CAAD Case 283/2014-T: IRS Anti-Abuse Clause on Withholding Tax Liquidation

Case No. 283/2014-T

Arbitral Decision

The Arbitrators Judge José Poças Falcão (appointed by agreement of the other Arbitrators), Professor Américo Brás Carlos and Dr. Ricardo da Palma Borges, appointed respectively by the Respondent and the Claimant, to form the Arbitral Tribunal, constituted on 07-07-2014, hereby agree as follows:

1 Report

A..., a company managing corporate shareholdings, S.A., a company with the unique tax identification number and registration number ("NIPC") … (hereinafter merely referred to as "A... SGPS" or "Claimant") filed, on 24-03-2014, a request for constitution of a collective arbitral tribunal, under the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which instituted the Legal Framework for Arbitration in Tax Matters ("RJAT"), in which the Tax and Customs Authority ("AT") is the Respondent.

In exercise of the option to appoint an arbitrator as provided in subparagraph b) of paragraph 2 of article 6 of the RJAT and in compliance with the provisions of subparagraph g) of paragraph 2 of article 10 and paragraph 2 of article 11 of the same legal instrument, the Claimant appointed Dr. Ricardo da Palma Borges as Arbitrator.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD on 26-03-2014 and notified to the AT on 27-03-2014.

Under the provisions of subparagraph b) of paragraph 2 of article 6 and paragraph 3 of article 11 of the RJAT, and within the deadline provided in paragraph 1 of article 13 of the RJAT, the head of the Tax Administration service appointed Professor Américo Braz Carlos as Arbitrator.

In accordance with the provisions of paragraphs 5 and 6 of article 11 of the RJAT, the President of CAAD notified the Claimant of the appointment of an Arbitrator by the head of the Tax Administration service on 15-05-2014, and notified the arbitrators appointed by the parties to appoint the third arbitrator who shall assume the position of president arbitrator.

On 11-06-2014 and 16-06-2014 the Arbitrators appointed by the parties communicated to CAAD the appointment of Judge José Poças Falcão as President Arbitrator.

The signatories appointed to integrate the present collective Arbitral Tribunal accepted the appointments, as legally provided.

Under the provisions and for the purposes of paragraph 7 of article 11 of the RJAT, the President of CAAD informed the Parties of such appointment on 19-06-2014.

Thus, in accordance with the provisions of paragraph 7 of article 11 of the RJAT, upon expiry of the deadline provided in paragraph 1 of article 13 of the RJAT, the collective Arbitral Tribunal was constituted on 07-07-2014.

In the request for arbitral pronouncement, the Claimant sought the declaration of illegality of the assessment of withholdings at source of Personal Income Tax ("IRS") No. 2013 … and respective assessment of compensatory interest, in the total amount of € 293,605.31, relating to the year 2010, requesting the condemnation of the AT to refund this amount to the claimant plus respective default interest.

For this purpose, it invoked, in summary:

a) Violation of the special duty of substantiation provided for in article 63 of the Code of Tax Procedure and Process ("CPPT");

b) Non-applicability of the general anti-abuse clause for imposing ancillary obligations and unconstitutionality of the contrary interpretation;

c) Non-fulfilment of the requirements that doctrine and case law have identified as necessary for the application of the general anti-abuse clause, namely: the means element, the intellectual element, the result element and the normative element;

d) Material unconstitutionality of the provisions of article 38, paragraph 2, of the General Tax Law (LGT), by violation of the constitutional principles of tax legality, protection of legitimate expectations and legal certainty.

The AT submitted a response concluding that the request for arbitral pronouncement should be judged without merit, absolving the Respondent of the claims, maintaining the assessments as they were made.

On 16-01-2015, the meeting provided for in article 18 of the RJAT took place, with the representatives of the Claimant and Respondent expressing themselves on procedural handling, any exceptions that should be appreciated and decided before the Tribunal considers the claim, the need for corrections to be made in the procedural documents presented, and the need for scheduling a new meeting for oral arguments. In that meeting, the Respondent dispensed with the witness João Pedro Ribeiro Henriques, whom it had listed in its respective response.

In that meeting it was also agreed that the proceedings would continue with simultaneous written arguments within a period of 10 days.

Those arguments were presented.

The Claimant concluded its arguments thus:

"(...)Wherefore we respectfully request that Your Excellencies deign to grant the present request for arbitral pronouncement regarding the act better identified in the preamble and, consequently, declaring its illegality, with the Claimant being reimbursed the amounts it unduly paid plus default interest.

The AT also presented written arguments concluding that all requirements for the application of the general anti-abuse clause are met, whereby the request for arbitral pronouncement should be judged without merit, for being unproven, absolving the Respondent of the claims, maintaining the assessments as they were made.

The Arbitral Tribunal was regularly constituted and is materially competent to consider the claims.

The parties possess legal personality and capacity and are legitimate (articles 4 and 10, paragraph 2, of the RJAT and article 1 of Regulation No. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities and no further exceptions were invoked.

2 Substantiation

2.1 Matters of Fact

2.1.1 Proven Facts

Based on the elements contained in the proceedings and the administrative proceedings attached to the record, the following facts are considered proven:

a) A... – Consulting and Clinical Services, S.A., a public company with registered address on Rua … Lisbon, with NIPC … (hereinafter "A... SA"), was incorporated on 29-12-2006;

b) Its purpose consists of managing healthcare units, consulting, training and provision of healthcare services;

c) According to the articles of association, the company may, secondarily, acquire and hold shareholdings in companies with a purpose different from that which it exercises;

d) From the tax registration of A... SA it appears that activity commenced on 12-01-2007;

e) A... SA was incorporated with share capital of € 50,000.00, with the subscription of shares distributed among the following shareholders (as outlined in the final report relating to the application of the general anti-abuse clause, hereinafter merely referred to as "CGAA Report"):

f) In January 2008, shareholder B... reinforced his shareholding in the capital of entity A... SA, with the acquisition from the other shareholders of a total of 23,996 shares, coming to hold 49,996 shares, that is, 99.99% of the share capital of said company (as outlined in the CGAA Report):

g) The remaining four shares continued to belong to C… and D…;

h) From 2007 to 2009, A... SA acquired shareholdings in other entities, which developed various operational businesses in the healthcare area, namely in clinical pathology, laboratory services, imaging, healthcare services management, emergency services management, analysis prescription management and supplier management;

i) These shareholdings had previously been held not only by B…, his wife and children, but also by third parties;

j) In the year 2008, A... SA acquired 70% of the share capital of company E... – SGPS, S.A., for € 3,400,000.00;

k) The shareholdings in company E... SGPS, SA were acquired from group F…;

l) Company E... – SGPS, S.A. was the parent company of a group consisting of four more companies (as outlined in the CGAA Report):

m) In the year 2008, A... SA acquired 5% of the share capital of company G… LDA, for the price of € 57,190.65;

n) In the year 2008, A... SA acquired 50% of the share capital of company H..., LDA from the two sons of B..., for the price of € 507,241.69 (as outlined in the CGAA Report):

o) In the year 2008, A... SA acquired 80% of the share capital of company I... LDA, for the price of € 330,973.83 (as outlined in the CGAA Report):

p) In the year 2011, A... SA acquired the remaining 20% of the share capital of said company;

q) In the year 2008, A... SA acquired 100% of the share capital of company J… LDA, for the price of € 6,000.00;

r) In the year 2008, A... SA acquired 50% of the share capital of company I..., CLINICAL LABORATORY, S.A., for the price of € 320,000.00;

s) Company I..., CLINICAL LABORATORY, S.A., was the parent company of a group consisting of four more companies (as outlined in the CGAA Report):

t) In the year 2008, A... SA acquired 100% of the share capital of company MEDICAL CENTER OF L…, LDA, for the price of € 33,000.00 (as outlined in the CGAA Report):

