Transfer Pricing in IRC: CAAD Ruling on Share Transactions Between Related Parties (275/2014-T)

ARBITRAL DECISION

I - REPORT

1. On 20-03-2014, the company A SGPS, S.A., NIPC ..., submitted a request for constitution of a collective arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as RJAT) having as its object the annulment of assessment no. 2013 ... and the reimbursement of the amount paid in the sum of €465,486.56 plus the respective indemnity interest, provided for in articles 43 of the LGT and article 61 of the CPPT.

2. Pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council appointed as arbiters of the collective arbitral tribunal the undersigned hereto, who communicated acceptance of the assignment within the applicable period, and notified the parties.

3. The tribunal is regularly constituted to hear and decide the subject matter of the proceedings.

4. The allegations supporting the Claimant's request for arbitral decision are, in summary, as follows:

4.1 The Claimant received the official assessment notice no. 2013 ..., relating to the year 2009, which determined tax to be paid in the amount of €465,486.56, with the voluntary payment deadline of 2014-01-17.

4.2 The assessment in question resulted from an internal inspection conducted on the 2009 fiscal year of the Claimant company herein.

4.3 The Claimant, on 29 December 2009, entered into several share transfer agreements, having thereby acquired shares of the following companies:

• B, SA (...) — hereinafter identified as B;
• C, SA (...)- hereinafter identified as C;
• D, SA (...) ― hereinafter identified as D.

4.4 In companies C and B, in December 2010, capital increases were carried out.

4.5 Subsequently, the Claimant proceeded to sell a substantial part of its participation in those companies to other shareholders of the same companies.

4.6 At the end of 2011, the Claimant had sold to the former shareholders a substantial part of its participation in the 3 companies, in a total of €3,025,851 (three million, twenty-five thousand, eight hundred and fifty-one euros).

4.7 The unit sale value corresponded to the unit value per share in the sale operation contested by the AT in December 2009.

4.8 The Claimant ceased to hold participation in the three companies, selling the remaining shares on 31/12/2012.

4.9 Although the sales operations initially took place at the end of 2009, they were conceived beforehand, with their owners intending to promote the joint sale of the companies, so as to obtain a substantially higher value than the separate sale of each of them.

4.10 In fact, it was the intention of its owners to sell the business associated with ... and ... (D), areas which at the level of international commerce were highly valued. Group E had a considerable position in Portugal and large international companies were interested in acquiring businesses in areas that had regional dimension, that is to say, that had considerable dimension.

4.11 However, the deterioration of the economic situation in Portugal made it impossible to proceed with the planned sales, since international investors lost interest in investing in Portugal.

4.12 This possibility being ruled out, A having decided that the area of activity of its subsidiaries would be the ... production business, decided to divest from the sectors of ..., ... and ..., which were the business areas of the 3 acquired companies.

4.13 Thus, it proceeded to the (re)sale, in two phases, of its participations: one at the beginning of 2011 and another in 2012.

4.14 In the first phase, without any gain or loss, since what motivated the sale of the participations was the restructuring of the group's activities and not the realization of gains. In the second phase, with minimal loss, since, having decided that it would divest these companies, there was no interest in declaring sale values that could never be paid, especially since the intention of this operation was to proceed with the repurchase by compensation of existing credits against the company, now Claimant.

4.15 These operations amount to a settlement of accounts between the alienating shareholders and the Claimant, which, not having received sums in fact at the time of the sale of the shares, consequently also received nothing in cash from the subsequent repurchases.

4.16 In light of these facts, the Claimant understands that the AT proceeded with an erroneous interpretation of the legal regime of transfer pricing, which triggered the subsequent unwarranted application of various legal norms, namely no. 4 of article 6 of the CIRS and article 15 of the Stamp Duty Code, and which resulted in the official assessment that is contested here.

4.17 In the procedure justifying the correction intended by AT, the AT invoked the existence of a violation of transfer pricing rules to justify its procedure.

4.18 That is to say, and according to the AT, having demonstrated that it was faced with a situation of special relationships between sellers and purchaser, it was justified to apply the transfer pricing regime.

4.19 However, even if one were to admit that it was a situation of transfer pricing, the fact of demonstrating a prerequisite for applying the regime does not relieve the AT of the obligation to verify the remaining prerequisites for application or to assure itself that it is applying the regime correctly.

4.20 Now, transfer pricing rules are rules intended to allow the AT to correct the taxable matter of this tax, the IRC and not any other. The obtaining of lower tax burden that is intended to be controlled is that of IRC ― and, eventually, the taxable profit under IRS of taxpayers who exercise a commercial, industrial or agricultural activity.

4.21 What resulted from the corrections made in the report prepared by the AT did not aim at the IRC of the Claimant, which is why it is understood that both the procedure adopted and the result achieved are unfounded and illegal.

4.22 In fact, no. 11 of article 63 of the CIRC is explicit in stating that what is at issue here is a correction within the scope of IRC which, when verified, leads to a corresponding correction also being made within the scope of the taxpayer who carried out the operation with the IRC taxpayer where the original correction took place.

