CAAD 277/2016-T: SGPS Tax Deductions Under Article 23 of CIRC – Illegal IRC Assessment Annulled

DECISION

I. REPORT

A… SGPS, SA ("Claimant", hereinafter), Legal Entity no. …, with registered office at …, Rua de…, no. …, …, has, under the provisions of articles 2º no. 1 a) and 10º no. 1 a) of Decree-Law no. 10/2011, of 20 January (which approved the RJAT), and of articles 1º and 2º of Ordinance no. 112-A/2011, of 22 March, formulated a request for arbitral pronouncement.

In the request for arbitral pronouncement, the Claimant declared its intention not to proceed with the appointment of an arbitrator, therefore the constitution of the Collective Arbitral Court was processed in accordance with the provisions of no. 1 of article 6º and no. 1 of article 11º of the CAAD, having been appointed by the president of the Deontological Council of the CAAD, José Poças Falcão (president), Henrique Nogueira Nunes and Álvaro José da Silva (members).

Both parties, notified of this appointment, did not manifest any intention to refuse it, therefore the Arbitral Court was deemed constituted on 25 July 2016, in accordance with subsection c) of no. 1 of article 11º of the RJAT.

Following notification in accordance with article 17º of the RJAT, the Tax Authority presented, within the legal period, its answer to the request for arbitral pronouncement formulated.

By order of 13-10-2016, the Arbitral Court dispensed with the meeting referred to in article 18º of the RJAT, considering it to be, in this case, a proceeding not susceptible to the definition of specific procedural rules, different from those commonly followed by the CAAD in the generality of arbitral proceedings, and there being no exceptions to be assessed and decided before ruling on the request, nor any need for correction of procedural documents.

In that same order, the date [16-1-2017] was set for the pronouncement and notification of the final decision of the proceeding to the parties within the period referred to in article 21º-1 of the RJAT.

Subsequently, and at the insistence of the Claimant, witness testimony production was, by order of 24-10-2016, accepted.

On 25-11-2016, witness examination took place at a hearing, and the parties were notified to submit their final arguments in writing (see respective record).

Both parties submitted their arguments within the respective period, concluding, in essence, in the form they had done in their respective pleadings.

By order of 15-1-2017, the period for the final arbitral decision was extended in accordance with article 21º-2 of the RJAT.

It is necessary to assess and decide.

Object and summary substantiation of the request

The request formulated has as its object the tax act of assessment of Corporate Income Tax (CIT) and compensatory interest (CI) no. 2015…, for the fiscal year 2011, and respective settlement statement, in the amount of € 88,867.85, with the grounds contained in the petition which are hereby given as fully reproduced for all legal purposes.

The Claimant requests:

a) The declaration of illegality of the additional assessment of CIT and CI [here challenged], with the consequent declaration of nullity or annulment thereof;

b) The recognition to the Claimant of the right to be indemnified for the costs incurred and to be incurred with the aforementioned guarantees, in the part in which these proportionally correspond to the additional assessment of CIT and CI [here challenged], to be determined at the appropriate time, after lifting of the guarantees;

c) The condemnation of the Defendant to pay the arbitration fee and other costs, if any.

The Claimant invokes, in support or substantiation of the request, the occurrence of procedural illegalities resulting from violation of no. 1 of article 15º of the RCPITA [Supplementary Regime of Tax Inspection Procedure], as well as substantive illegality of the corrections promoted by the Tax Inspection and which resulted in merely arithmetical corrections to the Taxable Income declared for purposes of CIT in the taxation period of 2011, in the amount of € 809,400.85, relating to: (i) financial expenses incurred with loans to shareholdings, in the amount of € 393,399.95, disregarded in accordance with no. 1 of article 23º of the CIRC; (ii) financial expenses non-deductible in accordance with no. 2 of article 32º of the EBF, in the amount of € 252,010.90; (iii) positive patrimonial variation not accrued resulting from debt forgiveness, which amounted to € 105,990.00; (iv) lack of fiscal deductibility of expenses associated with the alienation of shares, in the amount of € 58,000.00.

II. SUBSTANTIATION

The proven facts

As a result of the evidence presented by the parties (witness and documentary), the Court considers the following facts as proven:

a) The Claimant exercises the activity of management of shareholdings held in various companies that operate in the renewable energy sector: hydro, wind, photovoltaic, biomass, cogeneration and thermosolar (see Tax Inspection Report, hereinafter TIR);

b) The Claimant was subject to an external inspection procedure of partial scope in the area of CIT, with extension to the year 2011, determined by Service Order no. OI2015…, having been notified thereof on 23-06-2015, by signature by its representative of the respective credential (see TIR);

c) During the inspection procedure, there was considered to be the existence of irregularities capable of correction in the area of VAT which determined, according to the Tax Authority, in accordance with no. 1 of article 15º of the RCPITA, the alteration of the scope of the inspection action from partial to general (see TIR);

d) The alteration of the scope of the inspection action was determined by order dated 03-08-2015, and this Service Order was signed by the representative of the Claimant on 12-08-2015 (see fields 2 and 4 of the Service Order, attached by the Claimant as Doc. no. 5);

e) Following the inspection action, merely arithmetical corrections were promoted to the Taxable Income declared for purposes of CIT in the taxation period of 2011, in the amount of € 809,400.85, relating to:

i. Financial expenses incurred with loans to shareholdings, in the amount of € 393,399.95, disregarded in accordance with no. 1 of article 23º of the CIRC;

ii. Financial expenses non-deductible in accordance with no. 2 of article 32º of the EBF [Fiscal Benefits Statute], in the amount of € 252,010.90;

iii. Positive patrimonial variation not accrued resulting from debt forgiveness, which amounted to € 105,990.00;

iv. Lack of fiscal deductibility of expenses associated with the alienation of shares, in the amount of € 58,000.00.