u) In the year 2008, A... SA held 100% of the share capital of the limited liability company A... II – CONSULTING AND CLINICAL SERVICES, LDA., which saw its share capital increased and its type of company converted to a public company on 21 May 2010;

v) On 31 December 2009, the total of shareholdings (financial investments) of A... SA amounted to € 5,761,021.71, making the total assets €7,593,914.28;

w) On 31 December 2009, the equity capital of A... SA had the value of € 3,002,211.56;

x) On 31 December 2009, the total liabilities of A... SA amounted to € 4,591,702.72, of which € 2,533,304.35 referred to debts to credit institutions, € 936,423.40 to debts to fixed asset suppliers and € 299,467.98 to advances made to the company by shareholder B...;

y) In the year 2009, the revenues of A... SA are based approximately 60.6% on the recognition by that company of its share of the results generated in the subsidiary companies;

z) The Claimant was incorporated on 23 December 2009;

aa) The Claimant has share capital of € 50,000.00, divided into 50,000 ordinary shares, each with a nominal value of one euro;

bb) Shareholder B... holds 49,996 shares of the Claimant;

cc) The remaining shareholders of the Claimant, with one share each, are M…, N…, LDA, O… MODELISMO UNIPESSOAL, LDA, and P… UNIPESSOAL, LDA;

dd) The purpose of the Claimant consists of managing shareholdings in other companies as an indirect form of exercising economic activities;

ee) A... SA was evaluated during December 2009 (on a date that could not be determined, but prior to the date of the report of the Statutory Auditor mentioned below), by Q... & Associados – Society of Statutory Auditors, S.A.;

ff) The extensive report reflecting said evaluation, states on page 22 of 73:

"(…) Having in mind that the value of the business (€9,934,497) has implicit a multiple based on the expected EBITDA for 2009 of 12.4 (considerably above the other valued entities and the results obtained by benchmarking (see annex 4.12), we find it necessary to make some correction here. Thus, we believe that the value of A... SA, considering the valuation of all its direct and indirect shareholdings, is:

€27,000,000 (twenty-seven million euros)" – emphasis in original.

gg) This value was considered appropriate by Statutory Auditor R… in the context of his "Report of the Statutory Auditor under the terms of article 29 of the Commercial Companies Code", issued on 29-12-2009, in which the following passages are considered relevant:

"(…)

1. The assets were evaluated by Q... & Associados, SROC, S.A. in December 2009, in accordance with the valuation criteria indicated below:

· The current business of the company was evaluated based on expected cash flows from the same, validated by previous performance and existing contracts;

· Subsidiary operational companies of A... were evaluated using the same criteria;

· Dependent companies without operational activity were evaluated based on their realizable assets net of current liabilities;

· A recently acquired sub-group of companies was evaluated based on the acquisition value practiced with an independent party;

· Valuations were corrected based on the percentage of control of A..., SA in the same;

· Valuations were validated based on EBITDA multiples known from transactions of companies operating in the same sector of activity;

· Financing liabilities net of liquid availability were discounted or added in the valuations of the companies as of the most recent date;

· Conservative bases were formed in light of values obtained in the aforementioned methodologies to compensate for possible deviations and consider the current situation of uncertainties in the sector of activity in which the companies operate.

(…)

1. My work was performed in accordance with the Technical Standards and Audit Review Guidelines of the Order of Statutory Auditors, namely the Audit Review Guideline (DRA) 841 – Verification of In-Kind Contributions for Capital Realization of Companies, with appropriate adaptations, which require that it be planned and executed with the objective of obtaining acceptable assurance as to whether the value of the assets reaches or not the nominal value of the transaction in favor of the partners making the sale of assets to the company and the consideration to be paid by the company. For this purpose, such work included the verification:

a) of the existence of the assets;

b) of ownership of said assets and the existence of any liens or encumbrances;

c) of the suitability of the criteria used in evaluating them; and

d) of the value assigned to the assets.

1. We believe that the work performed provides an acceptable basis for the issuance of our statement".

hh) The Report of the Statutory Auditor concludes as follows: "Based on the work performed, we declare that the values found reach the nominal value of the transaction planned between the company and its shareholder and the consideration to be paid by the company".

ii) On 30 December 2009, the Claimant executed with its shareholder B... a contract for the purchase and sale of shares of the share capital of A... SA;

jj) The parties agreed that the price of the sale of shares, of € 26,995,680.00, would be divided in the following manner:

i) € 1,995,680.00, to be paid as soon as the Claimant had funds available for this purpose;

ii) € 25,000,000.00, to be constituted as an advance from the titled alienator B...;

kk) During the year 2010, the Claimant paid a total of € 1,260,386.27;

ll) This amount was deducted from said € 1,995,680.00, and reflected in the accounting of the Claimant in the same terms;

mm) In July 2011, I..., SA, was incorporated by merger into A... II, SA;

nn) On 15 September 2011, the Claimant submitted its Simplified Business Information Declaration (IES/DA) relating to the year 2010;

oo) The Claimant entered in field A5318 of annex A of said Declaration, relating to "Dividends", the amount of € 1,260,386.27;

pp) The Claimant recorded in account 278411 of the analytical trial balance relating to the year 2010 the sum of € 1,260,386.27;

qq) This account relates to "Other Debtors and Creditors", "Dr. B…";

rr) In 2013, the AT conducted an internal partial tax audit of the Claimant relating to the year 2010, in compliance with Service Order No. OI2013 …;

ss) In the course of the external audit action, the application of the general anti-abuse clause procedure was proposed, referred to in article 63 of the CPPT, which was authorized by a directive of the General Director of the Tax and Customs Authority, on 02-10-2013;

tt) In the CGAA Report, notified by Official Letter dated 15 October 2013, the contents of which are incorporated herein, the following is stated, among other matters:

"III.2 – Formation of A... SGPS SA

III.2.1 - Formation of the SGPS

(…)

d) It follows, as mentioned above, and which is incorporated herein, that the articles of association were drawn up on Tuesday, 22 December 2009.

In this, shareholder B..., holder of 99.99% of the share capital of A... SGPS SA, signs, in his own right and in the capacity as representative of the other shareholders [sic], the articles of association.

He was also appointed as sole administrator (clause five).

Being president of the General Assembly S…, and secretary of the same body T…, both children of sole administrator B....

III.2.2 - Share Purchase and Sale Contract for share capital of A... Consulting SA and Formation of an Advance of €25,000,000.00

Following the formation of A... SGPS SA, (Wednesday, 30 December 2009) an agreement was executed between this company and taxpayer B…, for the purchase and sale of shares held by him in the share capital of A... Consulting SA;

It is extracted from reading the share purchase and sale contract (see annex 4), executed on Tuesday, 30 December 2009, that:

a) The share purchase and sale contract, mentioned above, was executed between, the first contracting party, B..., tax number: … and, the second contracting party, A... - Company Managing Corporate Shareholdings S.A., NIPC: ….

b) That the first contracting party is the sole and legitimate owner and holder of 49,992 ordinary registered shares, each with the nominal value of € 1.00. These being representative of part of the share capital of the Public Company A... - Consulting and Clinical Services SA, NIPC: … and with share capital of € 50,000.00.

c) Clause One - The first contracting party sells to the second contracting party (A... SGPS SA), the 49,992 shares, fully paid, with the total value of € 49,992.00, and representative of 99.98% of the share capital of A... Consulting SA.

And that the purchase and sale of shares was subject to deliberation by the General Assembly of A... SGPS SA and A... Consulting SA.

d) Clause Two: The price due for the purchase and sale of the shares is €26,995,680.00 (twenty-six million, nine hundred ninety-five thousand and six hundred eighty euros) to be paid in the following manner.

i) €1,995,680.00 (one million, nine hundred ninety-five thousand six hundred eighty euros), to be paid as soon as the second contracting party (meaning A... SGPS SA) has funds to carry out this payment.

ii) the remaining value of €25,000,000.00 (twenty-five million euros) shall be constituted as an advance from the first contracting party (meaning B…), under the advance contract executed in this act.

e) Clause Four: The first contracting party, B..., assigns to the second contracting party, which accepts the assignment, the advances of which it is creditor in A... Consulting SA, in the value of € 299,467.98.

f) - Clause Five: The first contracting party, B..., acknowledges that it is not the holder of any credits against the second contracting party, except those arising from this contract relating to the sale of shares and the assignment of advances on A... Consulting SA.

