CAAD 285/2017-T: SGPS Financial Charges Deductibility and Autonomous Taxation on Light Passenger Vehicles Under IRC

Arbitral Tax Jurisprudence

Case No. 285/2017-T

Date of Decision: 2023-01-09

CIT

Value of Claim: € 6,080,872.00

Subject Matter: CIT. Holding Companies - Deductibility of financial charges incurred with the acquisition of equity interests. Autonomous taxation on charges incurred with light passenger vehicles – Reform of the arbitral decision (attached to the decision).
Replaces the arbitral decision of 31 May 2021

Arbitral Award (consult full version in PDF)

SUMMARY:

• Article 210 of Law No. 83-C/2013, of 31 December, is not unconstitutional when interpreted in the sense of not permitting, as a consequence of the repeal of Article 32, No. 2 of the Fiscal Benefits Statute, the deduction of financial charges borne by holding companies with the acquisition of equity interests under that scheme, which they still held as of 31 December 2013;

• Light motor vehicles for which evidence of exclusively business use is provided are not subject to the autonomous taxation provided for in Article 88 of the CIT.

ARBITRAL DECISION

(rendered following the decision by TCAS in Case 65/21)

I – Report

The taxpayer company "A..., SGPS, S.A.", with Tax Identification Number ... (hereinafter "Claimant"), presented, on 21 April 2017, a request for constitution of a collective arbitral tribunal, under the terms of the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter "RJAT"), and Articles 99(a) and 102(1)(e) of the Code of Tax Procedure and Process (hereinafter "CPPT"), in which the Tax and Customs Authority (hereinafter "TA" or "Defendant") is the respondent.

The Claimant seeks an arbitral pronouncement on the illegality of the CIT assessments No. 2015..., of 13 August 2015, with tax to be recovered in the amount of € 59.26 (1st act – CIT 2014), and No. 2017..., of 13 February 2017, with tax to be recovered in the amount of € 112,050.26 (2nd act – CIT 2014), as well as the corresponding statement of account No. 2017..., in the part relating to the deduction of amounts as financial charges incurred and autonomous taxation on light passenger vehicles. Concurrently, it requests the annulment of the decision to partially reject the administrative appeal filed on 23 January 2017 against those tax acts. It requests indemnity interest. It lists three witnesses and requests a party statement.

In the request for arbitral pronouncement, the Claimant, in the exercise of the option for the appointment of an arbitrator provided for in Article 6(2)(b) of the RJAT and in compliance with Articles 10(2)(g) and 11(2) of the same decree, designated Fernando Araújo as arbitrator.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the TA on 28 April 2017.

The TA, under the terms of Article 6(2)(b) and 11(3) of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, and within the period provided for in Article 13(1) of the RJAT, designated Henrique Fiúza as Arbitrator.

By ruling of 12 June 2017, the President of CAAD notified the two arbitrators to designate the presiding arbitrator, under the terms of Article 11(6) of the RJAT, and for purposes of application of Article 3(2) and (3) of Ordinance No. 112-A/2011, of 22 March.

In the absence of consensus between the arbitrators, the President of the CAAD Deontological Council was requested, on 6 July 2017, to designate the presiding arbitrator.

Under the terms of Article 6(2)(b), as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council designated José Baeta de Queiroz as president of the collective arbitral tribunal, who communicated acceptance of the office within the applicable period, and notified the parties of this appointment on 6 July 2017.

The collective arbitral tribunal was constituted on 24 July 2017; it was properly constituted and is substantively competent, under the terms of Articles 2(1)(a), 5, 6(1), and 11(1) of the RJAT (as amended by Article 228 of Law No. 66-B/2012, of 31 December).

Under Articles 17(1) and (2) of the RJAT, the TA was notified, on 24 July 2017, to submit its response.

The TA submitted its response on 2 October 2017.

In that response, the TA argues, in summary, for the total inadmissibility of the Claimant's request and the insufficiency of the evidence presented.

The arbitral ruling of 2 October 2017 requested, from the Claimant, the specification of the facts on which the additional evidence requested would be directed.

In a request filed on 17 October 2017, the Claimant enumerated the articles of the request for arbitral pronouncement on which the testimony of the witnesses listed and the statements of the party should be directed: 33, 35, 74-77, 105-106, 108, 117-131, 135-156, 159, 212, 215-219, 221-223, 225-284.

The arbitral ruling of 30 October 2017 admitted the additional evidence requested and set a date for the meeting provided for in Article 18 of the RJAT.

In a request of 2 November 2017, the Claimant requested a new date for that meeting.

The arbitral rulings of 2 and 3 November 2017 granted the Claimant's request, setting a new date for the said meeting.

In a request of 27 November 2017, the Claimant requested the attachment of new documents, under Article 423(2) of the Civil Procedure Code (hereinafter "CPC") ex vi Articles 16(f) and 29(1)(e) of the RJAT, aimed at proving the quantification of the financial charges claimed in the present proceedings and supporting the facts set out in Articles 74-77, 82, 108, 118, 121, 125, 128, 129, 131, 132, 135, 137, 148, and 158 of the request for arbitral pronouncement.

On 19 December 2017, the administrative case file (hereinafter "AF") was attached to the proceedings.

On 19 December 2017, the hearing on the merits took place.

At the beginning of that hearing, the Defendant attached a new document to the proceedings which was annexed to the minutes of the meeting.

At the hearing on the merits, the listed witnesses B..., C..., and D... were examined. And party statements were made by E....

The parties were notified to submit written arguments, and successive periods of 15 days were granted for that purpose.

The tribunal set the date of 23 March 2018 for rendering the arbitral decision.

The Claimant submitted its arguments on 17 January 2018.

On 30 January 2018, the Claimant requested, and it was admitted by arbitral ruling on the same date, the attachment to the proceedings of a legal opinion.

The Defendant submitted counter-arguments on 7 February 2018.

On 23 February 2018, the Claimant submitted a request in response to the invocation, in the Defendant's counter-arguments, of an exception of lack of material jurisdiction of the arbitral tribunal.

A decision was rendered on 24 May 2018, which, by majority, decided:

"To declare the exception of lack of material jurisdiction of the arbitral tribunal inadmissible.

To declare the request for declaration of illegality of the decision partially rejecting the administrative appeal of 23 January 2017, in the part regarding the rejection, admissible.