4.23 Pursuant to article 3 of the CIRC, the basis of this tax consists of profit, whereby profit consists of the difference between the values of net assets at the end and beginning of the tax period, with the corrections established in this Code.

4.24 Taxable profit is an operational result of business activity, which, consequently, is determined only within the scope of businesses (note that this broader concept is different from the concept of legal entities), based on accounting and corrected for tax purposes.

4.25 As results from the understanding of an opinion of the General Directorate of Taxes, the corrections resulting from the regime of special relationships can only be applied to taxpayers (of IRS or IRC) who are taxed on the basis of determination of taxable profit determined on the basis of result of commercial activity, that is to say, profit determined through accounting (corrected in accordance with the CIRC).

4.26 Thus, it is only determined in businesses and natural persons within category B with organized accounting, as these are the only natural persons who determine taxable profit, by express reference to the IRC Code (article 32 of the CIRC).

4.27 The AT made an error regarding the legal and factual grounds by invoking wrong legal grounds, which constitutes a violation of law, a fact which is grounds for challenge, pursuant to article 99, paragraph c).

4.28 It is concluded that the assessment made by the AT lacks legal basis, insofar as the transfer pricing regime did not permit it to proceed in the manner it did, due to non-verification of its prerequisites.

4.29 The General Tax Law contains a general anti-abuse clause in its article 38, no. 2, which is a norm of substantive nature in which it is intended to establish the possibility of effecting the taxation of the act or legal transaction that would have been performed or concluded but for those purposes, instead of the act or legal transaction respectively performed or concluded for purposes of mere tax avoidance.

4.30 Through it, legal transactions considered abusive became susceptible to being declared fiscally irrelevant.

4.31 However, in order to apply this norm, it is necessary to verify its applicability to the tax facts that are intended to be recharacterized.

4.32 For that purpose, article 63, no. 1, of the Code of Tax Procedure and Process (C.P.P.T.) establishes the conditioning of the application of the general anti-abuse clause to the opening of a specific procedure, which determines (no. 7) that the application of this provision is prior and mandatorily authorized by the highest-ranking official of the service or by the official to whom he has delegated such competence.

4.33 Here it is verified that the AT, upon proceeding with the recharacterization of the factual matter, omits the opening of the procedure legally established by law (general anti-abuse clause) to consider the sale transactions established by the parties as ineffective, so as to effect taxation in accordance with the applicable norms in its absence, invalidating the production of the tax benefits obtained by the parties.

4.34 And this always without conceding on the fundamental issue here, which is: the parties intended to undertake and did undertake an operation of purchase and sale of participations, generating capital gains in the sphere of the shareholders.

4.35 The AT used as criteria for valuing the companies those provided for in article 15 of the CIS for purposes of assessment of stamp duty on gratuitous transfers, which establish different approaches depending on whether they are limited companies or joint-stock companies, respectively, no. 1 and no. 3 a).

4.36 The AT presents no grounds whatsoever regarding the valuation method used and proceeded with a regulatory valuation that, by law, does not apply to the matter of transfer pricing, having only as its premise the maximization of tax collection.

4.37 The methods used by experts in business valuation never consider as a possibility the use of the criterion established in the CIS, but rather other types of criteria.

4.38 The method used is a regulatory method, applied to another reality (gratuitous transfer and for purposes of indirect taxation) and which contravenes the provision in no. 2 of article 58 of the CIRC as to the objective to be achieved.

4.39 The operation of valuation of the companies undertaken by the AT is thus illegal and arbitrary:
i. For not respecting the current normative framework, namely the provision in article 58, the regime of Ordinance 1446-c/2000, the provision in article 77.0 of the LGT, as well as the provision in article 38.0 of the LGT;
ii. For in no diploma of the national or international accounting system being addressed the formula of company valuation used for purposes of the CIS.

4.40 This formula is not part of any accounting obligation, nor is it acceptable as a form of accounting measurement of any company in any situation. It is a formula not recognized and non-existent in accounting and auditing norms.

4.41 The AT does not take into account the reality underlying the sale operation nor the terms in which such operations actually unfolded in the concrete case and unfold in generic terms in the market.

4.42 The situation in question does not constitute, for purposes of company law, any advance payment on account of profits.

4.43 In fact, this would always imply an outflow of financial means from the company, and this outflow would be accounted for as a debit in account #26 ― Shareholders and as a credit in account #1 — Net Financial Means.

4.44 Now, the situation in question is not an advance of a value to the shareholder on account of future profit, but a debt to the shareholder on account of a past purchase and sale, with entry of an asset in the debtor and no outflow in monetary means (or other type) to the creditor/shareholder.

4.45 The assessment here contested, and whose annulment is claimed, was already paid by the Claimant.

4.46 It results from the provision in no. 1 of article 43 of the General Tax Law (LGT) the right to reimbursement through indemnity interest, calculated on the amount of the tax and corresponding interest wrongfully paid, and counted from the date of wrongful payment until the full reimbursement thereof.