The first contracting party shall be fully and immediately released and relieved of any obligation, present and future, arising from its quality as shareholder of A... Consulting SA.

The second contracting party, A... SGPS SA, assumes the obligation to pay the amounts corresponding to taxes and any other costs that are due by force of the execution and performance of this contract.

g) – The share purchase and sale contract was executed in Lisbon on Wednesday 30 December 2009. B... having signed as seller and in representation of the acquiring company (A... SGPS SA).

III.3 - From the report of the Statutory Auditor (ROC)

(…)

e) Below, the summary table relating to the valuation of the shareholdings held by A... Consulting SA:

e1) Regarding the summary table of valuations, we make, only, the following reflections, regarding the value of the valuation assigned to company H... Lda.

e2) As mentioned above, A... Consulting SA proceeded to the acquisition, in 2008, of a shareholding, corresponding to 50% of the share capital. But that according to the shareholders agreement, has the right to 80% of profits. Having, See point III.1.4 b 2, in the previous year, acquired this shareholding for the amount of € 507,241.69 (See annex 7 - copy - trial balance 2008 - A... Consulting SA - account 41 Financial Investments).

e3) Within one year, the company and indeed the shareholding was valued at € 25,704,904, which corresponds to a valuation of almost 5000%.

e4) It is noted that, as mentioned above, the ownership of the shareholdings and indeed the management of the company, lay in the sphere of family B… family.

(…)

g) From the sequence of acts, we are, led to presume that the general assembly of A... SGPS SA took place either on Tuesday 29 or on Wednesday, 30 December 2009. But at a time that preceded the execution - signature of the share purchase contract, representative of the shareholding in the share capital of A... Consulting SA.

h) On the other hand, with B… positioned as a founding partner of A... SGPS SA, with 99.99% and also assuming the quality of seller, thus prevented from voting by legal requirement, who would have decided the acquisition of the shareholdings?

i) Focusing on the ROC report, the valuation of the shareholdings, object of the transaction, was accomplished in December 2009. Element that equally stands out, in the important urgency that is glimpsed in the sequence of acts leading to the execution of the business(es): formation of the SGPS and Purchase and sale of shares of A... Consulting SA.

III.4 - From the economic-financial analysis of A... SGPS SA

(…)

III 4.2 - From the administrative and economic-financial element

It results from their respective accounts (see annex 8). drawn up by the administration of A... SGPS SA, and from other elements consulted (especially from the model 10 declaration), issued by it, that there do not exist in its staff any salaried employees.

In this context is framed the fact that in the years 2009 and 2010, it had not incurred expenses, and concomitantly recorded in the respective accounts POC/SNC, with personnel.

From the elements above, we infer that, for this reason, A... SGPS SA will not render any service to its subsidiaries, which implies the existence of a staff of its own; Rather the opposite, it is the employees of its subsidiary or other companies held by A... Consulting SA, in this (A... SGPS SA) that render administrative - technical functions. Namely, from the TOC (as an independent worker).

From the analysis of Financial Shareholdings held by A... SGPS SA:

In this context and focusing on the table above, constructed based on information extracted from the accounting trial balances of company A... SGPS SA, it is noted that its portfolio of shareholdings (investments) financial, in 2009 and 2010, was composed (was limited to), uniquely and exclusively, by the shareholding in the share capital of A... Consulting SA.

From which, within the limits and conditions reported in this report, we can, with some certainty, infer that the formation of A... SGPS SA, based on the legal scope (management of Corporate Shareholdings in which the legal regime relating to the formation of SGPS is based), lacks objective foundation, particularly as regards the perspective and economic substance. In the points below we will address the fiscal substance of the business(es).

III 4.2.1 - From the economic-financial analysis

III 4.2.1.1 - From the 2009 Accounts - in the Balance Sheet

(…)

In a framework of a synthetic analysis of the accounts presented, we record that:

i) with reference to 31/12/2009, the equity capital of the company totaled only €49,945.00;

ii) breaking down the value; from the € 50,000.00 relating to share capital was reduced the amount of € 55.00, referring to the negative net result;

iii) due to the acquisition of the shareholding of 99.98% of A... Consulting SA, as mentioned above, was reflected in the accounting the value of € 26,995,680.00, in financial investments - capital shares.

Recorded in the following manner:

Actual value of acquired shareholdings: € 3,001,611.12;

Potential value inherent in them (goodwill): € 23,004,068.88

iv) in the account Shareholders (partners) (LIABILITY) was recorded the constitution of the respective debt of the company to shareholder B... in the amount of €25,299,467.98.

Being:

€ 25,000,000.00 - relating to "advances with the acquisition of A... Consulting SA";

€ 299,467.98 - refer to assumption by A... SGPS of the amount of the advance made by Mr. B… to company A... Consulting SA.

v) in conformity with what was agreed in the share purchase contract of A... Consulting SA, was recorded in accounting the "credit" of 1,995,680.00 €, with the founding and selling shareholder B....

vi) regarding the amount of € 324,467.98, recorded in other debtors.

It breaks down into:

€ 25,000.00 - Capital yet to be paid;

€ 299,467.98 - Advance from B… in A... Consulting SA, and assumed by A... SGPS.

vii) from the analysis of the cash flow statement (in IES/2009) it is verified that the SP, regarding this acquisition of the shareholding in A... Consulting SA, did not record the existence of any financial flow. That is, the existence of, concretely, of payments received. Reducing the legal business, in the economic - accounting context to a simple operation of recording in the accounting of the underlying economic facts.

III 4.2.1.2 - From the 2010 Accounts

(…)

From the analysis of the balance sheet

Breaking down the values, especially the account of financial investments, regarding the account of other debtors (SNC 27).

We have:

From which it follows that the amount of the credit that A... SGPS SA had with its shareholder, B..., recorded in account SNC 27 8411, was reduced, during the economic year 2010, by € 1,260,386.27.

Analysis of current account 27 84 11 (SNC)

Analyzing the movements recorded in the current account, (see annex 6) relating to the year 2010, it is noted that the amounts, identified below, were transferred to the legal sphere of shareholder B…, in the table below:

Consulting the IES, drawn up and presented by and on the responsibility of the Administration of the company, it is noted that, (See page 8 - Cash Flow Statement), the amounts transferred by A... SGPS SA to its shareholder B..., were made as dividend payments.

It is also observed that the amount of share capital (€ 25,000.00), recorded in account 26 1 1 1, which was yet to be paid, was paid in March 2010".

uu) Regarding the matter of law, the AT sets out its understanding on the correct interpretation of the general anti-abuse clause:

"Based on doctrine, in the breakdown of the doctrine already carried out of the norm contained in paragraph 2 of article 38° of the LGT, let us erect the operative solution to the case at hand.

For this purpose, the text cited in point III.5 is recovered, namely the normative provision, based on three segments:

1. acts or legal transactions essentially or principally aimed (...)at the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or at the obtaining of tax advantages that would not be achieved, in whole or in part, without the use of these means;

2. by artificial or fraudulent means;

3. and with abuse of legal forms.

Satisfied with those segments, we shall ascribe, as effect, the tax ineffectiveness of the act(s) or legal transaction(s) conducted [essentially or principally aimed (...)at the reduction, elimination or temporal deferment of taxes that would be due]. almost as if it were a test.

In the breakdown of doctrine and case law already established, five typological elements are identified, so that concretely one can resort to the General Anti-Abuse Clause.

