CAAD Case 284/2014-T: IRS General Anti-Abuse Clause on Capital Gains from Share Sales

ARBITRAL DECISION

The arbitrators, Judge José Poças Falcão (arbitrator-president), Dr. José Rodrigo de Castro and Dr. António Alberto Franco, appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 29-5-2014, agree on the following:

I REPORT

A..., taxpayer no. ..., deceased and here represented by the head of household B..., resident at Av. ..., in Lisbon ("A..."), B..., taxpayer no. ..., resident at Av.ª..., Lisbon ("B..."), C..., taxpayer no. ..., resident at Av. ..., Lisbon ("C..."), D..., taxpayer no. ..., resident at Av. ..., in Lisbon ("D...") and F..., taxpayer no. ..., resident at Rua das ..., Cascais ("F..."), together "Claimants", came, pursuant to article 10 of Decree-Law no. 10/2011 (hereinafter "RJAT" - Legal Regime of Tax Arbitration), of 20 January, to request the constitution of a collective arbitral tribunal, having as its object:

· the declaration of illegality, and consequent annulment, of the additional Personal Income Tax (IRS) assessments and compensatory interest no.s ..., issued by the Director-General of Taxes ("Contested Assessments"), from which resulted a total amount payable of € 369,463.30 - cf. docs. no.s 1 to 5 which are hereby attached and incorporated in their entirety for all legal purposes;

· the declaration of illegality, and consequent annulment, of the decisions denying the administrative complaints through which the Claimants contested the legality of those assessments ("Contested Decisions") - cf. docs. no.s 6 to 10 which are attached and incorporated in their entirety for all legal purposes; and

· the condemnation of the Tax and Customs Authority ("AT") to reimburse the sums unduly paid with respect to such assessments - in the total amount of € 369,463.30 (cf. docs. no.s 11 to 15 which are hereby attached and incorporated in their entirety for all legal purposes) – plus the due compensatory interest and default interest, if applicable.

They allege, in summary:

At the origin of the Contested Assessments (which the contested decisions maintain) are the corrections to the 2009 IRS of the Claimants carried out by the AT within the scope of an inspection procedure that resulted in the application of the general anti-abuse clause.

Following such procedure, and by application of the aforesaid general anti-abuse clause, the AT understood that the capital gains realized from the sale in 2009 of shares held for more than 12 months (on that date excluded from taxation in view of the wording of the law then in force) should be considered as taxable capital gains.

In reality, the Claimants sold on 31 December 2009 shares of G... company, S.A. ("G...") – held for more than 12 months – to H…, S.A. ("H...").

The aforementioned correction - at the origin of the Contested Assessments - results from the fact that, according to the AT's understanding, the transformation of G... from a limited liability company into a joint-stock company, on 5 December 2009, should be disregarded under the general anti-abuse clause (provided for in article 38, paragraph 2 of the General Tax Law – "LGT").

According to the AT's understanding, the sale of G... shares should be treated as if it were a sale of quotas, so the taxation exclusion provided for in article 10, paragraph 2, subsection a) of the IRS Code (applicable to capital gain income resulting from the sale of shares held for more than 12 months) should not be applied. Thus, and taxing the said operation as if it were a sale of quotas - by disregarding the transformation of the limited liability company into a joint-stock company - the capital gain income (which had been exempt pursuant to article 10, paragraph 2, subsection a) of the IRS Code) would be subject to taxation at the rate of 10%, in accordance with paragraph 4 of article 72 of the IRS Code.

This is thus the origin of the correction effected during the inspection, which is at the origin of the Contested Assessments and maintained in the administrative complaint proceedings, whose legality is here contested.

The Claimants deem such correction illegal because they understand that the capital gain income realized from the sale of G... shares should be excluded from taxation under article 10, paragraph 2, subsection a) of the IRS Code (as written at the time of the facts), and it is certain that such gains, even if realized through the sale of quotas (before the transformation of the company), would always be excluded from taxation in IRC under the provision of article 5 of Decree-Law no. 442-A/88 of 30 November, and the application of the general anti-abuse clause to the case sub judice is illegal.

H... has been engaged, since its constitution, in 1968, in the professionalized management of real estate, having as its object the "administration, direct or indirect operation or sale of movable or immovable property, already existing or acquired, as well as the purchase of real estate for resale" (cf. permanent certificate which is hereby attached as doc. no. 16 and incorporated in its entirety for all legal purposes).

It is thus the activity of purchase, rehabilitation and monetization of real estate that H... has been conducting, just as it did in the years 2006, 2007, 2008 and 2009 (which are the relevant dates in the present proceedings) and continues to do today - cf. H... management reports from 2006 to 2008 which are hereby attached as docs. no.s 17 to 19 and incorporated in their entirety for all legal purposes.

G... was constituted in 1944, under the name E…, Lda., having at that date, as its object the trade in representations – cf. deed of company constitution and respective publication which is hereby attached as doc. no. 20 and incorporated in its entirety for all legal purposes.

Without prejudice to other developments not relevant to the case sub judice, on 11 July 1985, the capital stock of G... was increased to 1,000,000$00 (redenominated and increased through the incorporation of reserves to € 5,000, at the time of the introduction of the euro) and was divided as follows – cf. doc. no. 21 which is hereby attached and incorporated in its entirety for all legal purposes:

The Claimants (with the exception of A..., who acquired his shareholding in 1965) thus became holders of G...'s capital stock in 1985 (a situation that was maintained until 5 December 2009) – cf. permanent certificate which is hereby attached as doc. no. 22 and incorporated in its entirety for all legal purposes, as well as doc. no. 21 attached.

On that date – 11 July 1985 – as well as in the years that followed, G... was essentially engaged in import and export, having as its object "the trade in representations, the administration of its own or third parties' properties, as well as the provision of other services to public or private entities" – cf. docs. no.s 21 and 22 attached.

With the intention of monetizing and providing G... with a business focus with high income potential, thus promoting the development and restructuring of the same, in 1994, A... donated to G... the urban real estate located at …, in Lisbon, registered in the urban property register of the parish of … under article …, with a tax patrimonial value (at that date) of 10,498,753$00 – cf. deed of donation which is hereby attached as doc. no. 23 and incorporated in its entirety for all legal purposes.

As a result of that donation, the recipient company – i.e., G... – proceeded (as it has always done) to payment of the due taxes (in this case, Inheritance and Gift Tax in a quite significant amount) – cf. doc. no. 24 which is hereby attached and incorporated in its entirety for all legal purposes.

The real estate brought into G..., due to its location and structure (although requiring rehabilitation and major works) had – as it still has – significant capacity to generate income, through the leasing of the various units thereof (in particular leasing to a supermarket that still operates there today) – cf. documents evidencing the lease values which are hereby attached as doc. no. 25 and incorporated in their entirety for all legal purposes, as well as property valuation report, prepared in October 2009 by I... ("Property Valuation Report"), which, inter alia, describes the property in detail and its respective lease agreements, which is hereby attached as doc. no. 26 and incorporated in its entirety for all legal purposes).

Over time, G... thus directed its activity towards the real estate market, in particular with respect to the professionalized management of real estate – cf. management reports relating to the years 2006 to 2008 which are hereby attached as docs. no.s 27 to 29 and incorporated in their entirety for all legal purposes.

Indeed, and always financed by its partners, G... proceeded immediately to a profound rehabilitation of the real estate in 1996, and subsequently conducted various rehabilitation and improvement works necessary for its monetization – cf. by way of example, the management report with respect to the 2006 financial year here attached as doc. no. 27.

Over time, and due to G...'s financing needs for the carrying out of rehabilitation and improvement works of its real estate assets, it was necessary, in addition to the advances made, to proceed to a capital increase, carried out in 2007, bringing it to € 65,000 distributed as follows – cf. docs. no.s 22 and 28 attached:

In 2008 (as well as in the years that followed), the management (monetization, rehabilitation and improvement) of its real estate assets continued to be G...'s principal activity – cf. management report with respect to the 2008 financial year attached as doc. no. 29.

The success and evolution of said company, reflected in its results, led to the natural need to adopt a market restructuring and repositioning strategy.

Within the scope of said G... market restructuring strategy, it was decided:

(i) On one hand, to proceed to a capital increase thereof, through the entry of a new partner with experience in the activity of professionalized real estate management (thus enabling the creation of synergies), entry that would also allow the financing of G..., through the entry of funds intended for the development of its activity (in particular for carrying out rehabilitation works of its real estate assets); and

(ii) On the other hand, to transform the company from a limited liability company into a joint-stock company, thus adopting a corporate model more appropriate both to its restructuring strategy and to the position already assumed in the market.

Indeed, it was intended both with the transformation of G... into a joint-stock company and with the entry of H... into the capital stock of the first, to direct and focus G...'s activity in the urban real estate market, acquiring a new dimension in terms of volume of assets and business and greater capacity for professionalized management of the real estate in portfolio.

With respect to the entry of a new partner into G...'s capital stock, the capital holders understood that both the experience already acquired by H... in the real estate market and its financial capacity could be beneficial to G..., just as the connection of G... to H... could be strategically beneficial to H....

Thus, on 2 November 2009, H...'s Board of Directors decided the following:

"The Board understands it should continue to privilege low-risk real estate opportunities with assured immediate profitability, although such opportunity is scarce, having then proceeded in the next step to the expansion of the company. Within the same management strategy comes the opportunity to take a position in the capital of E…, Lda. company (current G...), which will soon be transformed into a joint-stock company, a company whose principal asset consists of a mixed building with housing, commerce and services, entirely leased, with recent improvement works in an excellent location in the city. This position will be achieved through a capital increase with share premium, this investment involving a total value of 280,000 euros (two hundred and eighty thousand euros) for a relative participation of 7.14%. The company to be transformed presents a stable patrimonial situation, although it lacks funds that would enable completion of the improvement works of its real estate (…)" – cf. doc. no. 30 which is hereby attached and incorporated in its entirety for all legal purposes.

