IRS Capital Gains Taxation and CGAA Anti-Avoidance Rule – CAAD Case 288/2014-T

ARBITRATION DECISION

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. Luís Máximo dos Santos and Dr. Marcolino Pisão Pedreiro, appointed by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on 02-06-2014, agree as follows:

1. Report

A, Tax Identification Number …, filed a request for the constitution of a collective arbitral tribunal, in accordance with 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 referred to only as RJAT), in which the TAX AUTHORITY AND CUSTOMS AUTHORITY is the Respondent.

The Claimant requests the declaration of illegality of the personal income tax (IRS) liquidation and compensatory interest assessment No. 2013 …, relating to the year 2009, in the amount of € 1,475,148.01, and compensation for costs incurred in providing guarantees to suspend fiscal execution proceedings.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD on 28-03-2014 and automatically notified to the Tax Authority and Customs Authority on 31-03-2014.

In accordance with the provisions of Article 6(1) and Article 11(1)(b) of RJAT, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the appointment within the applicable period, and notified the parties of such appointment on 16-05-2014.

Thus, in accordance with the provisions of Article 11(1)(c) of RJAT, the collective arbitral tribunal was constituted on 02-06-2014.

At a hearing on 29-09-2014, witness evidence was produced, and the proceedings continued with successive written submissions.

The Claimant presented submissions with the following conclusions:

A) The present arbitration action is based on the transformation of a limited liability company into a joint-stock company whose principal shareholder is the Claimant and the sale of his shareholding to a new company (SGPS).

B) As he proved through documents and witnesses, through these acts and legal transactions the Claimant: (i) on one hand, merely reorganized companies of which he was (and is) a shareholder, in order to adapt the company structure to its new scale, volume of business and internationalization strategy; on the other hand, (ii) simplified the possible entry of new strategic partners and reference investors into the company to cooperate in new projects, namely by facilitating the acquisition of company capital by third parties to pursue its commitment to the internationalization of the architectural firm.

C) Ignoring the reality of the facts and the evidence produced, the Tax Authority merely attempts to discern in all of this mere "steps" of some alleged "tax scheme" and determined the application of the CGAA.

D) The Tax Authority presents no facts and produces no evidence supporting its decision to apply the CGAA and merely seeks to read an alleged artificial character into acts and transactions whose economic rationale was properly demonstrated by the Claimant, and to insinuate alleged "evasive intentions" by the taxpayer.

E) Even more serious is that the Tax Authority not only fails to demonstrate which concrete tax rule or rules applicable at the time when the legal facts occurred (i.e., in 2009) would determine the taxation of the acts and legal transactions conducted by the Claimant, but—naturally—cannot even show which rules would embody the "unequivocal intention of the legislator" to tax these acts or transactions.

F) The reason for the Tax Authority's inability to prove this intention is simple: there was no unequivocal intention of the legislator to tax these acts or legal transactions!

G) And yet, the Tax Authority notified the Claimant of the tax act challenged here, the personal income tax and compensatory interest assessment, denominated "Personal Income Tax Liquidation Statement," relating to the year 2009, in the amount of € 1,475,148.01, by applying the CGAA, provided for in Article 38(2) of the General Tax Law.

H) The Claimant strongly disagrees with this additional assessment given that it is entirely illegal, in particular because the application of the CGAA is inadmissible in the case sub judice given that none of the necessary requirements are met.

I) The Claimant has proved and demonstrated, through documents and testimony from the witnesses he called, the valid economic and commercial reasons underlying the acts and legal transactions under analysis.

J) Indeed, the Claimant demonstrated how, since he began his activity as an architect approximately 20 years ago on an individual basis, he founded and developed his architectural firm which is today a reference at the national and international level.

K) Namely, the Claimant initiated roughly in the last decade a strategy of marked growth and international expansion, which required the ability to be in favorable conditions to receive strategic partners into his capital, and as a result of the lessons from failed business ventures in the past, this required transforming B into a joint-stock company.

L) The Claimant proved that in 2008 he negotiated the potential sale of a minority shareholding of the capital (i.e., approximately 25%) of then B to C.

M) However, C established as a "sine qua non condition" (as stated in the words of the director of that company) for the completion of the transaction the prior transformation of that company into a joint-stock company, since as holders of only a minority share they did not wish to be subject to the more rigid corporate regime governing the transfer of quotas and desired a different composition of corporate bodies.

N) The transaction fell through both because B needed to complete a series of steps to effect that transformation expeditiously and because of the deepening of the economic crisis, particularly in the real estate sector.

O) Moreover, the negotiations with C demonstrated the necessity to rapidly proceed with the transformation of B into a joint-stock company if the Claimant intended to attract strategic partners for the development of his architectural firm, which occurred subsequently in 2009.

P) Concomitantly, the commitment to the internationalization of the Claimant's architectural firm spurred the necessity to establish a multiplicity of companies in various jurisdictions and, therefore, it became necessary to restructure the now group D.

Q) To that end, the Claimant established a holding company (SGPS) that would hold all the shareholdings of the group and, obviously, also hold the participations in Portugal (e.g., B, S.A.).

R) For this reason the Claimant proceeded to transfer his shareholding in B, S.A. to E, SGPS, S.A., as well as transfer other shareholdings held in Portugal (e.g., F S.A.).

S) The sale of the shares of B, S.A. was effected at market values and the value was set at € 13,000,000.00 (thirteen million euros), in accordance with the valuation carried out by an independent entity (Bank G).

T) Furthermore, the Tax Authority itself never contested the price at which the Claimant sold the shares, nor does the Claimant have knowledge that it contested the price of any other sale of shares of B, S.A..

