative Court - 2nd Section, of April 23, 1997, Official Journal/Appendix of October 9, 1997, page 1094), but only the issues raised save in the case of legal limitations of that duty (e.g., if any of the exceptions is deemed successful, the assessment of the subsequent exception or exceptions in the order of assessment will be precluded. In fact, each of the exceptions, by itself, will be an insurmountable obstacle to the assessment of the merits of the case, justifying a decision of dismissal of the action [Article 89, no. 4, of the Portuguese Code of Administrative Procedural Law, subsidiarily applicable by virtue of the provision of Article 29, no. 1, sub-paragraph c), of the Rules of Arbitral Tribunals], so that, should one of them proceed, there will be no utility in assessing any other).

Let us then look at the issue.

Insurance contracts linked to investment funds are commonly known as "unit-linked". These are life insurance contracts whose policy balance is expressed through units of account, representative of autonomous funds constituted by assets of the insurer or by participation units of one or more investment funds and whose profitability depends on the evolution of the value of those assets.

Investment-linked insurance is qualified as a structured savings capture instrument.

The underlying assets that make up one or more autonomous funds that compose the "unit-linked" - duly segregated in the insurance company's patrimonial sphere - are varied and allow exposure to different types of risk.

Among the possible underlying assets of investment funds, may be:

1. Financial instruments, such as, for example, shares and bonds;

2. Financial derivatives or investment funds, such as, for example, so-called hedge funds;

3. Commodities, including, among others, precious metals, cereals or oil;

4. Exchange rates or interest rates.

Investment-linked insurance contracts may take on different modalities, the following being noteworthy:

· Determined or undetermined duration;

· Continuous or periodic defined subscription period commercialization;

· Single or periodic, scheduled, or extraordinary payments;

· With or without capital and/or income guarantee;

· With or without scheduled redemptions during the period.

In "unit linked" there frequently coexists an element of risk borne by the insurance company, namely, the existence of a portion of guaranteed capital in case of death of the policyholder, and the existence of a financial component whose investment risk is borne, at least partially, by the policyholder.

Unit-linked have the market risk of the assets that make up the fund or funds or the investment fund or funds, including price risk, interest rate risk and currency risk.

The value of those assets may decrease by changing the value of the unit of account and causing loss of invested capital.

In certain products there is an impossibility of proceeding to redemption, during a considerable period of time or penalties are applied for early redemption, either by means of commissions, or by means of loss of guarantee of invested capital.

Counterparty risk or credit risk is associated with the financial capacity of the counterparties or issuers of the assets held by the fund or funds or the investment fund or funds.

There is the risk of conflicts of interest due to coincidence or links between the various entities involved in the creation of the product, for example, insurance company and issuer of assets that make up the autonomous fund, and the respective marketer.

There is also legal risk associated with possible changes in the legal regime of taxation or transfer and exercise of rights.

The core of the problem, as configured by the Tax Authority, lies in the circumstance that the income derived from the ownership of equity investments and in investment funds, in the context of that type of contracts (unit linked), by force of the prudential norms that bind the insurance activity, have a correspondence in the mandatory establishment of provisions of the same amount, relating to the responsibilities assumed with the counterparty in those contracts, which, in practice, would translate into the circumstance that, in themselves, those aforementioned income would not increase the taxable income of the insurance entity.

From this factual framework it follows, in the opinion of the Tax Authority, the non-applicability of the provision of Article 51, nos. 1 and 2), of the CIRC as well as the provision of sub-paragraph d) of no. 2 of Article 90 of the CIRC.

The Claimant, for its part, understands that there is no legal or factual obstacle to the applicability of the provisions indicated.

Let us examine.