Thus a capital increase of G... in the amount of € 5,000 would take place (as it did take place), through the entry of a new partner – H... – with a share premium of € 275,000 (cf. doc. no. 30 attached).

On the other hand, it was decided to carry out an alteration of the corporate model adopted by G... (from limited liability company to joint-stock company), in order to adapt it both to the dimension reached and to the future growth possibilities of G... – cf. Justificatory Report of the Transformation, of 26 November 2009, which is hereby attached as doc. no. 31 and incorporated in its entirety for all legal purposes.

Indeed, in such Justificatory Report of the Transformation – cf. doc. no. 31 attached - it can be read that "the Management considers it to be necessary and advisable the transformation into a Joint-Stock Company as this form of company presents manifest advantages namely by allowing:

1.  Greater flexibility in management and in the deliberative process necessary for the execution of the corporate purpose and the continuation of the increase in activity;
   

2.  More flexibility in the transfer of corporate holdings, lower costs in such transfers and greater celerity in the same.
   

3.  Resulting from the previous point, greater ease in opening the corporate capital to new investors;
   

4.  An adequacy of the company to a new corporate model more befitting its potentialities and economic-financial capacities;
   

We thus consider useful and opportune, considering the activity conducted by this company and its corporate structure, the modification of its legal structure, transforming E…, Limited (current G...) into a joint-stock company."

Said transformation was approved by General Assembly of G... on 26 November 2009, within which it was decided, unanimously by the partners, the transformation thereof into a joint-stock company – cf. doc. no. 32 which is hereby attached and incorporated in its entirety for all legal purposes.

Thus, on 5 December 2009, both the capital increase of G... and its transformation into a joint-stock company were registered – cf. doc. no. 22 attached.

In the same act, and because – in fact – G...'s activity was redirected towards the real estate market (in which it was operating exclusively at that date), the corporate purpose of G... was also altered to read: "Trade in representations, administration of property, direct or indirect operation of its own or third parties' real estate, sale of movable or immovable property, already existing or acquired, purchase of real estate for resale, as well as the provision of other services to public or private entities" [underlining by Claimants] – cf. doc. no. 22 attached.

Notwithstanding the capital increase mentioned above, in order to obtain the same synergies between G... and H... – given H...'s vast experience in the real estate market, in which G... was operating after the aforementioned redirection of its activity – the Claimants (as shareholders of both companies) verified that it was necessary to proceed to the sale of their shareholdings in G... to H....

Indeed, taking into account that H... was (as it still is) an entity with already vast experience in the real estate market (in which G... intended to develop its business with greater scope), one could obtain an efficiency gain resulting from the synergies generated with the acquisition of the majority of G...'s capital by H... (which is held by the same shareholders that held G... at the time of the operation).

On the other hand, this transfer was also motivated by the existence of funds in a significant amount in H... that would allow G... to be financed in the rehabilitation of its real estate assets, which had (as it still has) very high income potential, as is clearly evident from the Property Valuation Report here attached as doc. no. 26 prepared by an independent entity widely recognized and qualified in the market – I... –, on 26 October 2009.

As appears from that Report, not only did the annual rents obtained at that date from the operation of said real estate amount to € 282,852, but the market value of the same real estate – according to the Yield (Cash Flow) method – amounted to € 3,750,000, which well demonstrates the potential of said real estate (cf. doc. no. 26 attached, page 21).

Now, with the funds available H... could simply invest in new real estate or acquire G...'s shareholdings and thus invest indirectly in that company's real estate assets.

Taking into account the market situation, it was ultimately decided to proceed to the transfer of the shareholdings in G... held by the Claimants to H..., which would thus invest (although indirectly) in the real estate assets contained in G...'s assets.

Thus, and for the purpose of implementing such operation of purchase and sale of G... shares, the Board of Directors of G... requested an independent entity to assess the market value of G..., within the scope of which a valuation report of such company was prepared, with effects as at 31 December 2009 ("G... Valuation Report") which is hereby attached as doc. no. 33 and incorporated in its entirety for all legal purposes.

According to the G... Valuation Report, that company would have on 31 December 2009 a market value of € 3,800,000 (taking into account a material enterprise value of € 4,023,300 and an income value of € 3,385,400) – cf. doc. no. 33 attached.

Thus, on 18 December 2009, H...'s Board of Directors decided the following – cf. minutes of the Board of Directors of H... of 18 December 2009 which is hereby attached as doc. no. 34 and incorporated in its entirety for all legal purposes:

"(…) the Board addressed the opportunity to increase its current seven point fourteen percent shareholding in G..., S.A.

This is an investment that fits within the strategy defined by H... within the real estate sector since the company in question holds as its principal economic activity the leasing of real estate counting in its assets a building entirely leased, in good state of preservation and central location in the city of Lisbon.

According to independent valuations both of the real estate and of the owner company G..., S.A., both in the possession of the Board, the planned investment presents interesting profitability and very reduced risk, and furthermore it is inserted in the real estate leasing market in the city of Lisbon, precisely the sector where the company has been investing in recent years. Hence, in the continuation of contacts maintained with the shareholders, it was decided to proceed with the purchase of 1,250 shares of G..., with the operation to be completed by the end of the month, investing a total value of three million thirty-nine thousand two hundred and eighty-seven euros corresponding to the value per share of two thousand seven hundred and seventy-one euros and forty-three cents, as of 31 December 2009.

In compliance therewith, the Board of Directors decided to approve the described operation (…)"

Thus, on 31 December 2009, a contract of sale and purchase of shares was concluded between the Claimants and H..., for the total amount of € 3,339,287.50 (corresponding to 1,250 shares, at the value of € 2,671.43 each), by means of which the Claimants transferred to H... 1,250 shares held by them in G..., in the following terms – cf. contract of sale and purchase which is hereby attached as doc. no. 35 and incorporated in its entirety for all legal purposes:

As a result of such transfer of shares, G...'s capital stock was divided as follows:

Because the sale of shares held by the Claimants for more than 12 months was involved, the Claimants understood that the capital gain income in question should be considered excluded from taxation in IRS under the provision of articles 10, paragraph 2, subsection a) and 43, paragraph 4, subsection b) of the IRS Code (as written at 31 December 2009).

Thus, the Claimants reported the capital gains realized from the sale of G... shares to H... in section 4 (Paid transfer of shares held for more than 12 months) of Annex G1 (Non-Taxable Capital Gains) of their respective IRS Model 3 declarations of 2009 – cf. docs. no.s 36 to 40 which are hereby attached and incorporated in their entirety for all legal purposes -, which they did in the following terms:

(i) A... – cf. doc. no. 36 attached;

(ii) B... – cf. doc. no. 37 attached;

(iii) C... – cf. doc. no. 38 attached;

(iv) D... – cf. doc. no. 39 attached;

(v) F... – cf. doc. no. 40 attached.

For this reason, and as a consequence of the framework given by the Claimants in the annual income declarations presented (in which they understood articles 10, paragraph 2, subsection a) and 43, paragraph 4, subsection b) of the IRS Code as written at 31 December 2009 to be applicable), the income resulting from the sale of G... shares was not subject to taxation in that tax.

By Letter no. …, of 6 October 2011, from the Tax Inspection Division of the Finance Office of Lisbon, Claimant A... (who had died in the meantime on 20 March 2011) was notified to submit to those services the supporting documents of the values recorded in Annex G1 of his IRS declaration – Model 3 – of 2009 – (which are the values relating to the acquisition and sale of the shareholdings in G..., identified in the article above) - cf. doc. no. 41 which is hereby attached and incorporated in its entirety for all legal purposes.

In response to that Letter, Claimant C..., in the capacity of daughter of the aforementioned deceased A..., submitted, on 17 October 2011, to the Tax Inspection Division of the Finance Office of Lisbon the requested documentation (namely, the contract of sale and purchase of G... shares, concluded between the Claimants and H..., on 31 December 2009, and documentation evidencing the age of A...'s shareholding in G...) – cf. doc. no. 42 which is hereby attached and incorporated in its entirety for all legal purposes.

About nine months later, H... was notified, by Letter no. … of 26 July 2012 from the same Tax Inspection Division of the Finance Office of Lisbon to submit to those services a list of its shareholders in the years 2009 and 2010, as well as the supporting documents of the amounts paid to the Claimants as a result of the acquisition of G... shares on 31 December 2009 - cf. doc. no. 43 which is hereby attached and incorporated in its entirety for all legal purposes.

The requested information was submitted by H... to the Tax Inspection Division of the Finance Office of Lisbon on 3 August 2012 – cf. doc. no. 44 which is hereby attached and incorporated in its entirety for all legal purposes.

In September 2012, the Claimants and G..., respectively, were notified of Draft Applications of General Anti-Abuse Clause, where the AT, after describing the evolution of G...'s and H...'s capital structure, as well as the operations that occurred in 2009 (i.e., transformation and capital increase of G... into a joint-stock company and the transfer of G... shares held by the Claimants to H...), comes to assert that "In view of the chronological sequence described above, the general anti-abuse clause should be applied by disregarding the transformation of a limited liability company into a joint-stock company, and, taxing the transfer with the framework due to the transfer of quotas, under which the gain resulting is, in the sphere of the seller, subject to the special rate of 10% fixed by paragraph 4 of article 72 of the CIRS in force at the time of the facts (and without saving here the provision in subsection b) of paragraph 4 of article 43 of the same code), because the shareholding sold refers to a company that, on a date prior and close to the end of the non-taxation, was transformed from a limited liability company into a joint-stock company, and no economic business advantage is discerned" – cf. doc. no. 45 which is hereby attached and incorporated in its entirety for all legal purposes (for the sake of convenience and given the length of the document, only the Draft notified to Claimant A... is attached, the others being entirely identical and the Claimants offering themselves to attach to the proceedings all the other Drafts, should this learned Court consider it necessary or convenient).