U) It should also be noted that, although for reasons not directly related to the Claimant, his partner at the time in B was involved in a troubled divorce process and, according to his indications, the transformation of the company into a joint-stock company and subsequent sale of the shareholding dispensed with the need for express authorization from the then wife of partner H.

V) Thus, the Claimant has abundantly proved the economic and commercial motivation underlying the transformation of the company in question from a limited liability company to a joint-stock company and successive sale of his shareholding.

W) This transformation and sale were aimed at reorganizing the company as well as adapting its new structure and scale, permitting the entry of new strategic partners, as well as allowing the establishment of a holding company to manage the various shareholdings in the companies of group D (existing and future).

X) Strictly speaking, it was exclusively a decision of proper management of the Claimant's shareholdings in various companies and organization of the group of companies, as is customary in the manner of structuring corporate groups in Portugal—a decision which the Tax Authority has no authority to evaluate as to its merit.

Y) To that extent, the Claimant merely limited himself to applying the rules in force at the time, namely (i) Article 43(6)(b) of the Personal Income Tax Code which provided that the acquisition date of the shares of B, S.A. "in the case of transformation of a limited liability company into a joint-stock company is the acquisition date of the quotas from which they originated" (i.e., 1996); and (ii) Article 10(2)(a) of the Personal Income Tax Code which excluded from taxation capital gains from the sale of shares held for more than 12 months.

Z) The relevant factual reality demonstrates that the requirements for application of the CGAA provided for in Article 38(2) of the General Tax Law are not met.

AA) First and foremost, it should be noted that for analysis of the (illegal) application of the CGAA it is entirely irrelevant the price at which the Claimant and other shareholders sold the shares of B, S.A., since:

a. The Tax Authority at no time contested the value attributed in the sale by the Claimant of the shares of B, S.A. to E, SGPS, S.A., when it could have done so if it so understood because fiscal legislation would permit it; and,

b. Because nothing about the price at which the shares were traded can lead to any conclusion regarding the economic rationale underlying the transformation into a joint-stock company or the sale of shares to a holding company.

BB) With regard to the requirements for application of the CGAA, doctrine and jurisprudence have understood that five elements stated in that rule must be cumulatively satisfied, namely the elements: (i) means, (ii) result, (iii) intellectual, (iv) normative and (v) sanctioning.

CC) These elements, which must be satisfied cumulatively, are not (correctly none of them) at all present in the case sub judice and, therefore, the CGAA is inapplicable in casu.

DD) Regarding the result element (i.e., the existence of a tax advantage from the means used when compared to that resulting from the taxation resulting from the practice of normal acts or legal transactions with equivalent economic effect), this is not considered verified because in casu the alleged "normal" act or legal transaction would not be a simple onerous transfer of quotas.

EE) The truth is that the transformation into a joint-stock company has its own economic and business rationale and is inserted into an internationalization strategy and, contrary to what the Tax Authority contends, does not have solely an instrumental character of alleged "tax evasion plan".

FF) But, even if it were concluded that a tax advantage existed, the fact of considering this element met by itself is entirely irrelevant to the application of the CGAA because it has been understood that "in no case, a tax advantage or benefit will by itself indicate any idea of legal abuse" (cf. Leite de Campos, Diogo and Costa Andrade, João, Autonomia Contratual e Direito Tributário, A. norma geral anti-elisão, Coimbra, Almedina, 2008, pp. 82).

GG) As for the means and intellectual elements, these are not at all satisfied, since the transformation of the company is a transaction inserted in a set of various other acts and transactions executed in the context of the actual business reorganization of group D.

HH) The Claimant proved profusely, in particular through documentary and witness evidence, the internationalization strategy pursued by his architectural firm and which led to the necessity of equipping the company with the capacity to receive new strategic investors and reorganize the structure of holdings of the multiplicity of companies established in different jurisdictions, and therefore the CGAA is inapplicable to the present case.

UU) And the Tax Authority in insisting in the present proceedings with the defense of the application of the CGAA perpetuates a gross error in the application of this rule, which, understood in the terms sought by the Tax Authority, can moreover raise doubts as to whether the same is contrary to various constitutional provisions.

VV) The attempts of the Tax Authority to contradict the doctrine and unanimous arbitral jurisprudence on the application of the CGAA to the case sub judice are destined to fail, in particular when it criticizes what is called an "alleged doctrine subscribed by Saldanha Sanches in a single paragraph of his book 'Limits to Tax Planning' and widely disseminated and elevated by CAAD" (our emphasis) (cf. Article 164 of the Tax Authority's Response).

WW) The Tax Authority thus fails grossly to understand that, without an "unequivocal intention to tax," it is inapplicable the possibility to (re)characterize the behavior of taxpayers and it is not sufficient merely to argue that such behavior has an evasive nature.

XX) And if there is no such unequivocal intention to tax, the CGAA cannot be applied.

YY) In casu, this unequivocal intention simply did not exist because the legislator expressly did not intend to tax the capital gains resulting from the sale of shares and, concomitantly, established that in cases of transformation of limited liability companies into joint-stock companies the seniority of shares was "the acquisition date of the quotas from which they originated."

ZZ) The truth is that the legislator (and the Tax Authority itself!) was fully aware that the sale of shares preceded by a transformation could obviously result in an exclusion from the incidence of capital gains...

AAA) For which reason it is concluded that the normative element is not met and it is said that jurisprudence itself admits that "even if the transformation [were] motivated by exclusively tax reasons," it is the legislator that opts, expressly, to tax the sale of quotas and to not tax the sale of shares in that context" (cf. Arbitration Decision rendered in Proc. No. 123/2012-T of 9 May 2013).