f) The Claimant grants loans, in the form of supplementary capital contributions or supplementary payments, to its shareholding companies, without charging any interest or expenses (see TIR);

g) The Claimant when constituting the shareholdings grants them financing without any remuneration for a period of 5, 7 or 10 years (see testimony of witness B…);

h) The Claimant incurs substantial financial expenses, related to its activity and that of the shareholding companies;

i) The Claimant saw its results diminished by the assumption of financial expenses resulting from recourse to banking and recourse to loans from the companies C…, SGPS, SA (C…) and D…, SGPS, SA (D…), in order to free up financial means for the shareholding companies (see TIR);

j) The financial expenses accounted for by the Claimant were corrected by the Inspection in accordance with the following methodology (see TIR and testimony of witness E…):

• Calculation of the average balance of third-party financing annual of the Claimant (with banks, C… and D…, and with shareholdings);

• Determination of the expenses with financing incurred by the Claimant in the periods under analysis;

• Determination of the effective cost rate of third-party financing of the Claimant;

• Calculation of the average balance of annual non-remunerated financing to the shareholding companies;

• Application of the effective cost rate of third-party capital to the value of financing made to the said companies;

• Disregard as a fiscal expense of the value thus determined.

k) The Claimant proceeded to determine the financial expenses incurred, having made the addition, in field 779 of table 07 of the income statement for the year 2011, of the amount of € 156,401.34 referring to interest that it considered fiscally not accepted (see TIR);

l) The Claimant disregarded 40% of part of the financial expenses incurred with the acquisition of shareholdings;

m) For purposes of calculating financial expenses relating to shareholdings, the Tax Inspection considered the amount of € 1,097,154.97, concerning loans granted to shareholdings without remuneration (see TIR);

n) And the Inspection further considered that, of the € 1,097,154.97 of corrected financial expenses, € 408,412.24 are not fiscally deductible by virtue of being considered as relating to shareholdings (see TIR);

o) Since the amount of € 156,401.34 had already been added in table 07 of the Model 22 statement for 2011, the amount of € 252,010.90 was added (see TIR);

p) The Claimant disregarded 40% of part of the financial expenses incurred based on the map of determination of the taxable result contained in the fiscal file (see testimony of witness E… and as Doc. no. 1, attached to the Response);

q) The Claimant identified, in the scope of the inspection action, the values considered as remunerated assets, remunerated liabilities, other assets, shares, as well as financial expenses incurred, presenting calculation maps that served as the basis for determining the corrections proposed as non-deductible financial expenses (see TIR);

r) On 08-05-2009, the Claimant acquired from the Spanish law company F… SL, shareholdings corresponding to 51% of the share capital of 5 (five) Spanish companies: G… SL – acquisition of 51 shares with a nominal value of € 32.00 each, at the global price of € 67,830.00; H… SL – acquisition of 51 shares with a nominal value of € 32.00 each, at the global price of € 67,830.00; I… SL – acquisition of 51 shares with a nominal value of € 32.00 each, at the global price of € 67,830.00; J… SL – acquisition of 51 shares with a nominal value of € 32.00 each, at the global price of € 67,830.00; and K… SL – acquisition of 51 shares with a nominal value of € 32.00 each, at the global price of € 67,830.00. (see TIR);

s) On the date of execution of the respective purchase and sale agreements [8-5-2009], the Claimant delivered to F…, five (5) cheques in the amount of € 1,632.00 each, and it was agreed between the parties that the remainder of the price - € 66,198.00 per company, in a total of € 330,990.00 – would be paid on 08 June 2009;

t) The amount of € 330,990.00 was not paid on the date defined in the said agreements, nor was it accounted for as a liability in 2009, having only been restated at the opening of 2010, already within the scope of the SNC [National Accounting Standards], at which time the accounting entries contained in the table at page 55 of the TIR were made;

u) On 28-12-2011 a Merger Deed by incorporation was executed between the company G…, SL and the remaining four companies J…, I…, H… and K…, which had accounting effect as of 01-01-2011, with G… increasing its share capital by € 12,800, corresponding to the sum of the share capital of those four companies (see TIR);

v) Following this merger operation, the Claimant transferred all balances to the account of the incorporating company – G… – namely the values of the financial transactions that had taken place with those shareholdings, which amounted to € 29,596.00 (loans granted) and the premiums mentioned above, in the total amount of € 330,990.00 (see TIR);

u) [continuing] Through the same entry note no. …, the debt of € 330,990.00 that the Claimant had towards F… was settled as follows:

• € 225,000.00 were regularized by offset between the debt of project L… (€ 330,990) and amounts that would have been paid in excess by A… to F… in previous projects: project M… (€ 130,000) and project N… (€ 95,000);

• the remaining € 105,990.00 were de-recognized (see TIR);

v) [continuing] In the scope of an inspection action carried out with the Spanish company F… SL, the Spanish tax authorities detected the accounting of a provision for doubtful debts concerning the Portuguese company A…, which relate to the acquisition, on 08-05-2009, of shareholdings corresponding to 51% of the share capital of the 5 Spanish companies (see TIR);

x) According to the accounting records of F…, the sale price of those shareholdings amounted to € 339,150.00, corresponding to € 67,380.00 per entity acquired (see TIR);

z) The Claimant was notified to justify the de-recognition of the debt towards F… – in the amount of € 105,990.00, having presented a document, dated 20 July 2015 and entitled "Modificación de Acuerdo de Compraventa de Participaciones Sociales" [Modification of Share Purchase Agreement], by means of which it was agreed to alter the value of the 51% participation in the 5 Spanish companies from € 339,150.00 to € 233,160.00 (see TIR);

