IRC Cost Deductibility Under Article 23 and Deferred Payments – CAAD Arbitration 281/2015-T

ARBITRAL DECISION

The arbitrators Maria Fernanda dos Santos Maçãs (arbitrator president), Luis Menezes Leitao and Álvaro José da Silva, designated by the Ethical Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, agree as follows:

I – REPORT

1. On 4 May 2015, the companies "A... S.A.", NIPC..., and B..., SGPS, S.A., NIPC..., both with registered office at Rua do ..., ..., 3rd floor, ..., ...-... Porto, filed a petition for the constitution of a Collective Arbitral Tribunal, in accordance with the combined provisions of articles 2nd and 10th of Decree-Law No. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as "RJAT"), in which the Tax and Customs Authority (hereinafter "AT" or "Respondent") is the respondent.

2. In such petition, the Petitioners request an arbitral pronouncement on the illegality of the corporate income tax assessment No. 2014..., relating to the fiscal year 2010, requesting the corresponding annulment.

3. The petition for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the AT on 6 May 2015.

4. Pursuant to the provisions of article 2(a) of article 6, paragraph 2 and article 11, paragraph 1(b) of the RJAT, with the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the Ethical Council designated as arbitrators of the Collective Arbitral Tribunal Her Excellency Counselor Maria Fernanda dos Santos Maçãs, His Excellency Professor Doctor Luís Menezes Leitão and His Excellency Doctor Álvaro José da Silva, who communicated acceptance of the appointment within the applicable period.

5. On 29 June 2015, the parties were notified of this designation, having raised no objection.

6. The Collective Arbitral Tribunal was constituted on 15 July 2015, in accordance with the provisions of articles 2, paragraph 1(a), 5, 6, paragraph 1, and 11, paragraph 1 of the RJAT (with the wording introduced by article 228 of Law No. 66-B/2012, of 31 December).

7. On 9 October 2015, an arbitral order was issued dispensing with the holding of the meeting provided for in article 18 of the RJAT, under the principles of the Tribunal's autonomy in conducting the proceedings, and in order to promote celerity, simplification and informality thereof (articles 19, paragraph 2 and 29, paragraph 2 of the RJAT), inviting the parties to present pleadings, if they so wished. In the same order, 10 December 2015 was set as the deadline for delivery of the arbitral decision. By order of 10 December 2015, as it was within the legal period, the date was changed, setting 15 January 2016 as the final date for delivery of the Judgment.

8. The parties submitted written pleadings, wherein they reproduced the grounds previously mentioned, with the Petitioners also formulating a request to attach a legal opinion from Professor Doctor ... and Professor Doctor....

9. In the petition for arbitral pronouncement offered by them, the Petitioners invoke, in summary:

a) the framing adopted by the Finance Directorate of Porto regarding the issue of tax deductibility of the financial charges in dispute appears erroneous, according to which the loan contracted by C... aimed to "purchase" A..., since B... "was worth only" the social shares it held therein;

b) by disregarding the legal personality of the companies integrated in the Group, the Finance Directorate of Porto breaks the archetype upon which the concept of commercial company as holder of autonomous legal and tax personality is based;

c) differently, what the subsumption of the facts to law demonstrates is that C... acquired the social shares in B..., so it is with respect to this financing, with this purpose, that the discussion regarding the indispensability of financing expenses arises;

d) it follows from this that the tax framing of the operations carried out within the companies whose social shares are held by B... must be carried out with respect to each of the companies individually considered;

e) from the use of the tracing approach method referred to in the RIT A..., it follows, contrary to what the Finance Directorate of Porto intends, the understanding, defended by the Petitioners, that the financing generating the expenses in question is allocated to the acquisition of social shares of B...;

f) according to the method referred to in the preceding paragraph, the deductibility of interest on a financing depends on the allocation of that financing;

g) The rules for allocating financing, when it concerns the acquisition of assets, clearly show that, as long as ownership of those assets is maintained, the financing expenses for their acquisition are deductible, having as reference the framing of that acquisition in the corporate scope, at the moment it occurred, so that, if the financing was used for the acquisition of social shares of B... that, at no time, were disposed of, it is by reference to this acquisition that the deductibility of the expenses in question should be assessed;

h) the disregard of legal personality cannot, in any circumstance, be carried out based on a "demonstrative process, internationally used as tracing approach", which ignores the Law, namely the procedural and substantive regulation underlying the application of anti-abuse norms (notably, article 38, paragraph 2 of the General Tax Law ("LGT");

i) the fact that B... sold the social shares of A... to E... clearly demonstrates the absence of any legal connection between the financing obtained by C... and the acquisition of A...;

j) the possibility of deductibility of an expense is a corollary of the concept of income-increase that intends, in homage to the constitutional command, enshrined in article 104, paragraph 2 of the Constitution of the Portuguese Republic ("CRP"), to respond to the imperative of taxing companies according to "actual profit" which should correspond to the "net increase in the economic power of a subject between two temporal moments";

k) By virtue of the partial dependence of tax law on the accounting result, the starting point for determining the tax result should be the net result determined in accounting (article 17 of the Corporate Income Tax Code);

l) in the present case, it matters to know whether the financing connected with the deducted financial charges was directed to the business activity, because only to the extent that it was not would a "tax correction" be justified in the sense of disregarding the charges connected with the financing, insofar as it is necessary that the financing itself to which such expenses are connected is indispensable for maintaining the productive source;

m) since the deductibility of the financial charges in question should have as reference the potential of the financing obtained by C... (and, therefore, of the said expenses) to generate gains, at the moment when such financing occurred, the moment to be taken as reference for assessing the susceptibility of deduction of financial charges associated with said financing is the moment when such financing occurred;