BBB) Therefore, even if it were concluded that the transformation would be motivated solely by tax reasons—which was demonstrated and proved above not to be the case—the application of the CGAA would still be illegal given the express and reiterated option of the legislator in not intending to tax this type of transactions.

CCC) And, demonstrated that the cumulative non-verification of the remaining elements for application of the CGAA, it is required to conclude that the sanctioning element is also not met because there cannot be application of the rule's provision when its requirements are not met, contrary to what the Tax Authority alleges (!).

DDD) In these terms, given that none of the legal requirements for application of the CGAA provided for in Article 38(2) of the General Tax Law are met—much less the cumulative satisfaction of all elements—in the present case, the act of additional personal income tax and compensatory interest assessment challenged is manifestly illegal due to violation of law.

KKK) Moreover, if one were to admit the CGAA as applicable to the case sub judice, the interpretation underlying that legal provision, by disregarding the relevance of the transactions effected by the Claimant within the scope of his freedom of management and organization of his shareholdings with a view to pursuing his profit-making purpose under that interpretation of Article 38(2) of the General Tax Law, the Tax Authority grossly violates basic principles of the so-called fiscal constitution.

FFF) Article 38(2) of the General Tax Law, interpreted in the case sub judice in a manner permitting the Tax Authority the unilateral recharacterization of acts and legal transactions of individuals in a sense contrary to that which they, in the legitimate exercise of their private autonomy, actually intended and carried out, as the Claimant demonstrated above, violates the principles of justice, legal certainty and good faith, embodied in Articles 2, 13, 61 and 62, 103 and 266 of the CRP.

GGG) Therefore, the act of additional personal income tax assessment which applied the rule of Article 38(2) of the General Tax Law and the respective interpretation of that rule adopted by the Tax Authority in the case sub judice should be annulled due to violation of law, namely due to violation of Articles 26, 61 and 62, 103 and 266 of the CRP.

HHH) It should also be noted that the application in casu of the CGAA would imply a gross violation of the statute of limitations for tax assessment.

III) Indeed, it was clearly established without any room for doubt as one of the requirements for opening the proper procedure provided for in Article 63(3) of the Tax Code of Procedure and Process (CPPT) at the time of the facts (2009) the condition that it "be opened within the period of three years".

JJJ) Doctrine is clear to the effect that the opening of the proper procedure for application of anti-abuse rules is "an administrative power whose statute of limitations is fixed (...) at three years" (cfr. SALDANHA SANCHES, Abuso de Direito em Matéria Fiscal: Natureza, Alcance e Limites, Ciência e Técnica Fiscal No. 398, Apr.-Jun. 2000, Centro de Estudos Fiscais, pp. 36).

KKK) Now, at the date of notification of the act of additional personal income tax and compensatory interest assessment now being challenged (i.e., 26 November 2013) more than three years had already elapsed since the transformation and sale of shares of B, S.A., which occurred on 5 and 22 December 2009, respectively.

LLL) And three years of the statute of limitations had already elapsed whether the counting is done from the "performance of the act or the celebration of the legal transaction subject to application of anti-abuse rules" or from "the beginning of the civil year following the year in which the legal transaction was performed" (cfr. versions of Article 63(3) of the CPPT).

MMM) It should be noted that the statute of limitations for tax assessment has, contrary to what the Tax Authority contended in court, substantive nature, given that the institute of statute of limitations is based on values of legal certainty and security, and, therefore, is operative as of the date of the tax fact, under the principle "tempus regit actum".

NNN) For which reason it is entirely irrelevant that, after the date on which the legal transactions were concluded (i.e., in 2009), that same statute of limitations period was later extended to four years.

OOO) To that extent, at the date of notification of the additional assessment in issue, the statute of limitations for tax assessment had already run and, thus, Article 63(3) of the CPPT in the version applicable at the date of occurrence of the tax facts in 2009 and Article 45(1), in fine of the General Tax Law would be flagrantly violated, and therefore that act should be annulled, with all due legal consequences.

PPP) The Tax Authority also violated the deadline for opening the proper procedure for application of the CGAA.

QQQ) Indeed the notification of the Draft Tax Inspection Report (cfr. doc. No. 17 already attached hereto) in which the application of the CGAA was proposed was only notified to the Claimant on 19 December 2012.

RRR) And, it is emphasized that, by that date more than three years had already elapsed since the date of the transformation of company B, Ltd. into a joint-stock company to which the CGAA intended to be applied, as it had occurred on 5 December 2009.

SSS) Therefore, the act of additional assessment is entirely illegal, due to violation of Article 63(3) of the CPPT in the version provided on the date of occurrence of the tax facts to which the CGAA intends to be applied, and therefore should be immediately annulled.

TTT) The assessment of compensatory interest, in the amount of € 176,176.84, to which the Claimant was subjected, is also by itself illegal because it would only be possible if it were considered that in the case sub judice the corrections were legal and, in particular, to admit that the tax in question is due, which we have already seen cannot be justified or have any legal basis.

UUU) Now, for responsibility for compensatory interest to exist it is necessary that there be: (i) adequate causal nexus between the action of the taxpayer and the delay in assessment; and, (ii) the conduct of the taxpayer be reprehensible, by way of intent or negligence.

VVV) It is evident from the present arbitration action that the Claimant merely limited himself to applying the tax treatment that resulted from the law and, more specifically, to subject to taxation capital gains that were excluded from taxation as expressly provided for in Article 10(2)(b) of the Personal Income Tax Code.

WWW) For which reason, it is in no way understood how any responsibility could be imputed to the Claimant by way of compensatory interest when he merely applied the law in force at the date of the transformation of a limited liability company into a joint-stock company and at the date of the sale of the respective shares!

