Process: 285/2013-T

Date: February 6, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 285/2013-T) addresses the Portuguese Tax Authority's application of the General Anti-Abuse Clause (CGAA) under Article 38(2) of the General Tax Law (LGT) and the anti-abuse provision in Article 73(10) of the Corporate Income Tax Code (CIRC) to assess €29,667.86 in Personal Income Tax (IRS) for 2009. The taxpayer transferred shares of five companies to a holding company (B... SGPS) through in-kind capital contributions under a tax-neutral regime. Critically, these companies had been transformed from limited partnerships to joint-stock companies shortly before the transfers—some as recently as the same day. The Tax Authority argued this restructuring scheme was designed to avoid IRS taxation on capital gains, exploiting the exemption under Article 10(2)(a) of the IRS Code for shares held over 12 months, which did not apply to partnership interests. The Authority contended that the corporate transformations lacked economic substance and served primarily to convert taxable partnership interest gains into exempt share transfers. The arbitral tribunal, constituted under the Administrative Arbitration Regime (RJAT), found crucial facts unproven: specifically, that the transactions generated tax advantages or lacked economic rationale. This case illustrates the procedural requirements for applying anti-abuse provisions in Portugal, including the burden of proof on tax authorities to demonstrate artificial arrangements lacking business purpose. The decision demonstrates CAAD's role in reviewing whether tax authorities properly established the factual and legal requirements for CGAA application, particularly whether restructuring operations constitute abusive tax avoidance or legitimate business reorganizations. The case emphasizes that corporate transformations and tax-neutral mergers require careful analysis of economic substance beyond formal legal compliance to withstand anti-abuse scrutiny under Portuguese tax law.

Full Decision

ARBITRAL DECISION

The Arbitrator, Dr. António Rocha Mendes, appointed by the Deontological Council of the Administrative Arbitration Center to form the sole arbitral tribunal constituted on 10/02/2014, decides as follows:

I REPORT

  1. A..., NIF..., (hereinafter also referred to as "Applicant"), resident at Rua…, …, …, in Figueira da Foz, came, pursuant to Articles 2, no. 1, letter a), 10, no. 1, letter a) and 10, no. 2, of Decree-Law no. 10/2011 of 20 January (hereinafter "RJAT"), to submit to the Arbitral Tribunal for review the legality of the assessment of Personal Income Tax ("IRS"), in the total final amount of €29,667.86, including compensatory interest, relating to the year 2009, through the application of the general anti-abuse clause ("CGAA"), provided for in Article 38-2 of the General Tax Code (LGT) and the anti-abuse provision set forth in no. 10 of Article 73 of the Code of Corporate Income Tax ("IRC").

The basis of the contested assessment is that contained in the decision of 14 December 2012 applying the anti-abuse clause, notified to the applicant through official letter no. …, of 18.12.12, which constitutes the basis of the tax act in question (doc. no. 3), contained in the accounting examination report.

The applicant concludes by requesting the allowance of the objection and, consequently, the complete annulment of that tax assessment.

The Tax and Customs Authority ("AT") is the respondent.

The Applicant opted for non-designation of an arbitrator.

Pursuant to the provisions of letter a) of no. 2 of Article 6 and letter b) of no. 1 of Article 11 of the RJAT, as amended by Article 228 of Law no. 66-B/2012 of 31 December, the Deontological Council appointed the signatory as arbitrator of the arbitral tribunal, who communicated acceptance of the appointment within the applicable time period.

The parties were notified and did not manifest any intention to refuse the appointment of the arbitrator in accordance with the combined provisions of Article 11, no. 1, letters a) and b) of the RJAT and Articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of letter c) of no. 1 of Article 11 of the RJAT, as amended by Article 228 of Law no. 66-B/2012 of 31 December, the arbitral tribunal was constituted on 10.02.2014.

On 26 May 2014, the meeting provided for in Article 18 of the RJAT was held, with the representatives of the Applicant and the Respondent declaring their willingness to dispense with witness examination as well as the production of final arguments, which was accepted by the Tribunal.

By order of the Tribunal of 27/06/2014 and 27/08/2014 and 27/10/2014, the deadline for the arbitral decision was extended, for the reasons invoked, for the period of 3 months provided for in Article 21-2 of the RJAT.

  1. The Arbitral Tribunal was properly constituted and is competent.

The parties possess legal personality and capacity and are legitimate (Articles 4 and 10, no. 2, of the same statute and Article 1 of Ordinance no. 112-A/2011 of 22 March).

The proceeding has no nullities.