n) having the act that generates the cost a business purpose (i.e., having the financing potential to generate a benefit), the financial expenses associated with it will also have it, which implies the fiscal admissibility of their deduction;

o) regardless of whether it is considered that the financing was obtained for the acquisition of social shares in B... (as the Petitioner argues) or for the acquisition of social shares in A..., the truth is that, at the moment when it occurred, such financing had an evident profit-making purpose, which justifies the deductibility of financial charges associated with it, and that acquisition was motivated by a valid business interest, given the investment purpose of Group F... in the Portuguese clinical laboratory market, from which the financial charges incurred for the acquisition of social shares in B... shall be a fiscally deductible expense in light of the doctrine and case law referred to;

p) since the merger between A... and C... implies the continuity of the merged companies in the beneficiary company and given that C..., at the moment prior to the merger, bore financial charges relating to a financing whose tax deductibility is unquestionable, the corollary that follows is that the expense that was fiscally deductible in the merged company remains deductible in the beneficiary company of the merger;

q) since the economic validity of the merger operation — carried out under the tax neutrality regime provided for in the Corporate Income Tax Code – was never contested at any moment, it is not admissible to apply any anti-abuse norm:

r) insofar as, pursuant to recital No. 2 of Directive 2009/133/CE of 19 October 2009, relating to the common tax regime applicable to mergers, merger operations "should not be impeded by restrictions, disadvantages or distortions resulting in particular from the tax provisions of the Member States. It is therefore necessary to provide, for these operations, tax rules that are neutral in competition, in order to allow undertakings to adapt to the requirements of the internal market, increase their productivity and strengthen their competitive position at the international level", it would be profoundly contrary to the teleology of the Directive — transposed through the Corporate Income Tax Code – the possibility of the State disregarding tax expenses after a merger, since the State would obtain by another route the immediate taxation that it is intended to avoid with the neutrality principle reflected in the possibilities of deferral and continuity provided for in the Directive;

s) if any doubts remain in the mind of the Tribunal, the mechanism of preliminary referral provided for in article 267 of the TFEU is always justified;

t) considering that: on 5 December 2008, B... executed a purchase and sale contract ("Contract") with the Company G..., resident in the Netherlands ("G..."), through which it sold all the social shares held in A... for the amount of € 29,862,000.00; that according to the terms established in the Contract, payment of the price should be made as follows: (i) € 20,500,000.00 would be paid by the end of 2009 and (ii) € 9,362,000.00 would be paid by the end of 2010; that the statute of limitations for the right to assess is 3 years and that the inspection action carried out on the Petitioner (as dominant company of Group F...) occurred between 30 September 2013 and 3 January 2014, suspending the counting of the statute of limitations in this period, as determined by article 46, paragraph 1 of the LGT, in the present case, the right to assess for fiscal year 2010 expired on 6 April 2014, and even the date of preparation of the assessment – which occurred on 3 December 2014 – made to A... (as dominant company of Group F...) occurred at a moment after the end of the statute of limitations period;

u) the Law does not permit the Finance Directorate of Porto to use the Portuguese transfer pricing regime, established in article 63 of the Corporate Income Tax Code, without more, to proceed with the alteration of the legal form of a given operation and consequently correct the value of the operation it fictioned, so that, given the payment conditions agreed, if the Finance Directorate of Porto considered that the price fixed by the parties did not reflect an arm's length price, it was up to it to correct that price, if the legal requirements were met (which, as will be demonstrated, are not met). Having failed to do so, the Finance Directorate of Porto confuses the adjustment of the terms and conditions of a given operation (with direct impact on the sale price) with the "adjustment" of the operation itself;

v) the operation, as conceived and structured by B... and G..., being an operation of purchase and sale of social shares (no financing existing) and there being nothing in the transfer pricing regime – article 63 of the Corporate Income Tax Code – that permits the modification of the legal form of a given operation of the taxpayer, the Finance Directorate of Porto could never have used the transfer pricing rules to fictionally establish the existence of a financing and, subsequently, proceed to the determination of the associated remuneration;

w) also the interpretation of article 9, paragraph 1 of the Double Taxation Avoidance Conventions applicable to the present case, in accordance with the rules of the Vienna Convention on the Law of Treaties, leads to the conclusion that the legal form of a given operation cannot be altered through the application of the arm's length principle;

x) although what is at issue in the present case are the terms and conditions established in a purchase and sale contract executed in fiscal year 2008, the inspection procedure that occurred did not cover fiscal year 2008, since, from the outset, at the moment when such procedure began, the statute of limitations applicable in the context of transfer pricing had already been exceeded (indeed, given the duration of the inspection procedure, even the general four-year statute of limitations would always have been exceeded);

y) for the Finance Directorate of Porto to proceed with corrections to the taxable base and consequent additional assessment, under the norms relating to transfer pricing, it would be necessary for it to verify and prove the following prerequisites: (i) Existence of special relationships; (ii) The related entities having established conditions different from those that would normally be agreed between independent persons; (iii) The different conditions having led to the determination of a profit different from that which would be determined in their absence; (iv) The special relationships being an adequate cause for the "different conditions" agreed. In the present case, however, none of the circumstances mentioned is verified;