XXX) Concluding, therefore, that the assessment of compensatory interest to which the Claimant was subjected is absolutely illegal, due to error regarding the factual and legal presuppositions of the imputation of responsibility for compensatory interest and, thus, such assessment suffers from the vice of violation of law, and therefore should be annulled.

YYY) As for the Tax Authority's request that the Claimant be "condemned to pay the arbitral costs resulting from the present request for arbitral decision" solely because he would not have "exercised the right of hearing in the administrative proceedings," it is important to state from the outset that the Tax Authority is in error because the Claimant "exercises" his "right of hearing in the administrative proceedings," since he presented the same on 18 January 2013 - cfr. doc. No. 18, attached hereto with the application.

ZZZ) For which reason it is entirely false that the Claimant did not exercise his right of prior hearing as is documentally proved in the Proceedings!

AAAA) To that extent, the Tax Authority should therefore be condemned to pay the full arbitral costs in the case of the present action being judged well-founded.

V. THE REQUEST

Therefore, we request Your Excellencies that, in light of the evidence produced and submissions now presented, this arbitration action should be judged well-founded, and as a consequence and in light of the legal rules cited above, should annul the tax and interest assessment in issue relating to the year 2009, in the amount of 1,475,148.01 EUR, and further condemn the Tax Authority to indemnify the Claimant for the costs he incurs in providing guarantees to suspend the respective fiscal execution proceedings, all with due legal consequences.

The Tax Authority and Customs Authority counter-alleged, concluding as follows:

A. The Claimant seeks to demonstrate, in the arbitration proceedings, that the corporate transformation carried out in the terms and manner described in the tax inspection report had an underlying economic rationale, sustained, in the Claimant's erroneous understanding, in the following points:

a. Necessity of corporate reorganization and restructuring in face of unprecedented economic growth;

b. Personal obstacles to the sale of the shareholdings of partner H;

c. Interest of third parties (C) in the purchase of shareholdings in B, Ltd.

B. However, as to point a, the Claimant pins himself down on this question and in the goal of developing the matter, without the same having relevance for the proper decision of the case, and enrolled three witnesses who on what the question concerns, merely came to make assertions about the necessity of reorganization and corporate restructuring of B in face of unprecedented economic growth, without, however, any of the witnesses having managed to establish even a minimum of causal nexus between their cogitations and the necessity of alteration of the corporate type of that company.

C. As to point b, a group of companies may be constituted in its entirety by limited liability companies, and therefore this argument does not appear plausible as a justification and demonstration of any economic rationale, which, it is said, would underlie that transformation.

D. And it is the third witness itself (I), after ample cogitations and considerations regarding the necessity of international expansion of B and the necessity of a Holding Company—SGPS—to anchor the companies that were going to be disseminated outside national territory, acknowledged to know that the transformation of B into a joint-stock company was not legally, nor rationally, a sine qua non condition for the holding by a SGPS and, consequently, a condition for its much-desired expansion.

E. As to point c, we have that, in the words of the second witness heard at the witness examination (J—representative of C), that transaction fell through essentially due to the "fall of the [September 2008] and with a radical change in crisis paradigm"

F. That is, it was not the impossibility of transformation of the company into a joint-stock company that precipitated the end of negotiations, but rather the crisis experienced as a result of the subprime crisis triggered in the United States.

G. Furthermore, the above witness, questioned whether the transformation into a joint-stock company was a sine qua non condition for C's interest in participating in B, stated, categorically that it was a mere preference (see point 61 of the learned submissions) and that "the acquisition of quotas was also considered in a possible acquisition," i.e., it was not essential, as it turned out, that the transformation of the company in question would occur so that C invested in the acquisition of "...all or part of the Architect A's studio."

H. For which reason the statements set forth in points 62 to 67 of the learned submissions are contradictory to the evidence produced at witness examination and in points M) to O) of the conclusions.

I. Regarding the alleged "ACTS OF A PERSONAL NATURE UNDERLYING THE SALE OF PARTNER H'S SHAREHOLDINGS," partner H was married under the supplementary regime of acquests property with M, since August 1990.

J. Now, in accordance with the legal regime provided for in Art. 1721, in Art. 1724(b) and in Art. 1725 of the Civil Code (CC), the quotas held by that partner constituted common property.

K. Thus, in accordance with Art. 1682 of the CC, the sale of movable property requires the consent of both spouses.

L. Therefore, regardless of the type of shareholding, quotas or shares—the sale of common property would always require the consent of the spouse, in which terms on this point and, moreover, as in all others, all and any arguments advanced by the Claimant are without merit.

M. The decision to apply the CGAA is legally founded by way of a memorandum from the Director General of the Tax Authority and Customs Authority which on 01-08-2013 authorized the application of the CGAA, as the requirements provided for in Article 38(2) of the General Tax Law and in Article 63 of the Tax Code of Procedure and Process were met and whose content is given as fully reproduced in the present arbitration proceedings.

N. Confronting the corporate transformation and the respective transfer of the shares, formerly quotas, without any economic rationale justifying it, with the impact in terms of taxation that the same might have in the legal sphere of the applicants, in particular having regard to the different treatment, in Personal Income Tax, of the sale of quotas or of shares, an in-depth analysis of the circumstances and characterizing elements of the said transaction was carried out, with a view to the possible verification of the requirements for application of anti-abuse rules.

O. The Claimant attempts to distort the present action by distorting the facts that prove essential to the correct framework and proper application of the CGAA, and therefore it is important from the outset to proceed with its correct factual framework.

P. Company B, Ltd., was held until 07-07-2009, by three partners, and thus, did not satisfy the legal conditions for being transformed into a joint-stock company, given the legal requirement of a number of partners not less than five.