In the same Drafts of Application of General Anti-Abuse Clause, after discoursing on the verification of the prerequisites for the application of the general anti-abuse clause provided for in article 38, paragraph 2 of the LGT in the case at issue – in an interpretation clearly at odds with the various elements of the norm in question, as will be demonstrated -, the AT comes to conclude that "The acts and legal transactions carried out through the setup of an operation of capital increase of the company, E...LDA. (G..., S.A.), in the amount of € 5,000, through monetary contributions by a new partner (H... –, S.A.) with which there are special relations, and subsequent transformation into a joint-stock company, with redenomination of capital in shares, had as their objective the exclusion from taxation of capital gains obtained, replacing an operation subject to tax (paid transfer of equity stakes – quota) by an exempt one (sale of shares). Therefore, in view of the foregoing, one cannot conclude otherwise than that the described transaction is of artificial nature, and its use was determined essentially by tax reasons" – cf. doc. no. 45 attached.

It should be noted that, only and exclusively with said Drafts of Application of General Anti-Abuse Clause, did the Claimants become aware that against them (and with respect to the income declared by them with reference to the year 2009) inspection procedures were indeed running, which the AT qualified – wrongly, as will be demonstrated – as internal (instituted on the basis of internal service orders no.s OI…, with respect to Claimant A..., OI…, with respect to Claimant B..., OI…, with respect to Claimant C..., OI…, with respect to Claimant D..., and OI…, with respect to Claimant F...) – cf. doc. no. 45 attached.

In January 2013 the Claimants were notified of the order of the Director-General of the AT which, following the previous drafts, determined the application of the general anti-abuse clause to the transfer of shareholdings in G... carried out in 2009 by the Claimants (excluding, from the outset, the application of that rule to G...) – cf. doc. no. 46 which is hereby attached and incorporated in its entirety for all legal purposes.

In February 2013 the Claimants were notified of their respective Draft Inspection Reports, pursuant to which, and by application of the general anti-abuse clause, corrections to the 2009 IRS of the Claimants were proposed resulting from the qualification of the capital gains realized from the sale of G... shares to H... as capital gains subject to taxation at the special rate of 10%, provided for in article 72, paragraph 4 of the IRS Code, as written at the time of the facts – cf. docs. no.s 47 to 51 which are hereby attached and incorporated in their entirety for all legal purposes.

In such Draft Inspection Reports the following corrections were proposed:

(i) A... – cf. doc. no. 47 attached;

(ii) B... – cf. doc. no. 48 attached;

(iii) C... – cf. doc. no. 49 attached;

(iv) D... – cf. doc. no. 50 attached;

(v) F... – cf. doc. no. 51 attached.

In March 2013, the Claimants were notified of their respective Final Inspection Reports which maintained in full the corrections proposed in the Draft Inspection Reports – cf. docs. no.s 52 to 56 which are hereby attached and incorporated in their entirety for all legal purposes.

Following said corrections, the Claimants were notified – on 6 May 2013 - of the additional IRS assessments and compensatory interest which are now being challenged, from which resulted an amount payable (the voluntary payment deadline being 5 June 2013), in the total amount of € 369,463.30 (cf. docs. no.s 1 to 5 attached), in the following terms:

Claimant A... (represented by B..., as head of household) was notified of the IRS and compensatory interest assessment no. …, from which resulted an amount payable of 227,270.25 – cf. doc. no. 1 attached.

Claimant B... was notified of the IRS and compensatory interest assessment no. …, from which resulted an amount payable of € 35,607.41 – cf. doc. no. 2 attached.

Claimant C... was notified of the IRS and compensatory interest assessment no. …, from which resulted an amount payable of € 35,512.39 – cf. doc. no. 3 attached.

Claimant D... was notified of the IRS and compensatory interest assessment no. …, from which resulted an amount payable of € 35,579.79 – cf. doc. no. 4 attached.

Claimant F... was notified of the IRS and compensatory interest assessment no. …, from which resulted an amount payable of € 35,493.56 – cf. doc. no. 5 attached.

Although deeming said assessments illegal (since the same result from an illegal correction, as will be better demonstrated), the Claimants proceeded to the full voluntary payment of the assessed amounts – cf. docs. no.s 11 to 15 attached.

Notwithstanding the payment, because they deem the corrections made during the inspection resulting from the application of the general anti-abuse clause to the transformation of G... from a limited liability company and subsequent sale of G... shares to H..., and consequently deem the assessments here challenged illegal, the Claimants presented, on 3 October 2013, administrative complaints contesting such assessments – cf. docs. no.s 57 to 61 which are hereby attached and incorporated in their entirety for all legal purposes.

Between 24 December and 31 December 2013 the Claimants were notified of their respective decisions denying the administrative complaints presented – i.e., the Contested Decisions – where the AT reiterated its position (cf. docs. no.s 6 to 10 attached), maintaining the Contested Assessments in the legal system.

The Claimants understand that the IRS and compensatory interest assessments in question, as well as the Contested Decisions maintaining them, are illegal, and should be annulled with all legal consequences, as they suffer from numerous defects, both in form and in violation of law, all capable of, by themselves (and even more so together), necessarily leading to the annulment of the Contested Assessments.

In summary, the defects affecting those acts are outlined below:

a) The inspection procedures at the origin of the corrections incorporated in said assessments are illegal (which taints the assessments in question with illegality, as well as the Contested Decisions maintaining them). Such procedures can only be qualified as external procedures, therefore because of (a) the lack of prior notification to the Claimants, pursuant to article 49 of the Supplementary Regime of Tax Inspection Procedure - "RCPIT" (and also of articles 59, paragraph 3, subsection l) and the first part of article 69, paragraph 2 of the LGT), and (b) because the imperative six-month deadline for conclusion of the same procedures was exceeded (cf. article 36, paragraph 2 of the RCPIT), such procedures are illegal, and consequently illegal, on this basis, the Contested Assessments and the Contested Decisions maintaining them;

b) In addition, and even if it were otherwise, the corrections carried out by the AT are still illegal, due to lack of verification of the prerequisites for application of the general anti-abuse clause, and consequent violation of the provision of articles 38, paragraph 2 of the LGT, 10, paragraph 2, subsection a) and 43, paragraph 4, subsection b) of the IRS Code, which equally leads to the voidability of the Contested Assessments;

c) The same corrections would always be illegal, were it not for the defects outlined above, due to express violation of article 5 of Decree-Law no. 442-A/88 of 30 November, since the sale of quotas (had it occurred) would generate a gain excluded from taxation in IRS under the aforementioned statutory provision, which taints the assessments in question with illegality, as well as the Contested Assessments and the Contested Decisions maintaining them.

As in arbitration proceedings no.s 123/2012 and 124/2012 (cf. Respective Decision) "There is verified, sub iudice, a planning and a structure of acts and legal transactions, both related to the corporate reorganization and the investment that motivates it, that have an evident economic justification. Consequently, that transformation and sale do not stand as acts and transactions "central" to a structure of acts and transactions "essentially or mainly directed" to obtaining a tax advantage".

The conduct of the Claimants – by transforming G... from a limited liability company into a joint-stock company at a moment prior to the sale of their respective equity stakes - merits no censure under the Law.

And this not only because, even if there had been a sale of quotas, the respective capital gains would be excluded from taxation in the present case, but also because – as has been widely recognized by the most reputed doctrine and jurisprudence on this matter -, even if the capital gains resulting from the sale of quotas were subject to taxation (which is not granted in the present case given the application of article 5 of Decree-Law no. 442-A/88 of 30 November, which approved the IRS Code), the transformation of the company would merit no objection because it is not legally condemnable.

Indeed, the difference in taxation between capital gains resulting from the sale of quotas and capital gains resulting from the sale of shares is a clear option of the legislator that specifically intends to privilege the holders of shares over the holders of quotas.

This understanding regarding this specific case has, moreover, been repeatedly expressed by the doctrine and jurisprudence that have been addressing the matter…

First, Saldanha Sanches (in the cited work, page 180) states that "if the legislator, while at the same time taxing the capital gains from the sale of quotas, leaves untaxed the capital gains from shares or taxed them at a lower rate, cannot but accept fiscally the transformation of a commercial company into a joint-stock company even if the transformation is motivated by exclusively fiscal reasons", qualifying such situation as "conscious taxation gap".

Also arbitral jurisprudence has been deciding precisely in this sense.

See the Arbitral Decisions delivered in proceedings no.s 123/2012, 124-2012 and 138/2012 where it can be read that "even if the transformation were motivated by exclusively fiscal reasons", it is the legislator that expressly opts, to tax the sale of quotas and not to tax the sale of shares in that context".

In the same sense, it can be read in the Arbitral Decision delivered in proceedings no. 43/2013-T that:

"It is that even if the transformation of a limited liability company into a joint-stock company were motivated by exclusively fiscal reasons, one would not be faced with a condemnable act in the face of the tax law system, since the legislator himself opted by taxing under IRS the gains resulting from the sale of quotas and by not taxing under that tax the gains resulting from the sale of shares.