To partially annul the said decision, in the part regarding the rejection.

To annul the CIT assessment relating to the tax year 2014, to the extent that the financial charges incurred in the years 2003 to 2013 with the acquisition of equity interests, still held on 31 December 2013, by the companies G... SGPS and Z..., SGPS, of the Claimant's corporate group, were not deducted, which were added to the taxable profit of these taxpayers under Article 32(2) of the Fiscal Benefits Statute, as a consequence of the repeal of this special regime by Law No. 83-C/2013, of 31 December.

To annul the autonomous taxation levied on charges relating to light passenger vehicles of the Claimant during the tax year 2014.

To condemn the Defendant to pay the Claimant indemnity interest relating to taxes unduly paid, calculated from the date on which the period for decision on the administrative appeal expired, at the supplementary legal rate, until full reimbursement."

Appeals from that decision were filed to the Constitutional Court by the Public Prosecutor and the Tax and Customs Authority.

Those appeals originated Case No. 676/2018 of the Constitutional Court, in which Decision No. 638/2020 was rendered on 16 November 2020, which decided:

"Not to know the appeals filed, under Articles (a) and (b) of Article 70.1 of the Constitutional Law, by the Tax and Customs Authority;

Not to declare Article 210 of Law No. 83-C/2013, of 31 December, unconstitutional, when interpreted in the sense of not permitting, as a consequence of the repeal of Article 32(2) of the Fiscal Benefits Statute, the deduction of financial charges borne by holding companies with the acquisition of equity interests under that scheme, which they still held as of 31 December 2013; and consequently,

To grant the appeal filed by the Public Prosecutor and to order the reform of the decision appealed in accordance with the present judgment of non-unconstitutionality."

In compliance with the ruling by the Constitutional Court, thus accepting the dictates of Articles 2 and 80(2) of Law No. 28/82, of 15 November, a new arbitral decision was rendered on 31 May 2021.

This arbitral decision was challenged before the Central Administrative Court of the South, which granted it.

Given the request for recusal filed by the previous President of this collective arbitral body, the Deontological Council of CADD appointed Rui Duarte Morais to exercise such functions.

Having heard the parties, they stated they had nothing to request regarding the said substitution, understanding that, without further ado, the new arbitral decision could be rendered.

The text that follows constitutes a partial reissue of the arbitral awards previously rendered in this case with the necessary amendments to comply with the TCAS decision.

The case does not suffer from nullities and no questions, prior or subsequent, prejudicial or of exception (except those relating to the jurisdiction of the tribunal, to be addressed below), have been raised which would prevent consideration of the merits of the case, and the conditions for rendering a final decision are met.

The TA proceeded to designate its representatives in the proceedings and the Claimant filed a power of attorney, thus ensuring that both parties are properly represented.

The parties have legal personality and capacity and have standing, under the terms of Articles 4 and 10(2) of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March.

II – Grounds: Factual Matters

II.A. Facts Deemed Proven and Relevant to the Decision

The Claimant, which has the legal form of a Joint Stock Company, has as its purpose the management of equity interests.

The Claimant was subject to taxation, at the time of the facts, in accordance with the Special Regime for Taxation of Groups of Companies (RETGS), heading the following group subject to that regime:

The Claimant headed, at that time, a relevant group in the field of communication and entertainment in Portugal, created in 1992 and with a strong presence in the main segments of media and audiovisual content production, implying the intensive use of service vehicles.

In the tax year 2014, the group led by the Claimant incurred total charges with light passenger vehicles in the amount of € 2,386,124.00, with the respective autonomous taxation amounting to € 476,254.00, distributed mainly among the following companies:

Tier I – acquisition value less than € 25,000;

Tier II – acquisition value equal to or greater than € 25,000 and less than € 35,000;

Tier III – acquisition value equal to or greater than € 35,000.

The business activities carried out by companies J..., U..., X..., W..., P... and H... require, on a regular basis, the movement of employees to different parts of the country using light passenger vehicles – with almost all the vehicles in question being marked with company logos and subject to parking entrance and exit controls, mileage controls, and centralized logistics management.

There exists a "vehicle use agreement" which requires authorization for their use for private purposes (pages 282-283 of AF).

The existence of a fleet of vehicles capable of enabling timely movement of the employees of the group led by the Claimant to their mission locations is detailed as follows:

Between the tax years 2003 and 2013, the Holding Companies in the Claimant's group were accumulating the financial charges incurred with the acquisition of equity interests, fulfilling the requirement for application of the regime of Article 32 of the Fiscal Benefits Statute (FBS).

The gross amount of said financial charges amounted to € 28,413,549.00, corresponding to the acquisition of equity interests still held on 31 December 2013, with some exceptions.

The financial charges incurred with the acquisition of equity interests and which were accumulated under Article 32(2) of the FBS totaled € 21,747,813.74 (an amount arrived at by applying "exceptions" to the gross amount of € 28,413,549.00 – the equity interests held by G... SGPS in companies GG..., HH..., Lda, II..., S.A. and JJ..., S.A.).

The Claimant presented, on 28 May 2015, a self-assessment act for CIT corresponding to the tax year 2014, with non-exempt taxable matter in the amount of € 21,331,384.37, having calculated a tax amount payable of € 515,460.94.

The Claimant paid, on 29 May 2015, the assessed amount of € 515,520.19.

The Claimant received on 18 August 2015 the CIT assessment No. 2015..., corresponding to the tax year 2014, with tax to be recovered in the amount of € 59.26 (1st Act – CIT 2014; pages 645 of AF).

The Claimant, having detected errors in its self-assessment as a result of an evaluation of internal procedures, submitted, on 19 September 2016, an administrative appeal No. ...2016... against that assessment, under Articles 137 CIT and 68 and 131 of the CPPT, alleging violation of law.

The Claimant sought recognition in that administrative appeal of:

• the deductibility of financial charges incurred with the acquisition of equity interests, still held on 31 December 2013, by the controlled companies G... SGPS, S.A. (G... SGPS) and Z... SGPS, S.A. (Z..., SGPS), added to the taxable profit of these taxpayers under Article 32(2) of the FBS, as a consequence of the repeal of this special regime by Law No. 83-C/2013, of 31 December, in the total amount of € 21,747,813.74, corresponding to € 5,950,636.00 of tax unduly paid, with the calculation of € 416,429.00 of tax losses.

