Summary
Full Decision
ARBITRAL DECISION
CAAD: Tax Arbitration
Case No. 280/2014 – T
Subject: Corporate Income Tax – Special Regime for Taxation of Groups of Companies (RETGS); Municipal Surcharge.
Claimant: A – Sociedade Gestora de Participações Sociais, S.A.
Respondent: Tax and Customs Authority ("AT")
The arbitrators, Jorge Lino Ribeiro Alves de Sousa, Henrique Nogueira Nunes and Olívio Mota Amador, appointed by the Ethics Council of the Administrative Arbitration Centre ("CAAD") to form the Arbitral Tribunal, hereby agree as follows:
- REPORT
1.1. A – Sociedade Gestora de Participações Sociais, S.A., with fiscal identification number … (hereinafter abbreviated as "Claimant"), requested the establishment of the Arbitral Tribunal pursuant to article 2, section 1, paragraph a) of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT").
1.2. The request for arbitral ruling concerns the declaration of illegality of the self-assessment of Corporate Income Tax for the financial year 2011 which resulted in Corporate Income Tax payable in the amount of € 234,672.34, a first-instance tax act, and likewise the tacit dismissal of the Grace Petition presented and the Hierarchical Appeal presented, which aimed at the declaration of illegality of the same tax act (second-instance tax acts).
1.3. The request for establishment of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority (hereinafter abbreviated as "AT") on 25 March 2014, with the aforementioned arbitrators being designated as members of the Collective Arbitral Tribunal, who accepted the appointment.
1.4. On 13 May 2014 the parties were duly notified of this designation, and expressed no wish to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11, section 1, paragraphs a) and b) of RJAT and articles 6 and 7 of the Code of Ethics.
1.5. The Arbitral Tribunal was constituted on 28 May 2014.
1.6. In support of its request, the Claimant alleges, in summary, the following:
A - On the illegality of the 2011 self-assessment of Corporate Income Tax
(i) It alleges that the AT should consider the determination of its taxable profit with reference to the financial year 2011 as dominant company by inclusion in the Special Regime for Taxation of Groups of Companies ("RETGS") for the financial year 2011, of all shareholdings of at least 90% held indirectly by it in a set of companies resident in ... which are in turn held through English law companies, resident for tax purposes in the United Kingdom.
(ii) That it has been, since 2002, the dominant company of a group of companies taxed in accordance with the RETGS provided for in articles 69 et seq. of the Corporate Income Tax Code.
(iii) It considers that companies also headquartered in ... held by companies B, C and D should be considered as covered by the RETGS.
(iv) It considers that article 69, section 4, paragraph f) of the Corporate Income Tax Code (in the wording and numbering in force at the time) clearly violates Community law by excluding from the RETGS companies resident in ... whose shareholding level of at least 90% is obtained by non-resident companies.
(v) As support for its position, in response to a Binding Information Request ("PIV") presented by it, the AT replied to the same, expressly stating that, notwithstanding the provisions of article 69 of the Corporate Income Tax Code, a company resident in Portuguese territory held in at least 90% of capital through a company resident in another EU Member State, may in fact be part of the perimeter of a group for the purposes of the RETGS.
(vi) And that this framework should apply to the 2011 financial year, since the reasons justifying the application of the regime to the 2012 financial year, upheld by the AT, are the same reasons justifying its application to prior financial years.
(vii) That article 69, section 4, paragraph f), of the Corporate Income Tax Code, by excluding from the RETGS companies resident in ... whose holding is effected through non-resident companies, more specifically companies resident in the European Union, is clearly violating Community law, namely the Freedom of Establishment, provided for in article 43 of the Treaty establishing the European Community (TEC).
(viii) Invoking the doctrine established in the Judgment of the CJEU of 27 November 2008, delivered in Case C-418/07, better known as the Papillon Judgment.
(ix) It considers that with reference to the financial year 2011 it determined the group's tax result without including the companies held by companies E, B and D, in compliance with the legal provisions in force, but not conforming to its illegality.
(x) Illegality which it seeks to have corrected through the correction of the self-assessment of Corporate Income Tax at issue in these proceedings.
(xi) It argues that this is an interpretative Judgment of the CJEU, with respect to which the rule of its retroactive effect applies, a principle which cannot be unjustifiably derogated by Member States.
(xii) And that a provision provided for in the Treaty on European Union such as the Freedom of Establishment is directly applicable in domestic legal orders and is by itself sufficient to produce direct effects in individual legal spheres.
(xiii) Therefore it cannot fail to adopt a solution of application of the normative provisions contained in paragraph f), section 4, article 69 of the Corporate Income Tax Code that is compatible with the guidance resulting from the Papillon Judgment.
(xiv) It states that contrary to what the AT concludes in the PIV, the AT has the obligation to ensure that the domestic law that it applies is in conformity with international law, with international conventions, with Community law, or with any other law that has taken precedence over national law.
(xv) It states that it did not make the communication that the AT required of it, not because it forgot, but simply because national law considered that those non-resident companies held by resident companies could not be included in the RETGS.
(xvi) And that, as such, it merely complied with national law, which in no way can be weighed against it, and even less prevent the situation from being corrected and legality restored.