Which, succinctly, consist of

• the means element - concerns the freely chosen route - act or legal transaction, isolated or part of a structure of sequential, logical and planned acts or legal transactions, organized in a unitary manner - by the taxpayer to obtain the desired gain or tax advantage;

• the result element, deals with the obtaining of a tax advantage (concretized in the reduction, elimination or deferment of the tax burden), obtained by virtue of the choice of that means, if the economic results are compared with the fiscal effects of the acts or transactions, since some do not correspond to the others (to the same economic result does not correspond a similar fiscal result).

• the intellectual element, requires the choice of that means be "essentially or principally aimed[...] at the reduction, elimination or temporal deferment of taxes" (article 38, paragraph 2 of the LGT), that is, it requires, not the mere verification of a tax advantage, but rather that it be assessed objectively, whether the taxpayer "intends an act, a transaction or a given structure, only or essentially, for the prevailing tax advantages they provide".

• the normative element, has as its primary function to distinguish cases of tax avoidance from cases of legitimate tax savings. Indeed, and as mentioned above, only behavior that materializes an action intra (secundum) legem is considered legitimate, behavior that is not positioned beyond the intention of the norm assessed in light of the general principles of law forming and informing the legal order, maxime the tax law order, is no longer acceptable.

• and, finally, the sanctioning element, if the remaining elements are verified, determines, as a sanction, the ineffectiveness, in the exclusive scope of taxation, of acts or legal transactions deemed abusive, "with taxation then being carried out in accordance with the norms applicable in their absence and the aforementioned tax advantages not being produced" (final part of article 38, paragraph 2, of the LGT)".

vv) The CGAA Report proceeds, then, with the demonstration of the verification of said five elements (from the AT's perspective), which is given here as fully incorporated, only emphasizing the conclusive passages of each of the said elements:

"III.6.1.1 - Means element

(…)

It is thus verified that the acts and legal transactions carried out by the taxpayers are not typical or normal in the perspective of business management carried out on the basis of simple economic-financial rationality.

It is only possible to understand such a succession of acts and legal transactions in a context of seeking a certain fiscal result (of elimination of taxation);

The conditions of the transaction, as well as all the acts practiced, seem to be inserted in a logic designed by the shareholders of A... Consulting Sa with the objective of renaming a monetary flow, initially designated as payment of dividends, as "payment of an agreed price".

These contractual conditions, only seem possible to us by virtue of B… positioning himself, directly or indirectly, in both parties to the contract.

III.6.1.2 - Result Element and its combination with the Intellectual Element and normative element

(…)

In sum, the result element, following Diogo Leite Campos, consists of the tax advantage achieved through the means element, used by B…, which in the case in question resulted in the transformation of a financial flow, denominated as - distribution of dividends (subject to IRS under the terms of subparagraph h) of paragraph 2 of article 5 of the CIRS), into another flow, denominated as - payment of price (the price determined in the transaction of acquisition of the shares of A... Consulting Sa by the SGPS).

(…)

III.6.1.2.1 – Analysis of all the foregoing

(…) in the legal sphere of taxpayer B..., had he not sold his shareholdings in A... Consulting SA, to A... SGPS SA, they would be subject to taxation, under the terms of the provision in subparagraph h) of paragraph 2 of article 5° of the CIRS: the profits distributed by entities subject to IRC and made available to their respective associates or holders, including advances on account of profits;

Now, in 2009 and 2010, under the terms of paragraph 3 and paragraph 1 of article 71° of the CIRS (in the wording at the time), those profits distributed, would be subject to withholding at source as a definitive title, at the liberatory rate of 20% if obtained in Portuguese territory;

However, what took place, with the interposition of A... SGPS SA ((between the company producing the dividends (A... Consulting SA) and taxpayer B...)) was the removal of taxation of the monetary flow (resulting from the distribution of profits) proceeding from A... Consulting SA, since such flow benefits from the tax advantages already mentioned, when it enters the legal sphere of the SGPS, at the same time that the "packaging" there allows it to "escape" the incidence of the tax on personal income. In sum, both the legal entity and the individual (shareholder B...) benefit;

Indeed, it seems we are faced with a disproportionate (misfit) use of the Institute of Advance, given the "consequences" economic-fiscal, that in this case, it produces.

(…)

We cannot, however, admit that by way of the advance contract with company A... SGPS SA, its shareholder B…, carried out a financing operation using monetary means, nor that the intention was to introduce or increase liquidity, supplying, in this way, any treasury shortfalls.

Notwithstanding the freedom to shape his private life and also the contractual freedom that assisting taxpayers in general, it is more than evident, in terms globally perceived, that the patrimony of taxpayer B..., did not suffer substantial alteration with the alienation of his shareholding in the share capital of A... Consulting SA to company A... SGPS SA, as we can see:

In selling the majority shareholding (99.99%) that he held in A... Consulting SA to an SGPS, of which he is also a majority shareholder (99.98%), the management powers (inherent to that property) do not change, only because they came to be held indirectly. Indeed, taxpayer B... continues to hold the power to dispose of the shares he sold to his company (holder of 99.98% of the share capital of the SGPS).

In alienating part of his patrimony, as declared, the alienator positioned himself in a fragile economic-financial situation, aggravated by the uncertainty, inherent to the activity developed by A... SGPS SA, Especially the obtaining of revenues that would allow him to meet his obligations; Although the theory expounded is valid for the acts or transactions practiced, under the aegis of arm's length, which does not occur in this case. In that the seller is also the "owner" of 99.9% of the acquiring company. Thus remaining, by way indirectly, the holder of the shares of A... Consulting SA.

In a critical-reflective exercise, it is demonstrated, although the letter of the law (formal) permits the act or transaction carried out, that the fiscal effects achieved exceed (praeter legem), the ratio of the norm and other current legal order, namely the general principles of law.

We judge it demonstrated that taxpayer B... used the figure of advances - in general rule a means of financing companies, objectively achieving an extra-legal result, that is, exceeding the limit of legitimate fiscal planning or otherwise non-abusive.

Let us delve into the fiscal implications, in the year 2010 and subsequent, arising from the entire legal-formal arrangement made by the taxpayer.

Using this "arrangement", taxpayer B... "manages to transmute", the monetary flows resulting from the distribution of results, generated in A... Consulting SA, and which reach him via A... SGPS SA, in amortization of the advance.

In sum, we are faced with an operation of disguising the results (dividends), carried out within A... SGPS SA, in payment of credit to shareholder B....

(…)

Thus and for all the foregoing, we judge the conditions met for it to be concretely considered fiscally ineffective, the contractualization of the advance.

The taxpayer is free to "establish" the companies he deems fit, within the scope, among others, of the freedom of managing his private life, however, this freedom no longer welcomes, an action engendering credits mortgaging the very companies, harming, among others, the other creditors, concomitantly, the Portuguese State.

Alternatively, taxpayer B... could (should), when establishing A... SGPS SA, realize his shareholding in share capital, in kind, by delivering, for this purpose, the shareholdings he held in A... Consulting SA, valued in accordance with the requirements of the CSC.

This operation, by virtue of the amount of the price attributed to the transaction of the sale, on the part of B..., of the shares, set at € 26,985,680.00, which would extend the tax advantage achieved, for many many years, concretely, until the moment of complete amortization of the advance generated.

(…)

Thus, by application of the provisions of paragraph 2 of article 38° of the LGT, we find ourselves, in this case, before a set of operations that are nothing else but a distribution of results subject to withholding at source as title of IRS, under the terms of the provision in subparagraph h) of paragraph 2 of article 5 of the CIRS combined with the provision, in the CIRS, article 71° paragraph 1 subparagraph c) and (ex.) paragraph 3 subparagraph c) with the title Liberatory Rates.

Here arrived, it is important to recall that on the dividends, perceived in this manner - packaged in the figure of payment of a credit constituted by way of an advance, there is no incidence of IRS.