Q. Thus, on 08-06-2009, partner N who held a quota of € 2,500.00, transfers, by virtue of quota division, € 200.00 of that quota to partners O and P, in equal shares (Cf. fls. 10 of Annex I of the RFI).

R. On 30-11-2009, by deliberation of the General Meeting of B, Ltd. the entry of the new partners was determined.

S. In this way, the company began to meet the minimum legal requirements, so as to be able to be transformed into a joint-stock company.

T. In light of all that has been set forth above, on 05-12-2009, only 4 (four) days after the deliberation of entry of the new partners, company B, Ltd. was transformed into a joint-stock company, it being verified, meanwhile, that on that very same day, 05-12-2009, the majority partner who exercised the functions of management, effected the acquisition of the capital shares from partners N, O and P, leaving the joint-stock company again with only two partners, namely, partners A and H, for a nominal value of € 1.00 per share (cf. fls. 20 et seq. of Annex I of the RFI).

U. It should further be noted that, on the days 21-12-2009 and 22-12-2009, the capital shares that those two partners held in company B, S.A., were sold, for totally disparate unit values, to company E SGPS, S.A., which had been established on the day 15-12-2009.

V. By that contract, A sells 56,250 shares for the total value of € 13,000,000.00, that is, the unit value of each share amounts to € 231.111.

W. That is, with a time gap of one (1) day the same shares were transacted for totally disparate values, without any justification, i.e.:

a. A - the unit value of € 231.111.

b. H - unit value of € 15.52

X. Moreover, shares of the same nature were also transacted about 15 days earlier.

Y. Indeed, on 05-12-2013, P, O and N, sell to A 100 shares, 100 shares and 2,300 shares, respectively, for the unit value of € 1.00, which they held in said company.

Z. Now, the disparity of values, the fact that only for the shares transacted by the Claimant for the value of € 231.111 there is a report justifying the value of the same, is indicative of the artificial and unexpected character of the transactions in question, which, per se, is sufficient to remove, or at least to call into question, any economic and commercial rationale to the acts and legal transactions in question.

AA. And let it not be said that this question does not contribute to the present arbitration instance, since that, as was referred to above, from that disparity of values it can be concluded that all the concatenation of acts and legal transactions underlying the present dispute was "...essentially and mainly directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or deferral in time of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to obtaining tax advantages that would not be achieved, wholly or partially, without the use of such means." cf. Article 38(2) of the General Tax Law

BB. Moreover, contrary to what the Claimant alleges, the witness evidence was neither elucidative nor unequivocal in demonstrating the supposed, yet non-existent, economic and commercial rationale underlying those acts and legal transactions.

CC. Indeed, questioned on the first witness (Q), this one was not conclusive as to the explanation of this disparity, in such a short time gap, and to the existence of a justifying report only and solely for the shares transacted by the now Claimant.

DD. Indeed, nor could it be conclusive, since he resorted to silence, stating only and solely "...not understanding the content of the question"

EE. With effect, the witness merely emitted mere allegations and suppositions relating to the international growth of B, without, however, managing to establish a causal nexus between that supposed growth and the necessity of alteration of the corporate type now being contended.

FF. That is, in the month of December 2009 a set of acts occurred, which led to the capital gains associated with the sale of those shareholdings not being taxed in the sphere of the respective partners.

GG. From an analysis of the reasons underlying the transformation of the limited liability company into a joint-stock company, no document is presented that justifies such transformation, but rather, as referred to in point B.1.4 of the present response, a Management Report signed by the majority partner and sole manager and now Claimant, A.

HH. Now, from reading this document it is possible to conclude that this transformation was totally unnecessary and unexpected given the fact that that report mentions that "In order to give expression and viability to what is set out, it is necessary in compliance with legal requirements to increase the number of partners to five".

II. The grounds set forth in that justifying report present no evidence whatsoever of business strategy, proving to be vague, nor do they identify or specify any concrete benefit.

JJ. That is, in summary, on the same day that company B, Ltd. was transformed into a joint-stock company, shareholdings were transacted that reduced the shareholding structure to two mere partners, i.e., A and H.

KK. And it is certain that none of the witnesses (Q, I and J) was able to produce evidence indicating even the minimum of rational and economic correspondence of the transaction in question, with the questions that were put forward.

LL. Concluding what has been said before, the witness evidence required was entirely useless for the proper decision of the proceedings.

MM. It has been substantively demonstrated throughout the proceedings that the operation of corporate transformation was merely instrumental to the decision to sell the shareholdings, whose only objective was to enable the Claimant to enjoy the exclusion of taxation of capital gains in Personal Income Tax contained in Article 10(2)(a) of the CIRS ex vi Article 43(4)(b) of the Personal Income Tax Code, both in the version in force at the date of the completion of the sale of the shares.

NN. Otherwise, it cannot be inferred, in any way, than in the sense that a simple sale of shareholdings was replaced by a sequence of legal transactions upstream, which resulted in the renomination of capital into shares, and the establishment of a company of which he was sole administrator, with the sole objective of enabling the shareholder, a natural person, to effect the transfer of his shareholdings, to a company created only 7 (seven) days before, and of which the seller was the sole administrator….