4.47 In these terms, article 43 of the LGT, in recognizing the right to indemnity interest, merely indicates the cases in which it is to be presumed that taxpayers have the right to be indemnified by acts of the AT, considering that this right already pre-exists (and in other cases the taxpayer may have his right to indemnification recognized for damages that result to him from any act of the Administration, having only to bring the appropriate action to enforce civil liability and therein prove the damages suffered as being attributable to the action of the tax administration).

4.48 Now, the error affecting the assessment now challenged results from error of the services regarding the legal grounds (in effecting a tax assessment forbidden in accordance with legal provisions).

4.49 In these circumstances, the Claimant will have the right to be paid indemnity interest, within the deadline and under the conditions fixed in article 61 of the CPPT, that is to say calculated until the effective reimbursement of the tax wrongfully paid.

1. For its part, the Defendant Tax Authority and Customs Authority presented a reply, in which it defended itself in the following terms:

5.1 The operation under analysis is a characteristic case of violation of the Arm's Length Principle, primarily because the special relationships between buyer and seller alter what would be the equilibrium between what the seller accepts as price and what the buyer is willing to pay.

5.2 It is in accordance with this reality and bearing in mind the limitations of an impartial valuation of the participations, that the Tax Inspection Services compared the values resulting from the valuation with the prices actually practiced, using the methodology provided for in article 15 of the Stamp Duty Code.

5.3 Having determined the valuation value by the SIT, the difference was ascertained between the prices actually practiced and those which would normally be contracted, accepted and practiced between independent entities in comparable operations, which determined an excess totaled in €2,327,432.77.

5.4 Having discerned the factual panorama described above, the SIT concluded that the sale of social participations to A SGPS, S.A, is a related-party operation and the price practiced and the conditions accepted cannot be considered substantially identical to what would be practiced between independent entities.

5.5 What resulted in an excess practiced in relation to the price determined in accordance with the principles of arm's length and which this excess led to the individual assets of each seller being increased, and this increase was not subject to any taxation.

5.6 But this increase results and has its origin in resources of the company, which triggered a correction to the value of the operation for tax purposes, pursuant to the provision in no. 11 of article 58 and no. 2 of article 3 of Ordinance 1446-C/2001, of 21/12.

5.7 The taxation of these income was effected, pursuant to point 2 of paragraph a) of no. 3 of article 7 of the CIRS, that is to say by means of the withholding at source mechanism at the liberatory rate of 20% (article 71, no. 3, paragraph c) of the CIRS).

5.8 Which totals the amount of €465,486.56, by way of tax, owed, not withheld at source, and not remitted, and now attacked contentiously.

5.9 The present vexatio quaestio essentially turns on the interpretation that the Claimant makes of tax law, particularly of the transfer pricing regime, established in article 58 of the CIRC (current 63) in the wording in force at the date of the facts.

5.10 One of the fundamental principles governing transfer pricing in our Corporate Income Tax Code is the arm's length principle, around which a broad international consensus has formed on the understanding that its adoption allows not only to establish parity in tax treatment between enterprises integrated in international groups and independent enterprises but also to neutralize certain practices of tax evasion and to ensure the consequent protection of the domestic taxable base.

5.11 As to the normative basis, transfer pricing is established, at the date of the facts, in article 58 (current article 63) of the CIRC and is regulated by Ordinance 1446/C 2001, of 21 December.

5.12 The tax inspection services do not question the effectiveness of the sale but only the valuation of the shares and its violation in the light of the arm's length principle.

5.13 Thus, rather than the application of the general anti-abuse clause, in the manner defended by the Claimant, what was only appropriate, and thus proceeded the SIT, was the application of the transfer pricing regime.

5.14 For its part, in the case sub judice, the tax administration recognizes economic sense in the sales carried out, considering devoid of economic sense the price practiced, whereby only what was due to it was demonstration of the irrationality of the price practiced, namely by proof of its deviation in relation to market values.

5.15 Confining the analysis only to the price of sale of the shares, in the part in which it exceeded its expected value, when agreed between independent parties, it remained for the SIT to ascertain the real price, purging the inputs concerning the special relationships existing between related parties.

5.16 Normatively, paragraphs a) and c) of no. 4 of article 58 of the CIRC establish that special relationships exist in the following situations:

"It is considered that special relationships exist between two entities in situations in which one has the power to exercise, directly or indirectly, a significant influence on the management decisions of the other, which is considered verified, in particular, among:

a) An entity and the holders of its respective capital, or the spouses, ascendants or descendants thereof, who hold, directly or indirectly, a participation not less than 10% of the capital or voting rights;

c) An entity and the members of its governing bodies, or of any bodies of administration, management, direction or supervision, and respective spouses, ascendants and descendants".

5.17 At present, we find that the alienator F, his spouse G and his descendants, H and I, are shareholders who together hold control, with a participation of 85%, of the acquiring entity, A, SGPS, S.A, NIPC ....

5.18 And furthermore, the alienators F and G occupy, respectively the position of president and member of the acquiring entity.