Article 51 of the CIRC provides (in the wording in force in 2012):

Article 51

Relief from economic double taxation of distributed profits

1 - In determining the taxable profit of commercial or civil companies under commercial form, cooperatives and public enterprises, with registered office or effective management in Portuguese territory, the following deductions are made of income, included in the taxable base, corresponding to distributed profits, provided that the following requirements are met:

a) The company distributing the profits has its registered office or effective management in the same territory and is subject and not exempt from IRC or is subject to the tax referred to in Article 7;

b) The beneficiary entity is not covered by the fiscal transparency regime provided for in Article 6;

c) The beneficiary entity directly holds a participation in the capital of the company distributing the profits of not less than 10% and this has remained in its ownership, uninterrupted, during the year preceding the date of putting at the disposal of the profits or, if held for less time, provided that the participation is maintained for the necessary time to complete that period. (As amended by Law no. 55-A/2010 of December 31)

2 - The provision in the preceding number is applicable, regardless of the percentage of participation and the period in which this has remained in its ownership, to income from equity investments in which the technical reserves of insurance companies and mutual insurance companies have been applied, and also to income from the following companies:

a) Regional development companies;

b) Investment companies;

c) Financial brokerage companies.

3 - Notwithstanding the provision in no. 1, the regime established therein is applicable, under the terms prescribed in the preceding number, to general agents of foreign insurance companies, as well as to permanent establishments of resident companies of another Member State of the European Union and the European Economic Area that are equivalent to those referred to in the preceding number. (As amended by Law no. 3-B/2010 of April 28)

4 - The provision in no. 1 is equally applicable, provided that the conditions referred to therein are met, to the value attributed to the partnership, to the partner constituted as a commercial or civil company under commercial form, cooperative or public enterprise, with registered office or effective management in Portuguese territory, regardless of the value of its contribution with respect to income that has been effectively taxed, distributed by partners resident in the same territory.

5 - The provision in nos. 1 and 2 is also applicable when an entity resident in Portuguese territory holds a participation, under the terms and conditions referred to therein, in an entity resident in another Member State of the European Union, provided that both entities meet the requirements established in Article 2 of Council Directive no. 2011/96/EU, of November 30. (As amended by Law no. 66-B/2012 of December 31)

6 - The provision in nos. 1 and 5 is equally applicable to income, included in the taxable base, corresponding to distributed profits that are attributable to a permanent establishment, situated in Portuguese territory, of an entity resident in another Member State of the European Union or the European Economic Area, in the latter case provided that there is an obligation of administrative cooperation in the tax field equivalent to that established within the European Union, that holds a participation, under the terms and conditions referred to therein, in an entity resident in a Member State, provided that both such entities meet the requirements and conditions established in Article 2 of Council Directive no. 2011/96/EU, of the Council, of November 30, or, in the case of entities of the European Economic Area, equivalent requirements and conditions. (As amended by Law no. 66-B/2012 of December 31)

7 - For the purposes of the provision in nos. 5 and 6:

a) The definition of resident entity is that which results from the tax legislation of the Member State in question, without prejudice to what is established in conventions intended to avoid double taxation;

b) The participation in capital criterion referred to in no. 1 is replaced by that of holding voting rights when this is established in a bilateral agreement.

8 - (Repealed by Law no. 55-A/2010, of December 31, with effect from the fiscal period beginning after December 31, 2010)

9 - If the holding of the minimum participation referred to in no. 1 ceases before the completion of the one-year period, the deduction that has been made must be corrected, without prejudice to the consideration of the credit for double taxation at the international level that may be due, under the terms of the provision of Article 91. (As amended by Law no. 55-A/2010 of December 31)

10 - The deduction referred to in no. 1 is only applicable when the income derives from profits that have been subject to effective taxation. (As amended by Law no. 55-A/2010 of December 31)

11 - The provision in nos. 1 and 2 is equally applicable when an entity resident in Portuguese territory holds a participation, under the same terms and conditions, in an entity resident in another Member State of the European Economic Area that is bound to administrative cooperation in the tax field equivalent to that established within the European Union, provided that both entities meet conditions equivalent to those established in Article 2 of Council Directive no. 2011/96/EU, of the Council, of November 30. (As amended by Law no. 66-B/2012 of December 31)

12 - For the purposes of the provision in nos. 5 and 11, the taxpayer must prove that the investee entity and, in the case of no. 6, also the beneficiary entity comply with the conditions established in Article 2 of Council Directive no. 2011/96/EU, of the Council, of November 30, or, in the case of entities of the European Economic Area, equivalent conditions, by means of a statement confirmed and authenticated by the competent tax authorities of the Member State of the European Union or European Economic Area of which it is resident. (As amended by Law no. 66-B/2012 of December 31).