OO. Indeed, given the near simultaneity and the chronological sequence of the acts:

a. Of transformation of company B, Ltd. into a joint-stock company (deliberated on 30-11-2009 and registered by the [Registry Office] – cf. fls. 4 et seq. of Annex I of the RFI)

b. Of on 05-12-2009, by way of a time gap of only 4 (four) days after the aforementioned deliberation, the majority partner, who exercised the functions of management—and now Claimant—of B, S.A., having acquired the capital shares from partners N, O and P, leaving that joint-stock company again with only two partners, namely, partners A and H, for a nominal value of €1.00 per share (cf. fls. 20 et seq. of Annex I of the RFI).

c. Of the establishment on 15-12-2009, of company E, SGPS, S.A., (cf. pages 23 to 25 of Annex I of the RFI), whose partner, A, also majority partner and manager of company B, S.A., was designated as sole administrator. (cf. fls. 34 et seq. of Annex III of the RFI)

d. Of the purchase and sale of all the shareholdings of B, S.A, by the two sole partners, on 21-12-2009 and 22-12-2009, to E, SGPS, S.A., which were transacted for totally disparate values, without any justification, i.e.:

i. A - the unit value of € 231.111. (cf. fls. 2 et seq. of Annex I of the RFI)

ii. H - unit value of € 15.52 (cf. fls. 26 et seq. of Annex I of the RFI)

PP. As to the means element we have that the transactions object of analysis, are of an artificial nature and their use was determined essentially by tax reasons, in that:

a. The performance of the division and transfer of the sole quota with the entry of two new shareholders, permitted the fulfillment of the minimum requirements of partners, to effect the transformation of the company into a joint-stock company, and consequently the renomination of capital into shares, enabling the sale of the same, precluding their taxation in capital gains;

b. The discrepancy between the nominal value of the participation of the majority partner, A, which holds € 56,250.00 and the nominal value of the remaining participations;

c. Subsequently, and after the transformation operations, the Claimant, in a space of ten days, proceeded to the sale of almost all of his shares in company B, S.A., to E, SGPS, S.A., of which he was sole administrator and partner, benefiting from the regime of exclusion of taxation of capital gains;

d. The acts and legal transactions practiced immediately before the decision to sell the shareholding, took place, essentially, for tax reasons, that is, in order to make available financial resources to their holders, by virtue of the benefit of exclusion of taxation, since the sale of quotas would determine taxation in Personal Income Tax at the special rate of 10%.

QQ. In relation to the intellectual element, given the logical and chronological sequence in which the legal transactions in question were celebrated, the same allows it to be considered this set of transactions as a scheme conceived and executed as a means or tool for obtaining the avoidance of taxation with manifest abuse of the legal forms used.

RR. Indeed, the elements collected in the course of the Tax Inspection demonstrate, beyond any reasonable doubt, that in the present proceedings there is a preponderance of tax motivation over non-tax motivation, given the weakness of the arguments invoked by the Claimant.

SS. In truth, although the Claimant resorted to an expedient that is relatively simple and normal (i.e., transformation into a joint-stock company), it is certain that neither the reasons invoked for the transformation, nor any of the arguments alleged, but not proven, in the arbitration proceedings, can dispel the evidence that the Claimant had no other advantage, than the tax advantage.

TT. We can, therefore, confirm, the verification of the economic equivalence between the set of acts that preceded the operation of sale of capital shares and that which would have been carried out in the absence of these artificial means.

UU. Thus, the weakness of the arguments invoked, allied to the evident tax advantage, translated in the absence of taxation of the sale of shares, does not allow any other conclusion, in light of common sense and experience, than the effective fulfillment of the burden of proof that was incumbent on the Respondent and, consequently, the verification in the case at hand, of the intellectual element.

VV. As to the normative element, it is safe to affirm that the motivation of the legislator in the creation of such exclusion of taxation, grounded in Article 10(2)(b) of the Personal Income Tax Code (current Article 43(6)(b)), was not the arising of mere corporate transformation operations, purely formal and without material substance, which had as its objective a single advantage—purely tax—which was the exclusion of the payment of capital gains resulting from their sale.

WW. In a systematic and historical interpretation of the provision in question, we have that the exclusion, exceptional, of taxation of capital gains from the sale of shares held by its holder for more than 12 (twelve) months, was established with a view to encouraging capital markets, particularly the participation of small investors in the same.

XX. However, it was never regarded as a permanent rule, but only as a rule of a "provisional" character, with a well-defined goal, that is, to adjust the taxation of capital gains according to the objective of the financial market development and encouragement of small and medium investors policy.

YY. Arbitral jurisprudence centers obstinately on the normative element, regardless of the verification of the other elements of the CGAA, advocating that it will be legitimate for the taxpayer to opt for the less burdensome legal route, in a context of economic rationale, considering the allegedly abusive act as still constituting legitimate tax planning.

ZZ. To deny the application of the CGAA to a conduct not expressly prohibited by law, as has been argued time and again by CAAD, is an excessively restrictive interpretation of Article 38(2) of the General Tax Law which leads to a gap or a less clear provision permitting legal constructions violating the teleology of the rules in force, putting in question the purposes of the legal system as a whole, including the realization of constitutional principles.

AAA. With all due respect to the distinguished Professor and to the learned arbitral jurisprudence, to interpret the rule in the sense that is advocated in that doctrine and in that jurisprudence, and embraced by the Claimant, is nothing more than an abrogating interpretation disguised as a legislative impulse.

BBB. Indeed, the reasoning defended by Professor Doctor, and embraced in the arbitral jurisprudence cited by the claimant, would prevent any application of the CGAA, since, according to that understanding, either the conduct is expressly prohibited by law, or, in the cases of application of that clause, it would be sufficient for there to be a gap or a less clear provision, on which the taxpayer could engineer legal constructions in order to circumvent the teleology of the rule, as in casu.

CCC. Indeed, returning to the historical element underlying the creation of the rule, it is settled that the objective, for imposing the period set forth in Article 10 of the Personal Income Tax Code, was to prevent speculation on the stock market (with 12 months being the period that the rule considers reasonable to ensure that the objective is not that of speculation).