(xvii) It considers that a private party is not empowered to produce laws, while they are, even if non-conforming with EU Law, found in the domestic legal order, and therefore, it argues, must conform to their application, but may subsequently invoke before national courts any relevant Community provision to obtain an interpretation of the internal norms consistent or compatible with Community requirements.
(xviii) Thus, it argues that the application of retroactive effects to the Papillon Judgment cannot be avoided on the basis that it determines in the specific case the cessation of the RETGS of which the Claimant is the dominant company by virtue of the non-communication of the integration of companies held through non-resident companies, as the AT contends, when such possibility was not granted to it in the face of domestic law.
B - On the Illegality of the Municipal Surcharge
(i) It considers that when the Special Regime for Taxation of Groups of Companies applies, the taxable profit that serves as the basis for the incidence of the Municipal Surcharge should correspond to the sum of the profits and fiscal losses of the various entities of the group.
(ii) It understands that in the face of its specific case, it is found that in the period of 2011, the determination of the Municipal Surcharge should have been carried out on the taxable profit of the Group and not on the taxable profit of the companies individually considered.
(iii) Basing its position on extensive case law issued by the Supreme Administrative Court and by CAAD that have already ruled on this same issue.
(iv) Therefore it concludes that the value of the surcharge should be corrected, and in this correction should also be included the companies which according to the Papillon judgment should also be integrated into the RETGS, and whose calculation it presents.
D - On the restitution of the amount of € 212,628.60
(i) It alleges that in accordance with the interpretation made by the CJEU regarding the requirements on which the application of the RETGS depends and with the understanding of the case law and CAAD regarding the determination of the Municipal Surcharge, it has the right to be reimbursed the amount of € 212,628.60, an amount corresponding to the calculations it made, which results from the difference between the Corporate Income Tax to be recovered resulting from the interpretation made by the CJEU and that recorded in the Annual Statements of Income Model 22 previously submitted and comprising the determination of the Municipal Surcharge based on the taxable profit determined by the Group.
E – On the payment of compensatory interest
(i) It considers that it has the right to the payment of compensatory interest accrued and accruing until full payment of the amount of Corporate Income Tax that it unduly bore.
(ii) Because, it argues, this right derives from the violation of EU Law, with it being the consensus understanding of the CJEU that the collection of taxes in violation of Community Law results in the payment of interest with a view to compensation for damage resulting from the unavailability of the amounts unduly collected.
1.7. The AT replied, arguing that the requests should be judged unfounded, alleging in summary form as follows:
(i) It considers that the Claimant does not provide proof of the factual requirements for the application of the RETGS, namely regarding the verification of the minimum shareholding percentages of resident companies through non-resident companies at issue in these proceedings.
(ii) And that being this a material requirement for the exercise of the option to apply the RETGS it was incumbent on the Claimant to have proven it, since the AT is not in a position to assess whether the Claimant could or could not be taxed under this regime.
(iii) Considering that, it says, this minimum shareholding percentage of capital constitutes one of the constitutive facts of the right which the Claimant claims, argues that it is burdened with its proof, under the penalty of the claim being resolved against it.
(iv) It alleges that the application of the RETGS depends on the option to apply it, on the cumulative verification of a set of requirements provided for in section 3 of Article 69 of the Corporate Income Tax Code and on the non-existence of any of the application clauses of the regime listed in section 4 of Article 69 of the Corporate Income Tax Code.
(v) It considers that the Claimant, invoking the case law of the CJEU, could have exercised its option for the RETGS with respect to the financial year 2011, having at its disposal various means of response in case of refusal to apply the RETGS on the grounds of the application of national law without observance of the interpretation conveyed by the CJEU.
(vi) The Claimant having not proceeded to such an option, nor having complied with the formal requirements listed in the law.
(vii) It considers that this is not a situation in which the AT refused the taxation of Group A as a whole, including the companies held by Group C, in accordance with the RETGS, but rather a failure on the part of the Claimant in the exercise of an option that it was incumbent on it to make, notably by compliance with the formal requirements for such to occur.
(viii) It argues that the AT was not called upon to assess whether the Claimant could, under the Primacy Principle of Community Law, exercise such an option, but saying that it is not clear whether the AT, as a Public Administration body and in the absence of legislative amendment incorporating the understanding of the CJEU, could, even and under the principle of legality, authorize the exercise of such option.
(ix) It considers that the mere fact that the Claimant did not formalize any claim in this sense prevents the assessment of the claim at administrative level, due to lack of initiative capable of raising it.
(x) Therefore, it argues, this is a restriction of a right that the Claimant considered it had and which it did not exercise, not because it was barred from doing so by the AT, but because it did not exercise it in a timely manner.
(xi) Concluding for the total unfoundedness of the requests formulated.
1.8. The Tribunal dispensed with the holding of the first meeting of the Arbitral Tribunal, considering that the record already contains the necessary and sufficient facts to decide on the law, which did not meet with opposition from the parties. No exceptions were identified, nor was there any need for the presentation of arguments, considering that both parties had sufficiently substantiated, in fact and in law, their positions. A deadline was initially set until 28 November 2014 for the issuance of the decision and subsequently this deadline was extended to 12 January 2015 by an order dated 27 November 2014, due to the temporary replacement of the arbitrator-president.