And Article 90 of the CIRC provides:

Procedure and form of assessment

1 - The assessment of IRC is carried out as follows: (As amended by Law no. 3-B/2010 of April 28)

a) When the assessment is to be made by the taxpayer in the statements referred to in Articles 120 and 122, it is based on the taxable income contained therein;

b) In the absence of submission of the statement referred to in Article 120, the assessment is made by November 30 of the following year to that to which it relates or, in the case provided for in no. 2 of the said article, by the end of the 6th month following the end of the period for submission of the statement mentioned therein and is based on the amount of the minimum monthly remuneration or, when greater, the totality of the taxable income of the closest fiscal year that is determined; (As amended by Law no. 3-B/2010 of April 28, taking effect from January 2011, with regard to the simplified regime - no. 2 of article 92 of the law referred to).

c) In the absence of assessment under the preceding sub-paragraphs, the same is based on the elements available to the tax administration.

2 - To the amount determined under the preceding number the following deductions are made, in the order indicated:

a) The one corresponding to international double taxation;

b) The one relating to tax benefits;

c) The one relating to the special payment on account referred to in Article 106;

d) The one relating to tax withholdings not capable of compensation or reimbursement under the terms of the applicable legislation.

3 - (Repealed by Law no. 3-B/2010 of April 28, taking effect from January 2011, with regard to the simplified regime - no. 2 of article 92 of the law referred to).

4 - To the amount determined under no. 1, with respect to the entities mentioned in no. 4 of Article 120, the deduction relating to tax withholdings is only to be made when these have the nature of tax on account of IRC.

5 - The deductions referred to in no. 2 relating to entities to which the fiscal transparency regime established in Article 6 applies are imputed to their respective members in the terms established in no. 3 of that article and deducted from the amount determined based on the taxable income that has taken into account the imputation provided for in the same article.

6 - Where the special regime for taxation of groups of companies applies, the deductions referred to in no. 2 relating to each of the companies are made in the amount determined with respect to the group, under the terms of no. 1.

7 - From the deductions made under sub-paragraphs a), b) and c) of no. 2 no negative value can result.

8 - To the amount determined under sub-paragraphs b) and c) of no. 1 only deductions are made of which the tax administration has knowledge and which can be made under the terms of nos. 2 to 4.

9 - In cases where the provision of sub-paragraph b) of no. 2 of Article 79 applies, assessments are made annually based on the taxable income determined provisionally, and, in relation to the assessment corresponding to the taxable income for the entire assessment period, the difference ascertained is to be collected or cancelled.

10 - The assessment referred to in no. 1 may be corrected, if necessary, within the period referred to in Article 101, collecting or cancelling the differences ascertained.

The adjustment made by the Tax Authority and which is disagreed with by the Insurance Company Claimant, results from the inclusion in the deduction made to the IRC taxable income of income from the aforementioned securities allocated to "unit linked" portfolios which, having not affected the taxable base, would not meet the conditions expressly provided for to benefit from the deduction relating to relief from economic double taxation of distributed profits, provided for in the aforementioned Article 51 of the CIRC.

The matter in question was the subject of a detailed and relevant study by Saldanha Sanches and João Taborda da Gama, published in the journal Fiscalidade, in the year 2008, already cited in the Arbitral Award rendered in process CAAD no. 65/2015-T that will follow very closely.