z) considering: that the Finance Directorate of Porto was unable to demonstrate the existence of the highest degree of comparability as, on the contrary, it is verified that the comparable operation identified has the least comparability with the related operation; that the terms and conditions of the Contract were fixed already in a context of crisis, where the bankruptcy of H... stands out and that an analysis of the operations of entities of the Group (resident in Portugal), in the period in question, reveals that, in multiple circumstances, the Group renounced receiving default interest or the totality of the debts it was creditor for, in the economic context in question, being the more rational and efficient market decision, it is difficult to understand the attitude of the Finance Directorate of Porto in the sense of ignoring the real economic and financial circumstances in which the operation in question took place and which, certainly, justify it in light of the arm's length principle;

aa) even if it were admitted - which is not conceded and only as a mere matter of professional duty is admitted – that the terms and conditions fixed in the Contract were different from the terms normally practiced in an arm's length circumstance, the truth is that the correction of the price to a higher value would in no way influence the taxable profit and consequently the taxable base of B..., insofar as B... is an SGPS and, therefore, at the time of the facts, B... benefited from the tax regime for SGPS, so that gains realized would never contribute to the determination of taxable profit, in accordance with article 32 of the Statute of Tax Benefits. This means that, from the ATA perspective, the sale price of the social shares is irrelevant insofar as the resulting gain would never be taxed, so the Finance Directorate of Porto would always lack legitimacy to resort to the norms relating to transfer pricing;

bb) the fiscal irrelevance of the sale value for the ATA demonstrates, therefore, the fact that the terms and conditions practiced do not result from the special relationships existing with the entities in question, actual market terms and conditions having been practiced, taking into account the economic and financial context in which the sale operation occurred, being thus evident the illegality of the corrections made by the Finance Directorate of Porto, by deficient application of the legal provisions relating to transfer pricing;

cc) the Petitioners conclude, formulating requests to the effect that the tax assessment act in question be annulled due to breach of law and, consequently, that the Petitioners be reimbursed of the amount unduly paid of € 461,772.07, plus compensatory interest in accordance with article 43, paragraph 1 of the LGT, given the existence of error attributable to the services.

1. For its part, the Respondent presented its response, accompanied by the Administrative File, arguing, in the sense of the total lack of merit of the Petitioners' request, in summary, the following:

a) considering that the 1st Petitioner is bearing financial charges relating to a loan that "in fine" was intended to finance its own acquisition (obtaining that loan had as main objective to permit the acquisition of the 1st Petitioner, even though through B... SGPS); that the merger plan makes the effects of that merger retroactive to 1 January 2008 (which clearly reveals the intention and ultimate purpose of obtaining the loan in question and assuming the respective financial charges: the acquisition of the 1st Petitioner) and that the corporate purpose of the 1st Petitioner corresponds to the provision of clinical laboratory services (not having as activity the management of social shares, so that the expenses/income are not mutually related to the activity of the 1st Petitioner), the expenses relating to the acquisition of the 1st Petitioner, even though carried out through B... SGPS, cannot be considered fiscally deductible, because they are manifestly not essential to obtaining its profits or for maintaining the productive source;

b) the charges in question concern interest earned in the context of a financing, and interest gains autonomy relative to the principal obligation, as determined by article 561 of the Civil Code, applicable "ex vi", article 2, paragraph 2(d) of the LGT;

c) the tax deductibility of the interest borne depends on a judgment regarding its indispensability for the realization of the profits or gains subject to tax or for maintaining the productive source, with paragraph (c) of paragraph 1 of article 31 of the CIRC clarifying that these interest payments on capital borrowed are "applied in operations";

d) from the freedom of the parties to agree on a date for the effects of the merger to take place, as follows from paragraph 7 of article 68 of the CIRC, the transfer of the results of the merged company to the beneficiary, defined in paragraph 8 of the same article, only opens the possibility of choice between two hypotheses: a. if the date fixed in the plan for the taking effect from an accounting perspective is prior to the date of the merger, which implies the framing of all the movement developed after that first date in the sphere of the beneficiary company and, obviously, the submission to the discipline of cost acceptance that governs the determination of taxable profit in this company; b. if the choice falls upon the coincidence of these two dates, all movement developed by the merged company benefits from the tax discipline that is its own and, if that determination of the result is conducive to a tax loss, such loss can only be reflected in the sphere of the beneficiary company by way of the tax loss transferability regime applicable in merger situations;

e) the tax neutrality regime within the scope of corporate restructuring operations of the CIRC seeks only not to burden fiscally gains that more resemble potential gains, not containing, however, an exemption of gains, but rather a deferral of their taxation to the moment of actual realization thereof, so it is clear and unequivocal that from the provisions of paragraph 7 of article 68 of the CIRC and the attachment of the taking effect fiscally to the taking effect from an accounting perspective and not juridical, as well as the fact that the costs in consideration relate to the A..., the analysis of the deductibility of these financial charges must necessarily be carried out in the sphere of the Petitioner. Thus, regardless of the assumption of the loan in question by the 1st Petitioner having resulted from the merger, the costs recorded by this one in the fiscal year in question, with the financial charges relating to such loan do not satisfy the requirement of indispensability of costs/expenses that article 23 of the CIRC imposes, due to the lack of the necessary allocation of the costs in consideration to the business interest and to the productive activity proper to the 1st Petitioner;

f) there is no evidence that the assessment that determined the price practiced (€29,862,000.00) in the sale of Laboratory A... by the Respondent to G..., was "optimistic" given the adverse macroeconomic situation;

g) neither in the initial contract, nor in the addendum thereto is any compensation provided for the 2nd Petitioner as consideration for non-receipt of the price on the agreed dates, nor any penalty for the possibility of contractual non-compliance;

h) because it is concluded that the Arm's Length Principle was not complied with, the necessary adjustments were made in light of the Transfer Pricing regime;