1.9. After the AT presented its Reply and in light of its tenor, the Claimant understood to present a Request asking the Tribunal for a deadline until 12 September 2014 to attach documentation proving the shareholdings and respective percentages of the companies headquartered in the United Kingdom, alleging that Case No. 279/2014-T is being processed within this Centre, in which the same case is discussed, but with reference to the financial year 2010 and where such request was granted, which was admitted by the Tribunal.
2.0. The Claimant presented this documentation on 16 September 2014, beyond the deadline granted by the Tribunal, taking the opportunity to also attach documentation regarding the nature of the binding information request it presented and which forms part of the evidence attached to these proceedings.
2.1. The Tribunal, considering that the documentation presented is essential to the assessment and decision on the merits of the case, as it corresponds to questions and doubts raised by the AT itself in its Reply, understood to admit the same, further deciding to notify the AT to comment, if it wishes, within 10 days, and the postponement of the final decision until 28 November 2014.
2.2. The AT presented a Request on 30 September 2014 in which it informed that the Corporate Income Tax Services Directorate had concluded and informed the Claimant (in the context of appreciation of the hierarchical appeal) within the scope of a Binding Information Request, to the effect that the case law of the CJEU could only be applied from 1 January 2012.
2.3. The AT presented a Request on 7 October 2014, in reply to the Request presented by the Claimant on 16 September 2014, which it did beyond the deadline granted by the Tribunal, but which was admitted by it, arguing, in summary (i) that the documentation attached in English with this request could not be assessed by the Tribunal since they should have been translated, that (ii) the remaining documentation attached with the request does not provide sufficient proof of the minimum percentage of capital of all companies in the group and, finally, (iii) that the Claimant should be sentenced regarding the procedural costs, even in case of eventual success of the claim. The Tribunal understood to admit the request presented by the AT, notifying the Claimant thereof.
2.4. The Claimant presented a Request on 13 October 2014, commenting on (i) the question raised by the AT regarding the mandatory translation into Portuguese of part of document no. 5 attached by it and on (ii) the responsibility for payment of costs in the arbitration proceedings.
2.5. The Tribunal ordered the Claimant to attach to the record the Portuguese translation of part of document no. 5, which it proceeded to attach and a 10-day period was given to the Respondent to comment.
2.6. The Tribunal was duly constituted and is competent in respect of the subject matter, in accordance with article 2 of RJAT.
2.7. The parties have legal personality and capacity, show themselves to be legitimate and are duly represented (cf. articles 4 and 10, section 2 of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).
2.8. No procedural nullities or exceptions were identified, there being no obstacle to the assessment of the merits of the case.
- ISSUES TO BE DECIDED
As is peacefully accepted by both parties, the fundamental issues discussed in these proceedings concern, essentially, the determination, in light of the legal framework in force at the date of the tax facts at issue, of the tax treatment to be accorded to the inclusion of the Claimant in the perimeter of the RETGS, with respect to the financial year 2011, of all shareholdings of at least 90% allegedly held indirectly by it in companies resident in ... through companies E, B and D, companies resident for tax purposes in the United Kingdom, and likewise that the issue relating to the manner in which the Municipal Surcharge should be calculated with reference to the same financial year is assessed.
- MATTER OF FACT
With relevance for the assessment and decision on the merits, the following facts are deemed proven:
A) The Claimant presented on 31-05-2011 the Corporate Income Tax Statement Model 22, relating to the financial year 2011, as the dominant company of Group A - cf. Print of data recorded in the AT's computer systems attached by it as Document no. 1 with its Reply.
B) Subsequently, on 22-05-2013, it presented a replacement Statement Model 22, as the dominant company of Group A, for the same financial year 2011, in which it determined a net tax result of € 6,547,641.08, and a tax payable of € 234,672.34 - cf. Document no. 1 attached with the Claimant's Petition.
C) This latter Statement is recorded in the AT's computer systems as a non-enforceable document, however, a correction document relating to the financial year 2011, identified as no. 3182 2012 D0064 was issued - cf. Document no. 1 attached by the AT with its Reply.
D) By means of registered mail dated 30-05-2013, the now Claimant presented a grace petition against the self-assessment act of Corporate Income Tax for the year 2011 - cf. Document no. 2 attached with the Claimant's initial petition and Administrative Proceedings attached by the AT.
E) The grace petition was not decided and as the legal period of 4 months for decision after its presentation had elapsed, it was by law tacitly dismissed - cf. Administrative Proceedings attached by the AT to these proceedings.
F) By means of registered mail dated 23-10-2013, the Claimant filed a hierarchical appeal against the tacit dismissal of the grace petition, to which only a cover was given, with assignment of the number … - cf. Document no. 3 attached by the Claimant with the initial petition and Administrative Proceedings attached by the AT to these proceedings.
G) The hierarchical appeal was not decided and as the legal period of 60 days for decision after its presentation had elapsed, it was by law tacitly dismissed - cf. Administrative Proceedings attached by the AT to these proceedings.
H) On 21-03-2014 the present request for arbitral ruling presented by the Claimant was accepted by CAAD.
I) The Claimant has been, since 2002, the dominant company of a group of companies taxed in accordance with the RETGS provided for in articles 69 et seq. of the Corporate Income Tax Code.