aa) This document was drawn up and exhibited by the Claimant during the inspection action (see TIR);

bb) In 2010, there occurred a profound and unforeseeable alteration in Spanish legislation regarding the production of photovoltaic energy – the publication of Royal Decree-Law no. 14/2010, which began to impose regulatory rates lower than those foreseen in 2009 and with a new regime for updating those same rates more burdensome than that which was provided for in 2009…

cc) …which motivated a marked devaluation of the shareholdings acquired from F… in 2009 and mentioned above in r) and following;

dd) In light of that devaluation of the shares in question, between the Claimant and F… it was verbally agreed, in 2011, to modify the initial contract of 2009, reducing the price initially stipulated for the sale of the shares;

ee) That verbal agreement of 2011 only came to be documented in 2015, by means of a contract entitled "Modificación de Acuerdo de Compraventa de Participaciones Sociales" [Modification of Share Purchase Agreement], executed on 20.07.2015 between the Claimant and F…, whose legal effects were expressly reported back to 03.10.2011 (see doc. 19 attached to the TIR);

ff) That devaluation corresponded to the said amount of € 105,990.00 [difference between € 339,150.00 and € 233,160.00 – see above, z)], without any reflection at the level of the results of the fiscal year or of the equity of the Claimant;

gg) The Claimant incurred expenses related to commissions paid to the South African company O…, associated with the alienation of the shareholding P…, based in South Africa, in the amount of € 58,000, which it recorded in the account… (see TIR);

hh) The shareholding P…, held at 58% by the Claimant, was alienated in October 2011 to the Italian company Q… for € 1,160,000, an operation which generated a gain of € 918,650.00 determined by the difference between that realization value and the acquisition value (which amounted to € 241,350.00) (see TIR);

ii) This gain was not taxed by virtue of the application of the fiscal regime for SGPS set out in article 32º, no. 2 of the EBF then in force, having been deducted by the Claimant in field 769 of table 07 of the Model 22 statement for 2011 (see TIR);

jj) The commission of € 58,000.00, being an expense inherent to the sale of P…, was not accepted by the Tax Authority as an expense for fiscal purposes in 2011, which is why it was added to the Taxable Income of that fiscal year (see TIR);

kk) The supplementary capital contributions mentioned served to provide funds to the Claimant's shareholding companies, because they lacked them for the projects and businesses underway;

ll) Following the inspection action mentioned, the Claimant came to be notified of the assessment of CIT and compensatory interest (CI) no. 2015…, of 18.12.2015, relating to the fiscal year 2011, from which resulted the amount of € 88,867.85 to be paid, whose voluntary payment period ended on 18.02.2016;

mm) The Claimant was notified of this assessment through the CIT assessment statement, CI assessment statement, and settlement statement (Doc 1, attached by the Claimant with the initial petition);

nn) The aforementioned additional CIT assessment comprises CI of € 10,997.52;

oo) To suspend the inherent tax enforcement proceeding, the Claimant presented guarantees (sureties), as per the documents attached to the case by the claimant (Docs 20 and 21, attached with the initial petition);

pp) The constitution and maintenance of these guarantees entailed and continue to entail costs, namely with Stamp Tax, until the date of their release or cancellation;

qq) Having A… been equally inspected for the fiscal years 2008, 2009 and 2010, all corrections made (both in terms of Taxable Income and in terms of Taxable Matter) and their repercussions in terms of deductible tax losses, are thus summarized by the Tax Authority:

There are no other essential facts, proven or not proven.

Substantiation

It should be noted at the outset that the Court is not obliged to rule on all the matters alleged, but rather has only the duty to select those of interest to the decision, taking into account the cause (or causes) of action that substantiate(s) the request formulated by the claimant (see articles 596º, no. 1 and 607º, nos. 2 to 4, of the Code of Civil Procedure, in the wording of Law 41/2013, of 26/6, applicable under article 29º of the RJAT) and to state whether it considers it proven or not proven (see article 123º, no. 2 of the Code of Tax Procedure and Process).

On the other hand, in accordance with the principle of free assessment of evidence, the Court bases its decision regarding the evidence produced on its intimate conviction, formed from the examination and evaluation it makes of the means of proof brought to the proceeding and in accordance with its life experience and knowledge of people (see article 607º, no. 5 of the Code of Civil Procedure, in the wording of Law 41/2013, of 26/6). Only when the probative force of certain means is pre-established in law (e.g., full probative force of authentic documents – see article 371º of the Civil Code) does the principle of free assessment of evidence not prevail in the evaluation of the evidence produced.

In this case, to form its conviction, the Court considered, in addition to the copy of the administrative proceeding file attached by the Tax Authority to the case in accordance with the regulatory requirements, all the documentary material that forms part of the proceeding, in particular that indicated above, in conjunction with the testimonies given at the hearing by witnesses B…, R…, S… and E…, all analyzed critically.

II. Substantiation (continuation)

The Law

The Courts do not have to assess all the arguments formulated by the parties – this is what has been repeatedly stated by case law (see inter alia, Decision of the Plenary of the 2nd Section of the Supreme Administrative Court, of 7 Jun 95, proceeding no. 5239, in DR – Appendix of 31 March 97, pages 36-40 and Decision Supreme Administrative Court – 2nd Sec – of 23 Apr 97, DR/AP of 9 Oct 97, p. 1094).