i) contrary to what is alleged by the 2nd Petitioner, we are not faced with a case of "error evidenced in the declaration of the taxpayer", contrary to what is presupposed by paragraph 2 of article 45 of the LGT;

j) insofar as the correction of the Taxable Profit relating to the year 2010, that is, its determination in the absence of special relationships, was not, nor could have been determined based on a mere analysis of a declaration of the taxpayer, only with supplementary and external analyses to the declaration was it possible to conclude that it was necessary to correct the declared taxable profit, in conformity with the transfer pricing regime. Thus, it cannot be considered that the AT was faced with a situation where, through a simple reading or summary analysis of the submitted declaration, it could become aware of its incorrectness, so the statute of limitations for the right to assess to be considered is the normal period of 4 years, as established in paragraph 1 of article 45 of the LGT;

k) having the dominant company of Group A..., been notified of the assessment now contested on 10/12/2014 and having the inspection action taken place between 30-09-2013 and 03-01-2014, as appears on page 5 of the RIT Group, on the date of notification of the assessment, 10/12/2014, the statute of limitations for the right to assess had not yet expired;

l) at the date of the related operation already referred to, the 2nd Petitioner is held, indirectly, at a percentage of 100% of its capital, at a first level by G... and, subsequently, by F..., so that all these entities are in a situation of special relationships, in accordance with the terms established in paragraph (a) of paragraph 4 of article 63 of the CIRC, so that the commercial operations between them carried out should have the same contracts executed, accepted and practiced terms and conditions substantially identical to those that would be contracted, accepted and practiced between independent entities, in comparable circumstances, in obedience to the Arm's Length Principle contained in paragraph 1 of article 63 of the CIRC;

m) the deferrals of payment of the price stipulated and the non-requirement of payment of the respective interest, for the sale of Laboratory A... embodied free financings of the companies related to the 2nd Petitioner: G... and F... SA., and that, according to OECD guidelines, the general principle that should be adopted is that the financing should bear interest since it would have borne it in analogous circumstances between independent parties;

n) the remuneration of intra-group financings form part of the policy of Group F... itself, highlighting a mutual loan contract executed between the 2nd Petitioner and F... SA, by which a financing in the amount of €1,487,500.00 was granted, with a rate equivalent to EURIBOR at 3 months, plus a spread of 2%, as well as a mutual loan contract executed between F... SA and Laboratory A..., granting a financing in the amount of €324,276.42, with the same conditions mentioned above, and also 3 contracts executed between G... and Laboratory A...;

o) there is no doubt that the related operation includes a form of free financing carried out by a resident company to a related non-resident;

p) the Inspection Services took as reference the related operation as conceived by the 2nd Petitioner, that is, as a contract for purchase and sale of social shares, never having the Inspection Services altered the legal form of the contract for purchase and sale of social shares, so that, contrary to what is alleged by the 2nd Petitioner, there is no room for application of the anti-abuse norm;

q) based on the analysis carried out of the operation relating to the sale of Laboratory A..., it is concluded that the terms and conditions practiced in that related operation are not substantially identical to those that would normally be contracted, accepted and practiced between independent entities in comparable operations, disrespecting, thus, the Arm's Length Principle, so that, pursuant to paragraph 8 of article 63 of the CIRC, the 2nd Petitioner should have made the respective corrections to the taxable profit in the amounts corresponding to the tax effects attributable to this fact;

r) establishing in article 43, paragraph 1 of the LGT that "Compensatory interest is due when it is determined in amicable reclamation or judicial contestation that there was error attributable to the services from which results payment of the tax debt in an amount greater than that legally due", no compensatory interest is due for there being no error attributable to the services generating any obligation to indemnify. The possibility of recognition of the right to compensatory interest is therefore excluded, in accordance with paragraph 1 and paragraph 2 of article 43 of the LGT;

s) providing in article 43 of the LGT, only provides for the right to payment of compensatory interest, so that, also, there is no right to default interest in the present case.

II - CASE MANAGEMENT

1. The parties have legal standing and capacity and benefit from procedural legitimacy, in accordance with articles 4 and 10, paragraph 2 of the RJAT and article 1 of Ordinance No. 112-A/2011, of 22 March.

2. The AT proceeded with the designation of its representatives in the case and the Petitioner attached a power of attorney, with the Parties thus being properly represented.

3. The Tribunal is competent.

4. The case does not suffer from nullities.

5. No prior or subsequent questions, prejudicial or exceptional in nature, preventing the examination of the merits of the case have been raised, with the conditions for delivering a final decision being met.

III. MERITS

III.1. FACTS

§1. PROVEN FACTS

1. With relevance for the examination and decision of the case, the following facts are established and proven:

a) A... is a corporation integrated in Group F... since December 2005, a business group with a high degree of presence in the European clinical laboratory market;

b) the first Petitioner is registered for the exercise of the activity of 'Clinical Laboratory' having as its object the provision of services in the area of clinical pathology (clinical laboratory), in the sphere exclusively free and in contracted, and began its activity on 06-01-1978, having been framed, for purposes of corporate income tax, in the general regime for determination of taxable profit;

c) at a moment prior to December 2005, the social shares of A... were directly held 85% by the company B... and 15% by the Family ...;

d) in December 2005, Group F... entered the Portuguese market through the acquisition of the social shares of B... from Dr..., and at that date the following structure existed:

i. F..., S.A. held 100% of the social shares in the Dutch company "G..." ("G");

ii. G... held 100% of the social shares of B...;

iii. B... held 85% of the social shares of A... and 85% of the social shares of the company I..., S.A. ("I...");

e) Group F... has been present in Portugal since late 2005, the year in which it began, with the acquisition of the 1st Petitioner, a strong and sustained investment through successive acquisitions of companies holding clinical laboratory facilities, either through F... S.A. or its Dutch subsidiary G....