A situation like this, in which the legislator resisted long to eliminate such regime maintaining a "conscious taxation gap", is not susceptible to the application of the general anti-abuse clause. And it is not for the law enforcer to substitute for the legislator's options to tax or not to tax certain realities.

It thus becomes very evident that it was not the legislator's intention to tax capital gains resulting from the sale of shares, resulting from a prior transformation of the company whose shares are sold, nor does the general anti-abuse clause have such intention.

Thus, and even if the transformation of G... prior to the sale of shares by the Claimants were exclusively motivated by fiscal reasons – which as demonstrated is not the case -, one would always conclude – differently from what the AT understood - for the non-application of the anti-abuse clause to the case sub judice, due to lack of verification of the normative element, and for the consequent illegality of the corrections carried out by the AT and respective assessments (which are here in dispute).

The Respondent is the Tax and Customs Authority.

The Claimants chose not to designate an arbitrator.

Pursuant to subsection a) of paragraph 2 of article 6 and subsection b) of paragraph 1 of article 11 of the RJAT, as written by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the assignment within the applicable deadline.

The parties were notified and manifested no wish to refuse the appointment of the arbitrators, pursuant to the combined provision of article 11, paragraph 1, subsections a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in compliance with the provision of subsection c) of paragraph 1 of article 11 of the RJAT, as written by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 29-05-2014.

The Tax and Customs Authority presented a response in which, maintaining essentially the position that grounded the application of the CGAA, defended the lack of merit of the claims.

The AT alleged:

The Claimants seek to demonstrate, in arbitration proceedings, that the corporate transformation carried out in the terms and manner described in the inspection report had underlying an economic rationale, in the sense of "directing and focusing G...'s activity in the urban real estate market, acquiring a new dimension in terms of volume of assets and business and greater capacity for professionalized management of the real estate in portfolio.", however, the proof of facts is not made through mere allegations.

All the more so if the Claimants had any other purpose, other than to obtain a capital gain excluded from taxation, they would have, under the principle of collaboration, every interest, in the course of the inspection process that grounded the application of the CGAA, to exercise their right to be heard, sustained by facts and demonstrated that, notwithstanding the apparent abusive nature, the operation of transformation and sale of the corporate stakes had an economic rationale supporting it.

The decision to apply the CGAA is legally grounded through an order of the Director General of the Tax and Customs Authority (AT) which on 2012-12-27, authorized the application of the CGAA, because the prerequisites provided for in paragraph 2 of article 38 of the LGT and in article 63 of the CPPT were met, and whose content is incorporated in full in the present arbitration proceedings.

Comparing the corporate transformation and the respective transfer of the shares, formerly quotas, without any economic rationale justifying it, with the impact in terms of taxation that the same could have in the legal sphere of the claimants, namely taking into account the different treatment, under IRS, of the sale of quotas or shares, an in-depth analysis of the circumstances and elements characterizing the said transaction was carried out, with a view to the possible verification of the prerequisites for application of the anti-abuse norms.

Following the completion and subsequent delivery of SECTION 4, ANNEX G1 – Non-taxable capital gains – annex to the Model 3 IRS Income Declaration, pursuant to article 128 of the CIRS, the Claimants were notified to submit to the Inspection services of the Finance Office of Lisbon, the documents that originated the non-taxable capital gains and declared.

In compliance with the Service Orders subsequently referenced, five inspection actions were carried out, in the following terms:

a) Service Order no. OI…, issued for the taxable person D…, NIF ...;

b) Service Order no. OI…, issued for the taxable person F…, NIF ... and wife…, NIF ...;

c) Service Order no. OI…, issued for the taxable person A…, NIF ...;

d) Service Order no. OI, issued for the taxable person B..., NIF ...;

e) Service Order no. OI …, issued for the taxable person C…, NIF ....

In the course of the inspection procedure and the analysis carried out, there were found indications of legal acts essentially or mainly directed by artificial means and with abuse of legal forms, with the objective of the reduction of taxes that would be due without the use of those means, which appeared to constitute grounds for proceeding to the application of the anti-abuse legal norm provided for in paragraph 2 of article 38 of the LGT.

For this purpose, the application of the anti-abuse norm procedure was proposed, to which article 63 of the Code of Tax Procedure and Process (hereinafter CPPT) refers, which was authorized by order of His Excellency the Director General of the AT, of 2013/01/07, preceded by the exercise of the right to be heard).

From the authorization for application of the anti-abuse norm, to which paragraph 7 of article 63 of the CPPT refers, resulted the assessment presently in dispute, which was determined through the conclusion of the above-mentioned inspection procedures, which complied with all the legal and regulatory provisions provided for in the Supplementary Regime of Tax Inspection Procedure (hereinafter RCPIT) – namely the exercise of the right to be heard, stipulated therein.

The framing of the facts and the arguments presented by the Claimants are not acceptable.

The company G..., S.A., NIPC ... (company sold), was constituted on 02-08-1965, with the name of E…, LDA, and capital stock of 20,000$00.

A..., NIF ..., held a quota of 19,000$00, corresponding to 95% of the capital, the other quota (1,000$00) belonging to B…, NIF ....

On 11 July 1985, there was a capital increase to 1,000,000$00, with partner B... transferring her quota to C…, as well as the entry of 3 new partners, leaving the capital stock divided as follows:

Partners NIF Value Quota Percentage

A...... 600,000$00 60.0%

B... 100,000$00 10.0%

C… 100,000$00 10.0%

D… 100,000$00 10.0%

F... 100,000$00 10.0%

Total 1,000,000$00 100.0%

Upon the transition to the euro, the capital stock was redenominated and increased, through the incorporation of reserves, to 5,000.00 euros. The structure of capital stock remained the same as did the respective percentages.

On 08-03-2007 the capital stock was increased to 65,000.00 euros, again remaining unchanged the structure of capital stock:

Partners Value Quota (€) Percentage

A... 39,000.00 60.0%

B... 6,500.00 10.0%

C… 6,500.00 10.0%

D… 6,500.00 10.0%

F... 6,500.00 10.0%

Total: 65,000.00 100.0%

On 05-12-2009 the following facts occurred:

1. Entry of a new partner "H..., S.A.", NIPC ... in company E…, LDA;

2. Transformation of company E.., LDA into a joint-stock company, becoming known as "G... –, S.A"

3. Capital increase to 70,000.00 euros, represented by 1,400 shares, with a nominal value of 50.00 euros.

On this date the company came to have the following shareholding structure and capital:

Shareholders No. shares Capital % Capital stock No. Votes (1 vote = 20 shares):

A... 780 39,000.00 55.714% 39

B... 130 6,500.00 9.286% 6.5

C... 130 6,500.00 9.286% 6.5

D… 130 6,500.00 9.286% 6.5

F... 130 6,500.00 9.286% 6.5

H..., S.A. 100 5,000.00 7.143% 5

Total 1,400 70,000.00 100.00% 70

The structure of administration is a responsibility of a board of directors, as per the appointment contained in the permanent certificate.

Shareholders NIF

President A...

Member C... ...

Member J... ...

As per the content of the permanent certificate:

1. A... was managing director of the company, at least from 21-02-1994;

2. C... was managing director of the company, at least from 15-06-2005;

3. J... was managing director of the company from 03-08-2006.

On 31-12-2009 the individual shareholders sold 1,250 shares of this company to the company H..., S.A., the value of this acquisition was € 2,671.43 per share, which gives a total value of € 3,339,287.50.

Shareholders No. shares held No. shares sold Value realization

A... 780 – 770 - 2,057,001.10

B... 130 – 120 - 320,571.60

C... 130 – 120 - 320,571.60

D… 130 – 120 - 320,571.60

F... 130 – 120 - 320,571.60

Total 1,300 - 1,250 - 3,339,287.50

Payments were made via several checks issued on 01-03-2010.

For each partner, payment was made via two checks, one from Caixa Geral de Depósitos and another from Barclays.

CGD Checks - Barclays Checks - No. - Amount Total payment

A... - 1,957,001.00 – 6815055800 - 100,000.00 - 2,057,001.00

B... ---- 260,749.75 ---- 59,821.75 - 320,571.50

C... ---- 260,749.75 ---- 59,821.75 - 320,571.50

D... ---- 260,749.75 ---- 59,821.75 - 320,571.50

F... ---- 260,749.75 ---- 59,821.75 - 320,571.50

Total ---- 3,000,000.00 ---- 339,287.00 - 3,339,287.00

In parallel, the company H..., S.A., NIPC ... (company purchasing the shares), was constituted on 20-04-1968.

The company in question has a capital stock of 500,000.00 euros, corresponding to 10,000 shares, with a nominal value of 50.00 euros, distributed among the following shareholders:

Shareholders - No. shares – Capital – Percentage - No. Votes (1 vote = 500 shares)

A... - 6,000 - 300,000.00 60.00% - 12

B... - 1,000 - 50,000.00 - 10.00% - 2

C... - 1,000 - 50,000.00 - 10.00% - 2

D... 1,000 - 50,000.00 - 10.00% - 2

F... 1,000 - 50,000.00 - 10.00% - 2

Total: 10,000 - 500,000.00 - 100.00% - 20

The administration is the responsibility of a board of directors composed of three members, elected for three-year terms, as per permanent certificate. In the mandate for the three-year period 2007/2009, the composition of the board of directors was:

Shareholders - NIF

President A... - NIF ...

Member C... - NIF ...

Member J... - NIF ...

Given the framework described above, it is possible to conclude that the shareholders of the sold company are the same as those of the acquiring company, before the sale of shares. The shareholders have family relations with each other, namely father and children.

The members of the board of directors of the sold company are the same as those of the acquiring company.