Thus, the monetary transfers, carried out, during the year 2010, by A... SGPS SA to its shareholder, B..., as recorded in the IES/2010 amount to, the payment of "dividends"".

ww) The following is concluded in the CGAA Report:

"(…)

Given all the foregoing and aiming at a legally rationalized practice of tax law, it is understood that the conditions are met for one to resort to the mechanism provided for in paragraph 2 of article 38° of the LGT, as transcribed above.

III.8 - Proposed Corrections

During the year 2010, the Administration of A... SGPS SA transferred, to its shareholder - B..., the amount of € 1,260,386.27, See annex No. 6.

We are thus led, by application of the CCAA, to consider, for tax purposes, the values received, as payment of the debt, better detailed in point III 4.2.1.2 – From the 2010 accounts, capital income (as dividends), subject to withholding at source under IRS.

In light of the provisions of article 103 of the CIRS - with the title, Liability in case of substitution, the responsibility lies with company A... SGPS SA for the amounts that should have been withheld and were not, as required by paragraph 3 of the same article.

Now, in the case at hand, the total amount of tax not withheld at source, and as such, not delivered was € 261,431, as per the table below:

"

xx) The Claimant paid to its shareholder the sums referred to in the preceding subparagraph, according to it as payment for part of the price of the shares;

yy) On 06-09-2013, the Head of the Finance Department of … issued a directive, referring to the CGAA Report, in the following terms:

"I confirm the contents of this Report.

Given the reality described, it is justified that corrections be proposed under the terms of paragraph 2 of article 38 of the LGT, combined with article 63 of the CPPT, as well as in accordance with article 13° of Decree Law No. 42/91, of 22 January, and articles 98° and 101° of the IRS Code.

The taxpayer was notified of the Draft Report, to exercise the right of prior hearing, but his arguments produced no alteration in the presuppositions for application of the General Anti-Abuse Clause.

The present Report is proposed to be submitted to the consideration of the Esteemed General Director of the Tax and Customs Authority, for authorization of the assessment of the stated tax".

zz) Also on 06-09-2013, the Finance Director of … issued a directive in the following terms, referring to the Report of the Tax Inspection and opinions that fell upon it:

"Seen.

I agree with the opinions and as Report of the inspection action, attached.

The report of the observed tax situation justifies and substantiates the proposed corrections in the context of IRS, with reference to the year 2010.

The substantiation rests on the provision / determination of the technical norms contained in the IRS Code and in Decree Law No. 42/91, of 22 January, in the wording at the date of the facts, whereby the presuppositions of law and of fact are considered met, for one to proceed with subjecting to withholding at source the dividends paid or made available, in obedience to the application of the provisions of paragraph 2 of article 38 of the LGT, combined with article 63 of the CPPT.

Submit to the consideration of the Esteemed General Director of the Tax and Customs Authority, for authorization of the assessment of the tax.

Notify the taxpayer after the decision of the General Director".

aaa) The General Director of the AT authorized the application of the general anti-abuse clause in the terms proposed on 02-10-2013;

bbb) The Claimant did not carry out any withholding at source of any amount in relation to the payments it made to its shareholder during the year 2010, according to it as payment of the price debt;

ccc) As a consequence of the acts referred to in the preceding subparagraphs, the disputed assessment came to be issued, better identified above;

ddd) The Claimant paid the tax and respective interest on 12 February 2014, in the amount of € 293,605.31 - plus default interest in the amount of € 294.99 and costs of executive proceedings in the amount of € 1,044.74, all in a value of € 394,945.04;

eee) On 24-03-2014, the Claimant filed the request for constitution of an Arbitral Tribunal that gave rise to the present proceedings.

2.1.2 Unproven Facts

It was not proven that the valuation of the shares had as its purpose, exclusive or principal, the obtaining of tax advantages.

2.1.3 Motivation - Substantiation of the fixing of matters of fact

The matters of fact were fixed based on the elements contained in the Report of the Tax Inspection and in the initial petition. Naturally, as to the transcriptions made above, it is taken as established the fact that the transcribed texts were produced by the parties, but not the evaluative judgments contained therein by the same.

As to the fact referred to as unproven, the evidentiary judgment is based, on one hand, on the fact that the report of valuation of the alienated shares was prepared by a credible and independent entity, in the content of the report of the Statutory Auditor (prepared for purposes of article 29 and not for purposes of article 28 of the Commercial Companies Code, as erroneously referred to in subparagraph f) of point III.3 of the CGAA Report) and on the lack of probative elements presented by the Respondent for the disregard of said value and, further, by it being perfectly admissible that the fixing of the values of the shares had other motives, including compliance with the duty provided for in article 63 of the IRC Code.

It is noted the contradiction that on 15 September 2011, the Claimant submitted its Simplified Business Information Declaration (IES/DA) relating to the year 2010, entering in field A5318 of annex A of said Declaration, relating to "Dividends", the amount of € 1,260,386.27, but having recorded such amount as payment of debt to shareholder in subaccount 278411 (of "other debtors and creditors", within the "other accounts receivable and payable" of account 27) of the analytical trial balance relating to the year 2010 (and not in a subaccount 264 of "attributed results", within the account "shareholders & partners" of account 26). It is not possible to assign decisive effects to these facts, nor does it seem that such be determinant, since the AT does not allege that, in fact, dividends were paid by the Respondent but only that, in law, their payments merit such (re)qualification, in substance, should, as a result of the application of the general anti-abuse clause, the disregard of the fiscal effects primitively intended by the selling shareholder be operative.

2.2 Matters of Law

2.2.1 Preliminary Question – order of knowledge of the vices

The AT understood to apply to the Claimant the general anti-abuse clause provided for in article 38, paragraph 2, of the LGT.

At issue is the transmission to the Claimant of 49,992 shares representative of the share capital of A... SA, which occurred on 30-12-2009, for the price of € 26,995,680.00.

For payment of that price the Claimant became debtor of € 1,995,680.00, which it should pay as soon as it had the necessary funds, and of € 25,000,000.00, a debt that was contractually configured as advances, having as its respective creditor the seller and shareholder of the Claimant, B....

The AT considered that the valuation of € 540.00 per share transmitted, above the nominal value of € 1.00 per share, had the purpose of permitting the deferred reimbursement of said amount as advances, as the Claimant received dividends from A... SA.

In that measure, and based on the application of the general anti-abuse clause, the AT considered that the amounts paid by the Claimant to said shareholder, in the year 2010, should be treated fiscally as dividends, in that year, without there being taxation in the context of IRS.

In these terms, the AT determined that the € 1,260,386.27 that the Claimant delivered to said shareholder should be treated as capital income (as dividends) and assessed IRS and compensatory interest, in the total amount of € 293,605.31, assigning the payment to the Claimant, by understanding that this should have made withholdings at source regarding the amounts delivered, according to it, as payment of the price debt.

The Claimant substantiates its disagreement regarding the AT's understanding with the following reasons:

– Violation of the special duty of substantiation provided for in article 63 of the CPPT;

• Non-existence of tax obligation in the Claimant's sphere, due to non-applicability of the general anti-abuse clause for the imposition of ancillary obligations, and unconstitutionality of the contrary interpretation, as the various presuppositions or elements on which the application of the general anti-abuse clause depends are not met in relation to the Claimant;

– Non-existence of an obligation to withhold at source, since this depends on the verification of its own presuppositions provided for in the norms that establish the duty of withholding, in the case of dividends being paid, something that, in the Claimant's perspective, did not occur;

• The obligation to withhold at source being an ancillary duty, linked and subject to the principle of legality, incapable of being fictionalized through the application of the general anti-abuse clause that only renders the fiscal effects of the acts or legal transactions in question ineffective;

– That the addressees of the general anti-abuse clause are the holders of the income in question, it not being possible to apply it to third parties through a liability that is founded on mere intervention in the payment act, and it being necessary to verify the corresponding elements relative to the said holders;

• That it is the said income holders who have the original responsibility for the tax due as a result of the a posteriori disregard of the fiscal effects of the payment acts in which it effectively intervened;

– That it is upon those income holders that the obligation to pay tax falls;

And concludes the Claimant that to interpret the general anti-abuse clause in the sense of producing fiscal effects on third parties other than the taxpayer who acted motivated to obtain fiscal advantage, in addition to constituting violation of the principle of legal determination of the obligation to withhold at source, runs counter to other principles of the CRP.