5.19 For its part, the alienator K holds a participation of 15% in the acquiring entity, also belonging to its Board of Directors, where it occupies the position of member.

5.20 Taking into account the difficulty inherent in the valuation of a specific company, the legislator through article 15 of the Stamp Duty Code, stipulated that the value of the shares is that of the quotation on the date of transfer.

5.21 For, should it be otherwise, the adjustment at the level of transfer pricing would no longer be applicable, since it would be impossible to find a comparable that would convey the highest degree of comparability of a given social participation, insofar as all differ among themselves, not only at the level of balance sheet, but also in growth opportunities, market shares and position in the sector of activity, etc.

5.22 In the present case, the SIT proceeded with a quantification of the consideration that the Claimant would have paid (after withholding at source the corresponding amount) in a situation of absence of special relationships and compliance with the Arm's Length Principle.

5.23 It happens that, the price agreed on the purchase and sale of shares was clearly superior to what would have been practiced in a non-related operation.

5.24 Consequently, taking into account the transfer pricing regime, such excess cannot be considered as part of the vector of sale of the participations.

5.25 The action of the Tax Authority was governed by strict observance of the legal, constitutional and international and community law provisions to which it is bound.

5.26 It can never be considered that there was any error imputable to the services in the issuance of the assessment in question, an indispensable condition for condemnation in the payment of indemnity interest.

5.27 Furthermore, article 43 of the LGT only provides for the right to payment of indemnity interest, whereby there is also not in the present case any right to default interest.

1. On 10-10-2014, a meeting of the arbitral tribunal was held, pursuant to article 18 of the RJAT.

6.1 Witness examination was then proceeded with, with sound recording of the statements made, pursuant to no. 2 of article 118 of the CPPT, applicable ex vi paragraph a) of no. 1 of article 29.9 of the RJAT.

6.2 The Tribunal notified the Claimant and the Defendant to, in that order and in successive manner, submit written statements within 10 days, with the deadline for the Defendant to begin counting with notification of the joining of the Claimant's statements.

1. Both the Claimant and the Defendant submitted written statements in which they reiterated the positions expressed in their pleadings.

II – PROVEN FACTS

Based on the elements contained in the proceedings and in the administrative proceedings joined to the file, as well as the witnesses …, consultant, and …, ROC, the following facts are considered proven:

a) The Claimant, A SGPS, S.A, was subject to an internal inspection proposed by information dated 16 July 2013, in which, taking into account the analysis made, following a prior service order, to the process of acquisition from shareholders F and G, of shares in the companies B, SA (also designated B); C, SA (also designated C); D, SA (also designated D, and until 2009, J (p. 9 of the RIT), and verifying that this acquisition, in 2009, had been for a considerably high value, it was proposed the issuance of an internal service order for that company with extension to the year 2009 and partial scope of IRS withholding at source,

b) The service order was issued with date of 18/07/2013, with no. OI2… (PA 1, fls. 29 to 31), and the internal tax inspection action took place between that day and 01/10/2013 (PA 1, fls 5).

c) The Claimant initiated activity on 01/07/1995, in the form of limited company A Lda with share capital of €7,482.20 (Report of the Tax Inspection contained in the administrative proceedings, the contents of which are hereby reproduced, p. 5, Doc. no. 4 attached by the Claimant with the request and Administrative Process 1).

d) On 15 December 2009, an increase of its share capital to €50,000.00 was approved by corporate resolution, composed of 10,000 shares with nominal value of €5.00 each, and its transformation into a company with the denomination, A SGPS, S.A (article 24 Reply AT, p. 5 of RIT, Doc. no. 4 attached by the D. and PA 1, fls. 5 and 6).

e) The new joint-stock company was constituted by five shareholders, F, G, K, H and I, who held, respectively, 40%, 37.5%, 15%, 5% and 2.5% of the capital, with the Board of Directors composed of the three first, as president and members, respectively (RIT, fls. 6).

f) Four of the shareholders, holders of 85% of the capital, are linked by family ties (father, mother and two children) (p. 5 of RIT).

g) Each of the shareholders of A SGPS, S.A, transferred to this company, on 29 December 2009, social participations they held in the following companies: B, SA (also designated B); C, SA (also designated C); D, SA (also designated D, and until 2009, J (p. 9 of RIT).

h) By one of the contracts, F transferred the following lots of shares: 53,020 shares representing 40% of the share capital of B, SA (for the value of €974,632.35); 44,892 shares representing 44.89%, of the share capital of C, (for €1,301,868.00) and 12,033 shares representing 44.88% of the share capital of company D, SA (for €360,990.00 ), in a total of €2,637,490.35), and G transferred the following lots of shares: 45,838 shares, representing 35.03% of the share capital of B, SA (for €842,606.62), 39,904 shares, representing 39.90% of the share capital of C SA (for €1,157,216.00) and 10,696 shares, representing 40% of the share capital of D S.A (for €320,880.00), in a total of €2,320,702.62) (p. 10 of RIT).