Following the completion and subsequent delivery of SECTION 4, ANNEX G1 of the Model 3 IRS Income Declaration, pursuant to article 128 of the CIRS, the Claimants were requested to submit to the Inspection services, the documents that originated the non-taxable capital gains and declared.

The requested elements were submitted by mail, with entry registration in the AT services on 2011-10-17.

Given the documents sent by the Claimants and consequent written justification of the operations carried out that originated the capital gains relating to the transfer of E… LDA. (G..., S.A), it was possible to determine chronologically the following operations hereinafter summarized:

· 1965 – constitution of company E…, LDA;

· 11 July 1985 – Capital increase to 1,000,000$00, departure of one partner and entry of four new partners. Claimant A... comes to hold a quota of 600,000$00, corresponding to 60% of the capital, the remaining Claimants holding, individually, quotas of 100,000$00, corresponding to 10% of the capital for each;

· 05 December 2009 – capital increase with the entry of new partner, "H..., S.A.", NIPC ..., and subsequent transformation of the limited liability company E…, LDA. into joint-stock company G…–, S.A.

· 31 December 2009 – Through a contract of sale and purchase of shares, the Claimants sell, a set of shares of G... –, S.A., NIPC ... to the company H..., S.A, NIPC ..., in which they hold shares.

This operation of transfer of corporate stakes was declared in 2009, by the Claimants in annex G1 – non-taxable capital gains – of the income declaration model 3 of the IRS, based on the following values:

Claimant - Value of realization - Value of acquisition

A... - € 2,057,001.10 - € 2,954.42 (dated February 1965)

D... - € 320,571.50 - € 460.43, (dated July 1985)

C... - € 320,571.50 - € 460.43 (dated July 1985)

F... - € 320,571.50 - € 460.43 (dated July 1985)

B…- € 1,599.00 - € 460.43 (dated July 1985)

In this way, the transfer of these shares benefited from the exclusion of taxation under IRS, by force of the provision in subsection a) of paragraph 2 of article 10 of the CIRS, considering that the same were held for a period exceeding 12 months;

The transfer of shares was carried out on the last day of 2009, when it was already public knowledge that the norm provided for in subsection a) of paragraph 2 of article 10 of the CIRS would be revoked, as it actually was through Law no. 15/2010, of 26 July.

Notwithstanding the alteration made on 05 December 2009, pursuant to subsection b) of paragraph 4 of article 43 of the CIRS in force at the time of the facts, the date of acquisition of the shares is considered to be the date of acquisition of the original quotas, whereby the same are, for all legal purposes, held for more than 12 months, and for this reason exempt from taxation, by force of the provision in subsection a) of paragraph 2 of article 10 of the CIRS, in force at the time of the acts.

According to the indication of Claimant C..., in the response to the request of the inspection services, the combined amounts were received after 90 days from the conclusion of the contract, in the terms agreed therein, being submitted a copy of the two checks, both dated 01-03-2010.

Indeed, there is a change in company on 05 December 2009, making use of the prerogative of subsection b) of paragraph 4 of article 43 of the CIRS in force at the time of the facts, and subsequently, on the last day of that year, a sale of shares for a unit value (€ 2,671.43) higher than nominal value (€ 50.00) to an entity with which there are special relations – the same administrators, the same shareholders, existence of family relations among themselves – situations that, jointly with other facts subsequently described, reveal abusive character and total discrepancy of the transaction with normal market practices.

There is no evidence of the entry of new partners with a financial structure superior to that of the company;

For its part, the percentage of holdings that each comes to hold, as a result of the transformation, does not allow the company, to benefit from an effective improvement of its financial situation.

Thus, the Claimants' argument falls away, to the effect that this operation of corporate transformation generated benefits, of a financial nature, to the company.

Therefore, and thus being, it is to be concluded by the absence of a plausible grounding/economic reason for this operation of corporate transformation to be carried out.

Thereby, therefore, being evident, that the transformation operation only took place, in the sense that the taxable person could benefit, in 2009, from the exemption of taxation of capital gains generated by the transfer of holdings in joint-stock companies.

In view of the chronological sequence described above, the general anti-abuse clause was applied by disregarding the transformation of a limited liability company into a joint-stock company, and, consequently, taxing the transfer with the framework due to the transfer of quotas, under which the gain resulting is, in the sphere of the seller, subject to the special rate of 10% fixed by paragraph 4 of article 72 of the CIRS in force at the time of the facts (and without considering here the provision in subsection b) of paragraph 4 of article 43 of the same code), because the shareholding sold refers to a company that, on a date prior and close to the end of the non-taxation, was transformed from a limited liability company into a joint-stock company, no economic-business advantage being discerned.

What would have been a mere transfer of corporate stakes – quotas – was preceded by a redenomination of capital stock in shares, with the intent to enable the partners the transfer of a large part of their corporate stakes, thus obtaining capital gain income, generally taxable, thereby benefiting from the exclusion of taxation in IRS, pursuant to the provision in subsection a) of paragraph 2 of article 10 of the CIRS.

On 2012-09-18 the Claimants were notified, to exercise the prior right to be heard of the Draft Application of the General Anti-Abuse Clause, not having, however, exercised the right to be heard.

The Claimants argue, in arbitration proceedings, for the illegality of the inspection procedure.

However, in the administrative complaint proceedings they did not allege such fact.

Thus, and the arbitration process being instituted in the sequence and because of the express denial of the decision denying the administrative complaint, has as its object that same denial and has as its mediate object the act of assessment, whose annulment is ultimately aimed at.

Deduced an arbitration claim for denial of an administrative complaint, the arbitration challenge has as its object both the decision denying the administrative complaint and the own tax act, the assessment.

It is incumbent upon the Arbitral Tribunal to confirm the denial, with the challenged tax act remaining, or annul such denial, however its framing is conditioned on the facts and grounds that grounded the formation of the administrative decision.

Being a new grounding, subsequent to the formation of the administrative decision, aiming at the arbitration process, under the terms defined in the RJAT, a mere control of the legality of the correction acts effected, cannot the Arbitral Tribunal take knowledge thereof.

Notwithstanding:

ON THE NATURE OF INSPECTION PROCEDURES

As to the purposes, the inspection procedure can be one of verification and confirmation, aiming at confirming the fulfillment of the obligations of taxable persons and other tax obligors – subsection a) of paragraph 1 of article 12; and, or information, aiming at the fulfillment of legal duties of information or opinion of which tax inspection is legally entrusted – its subsection b).

With respect to the place of conducting the inspection procedure, the same can be classified, pursuant to article 13 of the RCPIT, as:

"a) Internal, when the inspection acts are conducted exclusively in the services of the tax administration through formal and coherence analysis of the documents;

b) External, when the inspection acts are conducted, totally or partially, in installations or dependencies of taxable persons or other tax obligors, of third parties with whom they maintain economic relations or in any other location to which the administration has access."

Now, all the Service Orders determined the conducting of internal inspection actions to verify the elements declared by the Claimants in the Model 3 IRS declaration.

And such inspection actions were conducted exclusively in the AT installations, through formal and coherence analysis of the declared elements, contained in the computer system, or of clarifications provided to the AT by the Claimants.

It was the completion and delivery of Section 4, annex G1 of the Model 3 IRS Income Declaration of 2009, that led the Finance Office of Lisbon – Tax Inspection Division to request from Claimant A... the documents that originated the non-taxable capital gains and declared.

And it follows immediately from the provision in paragraph 1 of article 63 of the LGT, that "the competent bodies can, under the terms of the law, develop all the necessary diligences for ascertaining the tax situation of taxpayers"

This request was made pursuant to the secondary obligations incumbent on taxable persons of IRS, and which finds legal support in article 128 of the CIRS which establishes, under the heading "Obligation to prove the elements of declarations", that:

"1- Persons subject to IRS must present, within the deadline set to them, the documents evidencing the income earned, the deductions and allowances and other facts or situations mentioned in their declaration, when the Directorate – General of Taxes requests them.

2- The obligation established in the previous number is maintained during the four years following those to which the documents relate.

3- The loss of the documents referred to in paragraph 1 for a reason not imputable to the taxable person does not prevent him from using other elements of proof of those facts".

The documents thus obtained and requested from Claimant A..., fall within an obligation to prove the elements of the declarations completed and submitted by him, which, notwithstanding the principle of declared truth, cannot at all be presumed absolutely untouchable, and can under the law, the AT request the documents that originated the non-taxable capital gains and declared.

Thus, one does not understand the Claimants' argument when they allege that " the corrections effected (within the scope of inspection procedures which the AT, strangely although very conveniently, qualified as internal", all the more so the procedure for authorization of application of the General Anti-Abuse Clause provided for in article 63 of the CPPT proceeded in accordance with the law and, granted the necessary authorization of the Director – General, the corrections resulting therefrom would be, regardless of the qualification of the inspection procedure, in compliance with the statute of limitations deadline, of article 45 of the LGT.

Also the information requested from H..., under the principle of collaboration, aimed at verifying the values recorded in annex G1 of the Model 3 declaration delivered by A..., which aimed at the analysis of the supporting documents as a result of the acquisition of shares of G... on 31 December 2009.

Not having proceeded beyond a formal and coherence analysis of the documents, which is what in substance, pursuant to article 13, subsection a) of the RCPIT, and implies the classification of the inspection as internal.

And such inspection actions were conducted exclusively in the AT installations, through formal and coherence analysis of the declared elements, which given the information requested, came to demonstrate that the same did not correspond to reality, because having been declared a non-taxable capital gain, from the analysis of the documents supporting the capital gains, it was only possible to ascertain that the same were taxed.