• the annulment of the autonomous taxation levied on charges for light passenger vehicles, in the total amount of € 130,236.00.

• the annulment of the autonomous taxation levied on representation expenses, in the total amount of € 111,991.00.

• indemnity interest to be added to the amounts to be reimbursed.

The Claimant was presented, on 14 December 2016, with the draft decision on the administrative appeal; and the Claimant exercised, on 29 December 2016, its right to participate, in the form of prior hearing (pages 585-613 of AF).

The administrative appeal was, by decision of 23 January 2017, partially granted, in the amount of € 111,991.00, assessed and paid as autonomous taxation under the terms provided for in Article 88(7) of the CIT; and partially rejected, in the part relating to the deduction of amounts as financial charges incurred with the acquisition of equity interests, and autonomous taxation on charges for light passenger vehicles (pages 1240-1246 of AF). In summary:

The Claimant received on 13 February 2017 the CIT assessment No. 2017..., corresponding to the tax year 2014, with tax to be recovered in the amount of € 112,050.26 (2nd act – CIT 2014), as well as the corresponding statement of account No. 2017..., in the part relating to the deduction of amounts as financial charges incurred and autonomous taxation on light passenger vehicles, in the amount of € 111,991.00.

By application of Article 39(10) of the CPPT, the Claimant is deemed to have been notified of the decision of 23 January 2017 on 19 February 2017.

The Claimant presented its request for arbitral pronouncement on 21 April 2017.

Some of the CIT assessments corresponding to the tax years 2003 to 2013, relating to the holding companies in the Claimant's group, have been the subject of judicial and arbitral challenge, with the result of revision of the amounts involved.

The facts deemed proven result from the tribunal's conviction, based on critical examination of the case documents and consideration of the testimony of witnesses, which demonstrated knowledge of the facts and testified with impartiality.

II.B. Facts Deemed Not Proven

Based on the documentary evidence made available in the proceedings and consensually accepted by the parties, and based on the testimonial evidence presented at the hearing on the merits, it is verified that, to the extent of interest for the decision of the case, nothing further was proven.

III – Grounds: Matters of Law

III.A. Position of the Claimant

1. Preliminary Question

(a) The Claimant begins by raising a preliminary question regarding the scope of assessment No. 2017..., what it designates as the "2nd Act", compared to the CIT assessment No. 2015..., what it designates as the "1st Act" – alleging that it is unclear whether the 2nd assessment is intended to replace the 1st; if it is intended to annul it. In the Claimant's view, the course followed should have been that of partial annulment of the original act, given the divisibility of the tax act, and the persistence of the remaining part of the act not annulled; and, on the contrary, it cannot be merely the "execution" of a previous decision, as if it were not a new assessment act. But, in doubt, the Claimant opted for challenging both assessment acts in cumulation of claims.

2. On the Deductibility of Financial Charges Incurred with the Acquisition of Equity Interests and Added to Taxable Profit

As regards the deductibility of financial charges incurred with the acquisition of equity interests and added to taxable profit, the Claimant believes that the taxable profit of the tax year 2014 of the Group of which it is the parent company, in the amount of € 21,331,384.37, should be reduced by the amount of € 21,747,813.74, relating to financial charges incurred by G..., SGPS and Z..., SGPS with the acquisition of equity interests still held on 31 December 2013, resulting in the Group calculating a tax loss of € 416,429.37.

As regards the deductibility of such financial charges, the Claimant begins by examining the regime established in Article 32(2) of the FBS by Law No. 32-B/2002, of 30 December (2003 Budget Law), as amended by Law No. 67-A/2007, of 31 December (2008 Budget Law) and repealed by the repeal of Article 32 of the FBS by Article 210 of Law No. 83-C/2013, of 31 December (2014 Budget Law); especially emphasizing the strengthening to which the regime of Article 32 of the FBS was subject through Articles 145 and 146 of Law No. 64-B/2011, of 30 December, in that that regime was expressly withdrawn from the general rule of transitoriness of benefits established in Article 3(1) of the FBS, and to the extent that the effectiveness of Article 32 of the FBS was expressly extended.

This reinforcement of stability and durability of the regime of Article 32 of the FBS would have been capable of reinforcing the expectations of potential beneficiaries, moreover, the Claimant argues, with the clarification of doubts undertaken by Circular No. 7/2004, of 30 March, issued by the CIT Service Directorate.

The Claimant recalls that some persistent doubts were clarified by Decision No. 42/2014 (Case 564/12) of the Constitutional Court, which established that the consideration of financial charges in the period to which they themselves relate does not violate constitutional principles, even if such charges precede the realization of capital gains.

In the Claimant's interpretation, the integration of that regime in the FBS can only mean that a more favorable solution for the taxation of capital gains relating to equity interests held permanently by holding companies was established, and it is not, therefore, about limiting in any way the deductibility of financial charges as capital losses, but only establishing a counterpart of the regime of exclusion of taxation of such capital gains.

Thus, the Claimant deduces, the financial charges incurred by holding companies with the acquisition of equity interests would only be deductible for purposes of determining taxable profit in the event that the capital gains associated with their disposal could not benefit from the said exemption, which is why Circular No. 7/2004 established that "should it be concluded, at the time of sale of the interests, that not all requirements for application of that regime are met, in that tax year the financial charges not considered as a cost in earlier years shall be treated as a tax cost" – an understanding corroborated by Decision No. 42/2014 of the Constitutional Court.

Accordingly, the Claimant concludes, the non-deductibility of financial charges associated with the acquisition of equity interests is the direct counterpart of non-taxation of capital gains that may be realized with reference to those interests, under the capital gains exemption – therefore, if the regime of Article 32(2) of the FBS does not apply, the financial charges that have been accumulated may be deducted for purposes of determining taxable profit.

The Claimant adds that companies G..., SGPS and Z..., SGPS considered financial charges in determining their taxable profit, as a result of application of the holding company tax regime, in a total amount of € 28,413,549.00, and that those charges, with some exceptions, consisted of financing for the acquisition of the equity interests still held, directly or indirectly, by G..., SGPS and Z..., SGPS on 31 December 2013.