The questions to be decided can be summarized as follows:

1st Whether or not there is merit to the question of violation of article 15º-1 of the RCPITA;

2nd Whether, in light of the provisions of article 23º of the CIRC (2011 wording) there is or is not illegality in the act of correction of financial expenses incurred with loans and supplementary capital contributions from the Claimant to its shareholdings;

3rd Whether the correction of the addition of € 252,010.90, relating to financial expenses related to shareholdings, has legal support, namely resulting from what is established in Circular no. 7/2004 of the Tax Authority;

4th Whether the positive patrimonial variation of € 105,990.00, not reflected in the fiscal year 2011, constitutes or does not constitute true debt forgiveness (see article 21º of the CIRC/2011);

5th Whether the commission in the amount of € 58,000 constitutes or does not constitute an expense inherent to the sale of the Claimant's participation in the South African company P… and whether it could or could not be accepted as an expense for fiscal purposes in 2011 (see articles 23º-1 and 46º-2 of the CIRC/2011) and

6th Whether or not the request for indemnification for improper guarantee is founded.

Analyzing each of these questions, always considering that it is essentially in light of the substantiation provided by the Tax Authority that the legality (or lack thereof) of the tax act should or can be reviewed (See, for example, Decision Supreme Administrative Court 23-9-2015, Proc no. 01034/11)

1st The question of violation of article 15º-1 of the RCPITA

Article 15º-1 of the RCPITA provides:

1. The purposes, scope and extent of the tax inspection procedure can be altered during its execution by means of a reasoned order from the entity that ordered it, and must be notified to the inspected entity.

It is demonstrated in the case that the Claimant was subject to an external inspection procedure of partial scope in the area of CIT, with extension to the year 2011, legitimized by Service Order no. OI2015…, having been notified thereof on 23-06-2015, by signature by its representative of the respective credential (see TIR).

And it is equally proven that, during the inspection procedure, the Tax Inspection would have detected irregularities capable of correction in the area of VAT which determined, "(...)in accordance with no. 1 of article 15º of the RCPITA (...)" the alteration of the scope of the inspection action from partial to general.

There appears to be no grounds for the invocation of irregularity which, it should be said, does not appear to have ever been invoked during the course of the inspection proceeding.

This is why, even if such irregularity had occurred objectively, it would always be necessary to bring to bear the understanding that the omission of a reasoned order to alter the purposes and extent of the inspection procedure should be considered degraded to a non-essential formality, as such not invalidating the subsequent procedural steps, namely the subsequent assessment, when it can be concluded, with a degree of certainty beyond any reasonable doubt (as appears to be the case in this proceeding), that the result to be achieved would always be the same, either because the taxpayer gave its cooperation with the inspection in that broadened scope without ever having challenged the lack of such order, or because, not even in the petition of its judicial challenge did it argue that any of the purposes pursued with the same order had been compromised in the determination of its taxable matter (See, for example, Decision of the Tax Audit Court of Appeals of 27-11-2012 – Proc no. 05449/12)

The invoked irregularity therefore does not succeed.

2nd Whether, in light of the provisions of article 23º of the CIRC (2011 wording) there is or is not illegality in the act of correction of financial expenses incurred with loans and supplementary capital contributions from the Claimant to its shareholdings.

In accordance with no. 1 of article 23º of the Corporate Income Tax Code then in force (2011 and 2012), costs or losses are considered fiscally deductible those that "are proven to be indispensable for the achievement of income subject to tax or for the maintenance of the productive source".

Next, the article exemplifies, by subsections, costs that are considered to be included.

It should be noted at the outset that the question of the indispensability of costs for purposes of the cited article 23º of the CIRC has in reality been the subject of frequent doctrinal and case law analysis.

Thus it is that the interpretation of the concept of indispensability contained in article 23º of the CIRC has, in Portuguese tax legal doctrine, in TOMÁS TAVARES and ANTÓNIO PORTUGAL, authors of seminal works on the elucidation of such concept.

For the first of these authors: "(…) The legal notion of indispensability is therefore circumscribed from an economic-business perspective, by fulfillment, direct or indirect, of the ultimate motivation for the obtaining of profit. Indispensable costs are equivalent to the expenses incurred in the interest of the company or, in other words, in all acts abstractly subsumable in a profit-seeking profile (…)." And continues: "(…) Indispensability subsumes itself to any and all act carried out in the interest of the company…The legal notion of indispensability thus represses acts that are non-conforming with the scope of the company, not insertable in the corporate interest, above all because they do not aim at profit (…)".

This author further notes the existence of two conceptions of "indispensability": a first one, not shared by us, argues that among the positive and negative components of income there should be a necessary causal relationship, of the type conditio sine qua non, or then, in a milder version, but with equal result, in some relationship of convenience, completely reviewable by the tax apparatus; the second, for its part, points as indispensable all true and real costs, even if linked to ruinous businesses. Here, it is necessary to ascertain the existence or non-existence of an economic cost in the sphere of the company; if it really exists, it is grasped by accounting and assumed in its entirety as a fiscal cost, if it does not exist, it is not an accounting cost, even if it appears in the company's books.[1]

The second author, regarding the question of what is the best interpretation of the concept of indispensability, expresses the following position: "(…) The solution adopted among us (at least in Doctrine), following the understandings advocated by Italian doctrine, has been to interpret indispensability in function of the corporate object. This position is present from the outset in the writings of Vítor Faveiro, who traces the indispensability of the expense to its appreciation as an act of management in function of the concrete corporate object, refusing that this indispensability can be assessed freely from whatever subjective judgment of the law enforcer".

It should be noted en passant that, with the legislative amendment, resulting from Law no. 2/2014, of 16 January, which the Corporate Income Tax Code underwent, the deductibility of expenses and losses ceased to be conditioned on indispensability, though it is still always required that expenses and losses be incurred or supported to "obtain or guarantee" income subject to CIT, that is, the requirement of indispensability of costs disappeared, as regards the deductibility thereof.

The cited works thus maintain that any economic loss (expense) that has a relationship with the corporate object, or is incurred within the effective scope of the activity pursued, or evidences a business purpose, will fulfill the requirement of indispensability.