One cannot say that it was the collected elements that allowed the corrections to be carried out, these resulted from the analysis of the documents supporting the taxpayer's declarations, which necessarily would have to be provided to the AT for verification of their truthfulness.

If the documents were not effectively in "possession" of the AT, the fact that they constituted the basis of the declarations made, would always imply that they would have to be brought into its "possession", which is effectively distinguished from the operation of "collecting", which would always imply a collaboration, distinct from an obligation.

Not having been carried out any inspection acts or collected and consulted any probative elements in the installations of the Claimants or of third parties, whereby only can the inspection procedure be qualified as internal.

The wording of paragraph 2 of article 36 of the RCPIT determines that "The inspection procedure is continuous and must be concluded within a maximum period of six months from notification of its initiation."

It happens, however, that the "notification of its initiation" is only legally provided for in the external inspection procedure, occurring, in that case, at the moment of delivery of the corresponding service order to the taxpayer (article 46 of the RCPIT), after such procedure has been communicated to him by means of an advice letter, to which article 49 of the RCPIT refers, with minimum advance notice of 5 days.

This is what follows, moreover, from the systematic insertion of the cited norm in the RCPIT in Title IV – Inspection Acts, Chapter II, under the heading "Place, time of inspection acts and deadline of the procedure", intending the legislator, naturally, to refer to the external inspection procedure since the internal procedure, pursuant to article 13 of the same diploma, is conducted exclusively in the services of the tax administration.

Indeed and taking into account that only the external inspection procedure depends on the credentialing of the officials for such purpose as well as notification of its initiation – cfr.- articles 46, paragraph 1 and 4, 49 and 50 of the same 46, paragraph 1 and 4, 49 and 50 of the RCPIT – cannot there have occurred the omission of the formalities invoked by the Claimants for not being the same legally prescribed for this type of inspections of internal character."

ON THE ILLEGALITY OF THE CORRECTIONS DUE TO VIOLATION OF ARTICLE 5 OF DECREE-LAW NO. 442-A/88 OF 30 NOVEMBER.

The Claimants equally disagree with the framing carried out by the AT of the gains resulting from the transfer of corporate stakes, "due to express violation of article 5 of Decree-Law no. 442-A/88 of 30 November".

At the date (2009) the transfer of quotas, was subject to a more rigorous regime by comparison with the transfer of shares, in that quotas were always subject to taxation, unless the transfer affected corporate stakes acquired before the entry into force of the CIRS, i.e., before 1989, as follows from the transitional regime of Category G, referred to by the Claimants, contained in article 5 of Decree-Law no. 442-A/88 of 30 November (diploma which approved the CIRS).

In it are provided own rules for the transfer of corporate stakes acquired before the entry into force of said CIRS, which occurred on 1 January 1989.

Nevertheless, it is important, to attend to the rules for determining the calculation of capital gains provided for in article 43 of the CIRS, in force at the date, and which we transcribe here:

1 - The value of income qualified as capital gains is that corresponding to the balance determined between capital gains and capital losses realized in the same year, determined pursuant to the following articles.

2 - The balance referred to in the previous number, relating to transfers made by residents provided for in subsections a), c) and d) of paragraph 1 of article 10, positive or negative, is only considered in 50% of its value.

3 - For determining the positive or negative balance referred to in paragraph 1, relating to operations carried out by residents provided for in subsections b), e), f) and g) of paragraph 1 of article 10, do not count the losses determined when the counterparty to the operation is subject in the country, territory or region of domicile to a clearly more favorable tax regime, contained in the list approved by regulation of the Minister of Finance.

(As written by Law no. 32-B/2002, of 30 December).

This wording has an interpretative nature, in accordance with paragraph 4 of article 26 of this Law.

4 - For the purposes of the previous number, it is considered that:

a) The date of acquisition of securities whose ownership has been acquired by the taxable person through incorporation of reserves or by substitution thereof, namely by alteration of the nominal value or modification of the corporate purpose of the issuing company, is the date of acquisition of the securities that gave rise thereto;

b) The date of acquisition of shares resulting from the transformation of a limited liability company into a joint-stock company is the date of acquisition of the quotas that gave rise thereto;

c) The date of acquisition of shares of the offering company in a public acquisition offer launched pursuant to the Securities Code the counterparty of which consists of such shares, given to exchange, is the date of acquisition of the shares of the companies targeted in said public acquisition offer;

d) Where securities of the same nature and conferring identical rights are involved, those sold are those acquired the longest ago;

e) In exchanges of capital stakes under the conditions mentioned in paragraph 5 of article 67 and paragraph 2 of article 71 of the Corporate Income Tax Code, the holding period corresponds to the sum of the periods in which the capital stakes delivered and received in exchange were held;

(As written by Law no. 32-B/2002, of 30 December)

f) The regime of the previous subsection is applicable, with the necessary adaptations, to the acquisition of corporate stakes in cases of merger or division to which article 68 of the Corporate Income Tax Code applies.

It is important to note subsection b) of paragraph 4 above, according to which "The date of acquisition of shares resulting from the transformation of a limited liability company into a joint-stock company is the date of acquisition of the quotas that gave rise thereto;"

However, broken down the corporate stake (quota), that gave rise to the taxable fact (transformation followed by transfer), it is important to take into consideration that the value thereof in 2009 was not the same as in 1965, in the case of A..., nor the same as in 1985, in the case of the remaining Claimants, as a result of the capital increases, meanwhile conducted, after 1 January 1989, eg the "substantial" capital increase that occurred on 8 March 2007, from which resulted a capital increase of 60,000.00 euros in the capital stock of that company.

In this respect, article 43 of the CIRS establishes, with respect to corporate stakes where there were capital increases, if the same is a capital increase by incorporation of reserves that the date to be considered, for the purpose of transfer, is the date of acquisition of the securities that gave rise thereto.

However, the same does not occur for shares resulting from capital increase by cash or in-kind contributions, and the gains obtained from their transfer are subject to taxation.

It results, therefore, that the capital increase in the amount of 60,000.00 euros, will lead to an increase in the value of the quota, and the capital gains obtained from their transfer will be subject to taxation, by virtue of the said capital increase having occurred after the entry into force of the CIRS.

Thus, and in summary, we have that:

· The company was constituted on 02-08-1965 with the name of E…, LDA, and capital stock of 20,000$00, in which A... held a quota of 19,000$00, corresponding to 95% of the capital, the other quota (1,000$00) belonging to B…, NIF ....

· On 11 July 1985 the capital stock was increased to 1,000,000$00, with partner B... transferring her quota to C…, as well as the entry of 3 new partners, leaving the capital stock divided as follows (values already expressed in Euros):

Partners – NIF – Value - Quota Percentage

A... – ... - 3,000.00€ - 60.0%

B... – 103315268 - 500.00€ - 10.0%

C... – ... - 500.00€ - 10.0%

D...– 153994126 - 500.00€ - 10.0%

F...– 145835600 - 500.00€ - 10.0%

Total 5,000.00€ - 100.0%

· On 08-03-2007 the capital stock was increased to 65,000.00 euros, with the structure of capital stock remaining unchanged.

Table II-2

Partners - Value Quota (€) - Percentage

A... - 39,000.00 - 60.0%

B... - 6,500.00 - 10.0%

C... - 6,500.00 - 10.0%

D... - 6,500.00 - 10.0%

F... - 6,500.00 - 10.0%

Total € 65,000.00 - 100.0%

· On 05-12-2009 there is a new capital increase, with the entry of the new partner, with a shareholding of 5,000.00 euros, subscribed in cash, resulting in the following shareholding structure and capital:

Shareholders - No. shares - Capital % Capital stock

A... – 780 - 39,000.00€ - 55.714%

B... – 130 - 6,500.00€ - 9.286%

C... – 130 - 6,500.00€ - 9.286%

D... 130 - 6,500.00€ - 9.286%

F... 130 - 6,500.00€ - 9.286%

H..., S.A. 100 - 5,000.00€ - 7.143%

Total: 1,400 - 70,000.00€ - 100.00%

It is thus unequivocal that the capital increase translates into a valorization of corporate stakes.

In line with the proper application of law and with the interpretation of the norms of the CIRS, namely article 43, it equally follows that excluded from taxation are not the gains made with the transfer of corporate stakes, resulting from capital increase by means of cash or in-kind contributions, as occurred, in the present case.

ON THE ALLEGED NON-VERIFICATION OF THE PREREQUISITES FOR APPLICATION OF THE CGAA, CONTAINED IN PARAGRAPH 2 OF ARTICLE 38 OF THE LGT.

Attending to the set of facts that have been reported, viewed as a coherent whole, it becomes imperative to conclude that we are in the presence of the reality normally designated by doctrine as tax evasion or avoidance (or yet, in the English expression, tax avoidance).

Since the sensible evidence demonstrates the existence of a primary purpose of concluding a certain transaction – in an economic sense – avoiding the use of a legal form that would be susceptible to implying subjection to taxation.

With the chaining of acts to which it resorted, an exclusive or, at least, predominant will was manifested to conclude the sale of the shareholdings in the form that would permit the income earned not to be subject to tax.

Thus, it results from the facts and the decision to apply the CGAA that the prerequisites and procedures provided for in article 63 of the CPPT are verified.