2.2.3.2 Position of the Respondent

In its Response and in its Arguments, the AT argues that:

• The assessment rested on the disregard of the monetary payments as alleged payments of the price debt for the purchase of shares, exempt from taxation, and on their requalification for tax purposes as distribution of dividends resulting from profits made available to the shareholder of the Claimant;

• The said requalification generates the obligation for the Claimant to carry out withholding at source of IRS upon payment of the amounts, (re)qualified as dividends;

• The formation of the Claimant and the carrying out of the advances lack economic substance;

• The valuation of the acquired shares and their sale do not reflect an act of corporate management that has a valid economic or business motivation;

• The regime of article 63 of the IRC Code does not apply in the case sub judice;

• The financing of the Claimant through advances had as its objective the interests of the shareholder of both companies (Claimant and A... SA);

• The presuppositions for the application of the general anti-abuse clause are met;

• The norm that establishes the general anti-abuse clause is not unconstitutional;

• The norms that determine the general anti-abuse clause, when interpreted in the sense that taxation resulting therefrom falls only on those who obtained illegitimate tax advantages, are unconstitutional, by violation of the principles of tax legality and equality.

2.2.3.3 Legitimate and illegitimate tax planning

It is well-known that there is legitimate and illegitimate tax planning.

In that sense, as Saldanha Sanches has taught, tax planning is legitimate when "the taxpayer forgoes a certain conduct because it is linked to a tax obligation or chooses, among multiple solutions that the legal order contemplates, that which, by intentional action or omission of the tax legislator results in lesser tax burdens"[1]. It shall be illegitimate when it corresponds to a "behavior of undue reduction, by contravening principles or rules of the tax-legal order, of the tax burdens of a certain taxpayer"[2].

As was decided in the context of the tax arbitration proceedings No. 200/2014-T [the respective footnotes are from the original]:

"(…) Within the framework of tax planning we can thus distinguish situations in which the taxpayer acts against legem, extra legem and intra legem.

When this acts against legem, its action is frontal and unequivocally illicit, since it directly violates tax law, and constitutes tax fraud ([3]) capable, even, of being subject to counter-administrative or criminal censure.

Action extra legem occurs when the taxpayer takes advantage abusively of the law to reach a more favorable fiscal result, despite not violating it directly. It adopts 'a behavior that has as its exclusive or principal purpose circumventing one or more tax-legal norms, in order to achieve the reduction or suppression of the tax burden' ( [4] ). Being that from that or those tax-legal norms one must detect an attempt to circumvent 'a clear intention to tax affirmed by the structuring principles of the system' ( [5] ). This type of action is commonly designated 'tax law fraud' but, as Saldanha Sanches warns, intending to better illustrate and distinguish these situations from those of tax fraud, is also designated 'abusive avoidance of tax burdens', 'abusive tax avoidance' or still 'tax avoidance' ( [6] ).

Only action intra legem appears legitimate – and thus, legitimate tax planning or non-abusive – is considered legitimate. Indeed, the obtaining of a tax saving does not constitute behavior prohibited by law, as long as the action does not fall within the above-mentioned action extra legem ( [7] )".

It means that the question posed to this Tribunal lies, then, in knowing whether the action of the Claimant is situated or not extra legem, that is, whether there is an abusive tax planning.

2.2.3.4 The five elements of the general anti-abuse clause

Article 38, paragraph 2, of the LGT, with the heading "Ineffectiveness of acts and legal transactions", has the following content:

"Acts or legal transactions that are essentially or principally directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, in whole or in part, without the use of such means, are ineffective in the tax sphere, with taxation then being carried out in accordance with the norms applicable in their absence and the aforementioned tax advantages not being produced".

The application of this norm must necessarily be complemented by article 63 of the CPPT, which defines the rules of administrative procedure for application of the said general anti-abuse clause.

Case law and doctrine have come to interpret the said norm as containing five distinct elements, being that one of them, the sanctioning element, is nothing more than the enactment of the norm. In other words, the cumulative verification of the other four elements allows one to assess whether a certain action can be considered abusive tax planning.

As also decided in the context of tax arbitration proceedings No. 200/2014-T [the respective footnotes are from the original]:

"These elements, around which both parties incidentally build their argument, consist:

– in the means element, which concerns the freely chosen route – act or legal transaction, isolated or part of a structure of sequential, logical and planned acts or legal transactions, organized in a unitary manner – by the taxpayer to obtain the desired gain or tax advantage ( [8] );

– in the result element, which deals with the obtaining of a tax advantage, by virtue of the choice of that means, when compared with the tax burden that would result from the practice of "normal" acts or legal transactions and of equivalent economic effect ( [9] );

– in the intellectual element, which requires that the choice of that means be "essentially or principally aimed[...] at the reduction, elimination or temporal deferment of taxes" (article 38, paragraph 2 of the LGT), that is, which requires not the mere verification of a tax advantage, but rather that it be assessed, objectively, whether the taxpayer "intends an act, a transaction or a given structure, only or essentially, for the prevailing tax advantages they provide" ( [10] );

– in the normative element, which "has as its primary function to distinguish cases of tax avoidance from cases of legitimate tax savings, in consideration of the principles of Tax Law, being that only in cases where one demonstrates a contrary legal intention or one not legitimating the result obtained can one speak of that »( [11] );

– and, finally, in the sanctioning element, which, presupposing the cumulative verification of the remaining elements, leads to the sanction of ineffectiveness, in the exclusive scope of taxation, of acts or legal transactions deemed abusive, «with taxation then being carried out in accordance with the norms applicable in their absence and the aforementioned tax advantages not being produced» (final part of article 38, paragraph 2, of the LGT).

Despite this breakdown, the analysis of the elements cannot be compartmentalized, since, as Courinha emphasizes, «the fixing of one element may, in practice, depend on another», whereby these «will not infrequently [...] assist one another» ( [12] ).

Let us appreciate, having this aspect in mind, the elements of the general anti-abuse clause in light of the substantiation of the decision, the proven facts, and the legal argumentation of the parties, namely the vices that the Claimant imputes.

In this analysis, one must start from the presupposition that the substantiation of the act that decided the application of the general anti-abuse clause that is to be appreciated is only that which appears in the act itself and the elements to which it refers, since the tax arbitration proceedings, as an alternative means to court proceedings of impugnation (paragraph 2 of article 124 of Law No. 3-B/2010, of 28 April), is, like this, a procedural means of mere legality, which aims to eliminate the effects produced by illegal acts, annulling them or declaring their nullity or non-existence [articles 2 of the RJAT and 99 and 124 of the CPPT, applicable by virtue of the provisions of article 29, paragraph 1, subparagraph a), of the same]. For this reason, the acts that are the object of the proceedings must be appreciated as they were practiced, the tribunal not being able, in the face of the finding of the invocation of an illegal foundation as the basis of administrative decision, to appreciate whether its action could be based on other foundations".

2.2.4 Appreciation of the question

Paragraph 2 of article 38 of the LGT requires that the application of the norm permits the elimination of the tax advantages that taxpayers intended to obtain with the tax planning.

Indeed, as well explained by the Tax Arbitral Tribunal in the context of proceedings No. 200/2014-T [the respective footnotes are from the original]:

"In truth, the final part of article 38, paragraph 2, of the LGT (wording of Law No. by Law No. 30-G/2000, of 29 December), in establishing the consequences of the application of the general anti-abuse clause 'with taxation then being carried out in accordance with the norms applicable in their absence and the aforementioned tax advantages not being produced' points decisively in the sense that application must be carried out in such a manner as to permit the exclusion of the production of the tax advantages.