Thus, suppose that company ALFA participates in company BETA in the proportion of 100%. The first is thus holder of a financial asset. What "activity" results in the sphere of ALFA from the participation that it holds in BETA? The first may intervene in the second, controlling its financial and operational policies in order to obtain benefits from the same, determining the production of new goods or services, the minimization of expenses, or other measures that increase its future economic benefits. But it is also clear that ALFA may intervene in BETA at the level of financial operations. Either by increasing the capital of BETA in order to increase its investment capacity, or by providing it with financial means to strengthen BETA's treasury in order to increase its investment capacity, or by providing it with financial means to strengthen its treasury. The entity ALFA, in the exercise of its own activity, administers and makes decisions concerning a financial asset, which flows from said participation. This constitutes activity of ALFA and not of BETA. This benefits from that activity, suffers the effects of ALFA's decisions, but does not develop the activity of managing the participation. If the managers of ALFA execute operations that affect the financing of BETA, they are not developing activity of third parties. They are developing ALFA's own activity, derived directly from the management of the financial asset represented by the participation in BETA. The company BETA has the nature of a shareholding, which gives ALFA's decisions the qualification of its own activity, inherent to its scope: the management of that participation. And that management can involve financing operations that are part of the activity of the shareholding. The shareholding is not some entity foreign to the activity and interests of the shareholding. There is no expense in the sphere of the latter that has nothing to do with its corporate interest. The expense incurred with interest on capital obtained and subsequently provided to the shareholding, is made in the interest of the shareholding, as a direct consequence of its activity of managing an asset that emerges from a participation, which is actually or potentially productive of income.

The activity of SGPS and the deductibility of financial expenses

Let us now look, in greater detail, at the application of SGPS [which is the case of the Claimant] to the regime of the cited article 23º of the CIRC.

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

A participation in a company is considered an indirect form of exercise of that company's economic activity when it does not have a casual character and reaches, at least, 10% of the voting capital of the shareholding, either by itself or together with participations of other companies in which the SGPS is dominant.

In light of the foregoing, it is clear that the activity of SGPS – an essential concept for assessing the indispensability of expenses incurred by them in the scope of the application of article 23º of the CIRC – not only encompasses the management of shareholdings, but this is its sole contractual object.

Now, the management of shareholdings will naturally involve its acquisition, the administration operations carried out by the shareholding necessary to the valorization of the acquired financial asset, to the financing of such asset and to eventual subsequent alienation. All of this can be subsumed in the activity of an SGPS.

Thus, the financing of a shareholding flows from the interest of the shareholding, in order to, by ensuring the financial sustenance of the acquired asset, increase its potential as a productive source of income. In such a case, the financial expenses that result from financings contracted in order, subsequently, to strengthen the equity of a shareholding, are included, form part of the scope of the activity of an SGPS. Of this there can be no doubt given the provisions in the norm, mentioned above, that regulates its activity.

It is therefore concluded that, as these expenses are related to the SGPS's own activity, they fulfill the requirements upon which the interpretation of the concept of indispensability of article 23º of the CIRC is based, namely in that part of no. 1 of this article where relevance is given to expenses indispensable for the maintenance of the productive source of income, in which are included financial nature expenses, expressly referred to in subsection c) of the same number.

For the foregoing, there is no grounds for the correction effected by the Tax Authority and Customs to the Claimant's taxable profit, concerning financial expenses with loans and supplementary capital contributions to its shareholding companies.

That is: the corrections made have no legal basis, and therefore are affected by the vice of violation of law by error regarding the legal presuppositions, which justifies the annulment of the acts of assessment of CIT and compensatory interest, as well as the respective settlement statement that were based on those corrections.

In the sense now defended, at least the following arbitral decisions are found: proceedings of the CAAD nos. 39/2013-T, 258/2015-T, 631/2015-T

3rd Whether the correction of the addition of € 252,010.90, relating to financial expenses related to shareholdings, has legal support, namely resulting from what is established in Circular no. 7/2004 of the Tax Authority (DSIRC)

The factual framework ascertained for analysis or assessment of this question is as follows:

"(…)

l) The Claimant disregarded 40% of part of the financial expenses incurred with the acquisition of shareholdings;

m) For purposes of calculating financial expenses relating to shareholdings, the Tax Inspection considered the amount of € 1,097,154.97, concerning loans granted to shareholdings without remuneration;

n) And the Inspection further considered that, of the € 1,097,154.97 of corrected financial expenses, € 408,412.24 are not fiscally deductible by virtue of being considered as relating to shareholdings;

o) Since the amount of € 156,401.34 had already been added in table 07 of the Model 22 statement for 2011, the amount of € 252,010.90 was added;

p) The Claimant disregarded 40% of part of the financial expenses incurred based on the map of determination of the taxable result contained in the fiscal file (…)"

This concerns the correction, partial, merely arithmetical, of the taxable income declared by the Claimant for purposes of CIT in the aforementioned taxation period of 2011, in the amount of € 252,010.90, allegedly based on the provisions of article 32º-2 of the EBF (wording in force in 2011 – Law no. 55-A/2010, of 31-12).

Article 32º-2 of the EBF then provided:

"2 - The gains and losses realized by SGPS, by SCR and by ICR on shares of which they are holders, provided they are held for a period not less than one year, and likewise, the financial expenses incurred with their acquisition do not contribute to the formation of the taxable profit of these companies."

The financial expenses were considered by the Tax Authority as non-deductible in accordance with no. 2 of article 32º of the EBF, 2011 wording [Fiscal Benefits Statute]

In question and essentially and specifically is whether the Tax Authority could or could not apply the method of indirect allocation resulting from Circular no. 7/2004 of the DSIRC.