J) This consolidation perimeter did not include, with reference to the financial year 2011, Company E, a company resident for tax purposes in the United Kingdom; and Companies B and D also resident for tax purposes in the United Kingdom.
K) The Claimant attaches as Document no. 3 with its request presented on 16/09/2014 and admitted to the record, a declaration issued by its Official Auditors, attesting to the relationship of shareholdings existing at the date of the financial year invoked by the Claimant in its petition.
L) The Claimant attaches as Document no. 4 with its request presented on 16/09/2014 and admitted to the record, the Financial Report and Accounts of Company F –…, S.A., dated 31/12/2011, in which in the Annex to the Financial Statements, in section 5 thereof, it is expressly stated that this company held, in 2010 and 2011, 100% of Company E, headquartered in England.
M) The Claimant attaches as Document no. 5 (which, subsequently and after notification by the Tribunal, was partially translated into Portuguese and attached to the record) attached with its request presented on 16/09/2014 and admitted to the record, Financial Report and Accounts of Company E, in which on page 31, reference is made to the holding of 100% of the capital of Companies B and D by the Group to which Company E belongs and on the same page 31 of the Independent Auditor's Report (G) which is part of this Financial Report and Accounts, it is expressly stated that in the years 2010 and 2011 Company E held 100% of Companies B and D.
N) The Claimant attaches as Document no. 3 with its request presented on 16/09/2014 and admitted to the record, a declaration issued by its current Official Auditors, attesting to the relationship of social shareholdings existing as the Claimant configures the same in these proceedings and with reference to the financial years 2010 and 2011.
O) The Claimant attaches as Document no. 6 with its request presented on 16/09/2014 and admitted to the record, the attendance list from the minutes of the General Assembly of Company C. SGPS, S.A., held on 31/03/2010, from which it appears that Company B held 99% of the share capital of said company and a declaration from the President of the Board of the General Assembly of Company C., SGPS, S.A., dated 09 September 2014, in which it declares that with reference to the General Assembly dated 31/03/2011, Company B held 99% of the share capital of the mentioned company.
P) The Claimant attaches as Document no. 10 with its request presented on 16/09/2014 and admitted to the record, minutes of General Assemblies dated 29/03/2010, 29/03/2011 and 02/04/2012 and respective attendance lists, of Company I from which it is verified that in the years 2010, 2011 and 2012 Company D Ltd was the holder of 100% of the share capital of said company.
Q) With reference to the year 2011 the Claimant presented in its Initial Petition the following corporate structure:
[Organizational chart showing: A at the bottom, H, F above A, E connected to F, B and D connected to E, C connected to B, I connected to D, and J, K, L, M, N, O above the structure]
R) The Claimant presented to the AT a binding information request (PIV), where, among other questions not relevant to the case sub judice, it seeks to have confirmed its understanding regarding two fundamental issues. The first question is that if the dominant company of Group A, SGPS, S.A., holds the dominant company of Group C …SGPS, S.A. in at least 90%, through companies based in the European Union (in casu, in the United Kingdom), which it alleges, can become a single group, in which the dominant company is A, SGPS, S.A and the second question consists in knowing, if the previous question is affirmative, given the fact that Company A, SGPS, SA has held Company C, SGPS, SA since 2006, whether there can be retroactivity in the application of the previous understanding in the application of the previous understanding, to 2006 (period in which, for the first time, it would be in a position to be integrated into the RETGS), or to 2008, or, at the minimum, from the current period onwards – cf. Document no. 1 attached to the record and Document no. 2 attached with the Request presented by the Claimant on 16/09/2014 and admitted to the record.
S) The AT ruled on the aforementioned PIV on 24/10/2012, with the Claimant becoming aware of it, at least from 14/11/2012 onwards (Cf. Document no. 2 attached with the request presented by the Claimant on 16/09/2014 and admitted to the record) expressly stating that, notwithstanding the provisions of article 69 of the Corporate Income Tax Code, and even considering the absence of a domestic enabling norm, a company resident in Portuguese territory held in at least 90% of capital through a company resident in another Member State of the European Union, may, in fact, be part of the perimeter of a group for the purposes of the RETGS, but restricting its understanding to financial years 2012 and onwards, making, however, the application of this understanding conditioned on compliance with the requirements for the application of the RETGS provided for in article 69 of the Corporate Income Tax Code - cf. Document no. 4 attached by the Claimant with the initial petition.
T) The tax result recorded in the RETGS of which C ... SGPS, S.A. is the dominant company amounts to a tax loss of € 1,867,601.62 – cf. Document no. 5 attached by the Claimant with its initial petition.
U) The tax result determined by Company I –…, S.A. amounts to taxable income of € 220,834.74 – cf. Document no. 6 attached by the Claimant with its initial petition.
- UNPROVEN FACTS
There are no unproven facts with relevance for the decision of the case.
- SUBSTANTIATION OF THE DECISION ON MATTERS OF FACT
Regarding the essential facts, the matter settled is configured identically by both parties and the Tribunal's conviction was formed on the basis of the extensive documentary evidence attached to the proceedings and discriminated above, whose authenticity and veracity was not questioned by either party.