After analyzing the economic and legal framework of the type of contracts in question ("unit-linked insurance") in terms that coincide, broadly speaking, with those briefly outlined above, these authors conclude, pointing out a characteristic of such contracts, essential for the understanding of the matter at hand, which is the circumstance that the insurance company "does not deliver the units of account, which have no existence or value outside of this relationship. It delivers what it is obliged to and what the insured has a right to - the value of the units of account, which constitutes the object of this legal relationship, that is, the amount in which its duty to perform consists."

That is: the primary/main obligation of the insurance company in the context of "unit-linked" contracts, is a sole, pecuniary obligation, of delivery of an amount liquidated as a function of the value that, at the moment of the event that extinguishes the contract, the unit of account has.

Accordingly, it is only at that moment, at the end of the contract, that there is income (emphasized in original) for the beneficiary, paid by the insurance company. Until then, it must be underlined, the assets of the counterparty to the insurance company remain unchanged, untouched. The variations in the value of the unit of account, which had corresponding mandatory provisioning carried out by the insurance company, have no influence on the assets of the counterparty to this. They do not give rise, in short, to any income for the holder of the "unit linked" product.

In the words of the same authors, "(…) insurance companies are not financial intermediaries, nor do they act on behalf of the insured (they are not agents, brokers, mandataries or commissioned agents). They act on their own account in the markets. Units of account are not participation units in funds, national securities of any other kind that belong to customers. They are mere national units of calculation (…)"

To understand that this is so, in any case, it suffices to note, immediately, that in the event of insolvency of the insurance company, without the respective contracts having matured, the counterparties in unit linked contracts will have no right whatsoever either over the assets acquired by the insurance company by virtue of their contract, or over the income that may have been generated and distributed to the insurance company by those assets. In such case (insolvency of the insurance company), the counterparties in unit linked contracts will have to present themselves as creditors of the insurance company, being paid in accordance with the applicable bankruptcy rules, by the totality of that company's assets, to the extent that is due to them, and not as a function of the contract that they concluded or their supposed "participation" in the assets accounted for as allocated to that contract.

Continuing with their analysis, the cited authors point out some other characteristics of the contractual regime in question, worthy of special note from the perspective that concerns us. Accordingly, "(…) from a practical point of view, it is also not to be excluded that, if not prohibited by the contracts, insurance companies do not even come to hold the indexing assets or do not sell them at the moment in which the contract with the customers ceases (…) ", adding that " (…) the duty of the insurance company at the event is always that of delivery of certain amounts, even if it does not acquire any assets, acquires less or different ones, or does not sell them (…)", evidencing in this way "(…) that unit-linked imply two types of legal relationship, different in almost all their elements."

It is thus clear, it is thought, that, both in legal as well as economic terms, there does not exist, in the context of the so-called "unit-linked insurance", any relationship between the subjects generating the income due by the insurance company's financial applications, and the customer of this holder of that product.

In this context, the authors have no doubts that the insured "(…) do not buy, do not sell, do not participate in losses, do not receive dividends. The subject, here, is the Insurance Company. The commercial obligations and rights are hers. Consequently, the active and passive tax obligations will be hers", so that "the income that it comes to obtain by being the holder of shares and participation units are gains subject to tax. Concretely, IRC", further stating that "when we assert that they are gains subject to tax, we want, of course, to assert that they are gains included in the taxable base, that is, subject to the fiscal regime globally considered and not just part of the regime. Thus, the entire regime of Article 22 of the [Portuguese Personal Income Tax Code] and the entire regime of IRC - including the mechanisms of relief from economic double taxation of Article 51 of the respective Code - are applicable to it."

As the cited authors further recall "(…) for the Corporate Income Tax Code, at the moment of defining the taxation base, there are no doubts that a distributed profit to the taxpayer is included in its taxable base, just as the income arising from the sale of merchandise, provision of a service or rental of real property." In this way, only full application will occur in these situations of Article 46 of the CIRC (now Article 51).