f) from late 2005 onwards, the 1st Petitioner became part of Group F..., and subsequently acquired various clinical laboratory facilities in the Northern region and, in 2011, a cardiology clinic.

g) in late 2007, the Group carried out a restructuring that began with the establishment of C... held 100% by E...;

h) at a later moment, E... sold to C... all the social shares it held in Portugal (among which were the social shares in B...), in the global amount of € 52,409,640.00, namely:

-100% of B... SGPS (which held 85% of the 1st Petitioner and 85% of I...);

-100% of the Clinical Pathology Laboratory J..., S.A.;

• 100% of K..., S.A.;

• 100% of the Clinic Laboratory L... Ltd.;

• 100% of M..., S.A.;

• 100% of N..., S.A.;

• 85% of the Laboratory of O..., S.A..

i) in July 2008, B... acquired from the Family ... for the global amount of € 5,600,000.00, 15% of the social shares in MLCT and 15% of the social shares in I... thus becoming the holder of all the social shares of the two companies;

j) Group F... financed itself with the ... to meet the needs of various subsidiaries, including C... S.A., with the financing obtained by this including:

• the amount necessary to settle almost the entirety of the amount owed to G... for the acquisition of the above-mentioned social shares, of which only €15,294.04 would remain outstanding;

• an additional loan in the amount of € 5,600,000.00.

k) this additional amount of €5,600,000.00 was immediately channeled by C... to the subsidiary B... SGPS, as accessory contributions, having been used by B... SGPS to acquire, for the same amount, the 15% of the capital of the 1st Petitioner and 15% of the capital of I... that still remained in the possession of the previous shareholders, "the Family...".

l) on 5 December 2008, B... executed a purchase and sale contract ("Contract") with the Company G..., resident in the Netherlands ("G..."), through which it sold all the social shares held in A... for the amount of € 29,862,000.00;

m) in accordance with the terms established in the Contract, payment of the price should be made as follows: (i) € 20,500,000.00 would be paid by the end of 2009 and (ii) € 9,362,000.00 would be paid by the end of 2010;

n) the terms and conditions of the Contract were fixed already in a context of crisis, where the bankruptcy of H... stands out;

o) B... benefited from the tax regime for SGPS;

p) from the operations of entities of the Group (resident in Portugal), in the period in question, it follows that, in multiple circumstances, the Group renounced receiving default interest or the entirety of the debts it was creditor for, in the economic context in question, being the more rational and efficient market decision;

q) the capital of A... was increased to € 200,000.00 through a contribution in kind corresponding to the entirety of the capital of C...;

r) on 29 December 2008, A... merged with C... through the incorporation of C... into A..., an operation which was carried out under the tax neutrality regime provided for in the Corporate Income Tax Code;

s) as a consequence of the operations described above, the 1st Petitioner became the holder of all the social shares held by C... S.A, as well as to integrate the responsibilities arising from the financings used for the acquisition of those social shares and, thus, to see its results affected, namely, by the charges relating to the servicing of the debt;

a) C..., at the moment prior to the merger, bore financial charges relating to a financing;

i) the acquisition, on 20 December 2007, by C... S.A. from G..., holder of the entirety of its capital, of the following financial interests, for a total of € 52,409,640.00, an operation which was initially financed by G...:

ii) the acquisition, on 21 July 2008, by B... SGPS, subsidiary of C... S.A., of 15% of the capital of the 1st Petitioner and of 15% of the capital of I... (which were still in the possession of the shareholders 'Family...') for the amounts of € 5,546,000.00 and € 54,000.00, respectively, in the total amount of €5,600,00.00, an operation which was initially financed by G...;

b) the financings and the respective charges are related to:

The financial charges relating to the acquisition of Laboratory A..., recorded in fiscal year 2010 amount to €1,260,956.15 and correspond to:

c) from fiscal year 2010 onwards, inclusive, the 1st Petitioner became subject to corporate income tax under the Special Tax Regime for Groups of Companies (RETGS);

d) A... was subject to a tax inspection carried out by the Finance Directorate of Porto"), between 13 September 2012 and 12 September 2013, credentialed by Service Order OI2012..., initially directed to the corporate income tax for fiscal years 2009 and 2010 and subsequently extended to fiscal year 2011;

e) the Finance Directorate of Porto applied the comparable uncontrolled price method having identified as a comparable operation financing contracts executed between entities of the Group and a banking syndicate composed of various international banks;

f) the said comparable operation presented an interest rate indexed to the EURIBOR rate at 3 months until April 2010 and subsequently to the EURIBOR rate at 1 month and a weighted average spread in the amount of 2.977%;;

g) by application of the financing conditions of Group entities with an international banking syndicate to the operation of purchase and sale in crisis, the Finance Directorate of Porto proceeded, under article 63 of the Corporate Income Tax Code, to correct the taxable base of B..., relating to fiscal year 2010, in the amount of € 1,089,770.57;

h) following the Tax Inspection, the company D... was notified of the respective report, in which corrections were made to its 2010 taxable profit, in the amount of € 1,260,956.15;

i) B... complied with all its declaration obligations and all its duties of cooperation with the ATA, evidencing in its documentation the operation in question, creating no constraints whatsoever to the investigation carried out by the Finance Directorate of Porto.

j) following the inspection (carried out between 30 September 2013 and 3 January 2014) the Tax Inspection Report relating to the Fiscal Group F... was issued;

k) the RIT Group has its origin in adjustments to the taxable profit of the following companies that are part of the Fiscal Group F...:

-A..., S.A. ("A..."), resulting from the Tax Inspection Report issued following the inspection action credentialed by Service Order No. OI2012... ("RITA...");

• B..., SGPS, S.A. ("B..."), resulting from the Tax Inspection Report issued following the inspection action credentialed by Service Order No. OI2012... ("RIT B...");

l) the inspection action took place between 13 September 2012 and 12 September 2013, with the period of the inspection procedure being extended by two additional periods of three months;

m) the preparation of the assessment occurred on 3 December 2014;

n) the Petitioner proceeded with the payment of the corporate income tax assessment in question, in the amount of € 461,772.07.