It is important to emphasize that the proof of the shareholdings held by Company C, SGPS, S.A., as the dominant company of a group of dominated companies subject to the RETGS, and duly listed in the Claimant's Initial Petition need not be carried out within the scope of these arbitration proceedings, since the AT in assessing the binding information request attached to the record, and in the context of its own Reply – cf. article 53 – at no time questions this chain of shareholdings, nor would it make sense for it to do so, considering the existence since 2006 of a RETGS applicable to Company C, SGPS, S.A., a situation which was maintained with reference to the financial year 2011.
It is also important to emphasize that the AT, in its request presented on 7 October 2014, despite contesting the proof attached by the Claimant as being sufficient to prove the chain of shareholdings relevant at issue in these proceedings, at no time individualizes or identifies the shareholding(s) which require proof, limiting itself to asserting in general terms that the Claimant did not attach sufficient proof.
- ON THE LAW
In accordance with the issues outlined, which appear in section 2, and having regard to the matter of fact, which is fixed in section 3, it is now necessary to determine the applicable law.
6.1. The first issue concerns the inclusion of the Claimant in the perimeter of the RETGS, with respect to the financial year 2011, of all shareholdings of at least 90% allegedly held indirectly by it in companies resident in ... through companies E, B and D, companies resident for tax purposes in the United Kingdom.
6.2. It is important to begin by describing the legal framework in force at the date of the tax facts at issue in these arbitration proceedings. In the initial version of the Corporate Income Tax Code there existed the possibility, albeit restricted, for groups of resident companies in ... to opt to be taxed on consolidated profit[1]. This system was eliminated by Law no. 30-G/2000 of 29 December, and in its place the Special Regime for Taxation of Groups of Companies (RETGS) was created, regulated in articles 63 to 65 of the Corporate Income Tax Code.
Article 63 of the Corporate Income Tax Code, with the heading "Scope and conditions of application", was renumbered to article 69, with the entry into force of Decree-Law no. 159/2009, of 13 July, which republished that Code. Sections 3 and 4 of article 69 had the following wording:
"3 — The option for the application of the special regime for taxation of groups of companies can only be formulated when the following requirements are cumulatively satisfied:
a) The companies belonging to the group all have their registered office and effective management in Portuguese territory and the entirety of their income is subject to the general regime of Corporate Income Tax, at the highest normal rate;
b) The dominant company has held the shareholding in the dominated company for more than one year, with reference to the date on which the application of the regime begins;
c) The dominant company is not considered dominated by any other company resident in Portuguese territory that meets the requirements to be qualified as dominant.
d) The dominant company has not waived the application of the regime in the three preceding years, with reference to the date on which the application of the regime begins.
4 — Companies in the following situations cannot be part of the group, either at the beginning or during the application of the regime:
a) Have been inactive for more than one year or have been dissolved;
b) A special recovery or bankruptcy proceeding has been instituted against them in which a ruling for continuation of the action has been issued;
c) Record tax losses in the three financial years preceding the beginning of the application of the regime, except, in the case of dominated companies, if the shareholding is already held by the dominant company for more than two years;
d) Are subject to a Corporate Income Tax rate lower than the highest normal rate and do not waive its application;
e) Adopt a tax period not coinciding with that of the dominant company;
f) The required level of participation of at least 90% is obtained indirectly through an entity that does not meet the legally required requirements to be part of the group;
g) Do not assume the legal form of a limited liability company, joint-stock company or limited partnership by shares, except as provided in section 10."
Section 1 of article 70 of the Corporate Income Tax Code provided as follows:
"With respect to each of the tax periods covered by the application of the special regime, the taxable profit of the group is calculated by the dominant company, through the algebraic sum of the taxable profits and tax losses determined in the periodic individual declarations of each of the companies belonging to the group."
In summary, the Corporate Income Tax Code provided for the taxation of groups of companies by the sum of the tax results determined in the income statements of each of the companies in the respective group. However, the application of this regime depended on the cumulative verification of a set of requirements, provided for in section 3 of article 69 of the Corporate Income Tax Code, and the non-existence of any of the situations established in section 4 of the same article.
6.3. The rule contained in paragraph f) of section 4 of article 69 of the Corporate Income Tax Code excludes from the RETGS companies resident in ... held through non-resident companies. Thus, the Claimant is prevented from including in the perimeter of the RETGS, of which it is the dominant company, the companies held by E, by B and by D, resident for tax purposes in the United Kingdom.
The restriction contained in paragraph f) of section 4 of article 69 of the Corporate Income Tax Code creates differentiated tax regimes for resident companies depending on the location of the companies that hold them. This differentiation appears to be susceptible to restricting the freedom of establishment and to generating a situation of inequality based on location. We are thus facing a violation of Community law, namely the Freedom of Establishment which is currently enshrined in article 49 of the Treaty on the Functioning of the European Union (TFEU) and previously in article 43 of the Treaty establishing the European Community (TEC).