Indeed, although the first part of this article 38, paragraph 2, contains an apparent distinction between the objectives sought by the taxpayer among 'reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose and 'obtaining of tax advantages', it is manifest that what is at issue in the reduction, elimination or temporal deferment of taxes is always the obtaining of tax advantages, the express and generic reference to tax advantages having only the objective of extending the scope of the norm to any tax advantages, beyond those specifically indicated, which are clearly the most frequent cases of realization of tax advantages, which are the reduction, elimination or temporal deferment of taxes.

That is, with the wording given by Law No. 30-G/2000, of 29 December, the general anti-abuse clause came to be able to apply to all situations of obtaining tax advantages and not only to situations of reduction or elimination of taxes, already provided for in the initial wording, and to that of temporal deferment, which was also expressly added in the new wording. ([13])

In this light, the reference made in the final part of article 38, paragraph 2, to the non-production of the 'aforementioned tax advantages' refers to all of them, whether the most common ones that are specifically referred to (reduction, elimination or temporal deferment of taxes) or those generically referred to, through the reference to 'tax advantages that would not be achieved'.

In fact, no other interpretation would be constitutionally admissible, since, in all cases being a matter of obtaining abusive tax advantages, it would be arbitrary and violative of the constitutional principle of equality (article 13 of the CRP) a hypothetical distinction of treatment between the situations specifically referred to and those generically referred to."

Now, the tax ineffectiveness of the acts or legal transactions practiced must necessarily have as its addressee the taxpayer who actually benefited from the effective tax planning.

Indeed, if the purpose of the general anti-abuse clause is the tax ineffectiveness of the legal transactions with the consequent elimination of the tax advantages unduly obtained, it is evident that said clause must be applied to those who benefited from the abusive tax planning and not to those who, like the Claimant, did not obtain any patrimonial advantage from said planning.

In the present case, the Claimant paid all amounts to the shareholder without withholding at source, whereby it will have been the shareholder who obtained economic advantages with the non-taxation. It means that in the case sub judice the result element is not verified in relation to the Claimant.

Following here closely the decision of the said Tax Arbitral Tribunal, made in the context of proceedings No. 200/2014-T:

"Being the shareholders the beneficiaries of the said advantages, the application of the general anti-abuse clause as it was carried out does not permit the removal of those advantages, since, by imposing on the Claimant the payment of the amounts equivalent to those advantages, it is only it that is imposed these burdens, the shareholders remaining in the intact ownership of the amounts received.

(…)

(…) it is evident that the scope of that article 38, paragraph 2, in establishing as a necessary effect of the application of the general anti-abuse clause the non-production of the tax advantages, presupposes the legislative understanding that the 'taxation in accordance with applicable norms' falls upon those who obtained the advantages and not upon those who merely had intervention in the acts from which they result without benefiting from those, since only thus is it possible to guarantee the intended effect of there not being produced the tax advantages especially or generically referred to.

In truth, it is concluded from the final part of paragraph 2 of article 38 of the LGT, in the wording of Law No. 30-G/2000, that the general anti-abuse clause does not aim at merely attributing to the Tax Administration compensation for acts that have caused it a loss of fiscal revenue, rather aims, concomitantly, to eliminate the illegitimate tax advantages that someone obtained, which reveals that it is underlain by concerns of equality and tax justice, which can only be satisfied by imposing taxation of the omitted amount on those who obtained those advantages.

For that matter, it is this sole interpretation that is compatible with the constitutional principle of taxation according to contributive capacity (article 104, paragraph 2, of the CRP) and the principle of taxation with respect for material justice (article 5, paragraph 2, of the LGT).

Indeed, these principles impose that there be taxed in taxes on income those who obtained the income and not those who did not obtain it and the value of material justice is clearly violated when, in a situation in which there exist illegitimate tax advantages, the corresponding amount is to be required from those who did not benefit from those advantages, leaving untouched those who unduly benefited from them".

Additionally, for the Claimant to have been a tax substitute it would have to be demonstrated the fiscal abuse (of the shareholder) and to be accepted the requalification proposed (of payment of the price of shares and of advances as dividends) ‑ being able to be imagined that, even if abuse existed, the solution for disregarding it could be another (fictionalizing, for example, that the shareholder was still the "fiscal holder" of the shares of A... SA alienated to the Claimant, which, if and when sold by this Claimant, would be taxable not in IRC but in IRS, in the sphere of that one; in this case even if there were abuse could never exist a tax substitute; see also what we shall say below by reference to the decision of the Tax Arbitral Tribunal, made in the context of proceedings No. 258/2013-T).

If there had been no such abuse the Claimant would not even assume the quality of tax substitute in which it was sued.

The construction of the AT, of seeking to tax the Claimant instead of seeking to tax its shareholder, has something of a circulus in demonstrando, and strikes against the system that for the general anti-abuse clause results from article 38, paragraph 2, and article 63 of the CPPT.

We accompany here entirely the said decision of the Tax Arbitral Tribunal, made in the context of proceedings No. 200/2014-T, when it rules to the effect that the decision to authorize the application of the general anti-abuse clause by the highest officer of the AT is constitutive of the tax fact. In these terms, it is logically impossible to consider that the obligation to withhold at source exists before the tax fact is even verified.

The Claimant, in its arguments, configures the withholding at source as an ancillary obligation or an ancillary duty. Even though there is doctrine that does so – using another the qualification of "auxiliary" – what in it stands out is, above all, and with interest for the record, its nature as a duty of conduct.

According to Manuel Faustino, "The object of the withholding duty is constituted by two distinct obligations: the obligation of assessment and collection of the tax that by law should be due; and the obligation of delivery into the coffers of the State of the tax assessed and collected, or that should have been" – cfr. by the author, The Withholding at Source Duty - And Other Autonomous Duties of Cooperation in IRS, Áreas Editora, Lisbon, 2003, p. 20 (emphasis in original). For this purpose, the author clarifies, in a footnote, that "even in mere withholding at source an act of assessment is practiced, in abstract, since in it come together the essential elements: determination of the taxable matter (a task that is not always easy), application of an effective rate by way of tax and the determination of an amount due by way of tax". However, the author warns of the precariousness of this tax relationship regarding the final debt of tax, since this will only be born at the end of the taxation period – cfr. by the author, Op. Cit., p. 20, note 2.

Withholding at source, however, has a complex legal nature, being constituted by various obligations imposed on the tax substitute. It is not solely reducible to an obligation to give since the obligations that logically precede the obligation to pay the debt of tax cannot be disregarded. The obligation to give is, indeed, merely eventful, as it is entirely dependent on operations of assessment depending on the type of income in question, the quality of the replaced taxpayer, the existence or not of exclusions from taxation (for example those resulting from Conventions to Prevent Double Taxation), of exemptions, of (internal) exemptions from withholding at source, and of assessment operations, with the determination of taxable matter (there sometimes being new exemptions depending on the amounts in question), and the application of the rate of tax. Alongside these obligations to do there arise, then, other duties, those truly auxiliary, such as the duties of registration and declaration to the AT, p.e. those provided for in 119 of the IRS Code. In this manner, much more is required of the tax substitute than merely the payment of the debt of tax, and not always, in fact, is it properly required of it.

It seems, then, to be concluded that the duty to withhold at source should be qualified as an autonomous duty of conduct or, as Saldanha Sanches qualifies it, a "duty of cooperation due to the tax debt of others". Note that this author also opts to qualify the obligation to withhold at source as an obligation to do: "Subjects of an intense and complex duty of cooperation, which has as its content the obligation of the realization of withholdings at source. These shall be integrated into the tax collection procedure, through a legally required intervention, of a third entity, between the subject bound by the legal provision and the Administration: through an operation by which an entity that, by the contractual relationships it has with others, owes them certain monetary payments, proceeds, by legal obligation, to the calculation of the percentage of that payment which, as advance payment (on account) of a tax debt in the process of formation, should be by it delivered into the coffers of the State. (…)

It is in relation to taxpayers who incur in this obligation, which is to say to taxpayers with forms of business organization, that the various types of cooperation duties can be assigned: and with the accounting organized as a presupposition for this assignment is well marked the legislative option to consider companies as the principal addressees of the do obligations, necessary for the compliance with tax law" - cfr. José Luís Saldanha Sanches, The Quantification of the Tax Obligation – Cooperation Duties, Self-Assessment and Administrative Assessment, Lex Editora, Lisbon, 2000, pp. 66 and 67 (emphasis ours).