Now, argues the Claimant, given the repeal, by Law No. 83-C/2013, of 31 December (2014 Budget Law), of the regime excluding taxation of capital gains realized by holding companies with respect to equity interests, the non-deductibility of financial charges incurred with interests that were unable to benefit from that regime ceases to have any legal justification.

In other words, the Claimant understands that the repeal of the holding company tax regime by Law No. 83-C/2013, of 31 December, determines the deduction, for purposes of determining its taxable profit in the tax year 2014, of the financial charges accumulated in the past under that tax regime, to the extent relating to equity interests still held on 31 December 2013, which therefore in no way benefited from that regime – a solution entirely similar to that previously existing where, at the time of disposal, it was concluded as to the impossibility of applying the regime of Article 32 of the FBS, with the sole difference that, in this case, the impossibility of applying the regime excluding taxation of capital gains realized by holding companies with respect to equity interests results, not from a fact attributable to the taxpayer, but to the law itself.

The Claimant argues that this solution is the same as that resulting from the transition from the CIT to the adoption of the Accounting Standards System (SNC) by virtue of Decree-Law No. 159/2009, of 13 June, in which case there was expressly established the fiscal recognition of financial charges accumulated in earlier periods of taxation, given the supervening limitation relating to the deductibility of financial charges incurred with the acquisition of equity interests for purposes of application of Article 32(2) of the FBS – because, alleges the Claimant, it was understood, and rightly so, that, to the extent that gains or losses associated with those equity interests would always be excluded from the scope of application of Article 32(2) of the FBS, it would be legitimate to recover the financial charges that had been accumulated in the past with respect to the same equity interests.

And the Claimant argues that it is also similar to the solution found for results associated with construction contracts, in which case Circular No. 8/2010 recognized to taxpayers who were making adjustments for purposes of determining their taxable profit under the then-established Article 19 of the CIT, that they had available "the same period (of five years) to 'reverse' the tax corrections they had been making".

The Claimant concludes that it would be manifestly unjust for the same understanding not to now be adopted with respect to financial charges accumulated for purposes of determining the taxable profit of earlier years, under Article 32(2) of the FBS.

And it adds that, for various reasons, it cannot be said that the effects of the repeal of the regime of Article 32(2) of the FBS are compensated for by the new "participation exemption" regime introduced by the CIT reform effective 1 January 2014 – precisely because there are holding companies which, with the simple entry into force of the new regime, would be penalized for having accumulated, until 31 December 2013, financial charges with the acquisition of equity interests.

The Claimant argues that a legislative gap occurred, because, in the repeal of the regime of Article 32(2) of the FBS, there was not established a regime applicable to financial charges calculated and accumulated to the taxable profit of tax years prior to the entry into force of the repealing law, putting at risk the legitimate interests of taxpayers.

The Claimant further argues that, absent transitional rules, it cannot be admitted that, by the fact that holding companies continue to benefit from a regime excluding taxation of capital gains realized with respect to some equity interests, such fact prevents the recovery of financial charges accumulated in the past as the counterpart of "use" of a special, beneficial regime for the taxation of capital gains – use which, by action of the legislator, ended up not occurring.

The Claimant does not accept that, against the justice of such a transitional solution, the principle of periodicity of tax years enshrined in Article 18 of the CIT be raised as a counter-argument, which in its view would violate the principle of protection of legitimate expectation and legal certainty and the principle of proportionality which finds qualified expression in Articles 2 and 18(2) and (3) of the Constitution.

Specifically, the Claimant stresses that companies G..., SGPS and Z..., SGPS had well-founded and legitimate reasons to rely on the deductibility of financial charges incurred in the context of financing obtained to support the acquisition of equity interests, and it was not reasonably exigible of them (nor of other taxpayers in the same circumstances) to rely on the possibility of a change in the legislative framework, in the sense that it came to occur, that is, in the direction of removal of consideration of those charges, already incurred, in the calculation of taxable profit – finding themselves suddenly confronted with the impossibility of "correcting the costs", by way of deduction of charges that accumulated to taxable profit in earlier years.

More than unjust, such a situation would constitute, in the view of the Claimant, a problem of retroactivity of tax law, of special sensitivity regarding the repeal of tax benefits – with serious injury to taxpayer expectations and relevant economic consequences regarding activities that the tax benefits began by encouraging for extrafiscal reasons.

The Claimant draws attention to the position taken by the Constitutional Court in its Decisions Nos. 128/2009, of 12 March and 287/90, of 30 October, which it considers inadmissible the affecting of expectations, in an unfavorable sense, when it constitutes a mutation of the legal order with which, reasonably, the addressees of its norms cannot be expected to count, in particular if expectations of continuity were sustained to private parties; expectations that may be deemed legitimate, justified and founded on good reasons. And it finds other examples of the same position of the Constitutional Court in Decisions Nos. 410/95, of 28 June, and 185/2000, of 28 March.

The Claimant argues that such legitimate expectations weighed in the economic, financial and corporate decisions of the group over these ten years in which companies G..., SGPS and Z..., SGPS accumulated, to their taxable profit, the financial charges incurred with the acquisition of equity interests, as a result of application of the said holding company tax regime, in the total amount of € 28,413,549.00, with financing contracted, which generated those financial charges, contracted by those companies.

Specifically, over 10 tax years (2003 to 2013, from the 2003 Budget Law to the 2014 Budget Law, that is between the creation and repeal of that special regime of tax benefits) those companies would have borne the negative effects inherent in the non-deduction of financial charges, adopting the position based on Circular No. 7/2004, in the legitimate expectation that those negative effects would, at some point, be reversed, taking into account what was postulated in the regime excluding taxation of capital gains established in Article 32(2) of the FBS, and the guidance provided by the Circular. Moreover, the expectation of the group to, at some point, benefit from the tax benefit enshrined in Article 32 of the FBS – in particular, to deduct the financial charges incurred by companies G..., SGPS and Z..., SGPS – ruled out the option of taking any decision potentially capable of preventing use of the tax benefit in question, in particular not changing the purpose of those holding companies to S.A.s, a decision that would have an enormous negative financial and tax impact for those two holding companies and for the group.