"If the insurance company could not relieve itself of the tax burdens that the fund or commercial companies had borne, it would have to pass on that burden to the indemnity to be paid to the insured. who would thus suffer double taxation: first, in the investment fund or in the legal entity and, then, at the moment in which it would be taxed in personal income tax for the indemnity it would receive", which "would annul the tax benefit that the legislator sought to grant to savings"

As the work being followed here refers, "the law structures a system that has its main beam in the tax neutrality of the insurance company that creates and manages the unit linked, providing that this, like any legal entity, is to be relieved of a series of tax burdens previously charged (tax withholdings and taxation of distributed profits), for the reason that downstream all those income will be taxed in the sphere of the insured as a natural person."

Indeed, "the provisions, by capturing profits that would otherwise be distributed, will result in the release of funds that will be invested in certain assets, with greater or lesser risk, with greater or lesser profitability. The question of greater or lesser risk of the insurance is a question distinct from the way more or less certain in which the investment can be made that will permit payment of future benefits of that insurance, which are always due regardless of the insurance company's concrete investment policy", as "if the insurance company makes a provision of 100, it can at the same time invest those 100 in a time deposit, in bonds, in shares or in any other assets whatsoever."

Finally, it should also be noted that Article 50 of the CIRC, in the wording resulting from Decree-Law no. 159/2009, of July 13, came in some way to clarify that, from the perspective of the legislator, the income resulting from assets "allocated to contracts in which the insurance risk is borne by the policyholder" contribute to the taxable profit of the insurance company.

Accordingly, by everything that has been stated above, it is understood that the additional corporate income tax assessment that is the subject of these proceedings lacks legal and factual support and therefore the requested annulment has merit.

Compensatory Interest

The Claimant cumulates with the request for annulment of the tax act that is the subject matter of these proceedings the request for condemnation of the Tax Authority to payment of compensatory interest.

In the case at hand, it is manifest that the illegality of the assessment act for which the Claimant paid is attributable to the Tax Administration, which, on its own initiative, carried it out without legal support.

Consequently, the Claimant is entitled to compensatory interest, under the terms of Article 43, no. 1, of the General Tax Law and Article 61 of the Portuguese Code of Tax and Customs Procedural Law.

Compensatory interest is due from the date of actual payment until full reimbursement to the Claimant of the amounts assessed, calculated on the basis of the amount actually paid at the legal rate, under the terms of Articles 43, nos. 1 and 4, and 35, no. 10, of the General Tax Law, Article 61 of the Portuguese Code of Tax and Customs Procedural Law and Article 559 of the Civil Code and Ordinance no. 291/2003, of April 8 (without prejudice to any subsequent changes in the legal rate).

III DECISION

The Arbitral Tribunal accordingly decides:

a) To uphold the arbitral claim filed and, as a consequence, annul the tax act that is the subject matter of these proceedings and condemn the Tax Authority to reimburse the Claimant for the tax paid, plus compensatory interest as set forth above; and

b) To condemn the Respondent to payment of the costs of the proceedings, in the amount of €4,284.00.

Case Value

The value of the case is fixed at €204,236.88, under the terms of Article 97-A, no. 1, a), of the Portuguese Code of Tax and Customs Procedural Law, applicable by virtue of sub-paragraphs a) and b) of no. 1 of Article 29 of the Rules of Arbitral Tribunals and of no. 2 of Article 3 of the Regulation of Costs in Arbitration Proceedings.

Costs

The amount of the arbitration fee is fixed at €4,284.00, under the terms of Table I of the Regulation of Costs of Arbitral Tribunal Proceedings, to be paid by the Respondent, given that the claim was entirely upheld, under the terms of Articles 12, no. 2, and 22, no. 4, both of the Rules of Arbitral Tribunals, and Article 4, no. 4, of the aforementioned Regulation.

§ Let notice be served.

Lisbon, January 29, 2016

The Collective Arbitral Tribunal,

José Poças Falcão
(Presiding Arbitrator)

Diogo Feio
(Member)

António Lobato das Neves
(Member)