Having the AT, for the purpose of grounding the decision to apply the CGAA, pursuant to paragraph 7 of article 63 of the CPPT demonstrated, that:

i) There occurred the practice or conclusion of act(s) or legal transaction(s) of artificial or fraudulent character, the negotiation manipulation of the operation of capital increase having been demonstrated, followed by the transformation into a joint-stock company, and consequently the redenomination of capital stakes - quota into shares, operations that occurred before the conclusion of the contract of sale and purchase of shares;

ii) It was verified that the conduct of such acts or transactions had as its main objective to enable the realization of operations of transfer of securities – shares, by natural persons, with benefit of exclusion of taxation, under IRS of the capital gains obtained;

iii) There was determined the economic equivalence of the acts or transactions conducted in relation to the alternative acts or transactions, through which the capital gain income obtained by the taxable person as a result of the sale of the holding in capital – quota, comes to be subject to taxation, by force of the provision in subsection b) of paragraph 1 of article 10 of the IRS Code, by the positive difference between the realization value, determined according to the rules established in article 44 thereof, and the acquisition value, determined pursuant to articles 45 and 48 also of the CIRS, plus the necessary and actually conducted expenses, inherent to the transfer, as provided for in article 51 of the IRS Code, to which the special rate of 10% should be applied, pursuant to article 72 also of the CIRS.

It is true that the legislator exempted from IRS the capital gains resulting from the sale of shares, and that there is full legitimacy to benefit from such exemption, but it should only be applied to acts that correspond to a normal transfer of corporate stakes and not to artificial operations that have solely as purpose the obtaining of tax advantages.

The general anti-abuse clause permits the consideration as ineffective within the tax sphere, of acts or legal transactions, essentially or mainly directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferral 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 are not achieved, wholly or partially, without the use of such means, proceeding then to the taxation in accordance with the norms applicable in their absence and the said tax advantages not being produced.

The essential requirements are met, in the case, for the applicability of article 38-2, of the LGT: the means element [the legal structuring of the sale of the corporate stakes, desired by the Claimants, was the object of a planning, tailored, whose purpose can only be justified with the obtaining of a tax advantage, which otherwise would not at all be obtained]; result element [tax advantage achieved through the activity of the taxpayer, which in the case under review and given the factual and chronological course described above, the taxable person succeeded, through the transformation of the company and subsequent sale – on the last day of the year 2009 and only 26 days after the transformation – an exclusion of taxation of the capital gain realized, taking advantage of the provision in subsection b) of paragraph 4 of article 43 of the CIRS and of subsection a) of paragraph 2 of article 10 of the CIRS, both in force at the time of the facts, when it was already public knowledge that this latter norm would be revoked, as it would be through Law no. 15/2010, of 26 July. Had the taxable person executed the transaction that could or should be executed, within the economic planning more rational and logical, or that is, the maintenance of the legal regime of the transformed company, the transfer of quotas, would be subject, in its capital gain, to the special rate of 10% fixed in paragraph 4 of article 72 of the CIRS (and without considering here the provision in subsection b) of paragraph 4 of article 43 of the same code), because the shareholding sold refers to a company that on a date prior and close to the end of non-taxation, was transformed from a limited liability company into a joint-stock company]; intellectual element [that the choice and form adopted by the taxpayer be fiscally directed (tax driven) to obtaining the tax advantage. Given the logical and chronological sequence in which the legal transactions in question were concluded, the same permits one to conclude that the intellectual element is present in the present case, with high conviction that the Claimants knew that they were using a form that would provide them, with tax benefits that would not be obtained if they had used another route that was economically equivalent.

We are thus faced with the confluence of all three elements that characterize the conduct condemned by the general anti-abuse clause, so that one must necessarily conclude that the application of the CGAA to the transfer of shareholdings in G... carried out on 31 December 2009 by the Claimants is perfectly appropriate, legal and justified.

Given that the measures undertaken and the decisions taken are in full compliance with the law and the regulations in force at the time, there is no illegality that could justify the annulment of the assessments.

Given the above, the conclusions are:

a) The nature of the procedures is internal, therefore not subject to the formal requirements of external procedures, such as prior notification, and the fact that they were not conducted within the six-month deadline for internal procedures is, per se, not a determining factor for their illegality;

b) The corrections carried out on the basis of the general anti-abuse clause have proper legal grounding and are in compliance with articles 38, paragraph 2 of the LGT and 63 of the CPPT;

c) There is no violation of article 5 of Decree-Law no. 442-A/88, since the Claimants, through capital increases in cash or in-kind, increased the value of their shareholdings, which resulted in capital gains that are subject to taxation;

d) The general anti-abuse clause was properly applied in the present case, since all the elements required for its application are present: artificial means, tax purpose and economic equivalence.

Therefore, the AT requested the dismissal of all the Claimants' claims.

II JURIDICAL ANALYSIS AND DECISION

The Claimants contest before this Arbitral Tribunal the application of the general anti-abuse clause (hereinafter "CGAA") to their transfer of shareholdings in G..., S.A., carried out on 31 December 2009.

The AT applied the CGAA, considering that the operation, composed of:

(a) The transformation of G... from a limited liability company into a joint-stock company, on 5 December 2009;

(b) The capital increase on the same date with the entry of a new partner;

(c) The sale of the shareholdings in G... on 31 December 2009 (26 days after the transformation);

constituted artificial operations essentially or mainly directed to obtaining a tax advantage (the exclusion of taxation of capital gains on the sale of shares, instead of their taxation at 10% if they were regarded as sales of quotas).

The main issue the Tribunal must resolve is whether or not the application of the CGAA is appropriate and legal in the case.

Before addressing the substantive question, it is necessary to decide on the legality of the inspection procedure itself, as raised by the Claimants.

INSPECTION PROCEDURES AND THEIR CLASSIFICATION

The Claimants argue that the inspection procedures were illegal because:

1. They should have been classified as external procedures and not as internal procedures;

2. They were not notified prior to the commencement of the inspection, as required by article 49 of the RCPIT;

3. They exceeded the six-month deadline for concluding inspection procedures.

The AT responded that:

1. The procedures were correctly classified as internal procedures because they consisted solely of the formal and coherence analysis of documents already in the AT's possession or which the Claimants were obligated to provide pursuant to their secondary tax obligations;

2. Prior notification is only required for external procedures, not for internal ones;

3. The six-month deadline in article 36, paragraph 2 of the RCPIT applies only to external procedures.

The Tribunal agrees with the AT's position on these matters.

Article 13 of the RCPIT clearly distinguishes between internal and external inspection procedures. Internal procedures are those conducted "exclusively in the services of the tax administration through formal and coherence analysis of documents." External procedures are those conducted "totally or partially in installations or dependencies of taxable persons or other tax obligors, of third parties with whom they maintain economic relations or in any other location to which the administration has access."

In the present case, all inspection acts were conducted in the AT's offices, based on documents submitted by the Claimants or already in the AT's possession. No visits were made to the Claimants' premises or to third parties. Therefore, the procedures were correctly classified as internal.

Furthermore, the preliminary notification required by article 49 of the RCPIT ("the taxable person shall be notified in advance of at least five days") is applicable only to external procedures. Internal procedures do not have this requirement because they do not involve access to the taxable person's premises.

As to the six-month deadline, article 36, paragraph 2 of the RCPIT provides that "the inspection procedure is continuous and must be concluded within a maximum period of six months from notification of its initiation." However, as the AT correctly argues, this provision applies to external procedures, where notification of initiation is required (article 46 of the RCPIT). Internal procedures, being conducted entirely within the AT's offices, are not subject to this same formal deadline.

The Tribunal notes that the Claimants did not raise the procedural illegality issue in their administrative complaints, only raising it now in these arbitration proceedings. This temporal sequence suggests that the Claimants, having received the inspection results and the decision to apply the CGAA, are only now seeking to challenge the procedure itself. However, the Tribunal will address the substantive issues on the merits.

APPLICATION OF THE GENERAL ANTI-ABUSE CLAUSE

The principal question is whether the application of the CGAA to the Claimants' transaction is legal and appropriate.

Article 38, paragraph 2 of the LGT provides:

"Acts or legal transactions that, by artificial means or fraudulent use of legal forms, are essentially or mainly directed to the reduction, elimination or temporal deferral of taxes that would be due in consequence of facts, acts or legal transactions of identical economic purpose, or to obtaining tax advantages that are not achieved, wholly or partially, without the use of such means, shall be considered as ineffective for tax purposes, and taxation shall be carried out in accordance with the rules applicable in their absence."

The application of the CGAA requires verification of four cumulative elements:

1. Artificial means or fraudulent use of legal forms;

2. Essential or main purpose of obtaining a tax advantage;

3. Tax advantage not achievable without such means;

4. Economic equivalence with alternative transactions.

The question is whether the Claimants' transaction meets all these requirements.

The Tribunal notes at the outset that the tax treatment of capital gains in Portugal, at the time of the transaction (2009), provided for a significant difference between:

a) Capital gains from the sale of shares held for more than 12 months: exempt from IRS (article 10, paragraph 2, subsection a) of the CIRS);

b) Capital gains from the sale of quotas held for more than 12 months: generally subject to taxation at 10% (article 72, paragraph 4 of the CIRS).

The fact that such a difference exists in the tax law is not, by itself, evidence of tax avoidance. The legislator explicitly chose to provide this different treatment, which is well-established and long-standing in Portuguese tax law.

As noted in prior arbitral decisions (cited by the Claimants), the existence of such a legislative choice is relevant to the analysis under the CGAA. In particular, the doctrine and jurisprudence cited by the Claimants make clear that the legislator deliberately chose not to tax capital gains from the sale of shares, even when held for more than 12 months, as a matter of policy. The transformation of a limited liability company into a joint-stock company, motivated solely or primarily by tax reasons, does not necessarily violate the CGAA if the resulting form (shareholdings in a joint-stock company) is a legally available form under Portuguese law.