II. GROUNDS

3. Matter of Fact

3.1. Proven Facts

The following facts are considered proven:

a) On 5 June 2009, the Applicant transferred to company B…, S.A., with NIF … ("B… SGPS"), 100 shares of company C… S.A. ("C…S.A.); and 5,000 shares of company D…, S.A. ("D…S.A.").

b) These transfers were carried out through in-kind contribution to the capital increase of the acquiring company (B…SGPS), with the Applicant acquiring 269,288 shares of B…SGPS with a nominal value of €1.

c) The nominal value of the participation acquired by the Applicant, i.e. € 269,288, corresponded to the sum of the equity capital values of C… S.A. and D… S.A. on the date of the transaction.

d) On the date of said transfers, B…SGPS had a capital of €50,000, divided into 50,000 shares with a nominal value of €1, belonging to: 49,845 shares to E…, the father of the Applicant; 50 shares to F…; 50 shares to G…; 50 shares to the applicant and 5 shares to H….

e) On 15 June 2009, the Applicant transferred to B… SGPS 20 shares of company I… S.A.(I... S.A.); 20 shares of company J… S.A. (J… S.A.); and 20 shares of K… S.A. (G…S.A.).

f) These transfers were carried out through in-kind contribution to the capital increase of the acquiring company (B…SGPS), with the Applicant acquiring 646 new shares of B…SGPS, also with a nominal value of €1.

g) The nominal value of the participation acquired by the Applicant, i.e. €646, corresponded to the sum of the equity capital values of K… S.A., I… S.A. and J… S.A. on the date of the transaction.

h) All transferred companies were initially constituted in the form of a limited partnership company, with their form being changed to joint-stock company on the following dates: companies D… S.A. and C… S.A., on 20 January 2009; and companies K…S.A., I… S.A., and J… S.A. on 5 June 2009.

i) All shares transferred by the Applicant, with the exception of D… S.A. shares, were held, for tax purposes, on the date of transfer, for less than 12 months.

j) Said transfers were reported in Form 4, provided for in Article 138 of the IRS Code, but the respective gains were not included (initially) in the respective annual tax return (Form 3), in particular in annexes G and G-1 (relating to capital gains and exempt capital gains).

k) The Applicant was notified by official letter … of 26 July 2012 to proceed with the substitution of Form 3 relating to the year 2009, and in response informed that the share transfer was carried out under the tax-neutral regime.

l) The AT considered that the operations of transformation of the legal form of the above-identified companies and the subsequent transfer to B… SGPS, under the tax-neutral regime, meet the factual requirements for the application of the general anti-abuse clause enshrined in Article 38 of the General Tax Code (LGT) and for the application of no. 10 of Article 73 of the IRC Code, applicable by cross-reference of nos. 8 and following of Article 10 of the IRS Code.

3.2. Unproven Facts
  • It was not proven that the operations or transactions described in letters a) to g) of the proven facts gave rise to any tax advantage for the participants nor that they were devoid of any economic rationale.
3.3. Motivation

The facts were established as proven based on documents submitted by the Applicant, the Tax Inspection Report and the documents contained in the instructional proceedings, also considering the fact that there is no controversy between the parties regarding the factual and objective framework contained in said documentation.

4. Grounds

The Law

In the matter at hand, the AT understood that the operations described in the above-mentioned framework, namely the transformation of the corporate form of the five companies above identified and their subsequent transfer, through an exchange of corporate interests, aimed essentially to avoid the capital gains realized by the Applicant in the transfer of such interests from being effectively taxed under IRS.

In fact, according to the AT, referring only to corporate transformations, "with this corporate change, the aim was to avoid taxation of these transfers, by virtue of the provision of letter a) of no. 2 of Article 10 of the IRS Code, which excluded from taxation capital gains resulting from the sale of shares held by their holder for more than 12 months" (see page 10 of the Inspection Report), an exemption which was not applicable to capital gains realized in the transfer of partnership interests.

The AT further added that "if the sale of the corporate interests held by the taxpayers had not been carried out without resorting to the prior transformation of the legal nature of the companies, the capital gain obtained from the transfer would have been subject to taxation" concluding that "through a set of operations and legal acts that led to the change of corporate type, the income obtained in these disposals were excluded from taxation, which would not have happened if the companies had maintained the partnership form" (see page 10 of the Inspection Report).

However, despite this statement, shortly thereafter in the same Inspection Report, the AT notes that, on the date of the transfer of interests in the five companies above identified to B… SGPS, only the shares of D… S.A. had been held for more than 12 months by the Applicant, whereby the capital gains realized on the transfer of shares of the other four companies were not exempt from taxation under the provision of letter a) of no. 2 of Article 10 of the IRS Code.