That Circular establishes, in the part that is of interest here, that "(…) as to the method to be used for purposes of allocation of financial expenses incurred with the acquisition of shareholdings, given the extreme difficulty of use, in this matter, of a method of direct or specific allocation and the possibility of manipulation that the same would allow, such imputation should be made on the basis of a formula that takes into account the following: the remunerated liabilities of SGPS and SCR should be imputed, in the first place, to remunerated loans granted by these to participated companies and to other investments generating interest, with the remainder being affected to the remaining assets, namely shareholdings, proportionally to their respective acquisition cost.

Regarding this question – correction effected by the Tax Authority to a taxpayer's taxable profit based on the non-deductibility of financial expenses incurred by an SGPS with the acquisition of shares and for purposes of application and interpretation or not to the specific case, of the tax benefit enshrined for SGPS (article 32º of the EBF) – Arbitral Case Law has understood that the additional assessment made on the basis of the method provided for in Circular no. 7/2004, and by reference to this, is affected by the vice of violation of law and the Constitution of the Portuguese Republic, since the determination of the manner of determining the amount of non-deductible financial expenses cannot be carried out by Circular, for, to admit such a solution would be to allow an administrative instruction to proceed with the determination of norms of incidence of CIT. To this extent, it was considered that the said Circular suffers from the vice of formal unconstitutionality[2], by violating the constitutional principles of legality and the reserve of law of the National Assembly (See Arbitral Decision rendered in Proceeding no. 24/2012T, in https://caad.org.pt/tributario/decisoes/decisao.php?s_processo=24&s_data_ini=&s_data_fim=&s_resumo=&s_artigos=&s_texto=&id=35).

In truth, there is not the slightest legal support for, instead of determining casuistically whether or not there is allocation of financial resources generating the expenses to the acquisition of certain shares, to impute the expenses, "in the first place, to remunerated loans granted by these to participated companies and to other investments generating interest, with the remainder being affected to the remaining assets, namely shareholdings, proportionally to their respective acquisition cost".

Now this method would only correspond to that legally required to determine the non-deductible expenses, if it were proven that, in fact, the financings to which the financial expenses refer had been allocated in the manner provided for there and, namely, as concerns the shareholdings, had been used proportionally to acquire them. But, beyond that lack of proof of the correspondence between reality and the imputation criterion used by the Tax Authority and Customs, not even any explanation is ventured in the said Circular for why the indicated formula should be used rather than another.

As the Tax Authority itself admits (see TIR, pages 49 and 50), the direct method of allocation would be the appropriate or most correct in order to ascertain the concrete allocation of financial resources generating the expenses to the acquisition of shareholdings.

To the contrary, the use of a criterion of indirect allocation, particularly that established in administrative instructions (Circular no. 7/2004), proves to be illegal.

In the sense of the illegality of the arithmetical corrections in light of the criterion defined in the cited Circular no. 7/2004, have already spoken various Tax Arbitral Courts constituted within the scope of the CAAD (see, in particular, the decisions rendered in proceedings nos. 21/2012-T, 24/2012-T, 292/2015-T, 295/2015-T, 738/2014-T, 69/2016-T, 663/2015-T) and also the judicial courts (see, for example, Decision of the Tax Audit Court of Appeals in proceeding no. 00997/12.8BEPRT of 14-3-2013)

No reasons or grounds are found to depart from such an understanding and, consequently, this correction is considered illegal.

4th Whether the positive patrimonial variation not reflected in the fiscal year [€ 105,990.00] constitutes or does not constitute true debt forgiveness (see article 21º of the CIRC/2011)

The question is related to or flows from the following factual framework ascertained in the case:

"u) On 28-12-2011, a Merger Deed by incorporation was executed between the company G…, SL and the remaining four companies J…, I…, H… and K…, which had accounting effect as of 01-01-2011, with G… increasing its share capital by € 12,800, corresponding to the sum of the share capital of those four companies (see TIR);

v) Following this merger operation, the Claimant transferred all balances to the account of the incorporating company – G… – namely the values of the financial transactions that had taken place with those shareholdings, which amounted to € 29,596.00 (loans granted) and the premiums mentioned above, in the total amount of € 330,990.00 (see TIR);

u) Through the same entry note no. …, the debt of € 330,990.00 that the Claimant had towards F… was settled as follows:

• € 225,000.00 were regularized by offset between the debt of project L… (€ 330,990) and amounts that would have been paid in excess by A… to F… in previous projects: project M… (€ 130,000) and project N… (€ 95,000);

• the remaining € 105,990.00 were de-recognized (see TIR, with underlining by us);

v) In the scope of an inspection action carried out with the Spanish company F… SL, the Spanish tax authorities detected the accounting of a provision for doubtful debts concerning the Portuguese company A…, which relate to the acquisition, on 08-05-2009, of shareholdings corresponding to 51% of the share capital of the 5 Spanish companies (see TIR);

x) According to the accounting records of F…, the sale price of those shareholdings amounted to € 339,150.00, corresponding to € 67,380.00 per entity acquired (see TIR);

z) The Claimant was notified to justify the de-recognition of the debt towards F… – in the amount of € 105,990.00, having presented a document, dated 20 July 2015 and entitled "Modificación de Acuerdo de Compraventa de Participaciones Sociales" [Modification of Share Purchase Agreement], by means of which it was agreed to alter the value of the 51% participation in the 5 Spanish companies from € 339,150.00 to € 233,160.00 (see TIR);

aa) This document was drawn up and exhibited by the Claimant during the inspection action (see TIR);

bb) In 2010, there occurred a profound and unforeseeable alteration in Spanish legislation regarding the production of photovoltaic energy – the publication of Royal Decree-Law no. 14/2010, which began to impose regulatory rates lower than those foreseen in 2009 and with a new regime for updating those same rates more burdensome than that which was provided for in 2009...