Although only Member States have competence in the matter of direct taxes, the CJEU has sustained, through its decisions, that these States must exercise this competence in conformity with European Union law. Thus avoiding violations of the five fundamental economic freedoms: (i) free movement of goods (articles 28 et seq. of TFEU); (ii) free movement of workers (articles 45 et seq. of TFEU); (iii) freedom of establishment (article 49 et seq. of TFEU); (iv) freedom to provide services (article 56 et seq. of TFEU) and (v) free movement of capital (article 63 et seq. of TFEU). Through the protection of each of these freedoms, directly applicable, there occurs a genuine harmonization by way of case law which translates into the obligation for national legislations to conform to each of these freedoms.
On the matter being assessed in these arbitration proceedings, the judgment delivered by the Court of Justice of the European Union (CJEU), on 27 November 2008, in Case C-418/07, known as the Papillon Judgment, concluded that norms which disadvantage, from a tax perspective, Community situations compared to purely internal situations, constitute a prohibited restriction by the norms of Community law relating to the freedom of establishment[2]. The AT in the binding information it provided to the Claimant, which is attached to the record [3], supports this understanding by stating:
"25. The guidance that emanates from the Papillon judgment is so clear and manifest, raising no doubt whatsoever, that, although the letter of the applicable legal provision does not lead directly to that solution, it seems that a solution should be adopted for the application of the relevant provisions of article 69 of the Corporate Income Tax Code in keeping with the requirements resulting from the mentioned judgment.
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Consequently, it is thought that it must be admitted, in light of the clear, manifest and indubitable character of the jurisprudence of the Court of Justice that, notwithstanding the current wording of the provision of article 69 of the Corporate Income Tax Code, a company resident in Portuguese territory held in at least 90% of capital through a company resident in another Member State of the European Union may be part of the perimeter of a group for the purposes of the RETGS.
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Thus, notwithstanding the current wording of article 69 of the Corporate Income Tax Code, the fact that there exists Case law of the CJEU (Judgment Papillon C-418/07) which raises no doubts as to its application to the matter under assessment, should be considered that there may be part of the perimeter of a group for the purposes of the RETGS companies resident in Portuguese territory held in at least 90% of capital, through a company resident in another EU Member State"
Consequently, the Claimant presents a corporate configuration apt for the application of the RETGS, notwithstanding the limitation resulting from the letter of domestic law, it being possible to conceive that, by way of European Union Law, the scope of application of the RETGS provided for in article 69 of the Corporate Income Tax Code can be extended.
6.4. The Respondent alleges that the Claimant, invoking the case law of the CJEU, could have exercised its option for the RETGS, with respect to the financial year 2011, and did not do so. Thus, the Claimant did not comply with the formal requirements listed in sections 7 and 8 of article 69 of the Corporate Income Tax Code. This Tribunal considers that the Respondent's argument is not well-founded for two reasons.
First, within the legal framework in force at the date of the facts subject to assessment in these proceedings the communication by the Claimant was devoid of meaning, because the rule contained in paragraph f) of section 4 of article 69 of the Corporate Income Tax Code excluded from the RETGS companies resident in ... held through non-resident companies. Thus, the Claimant did not communicate the integration of companies held through non-resident companies, because such was not permitted to it by national legal norms. It is not overlooked that the Claimant filed a grace petition against said self-assessment act of Corporate Income Tax and subsequently a hierarchical appeal against the tacit dismissal, which was also tacitly dismissed[4].
Second, the fact that the national legislator did not adequately amend the legal order to Community law in a timely manner cannot prevent the taxpayer from seeing its situation corrected and legality restored. Thus, the taxpayer may invoke before national courts any Community norm with a view to obtaining an interpretation of the internal norms consistent or compatible with Community law[5]. It is important to note that the national legislator only with the recently approved Law no. 82-C/2014, of 31 December, which amended the Corporate Income Tax Code, transposing Directive no. 2014/86/EU, of the Council, of 8 July, which amends Directive no. 2011/96/EU relating to the common tax regime applicable to parent companies and affiliated companies of different Member States, adequately adjusted the special regime for taxation of groups of companies to the recent case law of the CJEU[6].
6.5. The second issue concerns the manner in which the Municipal Surcharge should be calculated, in the financial year 2011, with respect to the Claimant in light of the application of the RETGS.
One of the manifestations of the tax authority proper to local authorities, provided for in section 4 of article 238 of the Constitution of the Portuguese Republic ("CRP"), is the levy of the surcharge according to the terms of the Local Finances Law.
In the Local Finances Law of 1998 (Law no. 42/98 of 6 August), the surcharge was imposed based on the collection determined by the Corporate Income Tax taxpayers. Under section 1 of article 18 of that diploma, municipalities could "… annually levy a surcharge, up to the maximum limit of 10% of the collection of Corporate Income Tax (IRC), which proportionally corresponds to the income generated in its geographic area by taxpayers who exercise, as their principal activity, an activity of a commercial, industrial or agricultural nature."
The Local Finances Law of 2007 (Law no. 2/2007 of 15 January) established a new regime for the surcharge. Article 14, section 1 of the Local Finances Law provides that "Municipalities may decide to annually levy a surcharge, up to the maximum limit of 1.5% on the taxable profit subject to and not exempt from Corporate Income Tax (IRC), which corresponds to the proportion of income generated in its geographic area by taxpayers resident in Portuguese territory who exercise, as their principal activity, an activity of a commercial, industrial or agricultural nature and non-residents with a permanent establishment in that territory."