According to the AT, it was for that reason that the Applicant chose to transfer the interests in the five companies above identified via the capital increase of the acquiring company (B…SGPS), carrying it out through in-kind contribution of those shares, which made it possible to characterize that operation as an exchange of corporate interests covered by the tax-neutral regime and thus to exclude from taxation the capital gains realized on the transfer of the four companies whose shares had not been held for more than 12 months (see page 12 of the Inspection Report).

The AT, convinced that the operations carried out, taken as a whole, are abusive, resorted to two anti-abuse rules that allowed it to counter the normal tax effects of the transformation of the corporate form and the subsequent exchange of corporate interests carried out under the tax-neutral regime.

Thus, in the first place, under the general anti-abuse clause provided for in Article 38, no. 2 of the General Tax Code ("LGT"), the AT disregarded, for tax purposes, the transformation of the legal form of companies D… S.A., C… S.A., K… S.A, I… S.A and J... S.A., allowing it to increase the Applicant's tax base by the value of the capital gain realized on the transfer of D… S.A. shares, (the only one which had been held for more than 12 months and which, therefore, benefited, for tax purposes, from said transformation of legal form).

Secondly, under the anti-abuse rule provided for in no. 10 of Article 73 of the IRC Code, the AT set aside the effects of the deferment of taxation provided for operations of exchange of corporate interests carried out under the tax-neutral regime, established in Articles 73 and following of the IRC Code (applicable to gains realized by the Applicant in the transfer of shares of the four companies held for less than 12 months, by virtue of the cross-reference of no. 8 of Article 10 of the IRS Code).

In the present case, these anti-abuse rules must be analyzed separately. In this analysis, one must start from the assumption that the basis of the act that decided the application of the general anti-abuse clause which must be examined is only that contained in the act itself and the elements to which it refers, since the tax arbitral proceeding, as an alternative means to judicial objection proceedings (no. 2 of Article 124 of Law no. 3-B/2010 of 28 April), is, like this, a procedural means of mere legality, which aims to eliminate the effects produced by illegal acts, by annulling them or declaring their nullity or non-existence [Articles 2 of the RJAT and 99 and 124 of the Code of Tax Procedure and Process – CPPT, applicable by virtue of the provisions of Article 29, no. 1, letter a), thereof]. For this reason, the acts which are the subject of the proceeding must be appreciated as they were practiced, and the tribunal cannot, upon finding that an illegal ground has been invoked as support for the administrative decision, examine whether its action could be based on other grounds.

4.1. Analysis in Light of the General Anti-Abuse Clause of no. 2 of Article 38 of the LGT

In this context, the issue to be decided is whether the transformation of the corporate form of the five companies above identified aimed to avoid the taxation of the capital gains realized by the Applicant in the subsequent transfer of the respective corporate interests or whether, on the contrary, that was not the sole or principal reason for said transformation.

In the opinion of the AT, the transformation of the legal form of the five companies above identified aimed solely to avoid the taxation of the capital gains realized by the Applicant in the subsequent transfer of the shares to B… SGPS, which is why the AT disregarded said transformation for tax purposes, under the provision of Article 38, no. 2 of the LGT, under which « acts or legal transactions are ineffective within the tax sphere that are essential or principally directed, by artificious or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, in whole or in part, without the use of such means, with taxation then being effected in accordance with the applicable rules in their absence and the aforementioned tax advantages not being produced».

Doctrine and jurisprudence have been deconstructing the letter of this rule by pointing out five elements present therein. With one of the elements corresponding to the enactment of the rule, the remaining four appear to be cumulative requirements that allow one to assess – as if it were abusive tax planning¹.

These elements, around which both parties moreover construct their argument, consist of:

  • the element of means, which concerns the freely chosen route – act or legal transaction, isolated or part of a structure of sequential, logical and planned acts or legal transactions, organized in a unitary manner – by the taxpayer to obtain the desired tax gain or advantage²;

  • the element of result, which deals with the obtaining of a tax advantage, by virtue of the choice of that means, when compared with the tax burden that would result from the practice of "normal" acts or legal transactions of equivalent economic effect³;

  • the intellectual element, which requires that the choice of that means be "essential or principally directed[...] to the reduction, elimination or temporal deferment of taxes" (Article 38, no. 2 of the LGT), that is, which requires not the mere verification of a tax advantage, but rather that one assess, objectively, whether the taxpayer "intends an act, a transaction or a given structure, solely or essentially, for the prevailing tax advantages that it provides"⁴;

  • the normative element, which "has as its primary function the distinction between cases of tax avoidance and cases of legitimate tax savings, in consideration of the principles of Tax Law, such that only in cases where an intention contrary to or not legitimizing the result obtained is demonstrated can one speak of the former"⁵

  • and, finally, the sanctioning element, which, presupposing the cumulative verification of the remaining elements, leads to the sanction of ineffectiveness, in the exclusive tax sphere, of acts or legal transactions deemed abusive, « with taxation then being effected in accordance with the applicable rules in their absence and the aforementioned tax advantages not being produced» (final part of Article 38, no. 2, of the LGT).