Thus, the Claimant understands that the criteria established by the decisions of the Constitutional Court regarding the inadmissibility of retroactivity of tax law are met, and that this retroactivity prevents a real expense, in this case the financial charges associated with the financing of investment and holding of equity interests, from being taken into account in calculating taxable profit, which is equivalent to taxing a fictional, non-existent income.

The Claimant insists that it had more than merely a hope regarding the application of the regime of Article 32(2) of the FBS, because it had already engaged in acts that fell within the scope of that regime's norm – and that the interpretation of the TA means that it was prevented, over 10 years, from deducting costs in counterpart to a putative tax benefit that, in the meantime, evaporated by legislative act.

This would mean, in the Claimant's understanding, more than a violation of the principles of certainty and legal certainty – this would imply, by supervening and unforeseen impossibility of cost deduction, a violation of the principles of tax capacity and real-income taxation; and, as regards companies that are not holding companies, a violation of the principles of equality and neutrality.

As to the timing of deduction of financial charges, the Claimant understands it should be the tax year 2014, since it is only with the entry into force of Law No. 83-C/2013, of 31 December (2014 Budget Law) that the regime of Article 32(2) is repealed, ceasing to meet the prerequisites that justified the accumulation of financial charges, making application of the tax benefit impossible and justifying the respective recovery – which, the Claimant insists, is consistent with the expectation formed by Circular No. 7/2004, when it established that "should it be concluded, at the time of sale of the interests, that not all requirements for application of that regime are met, in that tax year the financial charges not considered as a cost in earlier years shall be treated as a tax cost".

(b) The Claimant believes the situation is in all respects similar to that in which, with the entry into force of a new CIT regime (namely with the wording of the CIT approved by Decree-Law No. 159/2009, of 13 July 2009), a transitional period was expressly adopted (of 5 years, deemed a "reasonable period") for the reversal of tax adjustments made in earlier periods of taxation, in addition to other transitional adjustments. And in those cases the period that was considered relevant for purposes of reversal was the period in which the new tax rule was first applied, and not any earlier period of taxation.

The fact that, within the context of the CIT Reform, the legislator did not feel the need to establish a transitional period (having only established some specific regimes for certain realities, such as in Article 12 of Law No. 2/2014, of 16 January) does not mean, in the Claimant's view, that the same interests are not relevant or do not merit equivalent protection.

As to the alleged violation of the principle of equal treatment, the Claimant points out that the equalization of all companies for purposes of the new "participation exemption" regime is discriminatory of holding companies which, by force of the non-deductibility of financial charges associated with capital gains, were accumulating in the past those financial charges relating to equity interests and saw themselves deprived of recovering those accumulations when they ceased to justify themselves for tax purposes – in a position of disadvantage compared to companies which, not having adopted the form of a holding company, come to realize capital gains with reference to equity interests, to the extent that those did not accumulate, in the past, any financial charges associated with the acquisition of such equity interests.

3. On Autonomous Taxation of Charges Incurred with Light Passenger Vehicles

The Claimant begins by recalling that, in analyzing the list of expenses considered in Article 88 of the CIT, in the wording in force at that time, subject to autonomous taxation, the majority of doctrine and case law have understood that the reason for autonomous taxation lies in the finding that certain expenses, even though relevant for purposes of forming taxable profit, do not result, in a direct way, from the activity of the taxpayer and, even when that correlation exists, are susceptible to use that is not exclusively business in nature – recognizing, in summary, that expenses subject to autonomous taxation are in a "gray zone" between business purpose and personal advantage to their actual beneficiaries. This is, in other words, a matter of expenses which, even though contributing to the formation of taxable profit, do not allow, by their nature, a clear distinction to be made as to what sphere they relate: the personal sphere or the business sphere.

That norm aimed and aims, then, at dissuading abusive or fraudulent conduct – which is why the Claimant attributes to it an anti-abuse character, based, in its view, on a presumption of partial business use, which may be rebutted, under the general terms of Article 350 of the Civil Code and Article 73 of the General Tax Law (GTL), by demonstrating "exclusively business" use of the vehicles to which the incurred charges relate.

(b) Starting from that premise, the Claimant rejects the understanding, which it attributes to the TA, that autonomous taxation would be pure taxation of the expense, which would result, among other consequences, in removal of that regime from the general regime of income taxation.

For the Claimant, the establishment of a rebuttable presumption is a crucial key to the functioning of the autonomous taxation regime itself: because, if autonomous taxation applies to company expenses which, typically, involve the difficult separation between the business and personal spheres, being even susceptible to containing a remunerative component (particularly in the case of allowances or bonuses to directors), then, for purposes of facilitating taxation, and once the tax administration would not have the means to, in all cases, analyze the business character or lack thereof of the expense, the legislator instituted a presumption that opens the way for expenses to be, as a rule, taxable – unless proven otherwise, the burden being on the taxpayer taxed with the taxation, by a distribution of proof burden that falls on those in the best position to produce that proof.

(c) Moreover, the Claimant notes that, being involved are expenses which, although falling within the scope of autonomous taxation in CIT, are considered as deductible costs, thus contributing to the formation of taxable profit, nothing prevents the TA from, in turn, demonstrating that the general requirement of Article 23(1) of the CIT is not met, thus preventing the respective deduction.

The Claimant stresses that, by contrast, if the presumption were considered irrebuttable, this would affect constitutional principles such as those of tax equality and tax capacity.

And what the Claimant seeks is, precisely, to make proof of the "exclusively business" use of the vehicles in question in the present proceedings, use in the normal activity that is indispensable (without viable alternatives) for the maintenance of its income source and for the obtaining of revenues subject to tax, not constituting any form of assignment of private advantages to actual users, employees of the Claimant – thus rebutting what it considers to be merely a presumption established by the autonomous taxation provided for in Article 88 of the CIT.

The Claimant stresses that, having incurred in 2014 total charges with light passenger vehicles of € 2,386,124.00, with autonomous taxation of € 476,254.00, it came to request only the exclusion from the calculation of the total Autonomous Taxation amount of certain expenses with light passenger vehicles, in an amount of taxation of € 130,236.00 (corresponding to expenses in the total amount of € 849,216.98) – a fraction of the total, corresponding to service vehicles used exclusively in the activity of the various companies making up the tax scope subject to the RETGS, of which the Claimant was the parent company; excluding vehicles which are not, in the proceedings, the subject of challenge for purposes of calculating Autonomous Taxation, because the Claimant itself understands that such vehicles do not assume the business character necessary.