i) It is provided in the contract that the value of the sale of the shares is fully paid and it is verified that the credit balance of the accounts of Other Debtors and Creditors relating to the sellers of the shares was being reduced by various payments over the years 2010 to 2013, with no payment being recorded in the year 2009.

j) As to F, a credit balance of €2,637,490.35 passed, between 2010 and 2012, to a credit balance successively of €2,336,265.17, €1,072,311.48 and €62,943.89, with debit entries being made of the values relating to the alienation of shares of A, verified in 2011 and 2012 (p. 10 of RIT) and as to G, a credit balance in the value of €2,320,702.62 was being reduced over the years 2010 and 2012, passed successively to a credit balance of €2,081,418.67, €1,149,334.71 and €53,809.66, with debit entries being made of the values relating to the alienation of shares of A, verified in 2011 and 2012.

k) H transferred the following lots of shares: 3,022 shares representing 2.22% of the capital of B, SA (for €55,500.00); and 136 shares representing 0.14% of the share capital of C S A (for €3,944.00), in a total of €59,444.00, it being provided in the transfer contract that the value of the shares was fully paid (RIT and PA 3, fls 111);

l) It is provided in H's contract that the value of the sale of the shares is fully paid and it is verified that the credit balance of the accounts of Other Debtors and Creditors relating to the sellers of the shares was being reduced by various payments over the years 2010 and 2011, with no payment being recorded in the year 2009.

m) The credit balance of the Account of Other Debtors and Creditors, relating to H, in the value of €59,444.00 passed to a credit balance of €57,789.59, on 2010-12-31, and €0.00 (zero), on 2011-10-19, with the debit entry being made of the value relating to the alienation of shares of A, verified in July 2011 (p. 11 RIT).

n) I transferred 1,511 shares representing 1.1% of the capital of B, SA (for €27,750.00) and 68 shares representing 0.07% of share capital in C ..., for the value of €1,972.00, in a total of €29,722.00, it being provided in I's transfer contract that the value of the shares was fully paid (p. 11 and 12 RIT and fls. 110, PA 3).

o) There is no record of any payment in 2009, but the credit balance of the Account of Other Debtors and Creditors, relating to I, initially in the value of €29,722.00, was being reduced over the years 2010 and 2011, passing to a credit balance of €28,894.80, on 2010-12-31, and €0.00 (zero), on 2011-10-19, with the debit entry being made of the value relating to the alienation of shares of A, verified in July 2011 (p. 12 RIT).

p) K transferred lots of shares representing: 12.53% of the share capital of B, SA (for €302,882.35); 14.98% of the share capital of C S A (for €434,420.00) and 14.96% of the share capital of company D, SA (for €120,330.00), in a total of €857,632.35, it being provided in the transfer contract that the value of the shares was fully paid (p. 12 RIT and fls. 108 and 109, PA3).

q) There is no record of any payment in 2009, but the credit balance of the Account of Other Debtors and Creditors, relating to K, initially in the value of €857,632.35 was being reduced over the years 2010 and 2011; with no payment being recorded in the year 2009, passed to a credit balance of €762,187.60, on 2010-12-31, and €0.00 (zero), on 2011-07-24, with the debit entries being made of the values relating to the alienation of shares of A for K verified in July 2011 (p. 12 and 13 RIT).

r) Also L, wife of K, transferred to A SGPS, on the same day 29 December, 1,768 shares of B for 8,840.00 and 20 shares of C for 580.00 (Request, no. 7 and PA3 fls. 108 and 109)

s) At the end of the process of acquisition of the above-mentioned shares, the Claimant became holder, at the end of 2009, of 100,000 shares of C, 121,636 shares of B and 26,740 shares of D (I, 8 of the Request).

No. of shares Nominal value Acquisition value
C 100,000 500,000 2,900,000.00
B 121,636 608,180 2,235,871.32
D 26,740 133,700 802,200.00
€5,938,071.32

t) After capital increase of companies C and B, the Claimant's ownership in the three aforementioned invested companies passed to have the following composition (I-10 of the request)

No. of shares Nominal value Acquisition value
C 120,000 600,000 3,000,000.00
B 152,046 760,230 2,387,921.32
D 26,740 133,700 802,200.00
€6,190,121.32

u) In 2011, the Claimant came to (re)sell the participations object of the acquisitions described above to the former shareholders (11 and 12 of the Request, not contested by the AT):

• On 24 July 2011, it transferred to shareholder K 114,025.00 shares of B, for €357,682.35, and 90,480 shares of C, for €450,000 and 4,011 shares of D, for €120,330.00.
• On 21/10/2011, it transferred to shareholder F, 24,404 shares of B, for €122,020.00 and 26,400 shares of C, for €132,000.00 and to shareholder G, 21,539 shares of B for €395,935.77 and 16,800 shares of C, for €487,200.00.

v) At the end of 2011, the Claimant had (re)sold to the aforementioned shareholders a substantial part of its participation in the 3 other companies, in a total of €3,025,851 (three million, twenty-five thousand, eight hundred and fifty-one euros) but maintained the following participation in the companies: 58,800 shares of C, 83,298 shares of B and 22,729 shares of D.