Considering the elements of the general anti-abuse clause, the basis of the decision, the proven facts, and the legal arguments of the parties, we do not find in the case elements that allow us to identify three of the essential elements for the application of the general anti-abuse rule: the result element, the intellectual element, and the normative element.

Regarding the result element, we cannot fail to consider, first of all, that the transformation of the corporate form precedes an exchange of corporate interests carried out under the tax-neutral regime, i.e., an operation in which the taxation of the capital gains realized by the Applicant is deferred to the time when a future transfer of the securities acquired in the exchange occurs (in the present case a future disposition by the Applicant of the shares of company B… SGPS acquired in the transaction).

It should also be noted that of the shares of the five companies transferred, only the shares of one of those companies had been held for more than 12 months, whereby only the capital gains realized in relation to these could benefit from the exemption provided for in letter a) of no. 2 of Article 10 of the IRS Code.

It should further be noted that the application of the tax-neutral regime to the gains realized by the Applicant in the exchange of interests carried out did not depend on the transformation of the corporate form of the companies acquired by B… SGPS (the acquiring company in the exchange).

Thus, it is evident that the transformation of the corporate form did not result in any tax benefit for the Applicant, whereby it cannot be asserted that said transformation resulted in the obtaining of a tax advantage when compared with the tax burden that would result from the practice of "normal" acts or legal transactions (which in this case would be not to have decided on the transformation of the corporate form of the five transferred companies).

This fact necessarily prejudices the verification of the intellectual element, since it requires that the corporate transformation have been "essential or principally directed[...] to the reduction, elimination, or temporal deferment of taxes" (Article 38, no. 2 of the LGT). For, faced with the non-existence of a tax advantage, it is impossible to conclude that the taxpayer chose "an act, a transaction or a given structure, solely or essentially, for the prevailing tax advantages that it provides"

Finally, regarding the normative element, the sale of shares without subjection to taxation (under letter a) of no. 2 of Article 10 of the IRS Code) cannot be seen as something abusive or prohibitive: if there existed that so-called "conscious gap in taxation", the seller took advantage of it legally, understandably and legitimately

Therefore, the use of said legal and lawful legal forms cannot be considered as the use of artificious or fraudulent means, for purposes of no. 2 of Article 38 of the LGT, nor can any abuse of legal forms be discerned in the implementation of such operations.

Thus, the requirements provided for in no. 2 of Article 38 of the LGT being cumulative for the application of the CGAA, it must be concluded that the conduct of the Applicant cannot be considered as carried out with the essential purpose of avoiding the taxation of capital gains under IRS and as such is not covered by the provision of said rule.

4.2. Analysis in Light of the Anti-Abuse Rule of no. 10 of Article 73 of the IRC Code

In this context, the issue that arises is whether the operation of exchange of corporate interests, carried out under the tax-neutral regime, had underlying valid economic reasons that permit application of that regime, as the Applicant argues, or whether, on the contrary, as the AT maintains, the "operations of transfer of corporate interests to another company (...) did not have as their object valid economic reasons, such as the rationalization or restructuring of activities", in which case the application of said regime may be denied, under no. 10 of Article 73 of the CIRC.

This article, which contains the anti-abuse clause specifically intended for operations carried out under the tax-neutral regime, provides that: "The special regime established in this subsection does not apply, in whole or in part, when it is concluded that the operations covered thereby had as their principal objective or as one of their principal objectives tax evasion, which may be considered verified, namely, in cases where the companies involved do not have all of their income subject to the same IRC taxation regime or when the operations have not been carried out for valid economic reasons, such as the restructuring or rationalization of the activities of the companies participating therein, with the corresponding additional tax assessments to be made, where appropriate."

First and foremost, it is necessary to clarify that in order for the application of the tax-neutral regime to be denied, under no. 10 of Article 73 of the CIRC, it is not sufficient for the AT to merely allege that the operations in question "did not have as their objective valid economic reasons, such as the rationalization or restructuring of activities" (see Page 11 of the Inspection Report).

In fact, even if no. 10 of Article 73 of the CIRC established a legal presumption, in the sense that upon verification of the absence of valid economic reasons it would be presumed that the principal objective of the operation, or one of its principal objectives, was tax evasion, nonetheless it would be incumbent on the AT to demonstrate that the operation lacks such economic reasons.

For the demonstration of the existence of the presumptions underlying that presumption (i.e., the absence of valid economic reasons) falls to whoever invokes it. Only then, if that presupposition is successfully demonstrated, shall it become incumbent on the taxpayer to prove that the principal objective of the operation, or one of its principal objectives, was not tax evasion.