With the Local Finances Law of 2007, the surcharge ceased to be an additional to the Corporate Income Tax to become an addition, that is, it ceased to be calculated by applying a rate to the collection, and is instead calculated by applying a rate to the taxable amount.
From the analysis of the Local Finances Law of 2007, it follows that the surcharge may have its own rules, for example, for the determination of the taxable amount, for collection, for payment, for ancillary obligations different from the norms of the Corporate Income Tax. However, the Local Finances Law does not fully regulate the tax legal relationship of the surcharge. The surcharge regime, at the date of the present arbitration case, was silent regarding specific rules for determining the taxable amount. Thus, we conclude that, at the date of the facts of the present case, the Local Finances Law was silent regarding its own rules for determining the taxable amount of the surcharge, and the Corporate Income Tax regime should be applied.
From the factuality subject to these arbitration proceedings it follows that the Claimant was subject to the RETGS.
When the RETGS is applied, the surcharge must be imposed on the taxable profit of the Group and not on the individual profit of each of the companies that comprise it, since the taxable amount of the surcharge has as its reference the same aggregate taxable profit. It would only be otherwise if there existed a legal norm that established a specific rule for determining the taxable amount for the surcharge and different from that contained in section 1 of article 70 of the Corporate Income Tax Code. But that norm did not exist at the date of the facts subject to analysis in these arbitration proceedings.
The Circular Letter no. 20132, of 14 April 2008 states: "Within the framework of the special regime for taxation of groups of companies, the determination of the taxable profit of the group is carried out in the manner referred to in article 64 of the Corporate Income Tax Code, corresponding to the algebraic sum of the taxable profits and tax losses determined in the periodic individual declarations. If it is true that in the periodic individual declarations there is no true determination of collection, the same cannot be said with respect to taxable profit. In fact, each company determines a taxable profit in its individual declaration. Thus, for companies that are part of the perimeter of the group covered by the special regime for taxation of groups of companies, the surcharge should be calculated and indicated individually by each of the companies in its declaration, and the Annex A, if applicable, should also be completed individually. The sum total of the surcharges thus calculated will be indicated in field 364 of Table 10 of the corresponding group declaration, with the responsibility for payment falling to the dominant company…"
The Circular Letter is not a source of tax law and is part of what is called directive law composed of generic guidance directed to tax administration services regarding the interpretation and application of tax norms (article 59, section 3, paragraph b) of the General Tax Law).
The interpretation contained in Circular Letter no. 20132, of 14 April 2008, violates the law and cannot be invoked to substantiate the collection of the surcharge.
Finally, it is necessary to analyze the fact that Law no. 64-B/2011, of 30 December, which approves the State Budget Law for 2012, in article 57 amended various provisions of the Local Finances Law (Law no. 2/2007 of 15 January) and added a new section 8 to article 14 of the Local Finances Law with the following wording: "When the special regime for taxation of groups of companies is applicable, the surcharge is imposed on the individual taxable profit of each of the companies in the group, without prejudice to the provisions of article 115 of the Corporate Income Tax Code."
Thus, on 1 January 2012, a specific norm for determining the taxable amount for the surcharge entered into force, in cases of groups of companies.
From this it is reinforced the understanding that the legislator altered the regime in force, because it was aware that the earlier wording of article 14 of the Local Finances Law did not allow supporting the interpretation contained in Circular Letter no. 20132, of 14 April 2008.
The norm of section 8 of article 14 of the Local Finances Law is not interpretative in nature, because there is no reference, direct or indirect in the norm or in the State Budget Act, to its interpretative character.
Furthermore, taking into account the principle of prohibition of retroactivity of tax law, contained in section 3 of article 103 of the Constitution of the Portuguese Republic, the mentioned norm also cannot be applied retroactively.
In light of the foregoing, the regime contained in section 8 of article 14 of the Local Finances Law should apply only prospectively, that is, from 1 January 2012, and is not susceptible to application in the present arbitration case which concerns the financial year 2011.
The case law of the Supreme Administrative Court and arbitration case law converged in the understanding that the surcharge, when the RETGS is applicable, should be imposed on the taxable profit of the group and not on the taxable profit of each of the companies that comprise it. Thus, the Judgments of the Supreme Administrative Court delivered in cases 909/10 of 02/02/2011, 309/11 of 22/06/2011, 234/2012 of 02/05/2012 and 1302/12, of 09/01/2013 and the Arbitral Decisions delivered in cases 8/2011-T, 10/2011-T, 19/2011-T, 24/2011-T, 1/2012-T, 2/2012-T, 5/2012-T, 16/2012-T, 53/2012-T, 88/2012-T, 98/2012-T, and 106/2012-T, among others, decided thus.
In summary, the self-assessment acts of the surcharge owed by the Claimant with respect to the financial year 2011 are tainted by the defect of violation of law, by error regarding the legal requirements, insofar as the calculation of the surcharge should have been imposed on the taxable profit of the Claimant's tax group and not on the taxable profit of each company individually considered. In that correction should be included the companies that are part of the RETGS as a consequence of the provisions of the Papillon Judgment.