§2. UNPROVEN FACTS

1. There are no unproven facts that have interest for the decision of the case.

§3. REASONING OF THE DECISION REGARDING MATTERS OF FACT

1. The factual basis was founded on the critical analysis of the administrative file and other documents attached to the case, whose authenticity and veracity were not contested by any of the parties, as well as the consensual positions of the parties.

III.2. MATTERS OF LAW

The following are the questions to be examined:

A) The possible illegality of the correction to the taxable profit of A...

B) The possible illegality of the correction to the taxable profit of B...

C) The right to compensatory interest.

Let us examine these questions:

A) THE ILLEGALITY OF THE CORRECTION TO THE TAXABLE PROFIT OF A...

1. Article 23, No. 1(c) of the CIRC, in the version in force on the date of the facts establishes the following:

"1 - Shall be considered costs or losses those which are proven to be indispensable for the realization of profits or gains subject to tax or for maintaining the productive source, namely the following:

c) Financial charges, such as interest on borrowed capital applied in operations, discounts, premiums, transfers, exchange differences, expenses with credit operations, collection of debts and issuance of shares, bonds and other securities and redemption premiums".

It follows from this provision that for financial charges to be considered as costs, it is sufficient that they be in the abstract suitable to ensure the realization of income or to ensure maintenance of its productive source. Nothing therefore prevents that charges relating to the acquisition of social shares prior to a merger be considered deductible.

1. Indeed, as referred to in CAAD Decision No. 29/2012:

"The taxpayer, in the exercise of the freedom of economic initiative within the frameworks defined in the Constitution and the Law which is recognized by the Constitution of the Portuguese Republic [articles 61, paragraph 1, and 80(c)], has, in principle, the right to define with tax relevance the business strategies it deems appropriate and to choose the means to achieve the results it aims for, provided that there is no limitation justified by the need to ensure the simultaneous achievement of other values with constitutional recognition, such as, for example, ecological interests or workers' rights. Included in the essential core of such right will be the freedom of economic agents to formulate and implement their management options, when these do not affect any of the constitutional interests intended to be secured. Being certain that the requirements of taxation, necessary to ensure the general functioning of the State, can justify limitations to the costs relevant for tax purposes, these must follow from the Constitution or the Law, as those constitutional norms impose.

In this light, being the rule the freedom of economic initiative and taxation of companies having to be based fundamentally on their actual income (article 104, paragraph 2 of the CRP), the norm of paragraph 1 of article 23 of the CIRC, in the version in force in 2003, by limiting the relevance of costs to "those which are proven to be indispensable for the realization of profits or gains subject to tax or for maintaining the productive source" must be understood as permitting the tax relevance of all expenses actually incurred that are potentially suitable to provide profits or gains, regardless of the success or failure that they concretely provided".

1. The same decision also states: "The very letter of paragraph 1 of article 23 points decisively in that direction with the use of the future verb tense 'will be', instead of the past tense 'were': the appropriate perspective for assessing the indispensability of expenses for obtaining profits is that of the economic agent at the moment when he acted, when there is only the possibility that the business options to be taken will produce profits and not that of the tax authorities, acting in the presence of the results obtained, assessing the relevance that the expenses actually had for them to be achieved.

In this light, it is to be concluded that expenses are to be considered indispensable for the realization of profits those which, at the moment they are incurred, appear as potentially generators of profits, which has as a corollary that the tax relevance of a cost can only be eliminated when it is to be concluded, in light of the rules of common experience, that it did not have potential to generate profits, that is, when it is demonstrated that the act that generates the costs cannot be considered as an act of management, because it cannot be expected, with acceptable probability, that the expense incurred may result in a profit".

1. CAAD Decision No. 101/2013 also refers, where a similar case was decided: "Does not exclude a conclusion to the effect of such indispensability the possibility that the company could continue its activity without carrying out certain expenses, but only a judgment to the effect that the expenses in question did not have potential to positively influence the obtaining of profits. A conclusion to the effect of the dispensability of expenses for obtaining taxable profit shall have to be based on a demonstration that even if the expenses in question had not been incurred, the profits or gains that were actually obtained could be obtained. Which means that the conclusion to the effect of the indispensability of expenses for obtaining profits or gains can only be excluded if it can be stated that those expenses did not have potential to positively influence them".

2. The same decision also states: "Thus, it is not necessary to demonstrate that the financial charges actually produced a positive result in order to attribute tax relevance to them. It is sufficient that they be acts that can be accepted as acts of management, acts of the type that a company carries out with the objective of increasing revenues and with potential tendency to propitiate such increase.

In this matter, the control of the Tax Authority must be a control by the negative, rejecting as costs only those that clearly do not have potential to generate increase in gains, the administrative agent competent to determine the taxable base not being able to "arrogate to himself the role of manager and qualify the indispensability at the level of good or poor management, according to his feeling or personal sense; it is sufficient that it be an operation carried out as an act of management, without entering into an assessment of its effects, positive or negative, of the expense or charge assumed for the results of the realization of profits or for maintaining the productive source".