w) On 31/12/2012, the Claimant ceased to hold participation in any of the three companies B, SA (B), C, SA (C) and D SA (D) (no. 18 Request):

• on 14/12/2012, it transferred, for €580,663.19, to K, 83,300 shares of B which it had acquired for €1,185,200.26;
• on 31/12/2012, it transferred, for €652,080.00, to G, 58,800 shares of C which it had acquired for €1,297,200.00 and to M, for €613,683.00, 22,729 shares of D which it had acquired for €681,870.00.

x) Based, fundamentally on the situation described in paragraphs a) to u), the Tax Inspection considered that the operation of purchase and sale of shares by A had been practiced between entities in a situation of special relationships within the meaning of no. 4 of article 58 of the CIRC.

y) The IT calculated that the sale prices of the shares of the shareholders to A were the following (p. 13 of RIT):

• €18.37 or €18.38 for each share of company B, S.A.;
• €29.00 for each share of company C, S A;
• €30.00 for each share of company D SA.

z) With a view to finding a value which it considered more correct for the participations, the AT used the methodology provided for in article 15 of the Stamp Duty Code (CIS), no. 3 (in the case of B, S.A and C S.A) and no. 1 (for D) (RIT, p. 13)

aa) As to the first two, applying the formula, the values calculated were: €14.7372 for the shares of B, €16.6338 for the shares of C; as to D €608,787.48, as the value of 100% of the participation (pp. 13 to 16 of RIT);

bb) The RIT calculated the existence of an excess by which the contracts of purchase and sale of the shares representing the capital of companies B, S.A., C SA and D S.A., on 2009-12-29, between the sellers and buyer A SGPS, SA, would have been concluded, in the amount of €2,327,432.77 (€436,855.78 + €1,236,367.70 + €654,209.29) (RIT, p. 18).

cc) Having proceeded with the correction of the value of the operation for tax purposes, pursuant to the provision in no. 11 of article 58 and no. 2 of article 3 of Ordinance 1446-C/2001, of 21/12, the RIT concluded that "taking into account the tax treatment for the taxation of the excess ascertained as a result of the correction proposed by effects of the application of the transfer pricing regime to the operation of sale of parts of capital between related entities, as well as the moment in which this taxation should occur, the taxation of these income to be effected pursuant to the provision in point 2 of paragraph a) of no. 3 of article 7 and paragraph c) of no. 3 of 71 of the CIRS, article 13 of Decree-Law no. 42/91, of 22 January, no. of article 98 and paragraph a) of no. 3 of article 101 of the CIRS", it was calculated that the IRS tax not withheld at source and not remitted was €465,486.56, amount corresponding to the application of the withholding rate of 20% to €2,327,432.77 amount of the excess over the price practiced "between independent entities in comparable operations" (RIT, pp. 21 and 22).

dd) The Claimant was notified of the Project, by official letter no. ..., of 3/10/2013 (PA. 1 sheets numbered, 67 and et seq.) and also on 14 October 2013, to exercise the right to prior hearing.

ee) On 21 October 2013, the Claimant exercised the right to hearing attacking the lawfulness of the assessment for statute of limitations (for non-compliance with the 3-year deadline provided for in no. 2 of article 45 of the LGT), non-applicability of the transfer pricing regime (for not ascertaining any correction to the taxable matter of IRC) and non-applicability, to the valuation of the transfer of shares, of article 15 of the Stamp Duty Code (as this norm does not establish an adequate method for obtaining the market value of shares) (PA 1, fls. 37 to 43).

ff) The final Report of the tax inspection, dated 4 November 2013, sent by official letter no. ..., of 11 November 2013 (Doc. no. 4), rejected the arguments invoked in the exercise of the right to hearing, and confirmed the draft report, with the Opinion of the Team Leader, which received higher agreement: "I confirm the corrections of a purely arithmetic nature made in the year 2009 in the context of IRS withholding at source in the amount of €465,486.56, owed pursuant to paragraph c) of no. 3 of article 71 and paragraph a) of no. 2 of article 101, both of the CIRS and in the wording as of the date of the facts, resulting from the application of the discipline of Transfer Pricing provided for in article 58 of the CIRC, in the wording as of the date of the facts, and Ordinance no. 1446-C/2001, of 21 December (...)" (Doc. no. 4 attached with the Request and PA1, fls 1 to 27).

gg) On 19/11/2013, assessment no. ... was issued, (DUC ...) of IRC (Other income) in the amount of €465,486.56 and €70,600.92 of compensatory interest, for payment by 17/01/2014 (doc. no. 2 attached with the Request).

hh) On 17/01/2014, "partial payment of IRS withholding without interest" was made, in the amount of €465,486.56 (Docs. 6, 7 and 8, fls 12).

III – FACTS NOT PROVEN

Not proven the presumption that "N manifested interest in investing in this area in Portugal and for that fact, manifested interest in the acquisition of these companies".