The Claimant emphasizes the fact that service vehicles are the subject of very rigorous fleet management and logistics management, with a "pooling" of vehicles excepting some individual assignments dictated only by pragmatic interests of agility and accountability, and with the signature, by each user, of a use agreement in which use of the vehicles for personal purposes is expressly prevented, except when duly authorized – being that such use was never authorized.

The Claimant derives from these premises the inference that, from the total of charges with light passenger vehicles incurred by the group subject to the RETGS headed by it in the taxation period of 2014, the charges related to exclusively service vehicles should be excluded from the scope of autonomous taxation, to the extent that their use had an exclusively business purpose.

4. On Indemnity Interest

(d) To the extent that it paid € 515,520.19 corresponding to the CIT self-assessment, and in correcting the amounts self-assessed calculated amounts to be reimbursed of € 5,950,636.00 (as financial charges) and € 130,236.00 (as autonomous taxation), the Claimant requests that the annulment of the assessment acts to the extent now contested give rise to the concomitant recognition of the right to indemnity interest, under the terms and for the purposes of Article 43(1) of the GTL.

5. Arguments

In its Arguments, the Claimant, resuming the arguments already presented in its request for arbitral pronouncement, summarizes in some points the essential part of its position:

• Illegality, by violation of norms and legal-tax principles, of the partial rejection of the Administrative Appeal.

• Violation of principles of certainty and legal security, constitutionally established, with the understanding of the non-deductibility of financial charges incurred and accumulated to the taxable profit of the tax years 2003 to 2013 with respect to equity interests still held on 31 December 2013.

• Violation of principles of protection of legitimate expectation and legal certainty, constitutionally established, with the non-existence of a transitional regime coupled to the repeal of the regime of Article 32 of the FBS.

• Legitimacy of the expectations relating to the holding company tax regime on which the Claimant's economic and financial decisions for accumulation, to taxable profit, of financial charges incurred with the acquisition of equity interests in the tax years 2003 to 2013 were based.

• Existence of a treasury disadvantage for a holding company that confronts the sudden repeal of a regime that translates into the impossibility of deducting from its taxable profit all financial charges actually incurred and for which there was the legitimate expectation of being deducted.

• Violation of the principles of tax capacity, real-income taxation, and equality and neutrality, by the frustration of the expectation of benefit of a special regime that was applicable and had as its counterpart conduct that the Claimant adopted (being that the generalization of the "participation exemption" regime does not "clean the past" of accumulation and non-deduction of charges on account of a counterpart that became impossible, which resulted in "latent negative effects" for companies in the group of the Claimant).

• Illegality of the restrictive interpretation of the content of Article 88 of the CIT as to autonomous taxation.

• Illegality of the interpretation that dispenses with inquiry into the "business character" of the incurred charges for purposes of application of the autonomous taxation regime.

• Existence of genuine "business character" of the presented charges and relating to vehicles of the Claimant, in the sense that such charges are indispensable for the maintenance of the income source and the obtaining of revenues subject to tax, under the terms of the applicable wording of Article 23 of the CIT, and also in the sense that such charges correspond to exclusively professional use.

• Right to indemnity interest.

In particular, the Claimant emphasizes that Article 146(1) of Law No. 64-B/2011, of 30 December, in restructuring Article 32 of the FBS, greatly reinforced reliance on the durability of the regime established, by removing the merely temporary character of the tax benefit provided for in that Article 32, thus removing the general rule regime of transitoriness provided for in Article 3(1) of the FBS – which, in the Claimant's view, was an encouragement to adopt the conduct provided for as a condition for attribution of the tax benefit, generating legitimate expectations capable of constitutional protection.

The Claimant further emphasizes the character of reciprocity between conduct of the taxpayer (accumulation, to taxable profit, of financial charges incurred with the acquisition of equity interests in successive years, understood as a constraint on the deductibility of capital losses and financial charges incurred) and attribution of the benefit of Article 32(2) of the FBS, established by the Constitutional Court Decision No. 42/2014 and by Circular No. 7/2004 of the CIT Service Directorate – a reciprocity embodied in the indication, by Circular No. 7/2004, that, at the moment of sale of the interests, all financial charges not considered as a cost in earlier years would be treated as a tax cost, in case it were concluded as to the inapplicability of the special regime of exemption of capital gains.

The Claimant insists that the repeal of the holding company tax regime by Law No. 83-C/2013 is materially equivalent to the situation described in Circular No. 7/2004, that one in which it would be concluded as to the impossibility of applying the regime provided for in Article 32 of the FBS – even conferring reinforced legitimacy to the taxpayer to the extent that it is an impossibility generated by the legislator's own initiative; which, in the Claimant's understanding, would have justified the solution found, in a very similar situation, by the Directive of the General Director of Taxes of 24 February 2011, regarding the adaptation of the CIT to the Accounting Standards System (Article 5 of Decree-Law No. 159/2009, of 13 July).

The Claimant concludes, as to that point, that the principle of protection of legitimate expectation is violated, by failure to take account of cumulative effort that was encouraged by the legal framework itself, in terms of reciprocity with a tax benefit whose permanence was also suggested by the legal framework. The Claimant understands that there is thus created a situation of "strong retroactivity", with sudden and unexpected injury to expectations as to the applicable legal framework, with relevant economic consequences (notably the circumstance that the claimant never altered its corporate purpose solely in order not to be excluded from the regime of Article 32 of the FBS – which means that acts had already been undertaken that placed the Claimant within the regime of Article 32(2) of the FBS, and that this substantiveness was disregarded).

Moreover, the fact that failure to take into account financial charges incurred and accumulated to the taxable profit of the tax years 2003 to 2013 with respect to equity interests still held on 31 December 2013 has a repercussion on the companies in the Claimant's group, which cease to be taxed on their actual profit and come to be taxed on profit not obtained, given the non-deduction undertaken in that interval with a view to application of a regime that ended up not occurring.