DDD) Thus, to admit that Article 43(4) of the Personal Income Tax Code embraces the type of transaction in question (transformation and sale in a short space of time) seems to us to result in permitted speculation.

EEE. The transaction concluded in no way meets the teleological element of the rule, its ratio legis, as has already been referred to, in that between the transformation of the company, in order to make use of the prerogative of Article 10(2)(b) of the Personal Income Tax Code in force at the date of the facts, and the sale to another entity, held by the seller himself, only 17 days elapsed, and therefore here one does not glimpse any development of the financial market, or the customary investment of the normal investor.

FFF. In synthesis, the reason for the existence of anti-abuse rules is founded in the necessity to establish appropriate means of reaction to ensure compliance with the principle of equality in the distribution of the tax burden and in the pursuit of satisfaction of the financial needs of the State and other public entities (in accordance with Article 103(1) of the CRP).

GGG. The teleology of Article 38(2) is clear: to sanction evasive behavior, therefore, behavior that is only apparently legal, that hides itself under artificial operations, to which no true economic reason underlies.

HHH. For which reason the taxpayer may choose the less burdensome forms of taxation as long as it has as the limit of its minimizing objective fraud on the law.

III. Which was manifestly not the case.

JJJ. Furthermore, it is not insignificant to recall that the rule provided for in Article 10(2) of the Personal Income Tax Code ended up being repealed, which is indicative of the intention of the legislator to react to the numerous abuses perpetrated on the basis of these alleged conscious gaps in taxation.

KKK. It is indisputable that in this understanding/interpretation that has been embraced in the arbitral proceedings in the decisions cited by the Claimant the interpretation conveyed shows itself contrary to the Constitution, violating the principles of contributory capacity, equality and fiscal neutrality, and therefore cannot, in consonance, CAAD refuse, in casu, the application of the CGAA on the basis of such reasoning.

LLL. In the situation at hand, this artificial form of exclusion exists which was achieved by assigning to the acts a form different from the substance.

MMM. Being that, it is demonstrated that the transformation into a joint-stock company brought with it none of the reasons invoked in the Management Report, proposed by the Claimant himself—as majority partner and manager of the company in question—nor were the facts alleged in the arbitration proceedings demonstrated.

NNN. It is, therefore, patent the non-conformity of the result obtained with the ratio legis, the spirit and/or purpose of the law, the principles of taxation of income and the tax system in general.

OOO. In light of all that has been set forth above, as to this element, there are no doubts that the same is verified in the case sub judice, in that both the Constitution and tax law presuppose taxation according to contributory capacity, even when that taxation bears on tax facts, in principle excluded, such as the result of the sale of shareholdings.

PPP. The result element consists of the tax advantage achieved through the activity of the taxpayer, which in the case under examination and given the factual and chronological course described above, Point B – Of the Facts, the Claimant achieved, through the transformation of the company and subsequent sale—only 17 (seventeen) days after the transformation—an exclusion of taxation of the capital gain realized, taking advantage of the provisions of Article 10(2)(a) of the Personal Income Tax Code and Article 43(4)(b) of the Personal Income Tax Code, both in force at the date of the facts, when it was already public knowledge that this latter rule would be repealed, as it would be through Law No. 15/2010, of 26 July.

QQQ. Thus, if the taxpayer executed the transaction that could or should be executed, within the more rationally and logically economical business planning, that is, the maintenance of the legal regime of the company transformed, the transfer of quotas, would be subject, in its capital gain, to the special rate of 10% set forth in Article 72(4) of the Personal Income Tax Code (and without regard here to Article 43(4)(b) of the same code), since the participation sold refers to a company that on a date close prior to the end of non-taxation, was transformed from a limited liability company into a joint-stock company.

RRR. As emerges from the facts related, it was intended, simply, to transfer the shareholdings of the company in question, except that without the use of artificial means, the quotas of the company would be transferred, which would determine taxation in Personal Income Tax at the special rate of 10% in the sphere of the individual partner, and with the use of artificial means, which had as its fundamental objective to obtain an elimination of taxes, shares were transferred, having obtained a capital gain income excluded from taxation

SSS. To accept this transformation as legitimate would mean the subversion of the principle of legality, fiscal neutrality and equality—of contributory capacity, since taxation would cease to be materially just, in that there would be manifestations of non-taxed contributory capacity, producing effects not intended by the legal order.

TTT. Finally, as to the sanctioning element, this consists of the disregard of the tax effects of the contract of purchase and sale of shares celebrated by the Claimant, in the capacity of seller, and instead taxation of the legal transaction considered usual to obtain the economic effect in question, cf. provided for in Article 38(2) of the General Tax Law.

UUU. In light of what has been set forth, as to these operations, and in accordance with the provisions of Article 38(2) of the General Tax Law, the Tax Authority, substantively and correctly, proceeded to annul the values declared in Annex G1 and to the correction in Annex G—Onerous sale of shareholdings and other securities—in the income tax return, Form 3, of Personal Income Tax relating to the year 2009.

VVV. Having regard to the provisions of Article 72(4) of the Personal Income Tax Code, the positive balance between capital gains and losses, in the amount of € 12,943,750.00, is taxed at the special rate of 10%, and therefore an increase in Personal Income Tax is proposed in the amount of €1,294,375.00.

WWW. Thus, the taxpayer obtained a patrimonial advantage of € 1,294,375.00 derived from the non-taxation in the sphere of capital gains.

XXX. First and foremost, it is not foreseen how the application of the provision in abuse can violate Article 2 of the CRP which essentially determines that the Portuguese Republic is a democratic rule of law state.