cc) …which motivated a marked devaluation of the shareholdings acquired from F… in 2009 and mentioned above in r) and following;

dd) In light of that devaluation of the shares in question, between the Claimant and F… it was verbally agreed, in 2011, to modify the initial contract of 2009, reducing the price initially stipulated for the sale of the shares;

ee) That verbal agreement of 2011 only came to be documented in 2015, by means of a contract entitled "Modificación de Acuerdo de Compraventa de Participaciones Sociales" [Modification of Share Purchase Agreement], executed on 20.07.2015 between the Claimant and F…, whose legal effects were expressly reported back to 03.10.2011 (see doc. 19 attached to the TIR);

ff) That devaluation corresponded to the said amount of € 105,990.00 [difference between € 339,150.00 and € 233,160.00 – see above, z)], without any reflection at the level of the results of the fiscal year or of the equity of the Claimant."

It is well known that the forgiveness of a credit within the scope of a private agreement does not, as a rule, allow the company that granted it to record the amount it ceased to receive as a cost for tax purposes in the area of CIT, unless the tax rules that provide for this possibility are fulfilled, namely through the establishment of provisions for doubtful collection credits or through the regime of uncollectable credits.

The question is to determine whether an agreement to reduce debt always recourse to debt forgiveness.

The answer to this question appears to be negative.

In truth, debt forgiveness or, according to the nomenclature of the Civil Code[3], remission, is a form of extinction of an obligation by which the creditor forgives the debtor's debt, no longer intending to demand it. It occurs between two obligational subjects (inter partes), it not being admissible that a third party be prejudiced by the action of remission – See articles 863º and following of the Civil Code.

It is not confused with waiver, in that the latter is a voluntary loss of a right by manifestation of unilateral will, being that only the former (remission) is admitted, in general terms, as a form of extinction of credits.[4]

That is: in order for true debt forgiveness to occur, the consent of the debtor is necessary, save, of course, for cases of statutory forgiveness of tax debts or debts to the State.

In this case, the facts ascertained do not permit the conclusion that there was a real and effective forgiveness of debt.

Let us see:

It was demonstrated that a total debt of € 330,990.00 had its origin in the contracts for purchase by the Claimant, from F…, of 51% of 5 Spanish operational companies (photovoltaic energy producers), executed on 08.05.2009, and that these contracts had as their object the investment in photovoltaic energy production plants in Spain, in partnership with the said F… (project L…).

Having occurred subsequently, in 2010, a profound, unforeseen and unforeseeable alteration in Spanish legislation, regarding the production of photovoltaic energy (publication of Royal Decree-Law no. 14/2010, which began to impose regulatory rates lower than those foreseen in 2009, with a new regime for updating those same rates more burdensome than that which was provided for in 2009), this meant objectively and substantially an alteration of the presuppositions of the photovoltaic project initially provided for by the parties in 2009, to the point of making impossible its execution in the manner foreseen in it, namely at the level of the initially provided profitability, even making impossible the obtaining of the necessary licensing for the project startup, with the consequent impossibility of obtaining the financing necessary for the effect and a marked devaluation of the shareholdings acquired from F… in 2009, a devaluation that corresponded to the said amount of € 105,990.00, without any reflection at the level of the results of the fiscal year or of the equity of the Claimant.

That is: it was necessary to reduce the value of those financial assets (shares acquired from F…) in the accounts of the Claimant – as a function of the marked devaluation that those assets underwent, by objective supervening circumstances, directly related to the alteration of Spanish legislation of the photovoltaic sector in 2010, entirely unforeseeable at the time of execution of the purchase contracts in 2009.

There was not therefore any question of debt forgiveness on the part of F…, with the inherent "income" or positive patrimonial variation in the sphere of the Claimant.

Substantially what occurred was the mutual recognition by the parties of the occurrence of a substantial and supervening alteration of the circumstances that justified the acceptance by both of the consequent alteration/modification of the contract in light of the provisions in articles 437º and following of the Civil Code.

Now if the Claimant had that right and it was recognized also by the selling party, one cannot speak of "debt forgiveness" in light of the above considerations, for this (forgiveness or remission) would presuppose the existence and subsistence of the initial debt, with extinction of the payment obligation through agreement as to its inexigibility or extinction by pure and simple forgiveness by the debtor, with declaration that it would no longer intend to demand its performance.

That manifestly was not the case.

What the parties agreed to was to alter the sale price/value of the alienated shares, in the recognition that such obliged them the abnormal, unforeseen or unforeseeable alteration of the circumstances in which they founded the decision to contract.

It is understood, in conclusion, that there is not, expressed or implied, flowing from the elements of proof and proven facts, the existence of debt forgiveness to which the Tax Authority alludes and which also substantiates the additional CIT assessment that is the subject of this case, and consequently the correction and the consequent assessment lack, in that part, error in the factual presuppositions and the vice of violation of Law.

5th Whether the commission in the amount of € 58,000 constitutes or does not constitute an expense inherent to the sale of the Claimant's participation in the South African company P… and whether it could or could not be accepted as an expense for fiscal purposes in 2011 (see articles 23º-1 and 46º-2 of the CIRC/2011).