Now, in the case sub judice, the AT merely indicated as indications of absence of valid economic reasons that "from the analysis of the financial statements it does not appear that this operation resulted in significant changes in the functioning of the companies involved, namely by increasing their productivity and strengthening their competitive position" and that B... SGPS "on the date on which this legal transaction (exchange of corporate interests and capital increase) was carried out did not hold any other financial interests"(see Page 14 of the Inspection Report).

These indications are clearly insufficient for one to conclude that the operation carried out by the Applicant lacks economic rationale. For, on the one hand, the operation of exchange of corporate interests, aimed at changing the structure of ownership of the "acquired companies", will hardly imply a change at the level of the economic activity of each of them individually considered. The changes aimed at in this type of restructuring are essentially directed to improving the governance of those companies and the relations of the corporate group with third parties, namely banks and new investors.

On the other hand, the fact that B... SGPS did not hold any other interests on the date of the operation, as indicated by the AT, but is currently the holding company that heads a group formed by more than a dozen entities, weakens the second indication of absence of valid economic reasons pointed out by the AT. For, clearly, that company has been used to, as the Applicant points out, centralize the interests of all businesses held by his family.

Therefore, we conclude that the elements brought to the case by the AT are not sufficient to infer that the operation of exchange of corporate interests carried out by the Applicant lacks valid economic reasons, whereby the presuppositions of the aforementioned presumption were not demonstrated.

Thus, the operation must be analyzed in light of the other elements contained in the provision set forth in no. 10 of Article 73 of the CIRC.

For this purpose, it is necessary to draw attention to the fact that this rule transposes into the Portuguese legal order the provision contained in Article 15(1)(a) of Directive 2009/133/EC of the Council of 19 October concerning the common system of taxation applicable to mergers, divisions, partial divisions, contributions of assets and exchanges of shares between companies of different Member States and to the transfer of the registered office of a European Company (SE) or a European Cooperative Society (SCE) from one Member State to another ("Merger Directive").

Thus, the provision of no. 10 of Article 73 of the CIRC should, as a result of the principles of supremacy and direct effect of community law norms, be interpreted in light of the principle of that legal order, since the use of the anti-abuse mechanism provided for in the Merger Directive aims to guarantee, ultimately, the correct application of community law itself, even in those operations between entities resident in a single Member State⁹.

For this reason, the criteria for application of this anti-abuse rule are not absolutely coincident with those previously described in the context of the CGAA, since it should take into account the community legal order in which it is inserted, the jurisprudence of the Court of Justice of the European Union ("CJEU") and the specific purpose of the tax-neutral regime¹⁰.

Regarding its specific purpose, note that the tax-neutral regime has underlying the recognition that the maximization of organizational efficiency of companies is a value (extrafiscal) superior to the tax credit interests of Member States, whereby these, through the tax-neutral regime, relinquish tax revenue for the sole purpose of not hindering business reorganizations aimed at that efficiency¹¹.

However, the application of the tax-neutral regime generates asymmetry in the tax system, susceptible of incentivizing economic agents to adopt substitution behaviors¹², which, in the case before us, shall consist in the implementation of substitute transactions intended to permit the application of the tax-neutral regime to reorganizations that, substantially, do not aim at obtaining those efficiencies.

The need to avoid these behaviors (in fraud of law, or in abuse of rights, as per the terminology adopted by the CJEU)¹³ has been analyzed by the CJEU under two distinct prisms: (i) as a requirement of public interest, susceptible of restricting the application of fundamental freedoms; and (ii) as a manifestation of a general principle of Community Law, which permits denying the effects of the exercise of rights enshrined in that legal order in situations in which agents act abusively (i.e., in fraud of law)¹⁴.

Although it manifests itself differently, for the Court it is clear that in both cases we are dealing with the same concept. In fact, the fraud of law which it is intended to avoid in allowing national legislators to create rules restrictive of fundamental freedoms is exactly the same concept that permits denying the exercise of rights of community source carried out abusively (in fraud of law)¹⁵.

For that reason, in both contexts, the Court applies the same test to identify abusive situations, formulating them in the following terms: "the existence of an abusive practice requires, on the one hand, that the operations in question, despite the formal application of the conditions provided for in the relevant provisions of the Sixth Directive and of the national legislation transposing that directive, have as their result the obtaining of a tax advantage whose grant is contrary to the objective pursued by those provisions.