6.6. In these terms, the arbitral tribunal considers that the self-assessment act of Corporate Income Tax for the financial year 2011 should be declared illegal and the Claimant should be reimbursed the amount resulting from the difference between the amount recorded in the Periodic Annual Statements Model 22 and the amounts resulting from: (i) interpretation consistent with Community law regarding the requirements on which the application of the RETGS depends; and (ii) the payment of the Municipal Surcharge based on the taxable profit determined by the Group and not on the taxable profit of the companies individually considered.
6.7. It is now important to analyze the request for compensatory interest by the Claimant. In accordance with the provisions of article 43, section 1, of the General Tax Law, the judicial impugnation process allows for the condemnation of the AT to payment of compensatory interest when it is determined that there was error attributable to the services from which resulted payment of the tax debt in an amount higher than legally due.
Article 24, section 5, of RJAT provides that "payment of interest, regardless of its nature, is due, according to the terms provided for in the General Tax Law and in the Code of Tax Procedure and Process"
As it results from the foregoing, although the Claimant carried out the self-assessment, it is found that the act now annulled was illegal, since it did not depend on the Claimant the definition of the legal framework of the requirements on which the application of the RETGS depends nor the definition of the payment of the Municipal Surcharge, and the Claimant further attempted to demonstrate this in the context of administrative proceedings, and therefore the request for compensatory interest is well-founded.
Thus, pursuant to the combined provisions of sections 1 and 2 of article 43 of the General Tax Law, and article 61 of the Tax Procedure and Process Code, interest is owed from the day following that of the payment unduly made until the date of issuance of the respective credit note, at the rate determined in accordance with section 4 of article 43 of the General Tax Law.
6.8. Finally, the Respondent, in its request, dated 7 October 2014, states that even in the case of the (eventual) success of the request it must be understood that it was the Claimant who caused the action and must, therefore, be sentenced to pay the costs due for the proceedings, in accordance with the general rule contained in article 527 of the Civil Procedure Code, applicable ex vi article 29 of RJAT.
Article 527 (General rule regarding costs) of the Civil Procedure Code provides as follows:
"1 — The judgment that decides the action or any of its incidents or appeals sentences in costs the party that caused them or, in the absence of victory of the action, whoever benefited from the proceedings.
2 — It is understood that the party causes the costs of the proceedings in the proportion in which it is defeated.
3 — In the case of condemnation for solidary obligation, the solidarity extends to the costs."
The Arbitral Tribunal, pursuant to the foregoing, judged the Claimant's request to be well-founded and, consequently, in accordance with sections 1 and 2 of article 527 of the Civil Procedure Code, applicable by virtue of paragraph e) of section 1 of article 29 of RJAT, the responsibility for payment of the arbitration fee is unequivocally that of the Respondent.
7 – DECISION
In accordance with the foregoing, it is decided:
a) To judge the request for arbitral ruling to be well-founded and consequently to annul the self-assessment act of Corporate Income Tax for the financial year 2011, sentencing the Respondent to restore the amount of € 212,628.60 (two hundred and twelve thousand six hundred and twenty-eight euros and sixty cents);
b) To judge the request for payment of compensatory interest to be well-founded, at the legal rate, counted from the date of payment of the tax determined in the self-assessment now annulled until the date of full reimbursement of the amounts collected;
c) To sentence the Respondent to pay the costs of the present proceedings.
The value of the case is set at € 212,628.60 (two hundred and twelve thousand six hundred and twenty-eight euros and sixty cents), in accordance with the provisions of article 97-A, section 1, paragraph a), of the Tax Procedure and Process Code, applicable by virtue of paragraphs a) and b) of section 1 of article 29 of RJAT and section 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
The arbitration fee is set at € 4,284.00 (four thousand two hundred and eighty-four euros), in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid in full by the Respondent, pursuant to article 22, section 4, of RJAT.
Let it be notified.
Lisbon, Administrative Arbitration Centre, 12 January 2015
The arbitrators
Jorge Lino Ribeiro Alves de Sousa
Henrique Nogueira Nunes
Olívio Mota Amador
Document produced by computer in accordance with article 131, section 5 of the Civil Procedure Code, applicable by reference from article 29, section 1, paragraph e) of Decree-Law no. 10/2011, of 20 January. The wording of the present arbitral decision is governed by the spelling prior to the Orthographic Agreement of 1990.
[1] See, Rui Duarte Morais, Notes on Corporate Income Tax, Coimbra, Almedina, 2007, pp. 154.
[2] The CJEU declared in this Judgment as follows: "Article 52 of the EC Treaty (which, after amendment, became article 43 EC) must be interpreted to the effect that it precludes legislation of a Member State under which a consolidated profit tax regime is granted to a parent company resident in that Member State which holds subsidiaries and sub-subsidiaries also resident in that Member State, but the grant of such a regime is excluded for that parent company if its resident sub-subsidiaries are held through a subsidiary resident in another Member State."
[3] See, paragraph R) of section 3 of this Arbitral Decision.
[4] See, paragraphs D), E), F), and G) of section 3 of this Arbitral Decision.
[5] In this respect see the Judgment of the CJEU, of 13 November 1990, in Case C-106/89, known as the Marleasing Judgment, of 13 November 1990.
[6] According to article 5 this law applies to tax periods which begin on or after 1 January 2015.
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