The factual framework ascertained for analysis of this question is as follows:

gg) The Claimant incurred expenses related to commissions paid to the South African company O…, associated with the alienation of the shareholding P…, based in South Africa, in the amount of € 58,000, which it recorded in the account… (see TIR);

hh) The shareholding P…, held at 58% by the Claimant, was alienated in October 2011 to the Italian company Q… for € 1,160,000, an operation which generated a gain of € 918,650.00 determined by the difference between that realization value and the acquisition value (which amounted to € 241,350.00) (see TIR);

ii) This gain was not taxed by virtue of the application of the fiscal regime for SGPS set out in article 32º, no. 2 of the EBF then in force, having been deducted by the Claimant in field 769 of table 07 of the Model 22 statement for 2011 (see TIR);

jj) The commission of € 58,000.00, being an expense inherent to the sale of P…, was not accepted by the Tax Authority as an expense for fiscal purposes in 2011, which is why it was added to the Taxable Income of that fiscal year (see TIR).

The Claimant argues that the commission in question "(…) was related to the activity of the Claimant – which is an SGPS and which therefore dedicates itself, precisely, to the management of shares, namely to the sale thereof, as can be drawn from its respective statutory object, defined by law, and that a commission paid related to the sale of a shareholding is clearly related to the activity of the Claimant – and therefore, with all due respect, it is not seen what violation will have been committed of the provisions in article 23º no. 1 of the CIRC (…) Consequently, this correction is affected by the vice of violation of law, by erroneous interpretation and application of article 23º no. 1 of the CIRC (…)".

Article 46º of the CIRC in its no. 2 provides the following: "2 - Gains and losses are given by the difference between the realization value, net of the expenses that are inherent to it, and the acquisition value deducted from losses by impairment and other corrections (…)" (underlining by us).

That is, in this case, the value of the commission affected the realization value, reducing it (by allowing the deduction of the value of the commission paid) and therefore, being an expense inherent to the sale of P…, could not, as appears evident, be accepted as an expense for fiscal purposes in 2011, which is why it was correctly added to the Taxable Income of that fiscal year.

Therefore, the request must not succeed in this part.

6th Whether or not the request for indemnification for improper guarantee is founded.

The claimant provided bank guarantees intended to ensure payment and suspend execution in the part here challenged, of the additional assessment that is the subject of this case.

The General Tax Law provides:

Article 53º

Guarantee in case of improper payment

1 - The debtor who, to suspend execution, offers a bank guarantee or equivalent shall be indemnified in whole or in part for the losses resulting from its provision, if he has maintained it for a period exceeding three years, in proportion to the success in administrative recourse, challenge or opposition to execution that have as their object the guaranteed debt.

2 - The period referred to in the previous number does not apply when it is verified, in gracious reclamation or judicial challenge, that there was error attributable to the services in the assessment of the tax.

3 - The indemnification referred to in no. 1 is limited to a maximum of the amount resulting from the application to the guaranteed amount of the indemnity interest rate provided for in this law and can be requested in the same reclamation or judicial challenge proceeding, or autonomously.

4 - Indemnification for provision of improper guarantee shall be paid by deduction from the tax revenue of the year in which payment was made.

This Court understands that the assessment is affected, in this part, by error attributable to the Services: the passive subject will obtain partial success in the challenge, and the grounds for the consequent partial annulment are not attributable to him.

It is thus not applicable, in this case, the period of 3 years to which no. 1 of the cited article 53º of the General Tax Law alludes.

Being public and notorious that by the constitution of the sureties Stamp Tax was paid and other costs in function, in particular, of the value and period of the guarantee, it must be concluded that those costs must be refunded to the Claimant.

Having provided the guarantees for the total amount of the assessments that are the subject of this challenge, interest, costs and other increases (See article 199º-6 of the Code of Tax Procedure and Process) and going to obtain partial success in this action, the refundable costs will take into account the legality, in part, of the assessment as per the decision below.

That is: the presuppositions are recognized as being met that give the claimant the right to indemnification in accordance with the cited article 53º of the General Tax Law.

It is certain that the quantum of indemnification was not concretized or demonstrated.

However, this would not necessarily have to be alleged, for he who demands indemnification does not need to indicate the exact amount of damages – See article 569º of the Civil Code.

The calculation of the indemnification shall thus proceed in the course of execution of judgment and taking into account the limitations on its quantum provided for in article 53º-3 of the General Tax Law.

III. DECISION

It is therefore decided to render partially grounded the request for arbitral pronouncement, annulling, for illegality, the assessment of CIT and compensatory interest no. 2015…, for the fiscal year 2011, and respective settlement statement, in the amount of € 88,867.85, as well as the respective compensatory interest, excepting from this annulment the assessment in the part in which the Tax Authority considered the lack of fiscal deductibility of expenses associated with the alienation of shares, in the amount of € 58,000.00.

Value of the proceeding

The value of the proceeding is set at € 88,867.85, in accordance with article 97º-A, no. 1, subsection a) of the Code of Procedure and Tax Procedure, applicable by force of subsections a) and b) of no. 1 of article 29º of the RJAT and of no. 2 of article 3º of the Regulation of Costs in Tax Arbitration Proceedings.

Costs

The value of the costs of the proceeding is set at € 2,754.00, in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by both parties in the proportion of 8% by the Claimant and 92% by the Tax Authority and Customs.

Register and notify

Lisbon, 24 January 2017

The Arbitral Court,

(José Poças Falcão)

(Henrique Nogueira Nunes)

(Álvaro José da Silva)

[1] The deductibility of costs in the area of CIT, in Tax Magazine, January 2002.

[2] It is the settled understanding of the Constitutional Court that the prescriptions contained in Circulars of the Tax Administration do not integrate the concept of "norms" for purposes of constitutionality control (See Decision of the Constitutional Court no. 42/2014, of 9 January and the case law cited therein).

[3] The Civil Code of 1867 designated by forgiveness what is now remission of debt (see article 815º).

[4] Waiver does not integrate the list of forms of extinction of obligations provided for in the Civil Code, being admitted only in the scope of the forms of extinction of real guarantees [see, for example, articles 664º, 677º, 730º-d), 752º and 761º of the Civil Code]