1. Being that the Decision now cited relates to the same situation of the same Petitioners, only regarding fiscal year 2008.

2. In accordance with paragraph (c) of paragraph 1 of article 73 of the Corporate Income Tax Code, in the version applicable on the date of the facts, a merger is defined as "the operation by which a company (merged company) transfers the entire assets and liabilities that integrate its patrimony to a company (beneficiary company) which is the holder of all the parts representing its capital".

3. Article 97 of the Commercial Companies Code does not define the merger of companies, limiting itself to referring in paragraph 1 that "Two or more companies, even if of different types, may merge by their meeting in one". However, paragraph 4 of that provision, by enumerating the possible modalities of merger, contributes to the clarification of the legal meaning of this institution.

In accordance with this norm, "merger may take place:

a) By means of the global transfer of the patrimony of one or more companies to another and the attribution to the shareholders thereof of parts, shares or quotas of this;

b) By means of the establishment of a new company, to which the patrimonies of the merged companies are globally transferred, with the shareholders thereof being attributed parts, shares or quotas of the new company".

1. As RAÚL VENTURA states, "the essence of the merger of companies consists in joining the personal and patrimonial elements of two or more pre-existing companies, such that only one company comes to exist. For such a phenomenon to occur it is, by nature, indispensable that some companies be extinguished: either all, if the process results in a new company, or all the participating ones except one. It is also indispensable that the persons who formed the personal substrate of the participating companies form the personal substrate of the final company (whether new or pre-existing but expanded), which means that they will have to be holders of interests in those companies. Finally, the patrimonies of the companies that are extinguished shall, or only they or together with the patrimony of the company that does not become extinct, form the patrimonial substrate of the final company" .

2. In the merger of companies, therefore, there is a transmission of patrimonies by universal title. Article 112(a) of the Commercial Companies Code expressly refers that in a merger rights and obligations are transmitted to the incorporating or new company, clarifying article 97, paragraph 4 of the Commercial Companies Code that a global transfer of patrimony exists in merger.

There is thus a continuity of patrimony, so there is no reason to reject the tax deduction of charges borne by company C... for having been incorporated into company A....

1. It would also be contrary to the principle of tax neutrality provided for in Directive 2009/133/CE of 19 October 2009, which is also expressed in article 74 of the CIRS to permit the Tax Authority to disregard tax expenses after the merger of companies, since it would obtain by another route the taxation that is intended to be avoided by this regime.

2. It is thus concluded that the correction to the taxable profit made by the AT is illegal, and consequently the assessment in this respect is illegal.

B) THE ILLEGALITY OF THE CORRECTION TO THE TAXABLE PROFIT OF B...

1. Let us now examine the possible illegality of the correction to the taxable profit and the possible illegality of the assessment, also in this respect. In this context the first question to examine is that of the timeliness of the tax assessment.

2. The Petitioner argues that, in accordance with article 45, paragraph 2 of the General Tax Law the assessment deadline would be exceeded, since, in the case of error evidenced in the taxpayer's declaration the statute of limitations referred to in the previous number is three years.

3. However, we are not faced with a situation that involves a simple summary analysis of the situation, but one that resulted from inspection action.

4. So one cannot understand there to be error evidenced in the taxpayer's declaration.

5. Being the statute of limitations four years, in accordance with article 45, paragraph 1 of the LGT, so the statute of limitations for the right to assess has not yet expired.

6. The AT argues for making the correction to the assessment the existence of special relationships, which meant that the cost of financing does not correspond to what would have been obtained between independent entities.

7. Indeed, paragraph 1 of article 63 of the CIRS states that "in commercial operations, including, in particular, operations or series of operations on assets, rights or services, as well as in financial operations, carried out between a taxpayer and any other entity, subject or not to corporate income tax, with which it is in a situation of special relationships, terms or conditions substantially identical to those that would normally be contracted, accepted and practiced between independent entities in comparable operations must be contracted, accepted and practiced".

8. Paragraph 4 of the same article also states: "It is considered that special relationships exist between two entities in situations where one has the power to exercise, directly or indirectly, a significant influence on the management decisions of the other, which is considered to be verified, namely, between:

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

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

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

d) Entities in which the majority of the members of corporate bodies, or of the members of any bodies of administration, management, direction, administration or supervision, are the same persons or, being different persons, are linked by marriage, de facto union legally recognized or kinship in a direct line;

e) Entities linked by a subordination contract, a parity group contract or another of equivalent effect;

f) Companies which are in a relationship of domination, in the terms in which this is defined in the statutes which establish the obligation to prepare consolidated financial statements;

g) Entities between which, by virtue of commercial, financial, professional or legal relationships between them, directly or indirectly established or practiced, a situation of dependence exists in the exercise of their respective activity, namely when any of the following situations occurs between them:

1. The exercise of the activity of one depends substantially on the cession of industrial property rights or intellectual property or know-how held by the other;

2. The supply of raw materials or access to sales channels of products, merchandise or services by one substantially depends on the other;

3. A substantial part of the activity of one can only be carried out with the other or depends on decisions of this;

4. The right to fix prices, or conditions of equivalent economic effect, relating to goods or services transacted, provided or acquired by one is, by constant imposition of a legal act, in the ownership of the other;

5. By the terms and conditions of their commercial or legal relationship, one can condition the management decisions of the other, based on facts or circumstances unrelated to the commercial or professional relationship itself.

h) An entity resident or non-resident with permanent establishment situated in Portuguese territory and an entity subject to a clearly more favorable tax regime resident in a country, territory or region included in the list approved by ordinance of the Minister of Finance".