On the other hand, it must likewise result from a set of objective elements that the essential purpose of the operations in question is the obtaining of a tax advantage. Indeed, (...) the prohibition of abusive practices is not relevant in cases where the operations in question may have some explanation beyond the mere obtaining of tax advantages"¹⁶

The CJEU also had the opportunity to analyze the concept of abuse of rights in the context of the application of the Merger Directive¹⁷. The combination of the general anti-abuse doctrine developed by the Court and its jurisprudence in the specific cases in which it analyzed it in the context of reorganizations allows us to conclude that all operations carried out under the tax-neutral regime should be considered abusive that are: (i) principally motivated by "tax reasons"; and (ii) whose results contradict the object and purpose of the Merger Directive.

Interpreting the provision of no. 10 of Article 73 of the CIRC in light of community law, the jurisprudence of the CJEU and the specific purpose of the tax-neutral regime described above, we identify the following three essential elements for the application of the tax-neutral regime to be denied to a given operation: (i) that the operation results in the obtaining of tax advantages¹⁸; (ii) that the principal intention for carrying out said operation was the obtaining of such tax advantages¹⁹; and (iii) that the concrete result of the operation violates the normative principles underlying the tax-neutral regime, that is, in practice, that the operation carried out is not susceptible of generating the organizational efficiencies that justify the deferment of taxation granted by the Member States²⁰.

The application of this anti-abuse rule presupposes the cumulative verification of the three elements described above.

However, considering the proven facts and the legal arguments of the parties, we do not find in the case elements that allow us to identify any of these three elements in the operation of exchange of corporate interests carried out by the Applicant.

On the other hand, there is no element in the case that allows us to point out what the tax advantage obtained by the Applicant in the operation of exchange of corporate interests carried out was. The only reference to tax advantages brought to the case by the AT refers to the very effect of deferment of taxation of capital gains realized in the operation of exchange of corporate interests, which, in itself, cannot be considered as a tax advantage for purposes of the application of the anti-abuse rule in question.

For the realization of an abusive operation presupposes a duality of legal rules: one, the "defrauded rule", which gives rise to a tax obligation; and another, the "covering rule", which establishes lesser taxation, an exemption or the absence of an incidence rule in a given situation, to which the economic agent accesses through a substitution behavior, with a view to obtaining a tax advantage.

In the specific context of the tax-neutral regime, the defrauded rules are the incidence rules on gains realized in the onerous disposal of assets (in the case at hand letter b) of no. 1 of Article 10 of the IRS Code), which prevent (or hinder) the economic agent from accessing the desired tax advantages. The covering rule is the rule of the tax-neutral regime that allows the agent to achieve the intended result (i.e., achieve the desired tax advantage) without suffering the tax impact of the defrauded rule.

That is, agents adopt transactions (substitutes), formally eligible for the tax-neutral regime (covering rule), with a view to obtaining an objective (the tax advantage) alien to the purpose of the regime, so as to avoid the tax incidence (defrauded rule) on the transaction (substituted) that would normally lead to the realization of that objective.

Thus, it is concluded that the deferment of taxation provided for in the tax-neutral regime is not the objective of the agent (i.e., it is not the desired tax advantage), but only the means used to avoid the tax obstacles that prevent it from accessing that objective (i.e., the desired tax advantages).

Now, in the case sub judice, no elements were brought to the case that allow identification of the tax advantage to which the Applicant allegedly intended to access through the realization of the operation of exchange of corporate interests.

On the contrary, the AT refers as the basis for application of the anti-abuse rule only that the Applicant, with said operation, sought "non-taxation, by virtue of no. 8 of Article 10 of the CIRS". Now, this is precisely the rule that establishes the deferment of taxation in the context of operations carried out under the tax-neutral regime.

That is, in the process of applying the anti-abuse rule, the AT confused the covering rule allegedly used with the tax advantage allegedly intended by the Applicant, thereby not identifying which it understands to have been the latter²¹.

This fact has a direct impact also on the examination of the second element of the anti-abuse rule of no. 10 of Article 73 of the CIRC, since the operation had "as its principal objective or as one of its principal objectives tax evasion". For tax "evasion" presupposes the existence of a tax "advantage" for the agent.

Imagine, for example, that the exchange carried out had as its sole purpose to make possible the compensation of the tax losses of one company with the profits of another company, despite the fact that this structure is inefficient from an economic point of view. In a world without taxes, this structure would never be implemented because of the costs inherent in the transaction itself and the inefficiencies of the post-reorganization structure. In the real world, however, these inefficiencies would be offset by the tax advantage inherent in the possibility of compensating tax losses.

In this hypothetical case, we would be forced to conclude that the essential motivation for the realization of the exchange of corporate interests was of a tax nature, because in the absence of taxes that operation (which results in an inefficient structure) would not be carried out.