Not proven that the decision to sell the shares of the shareholders of companies B, C and D to A SGPS had as its cause the intention of joint sale of the same companies.

Not proven that the shareholders of the companies did not receive, in total or in part, the amounts for which they declared to sell their participations.

Not proven that the valuation method used in the document is the most adequate to translate the market value of the Claimant.

IV – OF THE LAW

OF THE ILLEGALITY OF THE IRC ASSESSMENT

Article 63 (former 58) of the CIRC provides:

"1 — In commercial operations, including, in particular, operations or series of operations on goods, rights or services, as well as in financial operations, effected between a taxpayer and any other entity, subject or not to IRC, with which it is in a situation of special relationships, the terms or conditions must be contracted, accepted and practiced substantially identical to those which would normally be contracted, accepted and practiced between independent entities in comparable operations.

2 — The taxpayer must adopt, for the determination of the terms and conditions which would normally be agreed, accepted or practiced between independent entities, the method or methods capable of ensuring the highest degree of comparability between the operations or series of operations it carries out and other substantially identical ones, in normal market situations or in the absence of special relationships, taking into account, in particular, the characteristics of the goods, rights or services, market position, economic and financial situation, business strategy, and other relevant characteristics of the taxpayers involved, the functions performed by them, the assets used and the distribution of risk.

(…)

4 — Special relationships are considered to exist between two entities in situations in which one has the power to exercise, directly or indirectly, a significant influence on the management decisions of the other, which is considered verified, in particular, between:

a) An entity and the holders of its respective capital, or the spouses, ascendants or descendants thereof, who hold, directly or indirectly, a participation not less than 10% of the capital or voting rights;

b) Entities in which the same holders of capital, respective spouses, ascendants or descendants hold, directly or indirectly, a participation not less than 10% of the capital or voting rights;

c) An entity and the members of its governing bodies, or of any bodies of administration, management, direction or supervision, and respective spouses, ascendants and descendants;"

As can be verified, pursuant to this article, the requirement of the existence of special relationships between the company and its shareholders is manifestly fulfilled, and the fact that these are not subject to IRC does not exclude the application of this provision.

As stated in article 1, no. 1 of Ordinance 1446-C/2001, of 21 December: "In operations effected between a taxpayer of IRS or IRC and any other entity, subject or not to these taxes, with which it is in a situation of special relationships, the terms and conditions must be contracted, accepted and practiced substantially identical to those which would normally be contracted, accepted and practiced between independent entities in comparable operations". It seems manifest, in light of the terms of the operation, that these terms were not practiced, and it is naturally noteworthy that it reached the point of declaring in the contracts that the price of the sale of the shares had already been paid when such did not come to occur. In fact, everything indicates that the objective of the set of operations is to transfer value to the shareholders, escaping the usual taxation in this type of operations.

Furthermore, article 3, no. 2 of the aforementioned Ordinance states: "When the terms and conditions of a related operation in which a taxpayer and an entity resident in Portuguese territory are involved differ from those which would normally be agreed, accepted or practiced between independent entities, the General Directorate of Taxes may make corrections to taxable profit that are necessary so that the respective amount corresponds to what would have been obtained if the operation had taken place in a normal market situation. Now, having been demonstrated the practice of conditions different from those practiced between independent entities, naturally the AT can resort to the transfer pricing regime, and is not obliged to resort to the general anti-abuse clause.

Regarding the method to be adopted to establish the corrections, reference must be made to the provision in article 4 of Ordinance 1446-C/2001, of 21 December:

"1 - The taxpayer must adopt, for the determination of the terms and conditions which would normally be agreed, accepted or practiced between independent entities, the most appropriate method for each operation or series of operations, taking into account the following:

a) The comparable uncontrolled price method, the resale price method reduced or the cost plus method;

b) The profit split method, the net margin method of the operation or another method appropriate to the facts and specific circumstances of each operation that satisfies the principle stated in no. 1 of article 1 of this ordinance, when the methods referred to in the preceding paragraph cannot be applied or, if they can be applied, do not allow to obtain the most reliable measure of the terms and conditions that independent entities would normally agree, accept or practice.

2 - The most appropriate method for each operation or series of operations is considered to be that which is capable of providing the best and most reliable estimate of the terms and conditions which would normally be agreed, accepted or practiced in a situation of arm's length, with the choice being made for the method most apt to provide the highest degree of comparability between related and non-related operations and between entities selected for comparison, which has better quality and greater amount of information available for its proper justification and application and which entails the least number of adjustments for purposes of eliminating the differences existing between the facts and comparable situations.