The fact that, effective 2014, a "participation exemption" regime came into force that does not discriminate between forms and corporate purposes as regards capital gains from equity interests of which they are holders means, in the Claimant's view, that holding companies which until 31 December 2013 have undertaken financially penalizing conduct on account of a reciprocity that, being imposed on them to achieve a benefit, nonetheless did not come to be materialized in that benefit. Being penalized, holding companies, violates the uniformity which, in the form of identity of criteria, must be respected by tax law.

The Claimant insists that, having calculated a taxable profit of € 21,331,384.37, it should be deducted from that profit the amount of € 21,747,813.74, resulting in the final calculation of the tax loss of € 416,429.37.

The Claimant resumes its arguments regarding autonomous taxation of charges with light passenger vehicles, arguing that it is based on a rebuttable presumption and does not aim at pure taxation of the expense, and that proof was made of the "business character" of the charges, thus rebutting the legal presumption.

And it also resumes the grounds for its request for indemnity interest.

6. Response to the Exception of Lack of Material Jurisdiction of the Arbitral Tribunal

Invoking the principle of contradiction and Articles 16(a) of the RJAT and 584(2) of the CPC (ex vi Article 29(1)(e) of the RJAT), the Claimant submitted, on 23 February 2018, a request in response to the invocation, in the Defendant's counter-arguments, of an exception of lack of material jurisdiction of the arbitral tribunal.

The Claimant begins by arguing that such invocation of an exception is untimely, because it should have been included in the Response submitted within the period of Article 17(1) of the RJAT, or been raised at most at the meeting referred to in Article 18(1)(b) of the RJAT – which was not done, appearing only in final arguments, which violates Article 573(1) of the CPC and Article 83(1)(c) of the Code of Administrative Court Procedure (CPTA) (both ex vi Article 29(1)(e) of the RJAT).

Without conceding on the timeliness issue, the Claimant recalls that the object of the proceeding is the illegality of assessment acts, which is why it is evidently not required of the arbitral tribunal more than a merely annulment result. But it also recalls that it is unnecessary for the tribunal to rule on the obligation to reimburse, as it results from the law as an effect of annulment (Article 100 of the GTL); and the same as to any other aspect regarding the execution phase of judgments.

III.B. Position of the Defendant

(a) In its response, the TA maintains the understanding that the contested assessments constitute a correct application of the Law, suffering from no vice.

1. On the Deductibility of Financial Charges Incurred with the Acquisition of Equity Interests and Added to Taxable Profit

The Defendant opposes the idea of the Claimant regarding deductibility, and actual deduction, reportable to the tax year 2014, of financial charges incurred from 2003 to 2013 by the controlled companies G..., SGPS and Z..., SGPS, incurred in financing from external entities whose destination was mainly the acquisition of equity interests, still held by these companies; more specifically, the idea of deducting from the taxable profit of the entities controlled by the Claimant, all financial charges incurred, in the 10 years prior to 2014, with the acquisition of equity interests, which under the repealed Article 32 of the FBS were accumulated.

The Defendant understands that such request by the Claimant does not have any support in the letter or spirit of the law.

First, because, as the Defendant points out, the repeal of Article 32 of the FB, and specifically the repeal of the regime exempting from taxation capital gains generated with the transmission of equity interests by holding companies, but also preventing these from deducting capital losses generated with those transmissions to taxable profit, was not accompanied by the creation of any specific regime that would succeed it – and the absence of a successor resulted from a conscious and intentional legislative choice.

Thus, between the 2003 Budget Law and the 2014 Budget Law there was in effect a regime which, exempting from taxation capital gains generated by holding companies with the alienation of equity interests, at the same time ensured tax collection by preventing the deduction of financial charges incurred for their acquisition, including financing – as clarified by Circular No. 7/2004 of the DSIRC.

The Defendant points out that the Claimant could not have been unaware of the rule established in point 6 of that Circular No. 7/2004, that "should it be concluded, at the time of sale of the interests, that not all requirements for application of that regime are met, in that tax year the financial charges not considered as a cost in earlier years shall be treated as a tax cost" – and that, therefore, entities benefiting from the regime provided for in Article 32 of the FBS, as it stood at the time of its repeal, should accumulate to taxable profit financial charges associated in the period in which these were incurred, in accordance with the rule of economic periodicity provided for in Article 18(1) of the Corporate Income Tax Code (CIRC).

The Defendant further recalls that, as some taxpayers understood that consideration of those financial charges should be reported to the tax year in which the equity interests (whose acquisition had been financed) were disposed of, the matter was submitted to the Constitutional Court, which in Decision No. 42/2014, of 9 January (Case No. 564/12) concluded that the accumulation of financial charges, in the period to which they themselves relate, did not constitute any violation of the constitutional principles of tax capacity or proportionality, instead assuming itself as an appropriate solution taking into consideration "special reasons of practicability and feasibility".

This, according to the Defendant, prevents the solution proposed by the Claimant, which is the deduction, for purposes of determining its taxable profit in the tax year 2014, of financial charges incurred by G..., SGPS and Z..., SGPS related to the acquisition of equity interests, which still appeared on the balance sheet on 31 December 2013 and which, in view of the repeal of the regime provided for in Article 32 of the FBS, were unable to benefit from that regime – based on the idea that the impossibility of application of the regime of Article 32 of the FBS would imply effects beyond its extinction, that is in the tax year 2014.

Because, in sum, in the Defendant's understanding, the financial charges provided for in Article 32 of the FBS, and for entities benefiting from it, necessarily had to be imputed to the economic period in which they are incurred.

On the other hand, the Defendant recalls that the Commission for Reform of Corporate Income Tax clearly explained the objective of repealing the special tax regime from which, between 2003 and 2013, holding companies benefited, indicating that "the adoption of the new 'participation exemption' regime has made redundant, from the Commission's perspective, various special tax regimes currently in existence", and that "since the new regime also consumes the tax regime provided for holding companies, and given that these failed to achieve the originally proposed objective of establishing themselves as a fiscally competitive vehicle on the international plane, it is proposed that Article 32 of the FBS be eliminated, further recommending that the legal regime of these entities be terminated" (this despite the repeal of Article 32 of the FBS having ended up being promoted by Law No. 83-C/2013, and not by Law No. 2/2014).

Thus, the Defendant argues that the tax year 2014 of the Claimant must be fully subject to the new "participation exemption" regime, with capital gains and capital losses resulting from the transmission of equity interests being subject to the regime of current Article 51-C, combined with the provision in Article 23-A, both of the CIRC, with financial charges incurred having to pass through the sieve of Article 67 of the CIRC, which serves as the general rule limiting the deductibility of financing costs.