Thus, we can conclude that operations are motivated principally by tax reasons those which, notwithstanding that they may have underlying a non-tax advantage, would not be carried out if they did not result in tax advantages (i.e., tax advantages remain the determining component for the realization of the operation).

According to the jurisprudence of the CJEU, the analysis of this aspect must be carried out in a wholly objective manner, and must "result from a set of objective elements that the essential purpose of the operations in question is the obtaining of a tax advantage". For that purpose, the judgment regarding motivation "may take into account the purely artificial character of the operations, as well as the relations of a legal, economic and/or personal nature between the operators involved, since these elements are susceptible of demonstrating that the obtaining of the tax advantage constitutes the essential objective pursued, without prejudice to the eventual existence, beyond this, of economic objectives inspired by considerations, for example, of marketing, organization and guarantee".

However, in the case sub judice, no elements were brought to the case that would allow evaluation of whether this operation would have been carried out in a "world without taxes", since not even any tax advantage that served as a reason for the realization of the operation of exchange of corporate interests carried out by the Applicant was identified, nor were elements presented relating to potential inefficiencies inherent to the new structure.

For that reason, it also becomes impossible to evaluate the third element of the anti-abuse rule, that is, to evaluate whether the operation in question brings organizational efficiencies to the reorganized companies, which would justify the application of the tax-neutral regime and the consequent relinquishment of tax revenue by the State, or whether, on the contrary, the operation carried out is not susceptible of bringing economic efficiencies to the reorganized corporate group, a situation in which the concrete results of the operation would not be aligned with the purpose of the tax-neutral regime.

As we stated previously, the AT merely indicated that "from the analysis of the financial statements it does not appear that this operation resulted in significant changes in the functioning of the companies involved, namely by increasing their productivity and strengthening their competitive position" and that the acquiring company "on the date on which this legal transaction (exchange of corporate interests and capital increase) was carried out did not hold any other financial interests in other companies" (see Page 14 of the Inspection Report), allegations which are manifestly insufficient to demonstrate that the operation in question brought no economic efficiency to the corporate group in question and that, as such, produces effects contrary to the purpose of the regime of tax-neutral treatment under which the operation was carried out.

It should be finally noted that, under the provisions of Article 74 of the LGT, not only does the burden of proof of the three elements described above fall on the AT, but, in accordance with Article 100 of the CPPT, if doubts arise as to the presence of any of those elements, such doubt must be valued in favor of the taxpayer.

5. Conclusion

It is thus concluded that the factual requirements on which the application of the general anti-abuse clause provided for in no. 2 of Article 38 of the LGT nor of the anti-abuse rule provided for in no. 10 of Article 73 of the CIRC are not met.

In both cases, when those rules state that, for their application, the transactions must be principally directed to the reduction, elimination or temporal deferment of taxes that would be due, it becomes necessary to demonstrate, among other facts, that in the operation at issue tax advantages were obtained and that the obtaining of these was the essential or principal objective sought by the taxpayer.

Now, the proof of the existence of such advantages and of the tax motivation which, in the case, does not appear, at least, evident.

And, even if some doubts could be raised as to whether or not that was the essential or principal purpose of the business operations objectively carried out, the truth is that such doubt would always have to be valued in favor of the taxpayer in light of the provisions of Articles 74 of the LGT and 100 of the CPPT.

Therefore, the request for annulment of the acts of assessment of IRS for the year 2009 and compensatory interest which is the subject of this proceeding must be judged to be well-founded.

6. Value of the Proceeding

In accordance with the provisions of Article 306, no. 2, of the Code of Civil Procedure and 97-A, no. 1, letter a), of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is fixed at € 29,667.86.

III. DECISION

  1. In accordance with the foregoing, this Arbitral Tribunal decides to judge the request for arbitral decision to be entirely well-founded and determines the annulment of the tax assessment which is the subject of these proceedings and all accruals (compensatory interest) and

7. Costs

The Tax and Customs Authority shall bear the costs, with the respective amount being fixed at € 1,530.00 (one thousand five hundred and thirty euros), under the terms of Article 22-4 of the RJAT and Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings.