It is indeed debatable whether the method referred to in article 15, no. 3, of the CIS for valuation of social participations is the most appropriate to this reality. According to the aforementioned article:

"3 - The value of shares, securities and public debt certificates and other credit papers is that of the quotation on the date of transfer and, if there is none on that date, the latest one within the six months prior, observing the following, in the absence of official quotation:

a) The value of the shares is that corresponding to their nominal value, when the total of the value thus determined, relative to each invested company, corresponding to the shares transferred, does not exceed (euro) 500 and what results from the application of the following formula in the remaining cases: Va = 1/2n[S + ((R1 + R2)/2)f]

in which:

Va represents the value of each share on the date of transfer;

n is the number of shares representing the capital of the invested company;

S is the substantial value of the invested company, which is calculated from the accounting value corresponding to the last fiscal year prior to the transfer with corrections that prove to be justified, considering, whenever applicable, the provision for taxes on profit;

R1 and R2 are the net results obtained by the invested company in the two fiscal years prior to the transfer, with R1 + R2 = 0 in cases where the sum of those results is negative;

f is the capitalization factor of net results calculated on the basis of the interest rate applied by the European Central Bank to its main refinancing operations, as published in the Official Journal of the European Union and in force on the date on which the transfer occurs;

b) In the case of companies constituted less than two years before, when it is necessary to resort to the use of the formula, the value of their respective shares is that which corresponds to them in the substantial value, that is: Va = S/n

c) Public debt securities and certificates and other securities for which no valuation rules are established in the present Code are taken at the value indicated by the Securities Market Commission, pursuant to the terms of paragraph d) of no. 6 of article 26, which results from the application of the following formula: Vt = (N + J)/(1 + rt/1200)

in which:

Vt represents the value of the security on the date of transfer;

N is the nominal value of the security;

J represents the sum of interest calculated from the last maturity prior to the transfer to the date of repayment of the capital, and the amount ascertained should be reduced by half when the securities are subject to more than one repayment;

r is the discount rate implicit in the movement of the value of bonds and other securities quoted on the stock exchange, which is fixed annually by ordinance of the Minister of Finance, under the proposal of the General Directorate of Taxes, after hearing the Securities Market Commission;

t is the time which elapses between the date of transfer and that of repayment, expressed in months and rounded up, and the number ascertained should be reduced by half when the securities are subject to more than one repayment;

d) Public debt securities or certificates whose value cannot be determined in this manner are considered at the value indicated by the Public Credit Management Institute."

However, this is the only criterion existing in the legislation for the case of non-listed shares, and there is no reason to exclude its applicability in the context of transfer pricing. In fact, as the shares are not listed, it will be necessary to apply a criterion to determine their value at the time of the transfer, and the rule should be resort to the legally established criteria in similar cases.

In fact, although the recognition is made of the adoption by Tax Law of self-valuation criteria of a commercial nature, this application depends on the tax norm permitting it. As writes SALDANHA SANCHES, A quantificação da obrigação tributária, Lisbon, CEF, 1995, p. 234, "in the determination of the value of goods belonging to the individual assets of taxpayers, we are using, as we have seen previously, rules with solely fiscal function, shaped by the interest in the public application of tax law and from the outset prejudiced, in their objectivity, by the unilateralism of the purposes they aim to achieve".

To defend the solution proposed by the Claimant, of allowing the use of valuation criteria not existing in the law, would entail running the risk of creating grave inequalities, with each taxpayer coming to defend its own method of valuation of its social participations.

Although it can be accepted that the solution of art. 15 CIS is not the most adequate, what seems evident to us is that it is that which is actually present in the legislation.

It is therefore understood that, in this case, the Tax Administration proceeded in the manner legally provided for, and there is thus nothing to point out regarding the valuation criterion used.

Now, having been considered the existence of entries in the accounts of the shareholders not justified by the contract of transfer of the shares, there is naturally place for their taxation by virtue of the application of the presumption of article 6, no. 4, CIRS.

This taxation should be effected at the moment of placing at the disposal of the income, pursuant to point 2 of paragraph a) of no. 3 of article 7 of the CIRS, by means of the withholding at source mechanism at the liberatory rate of 20% (article 71, no. 3, paragraph c) of the CIRS, then in force).

It must therefore be considered that the assessment under attack does not suffer from any defect.

OF THE INDEMNITY INTEREST

Article 43, no. 1 of the General Tax Law establishes that "indemnity interest is owed when it is determined, in administrative review or judicial challenge, that there was error imputable to the services from which results payment of the tax debt in an amount greater than that legally due."

However, in this case there is not in fact any error on the part of the services, imputable to these or not. Therefore, indemnity interest cannot exist.

IV. DECISION:

For these reasons, this collective Arbitral Tribunal:

• Judges as lacking merit the request for annulment of assessment no. 2013 ..., in the total amount of €465,486.56

• Judges as lacking merit the request for condemnation in indemnity interest.

• Absolves the defendant of the aforementioned requests.

Value of the proceedings: The proceedings is fixed at the value of €465,486.56 (value indicated and not contested), and pursuant to article 22, no. 4 of the RJAT, the value of the corresponding arbitration fee of €7,227.56, pursuant to Table I of the Cost Regulation of Tax Arbitration Proceedings.

Costs at the charge of the requesting entity.

Lisbon and CAAD, 5 December 2014

The Arbiters

José Poças Falcão
(President)

Maria Manuela do Nascimento Roseiro

Luís Menezes Leitão