1. However, what is at issue in this purchase and sale contract is not an autonomous financing, being only a purchase and sale contract, that is, it determines the creation of two obligations: the obligation to deliver the goods (article 879(b) of the Civil Code) and the obligation to deliver the price (article 879(c) of the Civil Code).

2. The specific conditions of deferral of payment of the price are capable of being applied in any other purchase and sale contract and do not derive solely from the special relationship between these companies, so one does not understand there to be any violation of the arm's length principle.

3. CAAD Decision No. 101/2014 states in this respect: "(...) it is certain that, in the realm of the purchase and sale contract, there is a series of operations and inherent obligations, and it is possible to specifically identify the deferrals relating to payment of the price. However, these are an integral part of a contract which, as is recognized by the parties, is one and includes all these dimensions (...). It is not possible, therefore, to fragment the purchase and sale contract to apply transfer pricing to one of the elements that compose it. (...) Notwithstanding there being contract clauses and amendments to it which translate into a deferral of payment and consequently have the effects of a loan contract, those clauses are integrated in the contract understood as a whole, and cannot be abstracted from it to gain autonomous existence. There would remain, therefore, only one way to abstract a possible financing from the transaction − that of disregarding the transaction executed and the requalification of it. Now, such action, although not impossible, would always be exceptional. Both at the general level and in the strict context of national law".

4. Being that, in any case, a requalification of the transaction executed could not exist merely in light of article 63 of the CIRC.

5. For, as the same Decision also states: "The disregard of the operation carried out is equally something exceptional and which presupposes the application of its own procedure. In the concrete case, the effectiveness of the contract was not put into question or it was not suggested that it aimed at the reduction of tax in an artificial, fraudulent manner and with abuse, concealing a financing contract, the only operation that would really be intended by the parties (...). Now, not having been initiated the only procedure that would permit a requalification of the financial operation practiced in fiscal terms, which would only be possible with the framework of article 63 of the CPPT and article 38, paragraph 2 of the LGT (general anti-abuse norm), there is no room to do it, applying, without more, article 63 of the CIRC to an operation that does not fit it".

6. CAAD Decision No. 76/2012 also states in this respect: "In the application of the norm on transfer pricing, the Tax Authority must pay attention to the operation actually practiced, to the 'legal form' used by the taxpayer in its commercial or financial operation, being able to alter, for tax purposes, its terms or conditions when it considers them different from those that would normally be contracted, accepted and practiced between independent entities in comparable operations. It is these operations actually carried out that are fictioned, for tax purposes, to have been carried out in other terms or conditions. Different from these situations and outside the transfer pricing regime are situations in which the Tax Authority concludes that, instead of the commercial or financial operations actually carried out, independent persons would carry out other operations, of different types, with other 'legal forms'. In these cases, the requirements for ceasing to consider effective, for tax purposes, the operations actually carried out are not those provided for in the [former] article 58 of the CIRC, but rather those provided for in article 38, paragraph 2 of the LGT and article 63 of the CPPT".

7. Now, the Tax Authority merely demonstrated the existence of special relationships between the companies, in accordance with article 63 of the CIRC.

8. Not having demonstrated that they executed a contract for a value clearly lower than those that would normally be contracted, accepted and practiced between independent entities in comparable operations, thus violating the arm's length principle.

9. In light of all the foregoing, it is necessary to conclude that the corporate income tax assessment No. 2014..., relating to fiscal year 2010, is illegal.

C) THE RIGHT TO COMPENSATORY INTEREST

1. The Petitioner further requested payment of compensatory interest, under article 43 of the LGT.

2. It follows from paragraph 1 of that article that "when it is determined, in amicable reclamation or judicial contestation, that there was error attributable to the services from which results payment of the tax debt in an amount greater than that legally due".

3. We can also understand that, as follows from paragraph 5 of article 24 of the RJAT, the right to compensatory interest can be recognized in arbitral proceedings.

4. It will, however, have to be determined whether or not there was error attributable to the services.

5. Being a correction to the taxable profit, the existence of that error is manifest.

6. We are, indeed, faced with negligence on the part of the Tax Authority, negligence which translates into an "error attributable to the services", as stated in article 43 of the LGT.

7. Taking into account what is established in article 61 of the CPPT and having verified the existence of error attributable to the services of the Tax Administration, from which resulted payment of the tax debt in an amount greater than that legally due (see article 43/1 of the LGT), we understand that the Petitioner has the right to compensatory interest at the legal rate, calculated on the amount of € 461,772.07, which will be counted from the date of payment of that amount, until the full reimbursement of that same sum.

IV. Decision

In accordance with the foregoing, the Arbitral Tribunal decides to judge as well-founded the petitions of:

a) annulment of the corporate income tax assessment No. 2014..., relating to fiscal year 2010; and

b) condemnation of the Tax Administration to reimburse the amount unduly paid, in the sum of 461,772.07 euros, plus compensatory interest at the legal rate, counted from the date of payment, until the full reimbursement of the said amount.

V. Value of Proceedings

The value of the proceedings is fixed at € 461,772.07 (value indicated and not contested), in accordance with the provisions of article 97-A of the CPPT (applicable ex vi article 29, paragraph 1(a) of the RJAT) and article 3, paragraph 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

VI. Costs

In accordance with article 22, paragraph 4 of the RJAT, the amount of costs is fixed at € 7,344, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, charged to the Tax and Customs Authority.

Lisbon, 15 January 2016.

The Arbitrators

Maria Fernanda Maçãs

(President)

Luis Menezes Leitão

Álvaro José da Silva