Lisbon, 06/02/2015

The Arbitrator,

António Rocha Mendes

Frequently Asked Questions

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What is the General Anti-Abuse Clause (CGAA) under Article 38(2) of Portugal's General Tax Law (LGT)?
The General Anti-Abuse Clause (CGAA) under Article 38(2) of Portugal's General Tax Law (LGT) is a provision that allows the Tax Authority to disregard or recharacterize transactions that, despite formal legal compliance, are primarily designed to obtain undue tax advantages. The CGAA applies when operations lack economic substance and serve mainly to avoid or reduce tax liability. To invoke the CGAA, the Tax Authority must demonstrate that: (1) the transactions result in a tax advantage; (2) they lack valid economic rationale beyond tax savings; and (3) they constitute an abuse of legal forms. The burden of proof rests on the Tax Authority to establish all factual elements supporting CGAA application. In Process 285/2013-T, the Authority invoked the CGAA against corporate transformations followed by share transfers under tax-neutral regimes, arguing these arrangements artificially avoided capital gains taxation.
How does the anti-abuse provision in Article 73(10) of the Portuguese Corporate Income Tax Code (CIRC) apply to restructuring operations?
Article 73(10) of the Portuguese Corporate Income Tax Code (CIRC) contains a specific anti-abuse provision targeting restructuring operations that benefit from tax-neutral treatment under the IRC merger regime. This provision applies to mergers, demergers, asset transfers, and share exchanges that formally qualify for tax deferral but lack genuine economic motives. Under Article 73(10), the Tax Authority can deny tax-neutral treatment when restructuring operations are primarily motivated by tax avoidance rather than valid business reasons such as rationalization, expansion, or operational efficiency. The provision is applied by cross-reference to personal income taxation through Articles 8 and 10 of the IRS Code. In the case analyzed, the Authority argued that transforming limited partnerships into joint-stock companies immediately before transferring them to a holding company constituted an abusive restructuring scheme designed to access the tax-neutral regime and capital gains exemptions unavailable to partnership interests.
Can the Portuguese Tax Authority (AT) reclassify income from IRC to IRS using the General Anti-Abuse Clause?
Yes, the Portuguese Tax Authority can attempt to reclassify income from IRC (corporate) to IRS (personal income) contexts using the General Anti-Abuse Clause, though such reclassification faces significant legal scrutiny. In Process 285/2013-T, the Authority applied both Article 38(2) of LGT (CGAA) and Article 73(10) of CIRC—provisions primarily associated with corporate taxation—to assess personal income tax (IRS) on an individual taxpayer. This cross-application occurs through Articles 8 and following of the IRS Code, which incorporate certain IRC anti-abuse provisions into personal taxation. However, the Authority must satisfy rigorous procedural and substantive requirements: demonstrating that the taxpayer obtained undue tax advantages through artificial arrangements lacking economic substance. The arbitral tribunal's finding that tax advantages and lack of economic rationale were 'unproven' suggests courts require concrete evidence beyond theoretical tax differences to sustain such reclassifications, protecting taxpayers from arbitrary recharacterization of legitimate business transactions.
What procedural requirements must the Tax Authority follow when applying the CGAA in Portugal?
When applying the CGAA in Portugal, the Tax Authority must follow strict procedural requirements to ensure taxpayer rights. First, the Authority must conduct a thorough investigation establishing the factual basis for CGAA application, including proof that transactions generated tax advantages and lacked genuine economic purpose. Second, before issuing an assessment, the Authority must notify the taxpayer of its intention to apply the CGAA and provide an opportunity to respond—ensuring the right to prior hearing (direito de audição prévia). Third, the Authority must issue a formal decision explicitly identifying the legal basis for applying the CGAA, describing the abusive arrangements, and explaining why normal tax provisions are insufficient. Fourth, this decision must be properly notified to the taxpayer with full reasoning. In Process 285/2013-T, the Authority issued a decision on December 14, 2012, applying the anti-abuse clause, which was notified through official letter on December 18, 2012. The Authority bears the burden of proof for all elements supporting CGAA application, and any factual uncertainties must be resolved in favor of the taxpayer.
How does CAAD arbitration resolve disputes involving anti-abuse tax provisions under the RJAT framework?
CAAD (Centro de Arbitragem Administrativa) arbitration provides an alternative dispute resolution mechanism for tax disputes involving anti-abuse provisions under the Administrative Arbitration Regime (RJAT - Decree-Law 10/2011). Taxpayers can challenge CGAA assessments by submitting arbitration requests under Articles 2(1)(a) and 10 of RJAT, which grants CAAD jurisdiction over the legality of tax assessments. The process involves: (1) constitution of an arbitral tribunal—either with arbitrators chosen by parties or appointed by CAAD's Deontological Council; (2) written proceedings where both taxpayer and Tax Authority present arguments and evidence; (3) optional hearings under Article 18 of RJAT for witness examination and oral arguments; and (4) a binding arbitral decision typically issued within specified deadlines (extendable under Article 21-2 RJAT). In Process 285/2013-T, a sole arbitrator was appointed, the tribunal was constituted on February 10, 2014, and parties waived witness examination. The arbitrator extended decision deadlines three times. CAAD arbitration offers faster resolution than judicial courts, specialized tax expertise, and thorough review of whether the Tax Authority properly established factual and legal requirements for anti-abuse provisions, protecting taxpayers from overreach while ensuring tax law integrity.