In the present case, the facts show:

1. G... was established in 1944 as a limited liability company with an initial business purpose of trade in representations;

2. Over time, G...'s business was redirected towards real estate management and the leasing of real estate;

3. In 1994, a significant real estate asset was donated to G..., which became its principal asset;

4. By 2007, G... conducted a capital increase to finance rehabilitation works on the real estate;

5. In late 2009, the Claimants (as the principal shareholders) and the management of G... decided to pursue a restructuring strategy that included:
   a) The entry of a new partner (H...) with experience in real estate management;
   b) The transformation of the company into a joint-stock company to provide greater flexibility in the management and transfer of shareholdings.

The AT argues that there was no economic reason for the transformation other than to avoid taxation. However, the record contains evidence of legitimate business considerations:

1. The decision of the Board of Directors of H... (dated 2 November 2009) explicitly states that the entry into G... was motivated by the opportunity to acquire a low-risk real estate investment with assured returns, and that H... sought to expand its portfolio in the real estate sector.

2. The Justificatory Report of the Transformation (dated 26 November 2009) provides detailed reasons for the transformation, including:

   • Greater flexibility in management and deliberation;
   • Greater flexibility in the transfer of shareholdings;
   • The ability to attract new investors;
   • Adaptation of the company structure to its economic capacity and potential.

3. The real estate property, as documented in the Property Valuation Report, had significant value (€ 3,750,000 based on the income approach) and generated substantial annual rental income (€ 282,852).

4. The capital increase on 5 December 2009 was for € 5,000, with H... paying a premium of € 275,000 for a 7.14% shareholding, demonstrating that H... was willing to pay a significant price for entry into G...'s capital.

The question thus becomes: was the transformation of G... from a limited liability company into a joint-stock company "essential or mainly directed" to obtaining the tax advantage of the exemption of capital gains on the sale of shares?

On this point, the Tribunal notes the following considerations:

1. While the transformation was followed by the sale of the Claimants' shares only 26 days later, the decision to transform was made and approved in November 2009, before the decision to sell the shares.

2. The transformation was not effected solely for the purpose of enabling the immediate sale of shares. The Board decision to transform was presented in the context of a broader strategy to restructure G... and to enable the entry of a new partner with real estate expertise.

3. The real estate market conditions and the opportunity to attract a new investor were documented factors in the decision.

4. The fact that the Claimants were aware in late 2009 that the exemption for capital gains from share sales was to be revoked (which occurred in July 2010) is a factor that supports the view that the timing of the transaction was influenced by tax considerations. However, the existence of such awareness does not, by itself, render the transaction artificial if it was part of a broader restructuring with legitimate business purposes.

The Tribunal finds that while the Claimants may have been aware of the differential tax treatment of capital gains and may have been motivated in part by tax considerations, the evidence does not establish that the transformation of G... was "essential or mainly directed" solely or primarily to obtaining the tax advantage. Rather, the evidence suggests that the transformation was part of a broader restructuring of G... that had legitimate business purposes, including:

1. The entry of a new partner with real estate expertise;

2. The restructuring of G...'s corporate form to facilitate management and future transfers of shareholdings;

3. The alignment of G...'s corporate structure with its evolved business focus on real estate management.

Moreover, the fact that a transaction produces a tax advantage does not, by itself, constitute tax avoidance in violation of the CGAA. The CGAA requires that the transaction be "essentially or mainly directed" to obtaining a tax advantage "by artificial means or fraudulent use of legal forms." The transformation of a limited liability company into a joint-stock company is a standard corporate operation under Portuguese law and is explicitly provided for in the Commercial Companies Code. It is not an "artificial" form in the sense that it is a legitimate, standard corporate restructuring tool available to all companies in Portugal.

Furthermore, the prior arbitral decisions cited by the Claimants (particularly decisions in proceedings 123/2012, 124/2012, and 43/2013-T) establish that even if a corporate transformation were motivated solely by tax reasons, the CGAA would not be appropriately applied where the legislator has explicitly chosen to provide a different tax treatment for the resulting legal form (in this case, shares versus quotas).

As stated in decision 43/2013-T:

"It is that even if the transformation of a limited liability company into a joint-stock company were motivated by exclusively fiscal reasons, one would not be faced with a condemnable act in the face of the tax law system, since the legislator himself opted by taxing under IRS the gains resulting from the sale of quotas and by not taxing under that tax the gains resulting from the sale of shares. A situation like this, in which the legislator resisted long to eliminate such regime maintaining a 'conscious taxation gap' is not susceptible to the application of the general anti-abuse clause."

The Tribunal agrees with this analysis. The legislator, in establishing the differential treatment of capital gains from the sale of shares versus quotas, made a deliberate policy choice. The fact that the Claimants benefited from this policy choice through the transformation of G... and the subsequent sale of its shares does not constitute tax avoidance in the sense condemned by the CGAA.

Therefore, the Tribunal finds that the application of the CGAA to the Claimants' transaction is not appropriate and legal.

CAPITAL GAINS AND THE TRANSITIONAL RULES OF THE CIRS

The Claimants further argue that even if the transformation is not disregarded, the capital gains should be excluded from taxation under article 5 of Decree-Law no. 442-A/88, which provides transitional rules for capital gains from the sale of shares acquired before the entry into force of the CIRS.

Article 5 of Decree-Law no. 442-A/88 provides that capital gains from the sale of shares acquired before 1 January 1989 are excluded from taxation in IRS.

At the time of the sale (31 December 2009), the Claimants' shareholdings in G... had the following acquisition dates:

• A...: shares acquired in 1965 (as part of the original quota);
• B..., C..., D..., F...: shares acquired in 1985 (as part of the quotas acquired or transferred at that date).

Pursuant to article 43, paragraph 4, subsection b) of the CIRS, "the date of acquisition of shares resulting from the transformation of a limited liability company into a joint-stock company is the date of acquisition of the quotas that gave rise thereto."

Therefore, for the purposes of determining the acquisition date of the shares sold on 31 December 2009, the relevant dates are:

• A...: 1965 (more than 12 months, and before 1 January 1989);
• B..., C..., D..., F...: 1985 (more than 12 months, and before 1 January 1989).

Both dates are before 1 January 1989, and therefore the capital gains from the sale of the shares are excluded from taxation under article 5 of Decree-Law no. 442-A/88, regardless of the fact that they were sold after the transformation of G... into a joint-stock company.

However, the AT argues that the capital gains should be computed taking into account the capital increases that occurred after 1 January 1989, specifically the substantial capital increase in 2007. Under this analysis, only the portion of the capital gains attributable to the pre-1989 acquisition would be exempt, and the portion attributable to the capital increase in 2007 would be subject to taxation.

The Tribunal notes that article 43, paragraph 4, subsection a) of the CIRS addresses this situation for capital gains resulting from incorporation of reserves. It provides that "the date of acquisition of values mobiliários whose ownership has been acquired by the taxable person by incorporation of reserves or by substitution thereof, namely by alteration of the nominal value or modification of the corporate purpose of the issuing company, is the date of acquisition of the securities that gave rise thereto."

This provision means that capital gains from the alienation of securities acquired through the incorporation of reserves retain the acquisition date of the original securities and therefore benefit from the exemption if the original acquisition was before 1 January 1989.

However, for capital increases by cash contributions (as occurred in 2007), article 43, paragraph 4 does not provide for the retention of the original acquisition date. Therefore, the capital gains attributable to the 2007 capital increase would be subject to taxation.

But this analysis applies only if one accepts that the AT's application of the CGAA is appropriate, which the Tribunal has found it is not.

If the CGAA does not apply, and the Claimants' shareholdings are properly characterized as shares acquired before 1 January 1989 (by virtue of the operation of article 43, paragraph 4, subsection b) of the CIRS), then the entire capital gain from their sale is exempt from taxation under article 5 of Decree-Law no. 442-A/88.

THE SUBSTANCE OF THE CLAIMANTS' CLAIMS

The Tribunal has determined that:

1. The inspection procedures were correctly classified as internal procedures and do not suffer from the illegality claimed by the Claimants.

2. The application of the CGAA to the Claimants' transaction is not appropriate and legal, because:

   a) The transformation of G... from a limited liability company into a joint-stock company, although possibly motivated in part by tax considerations, was not "essential or mainly directed" to obtaining a tax advantage. The evidence shows that the transformation was part of a broader restructuring strategy with legitimate business purposes.

   b) The legislative choice to exclude from taxation capital gains from the sale of shares held for more than 12 months, while taxing capital gains from the sale of quotas, is a deliberate policy choice that does not, by itself, constitute a basis for the application of the CGAA.

   c) Prior arbitral decisions have consistently held that the CGAA is not appropriately applied to transactions where the legislator has deliberately chosen to provide differential tax treatment for different legal forms.

3. If the CGAA is not applied, the Claimants' capital gains are exempt from taxation under article 10, paragraph 2, subsection a) of the CIRS (or article 5 of Decree-Law no. 442-A/88 for the transitional rules), and the assessments are illegal and should be annulled.

DECISION

For the foregoing reasons, the Tribunal decides:

1. To declare the illegality and annul the additional IRS assessments and compensatory interest issued on 6 May 2013 to each of the Claimants (docs. nos. 1 to 5).

2. To declare the illegality and annul the decisions denying the administrative complaints submitted by the Claimants (docs. nos. 6 to 10).

3. To condemn the Tax and Customs Authority to reimburse the Claimants in the total amount of € 369,463.30, representing the sums paid by them with respect to the annulled assessments, plus interest at the legal rate from the date of payment until the date of reimbursement.

4. The costs of the arbitration proceedings are borne by the Tax and Customs Authority.

Lisbon, [date]

[Signatures of the three arbitrators]