On the other hand, it is to be noted that the duty to withhold at source is born ex lege and is linear, not being within the availability of the parties. Withholding at source shall only be due by the substitute when the law imposes it and for the types of income for which withholding is provided.

Diogo Feio states, "One cannot forget that the tax substitution, as we have come to describe it, has its origin in the appearance of two legally relevant facts: a first, which puts the Tax Administration and the taxpayer in contact, determining the birth of the tax-legal relationship, and a second, accessory in relation to the initial, but which comes to overlap it, since from it results that a third party becomes ab initio holder of the passive position and consequent obligations of said tax-legal relationship. In this manner, one must attend to the fact that the same reality, the perception of an income, entails two related facts that come to have as a result an alteration in relation to what is normally the case regarding ownership on the passive side of the tax obligation.

This entire process, as has already been mentioned, has a merely legal origin, whereby, beyond two facts, there exist two legal norms related to one another. The first, which must respect and be guided by the principle of contributive capacity, determines who is the taxpayer, and the second, valuing a certain relationship of a factual nature, imposes the substitution of the taxpayer by the substitute. In admitting that this is, as we have been saying, one of the fields in which the principle of legality plays a relevant role, one does not enable the determinations regarding the taxpayer to have merely voluntary bases. It seems obvious that tax substitution could never be determined through free intervention of the subjects, in that it refers to an alteration in one of the fundamental elements of the tax-legal relationship, its passive side. Thus, it must be the law that defines who and under what conditions can be qualified as a substitute. The consideration that tax substitution must be determined by law is accepted in general fashion by doctrine, in that the same embodies a great and profound alteration operated in the passive side of the tax-legal relationship in question". Cfr – by the author, Tax substitution and withholding at source: the specific case of taxes on income, Coimbra Editora, Coimbra, 2001, pp. 55 and 56 (emphasis ours).

To the same effect speaks Manuel Faustino: "(…) the withholding duty is an autonomous bound duty, subject unquestionably to the principle of legality and, for part of the doctrine, also subject to the principles of proportionality and contributive capacity, measured by the available income. And, as a consequence, it is still an unavailable duty, in the sense that, being categorically imperative, it cannot be removed or, in general, modified, by the will of the parties". Cfr – by the author, Op. Cit., p. 21.

Or, in the words of Diogo Feio, Op. Cit., 2001, p. 40 (emphasis ours) "Really, and in a very synthetic manner, tax substitution should be understood as a modification, determined by way of law, in the subjective configuration normal to the tax-legal relationship.".

In this manner, the principle of tax legality opposes the tax substitute being able, by its own free initiative, to proceed with withholding at source when the law does not provide it for the payment flow in question. The requalification of a mere payment into a true income by effect of the application of the general anti-abuse clause is constitutive of the tax fact, and not merely declarative, and only occurs subsequently, whereby opposing to the Claimant the non-compliance with a duty to withhold at source cannot help but be seen as an imposition retroactively of a duty of conduct, since at the moment of payment of the price of purchase of the shares to the partner the Claimant could not be considered a tax substitute of the latter attent the legal act in question.

It seems to us, thus, that to intend to impose on the Company the duty to withhold at source when this is not expressly provided for the operation in question, at the moment of its performance, is to destroy the structure inherent to the institute, and the very system of "assessment of taxes based on the anti-abuse provision contained in paragraph 2 of article 38 of the General Tax Law", in the words of article 63 of the CPPT, in clear violation of the principle of tax legality. The requalifications operated by the AT cannot be constitutive of obligations to do, of duties of conduct.

As was decided in tax arbitration proceedings No. 200/2014-T [the respective footnotes are from the original]:

"On the other hand, it is not even to be ventured the possibility of, based on civil law, the Claimant recovering what it paid in the measure of the unjust enrichment of the shareholders, based on unjust enrichment, since the application of the general anti-abuse clause only permits to consider the transactions or acts ineffective 'in the scope of tax law', as results from the text of paragraph 2 of article 38 of the LGT, whereby the transactions celebrated maintain their full effectiveness for civil effects and, in terms of civil law, the integral receipt of the amounts received by the shareholders has legal cause, since it is the counterpart of the transmission of the shares thereof to the Claimant, in the context of the purchase and sale.

Being thus, it is safe that the wording of paragraph 2 of article 38 of the LGT introduces the principle that the invalidity determined by this rule as regards tax matters shall not extend to the civil-law validity of the underlying legal transaction; that is to say that the general anti-abuse clause is only of tax scope, that is, it only determines the ineffectiveness of the tax effects that the legal transaction would produce, not its civil invalidity.

Now, the constitution of the Claimant is not vitiated by illegality, the company having been regularly constituted with the legal and regulatory requirements being fulfilled. The share purchase and sale contract is a consensual contract that, for civil purposes, is perfectly valid, having the sellers received the price that was agreed upon, with the consequent transfer of the goods (the shares), all with the necessary legal effects. The only thing that is in question is whether, for purposes of taxation, the fiscal effects originally intended by the shareholder should be produced. It was not a case of the contract being null or void, nor of there being a misuse of law at the civil law level, but only at the tax law level.

We therefore conclude, consistently with what was decided in the aforementioned proceedings, that imposing on the Claimant the duty to withhold at source when such a duty was not present at the time the payment was made constitutes a retroactive application of a duty that is incompatible with the principle of legality and runs counter to the tax system itself resulting from articles 38, paragraph 2, and 63 of the CPPT."

Based on all the foregoing, we conclude that the general anti-abuse clause was not properly applied in the present case, since it was applied to a subject who did not obtain the tax advantages that the abuse was intended to achieve, which constitutes a clear violation of the system that results from article 38, paragraph 2, and article 63 of the CPPT, and of the constitutional principles mentioned by the Claimant.

Therefore, the absence of the result element relative to the Claimant constitutes a vice that prevents the application of the general anti-abuse clause, rendering the assessment illegal.

Given this conclusion, we do not need to assess the remaining elements of the general anti-abuse clause or the other defects alleged by the Claimant in its request.

However, and for the sake of completeness, we note that:

The alleged violation of article 63 of the CPPT, regarding the special duty of substantiation, is not substantiated by the Claimant with specific instances of non-substantiation or obscurity in the CGAA Report. The reasons alleged for non-substantiation are integrated into the arguments about the presuppositions of application of the general anti-abuse clause itself.

2 Ruling

Given all the foregoing, the Tribunal Arbitral resolves:

1. To grant the request for arbitral pronouncement filed by A... – SGPS, S.A. against the Tax and Customs Authority;

2. To declare illegal the assessment of withholding at source of Personal Income Tax (IRS) No. 2013 [reference omitted] relating to the year 2010, and the associated assessment of compensatory interest, as modified by the order of assessment dated [date omitted] and rendered final by the order for enforcement of assessment dated [date omitted];

3. To condemn the Tax and Customs Authority to refund to A... – SGPS, S.A. the amount of € 293,605.31, corresponding to the tax and compensatory interest that was unduly paid, plus default interest calculated in accordance with the law;

4. To absolve the Claimant of the remaining petitions presented.

Thus they decided and by the undersigned Arbitrators sign this judgment, which is read in the session held for that purpose.

Lisbon, [date]

The Arbitrators

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Judge José Poças Falcão

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Professor Américo Brás Carlos

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Dr. Ricardo da Palma Borges