On the other hand, the solution advocated by the Claimant would only be viable, according to the Defendant, if an express transitional regime existed – which the Claimant itself recognizes did not exist. Without that legal regime, it is not incumbent upon the TA to substitute itself for the legislator, in open violation of legality.

More serious, it would specifically collide with the structural principle provided for in Article 18 of the CIRC, relating to the economic periodicity of taxable profit, the possibility of complete, one-time regularization of all financial charges, which in the limit could relate to eleven periods of taxation (from 2003 to 2013), without even the temporal staggering that an express transitional regime would not fail to establish.

Given the possibility of tax fraud that insinuates itself in the possibility of delay between financial charges and realization of capital gains, the solution could not be, in the Defendant's understanding, other than that of periodicity – with few exceptions, but even those provided only in transitional regimes, incomparable to the regime of tax benefits that applied to holding companies.

In sum, summarizes the Defendant, if the legislator did not define any transitional regime in Law No. 83-C/2013, of 31 December, which repealed Article 32 of the FBS, nor in Law No. 2/2014, cannot such a regime be conceived and applied, whether by the TA or by taxpayers, under penalty of violation of the principle of legality.

On the other hand, the Defendant argues that the requests of the Claimant, of possible correction of non-deducted expenses in earlier years, in case on the date of disposal of equity interests the requirements for application of the special regime of exemption of capital gains were not met, is a regime that would only make sense within the special regime of holding companies, as defined in Article 32 of the FBS, and during its effectiveness, but certainly does not make sense with the repeal of that regime.

Moreover, the repeal of the special regime of holding companies does not confuse with any of the requirements enumerated in Circular No. 7/2004.

Thus, deduces the Defendant, there is no legal coverage for the Claimant's request, that the repeal of Article 32 of the FBS has as its automatic consequence the recapture of non-deducted financial charges and the respective deduction to the taxable profit of tax year 2014.

On the contrary, observes the Defendant, the Claimant seeks to invoke application of a regime based on the repeal of that same regime – as if that repeal were the fulfillment of a requirement for application of that same regime, and therefore as if that repeal had not taken place. Indeed, the Defendant recalls that Circular No. 7/2004 did not survive the repeal of Article 32 of the FBS, because the subject of that administrative instruction was exclusively the application of that norm.

The Defendant concludes that the Claimant seeks, after all, the production of effects identical to those of a declaration of unconstitutionality, as provided for in No. 1 of Article 282 of the Constitution, with respect to the repeal of Article 32 of the FBS. Its request recasts itself, therefore, to the filling of a gap – but, the Defendant recalls, it is not incumbent upon the Tax Administration, nor the Courts, to correct options of legislative policy, allowing the restoration of benefit regimes and the filling of gaps, contravening the express motivation of the CIT Reform Commission, creating transitional regimes that do not appear in the law.

The integration of tax law, allegedly sought by the Claimant, would run counter to the principles of certainty and legal security and equality among all citizens, as well as to the principle of legality, becoming materially unconstitutional by violation of the principle of tax legality, by violation of the principle of tax equality, by violation of the principle of the democratic Rule of Law, the reserve of tax law, and the separation of powers, with the consequent subjection of courts to law, under the terms of Articles 2, 103, 165, and 202 of the Constitution.

As to the alleged violation of the principle of equality, the Defendant points out the ambiguity of it appearing to be referred to both to the legislator and to the TA itself, being that in the case of the TA it is bound to legality and the application of norms, not their creation, modification or extinction – which would already always follow from the constitutional framework and the establishment of the principle of legality, but is expressly established in Article 14(1) of Decree-Law No. 117/2011, of 15 December.

Thus, infers the Defendant, the TA's decision to reject the deductibility to the taxable profit of 2014 of financial charges incurred by companies G... SGPS and Z... SGPS in the years 2003 to 2013 and not deducted to the taxable profits of those years, was not based on a reducing interpretation of the law but, rather, on the absolute non-existence of legal normative that enabled it to accept the requested deduction.

As to the violation of the principle of equality by the legislator, the Defendant finds it strange that it be associated with the repeal of a system of positive discrimination, which gave way to an equalization of regime among all CIT taxpayers – a measure that promotes, therefore, equality, ending a lack of justification for discrimination.

Moreover, the Defendant understands that with the 2014 Reform the legislator's intention was, within its freedom of decision, to avoid the creation of rules limiting the deductibility or recapture of financial charges, which would evidence there having been no intention to permit, within the framework of the new regime, the reintegration of expenditure with interest which, in earlier years, had been the subject of deduction or non-deduction.

On the other hand, the Defendant argues that the regime succeeding the repeal of Article 32 of the FBS, far from disadvantaging holding companies, in practice establishes for them (as for other companies) a more favorable regime than the previous one: this regime applicable to income derived from the holding of equity interests, established in Articles 51 and 51-C of the CIRC, although requiring the verification of certain conditions, subjects financial charges only to the general limitations on deductibility provided for in Articles 23, 23-A and 67 of the CIRC.

The Defendant further recalls that it was a question of repealing a tax benefit, and that a good understanding of what constitutes tax burden and relief should lead to the conclusion that what the legislator intended was to equalize CIT taxpayers, ending a situation of relief that had to have, in the overall accounting of tax receipts, its counterpart in support, in burden, implicit but effective, of non-benefiting taxpayers.

Additionally, the Defendant draws attention to the circumstance that the assessment challenged by the Claimant was limited to the question of the legal characterization to be given to the factual scenario alleged, without any assessment having been carried out aimed at verifying the truthfulness of the facts invoked, in particular regarding the values allegedly incurred and accumulated to taxable profit, in the tax years 2003 to 2013.

As to that factual question, the Defendant understands that proof of the facts invoked is not made, and that they differ from the values appearing in the periodic returns filed by the claimant itself, and which enjoy the presumption of truthfulness under Article 74 of the GTL.

That, alleges the Defendant (invoking doctrine and case law), is sufficient for inadmissibility of the arbitral request, by mere consequence of the rules of burden of proof.

In the Defendant's view, presenting itself with the invocation of there having been assessed