YYY. As to Article 13 of the CRP (Principle of Equality), it is false that the Tax Authority has never applied the CGAA since 1999 in cases of transformations of limited liability companies into joint-stock companies, and the provision in question is applied whenever, as in the situation at hand, the occurrence of "acts or legal transactions essentially or mainly directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or deferral in time of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to obtaining tax advantages that would not be achieved, wholly or partially, without use of such means, with taxation then effected in accordance with the applicable rules in their absence and the said tax advantages not being produced," is considered and demonstrated to have occurred.

ZZZ. As to Article 26 of the CRP (Other personal rights), the Claimant does not demonstrate how the application of the CGAA can violate his rights to "personal identity, to development of personality, to civil capacity, to citizenship, to good name and reputation, to image, to word, to privacy of private and family life," as some form of "discrimination" or offense to "human dignity" or "information relating to persons and families," or yet to "personal dignity and genetic identity of the human being, namely in the creation, development and use of technologies and in scientific experimentation," or that any "deprivation of citizenship" or "restrictions to civil capacity" has occurred, in particular by "political reasons," it not being understood what the Claimant alleges.

AAAA. As to Articles 61 and 62 of the CRP, it is also judged that the Claimant has made an error in alleging their violation, since Article 61 is relating to "Private, cooperative and self-management initiative," and Article 62 of the "Right to private property," with no causal nexus existing between what is provided therein and the application of the CGAA of Article 38(2) of the General Tax Law.

BBBB. As to Article 103, as is demonstrated in the present Response, not only is the CGAA provided for in the Law, but its application was made in compliance with what is provided for in the General Tax Law, in the Tax Code of Procedure and Process and in the Constitution itself, and therefore no violation of this rule occurred.

CCCC. Finally, as to Article 266, it should be noted that the Tax Authority acted precisely with a view to "pursuit of the public interest," and "in respect of the rights and legally protected interests of citizens," since it is required, given its legally defined competencies under Article 2 of Decree-Law No. 118/2011, of 15 December.

DDDD. The subtle attempt of the Claimant to convey the idea that, the relevant moment for the beginning of the period for application of the proper procedure for application of the CGAA provided for in Article 38(2) of the General Tax Law, was the date of the celebration of the transactions is clear.

EEEE. However, and contrary to what the Claimant said in Article 132 of the arbitration request, the version of Article 63(3) at the time of the facts provided that the procedure could be opened within the period of three years counted from the beginning of the civil year following the year in which the legal transaction subject to the anti-abuse provisions was performed (Version of Law No. 64-A/2008, of 31 December)

FFFF. In accordance with Article 12(3) of the General Tax Law, Article 63(3) of the Tax Code of Procedure and Process does not have substantive nature. It is a procedural rule that determines the period for opening the proper procedure for application of the anti-abuse provision provided for in Article 38(2) of the General Tax Law

GGGG. Having the procedure for application of the anti-abuse provision begun after the entry into force of Law No. 64-B/2011, of 30 December, and being the version conferred by that legislation to Article 63 of the Tax Code of Procedure and Process that was in force at the date, and given its applicability, the period of 4 years provided for in Article 45 of the General Tax Law should be considered applicable.

HHHH. The same conclusion was reached in the arbitration decision rendered in proceeding No. 124/2012-TCAAD, as, contrary to what the Claimant refers, the Arbitration Award cited (as well as the Arbitration Award No. 123/2012-T) has relevance, since in it/them is determined not only the "procedural nature" and not substantive of Article 63 of the Tax Code of Procedure and Process, and, as well, what law applies for the determination of the period for opening the procedure for application of the CGAA, in situations in which between the date of performance of the facts and the beginning of the procedure there is more than one applicable version with respect to the mentioned period.

IIII. The allegation of the Claimant regarding the reduction of the statute of limitations period of the right to assessment to three years, lacks any sense or legal support.

JJJJ. And, as to this particular, it is important to stress again that:

• Even if one were to consider the version in force when the facts occurred (which is herein examined without conceding), the starting term for the beginning of the procedure would, contrary to what the Claimant refers, always be counted from the beginning of the civil year following the year in which the legal transaction was performed, without that affecting the normal statute of limitations period of 4 years provided for in Article 45 of the General Tax Law;

• The version of Article 63 of the Tax Code of Procedure and Process in force on the date of opening of the procedure, which is the one actually applicable to the situation at hand, no longer provided any period for the beginning of such procedure, and therefore [even in the logic of the Claimant—to which no credence is given—that understands that the statute of limitations period of the right to assessment will be that which results from Article 63 of the Tax Code of Procedure and Process], this would always be that of 4 years provided for in Article 45 of the General Tax Law;

• In any case, Article 45 of the General Tax Law at the time of the facts, already provided that the statute of limitations period of the right to assessment was 4 years, and therefore the Claimant's understanding is contested to the effect that this period is reduced to the 3 years provided for in Article 63(3) of the Tax Code of Procedure and Process, since such exception is not contained in the Law.

KKKK. Thus, if the date of notification of the act of additional Personal Income Tax and compensatory interest assessment now being challenged occurred on 26 November 2013, it is easily inferred that no statute of limitations of the right to assessment occurs, since that right would only be extinguished on 31.12.2013.

LLLL. Contrary to what the Claimant refers, no statute of limitations of the opening of the proper procedure for application of anti-abuse provisions occurred.

MMMM. As to the moment in which the Claimant became aware of the proper procedure for application of the general anti-abuse clause, this, as has been referred to, does not coincide with the notification of the Draft Tax Inspection Report, which only came to occur on 25.09.2013.

NNNN. They are, in fact, temporally distinct moments, since the Draft application of the general anti-abuse clause was notified personally to the Claimant on 19.12.2012, and this is the qualification that was intended to be made in the Response.

OOOO. For which reason, from what is set forth, it is easily inferred that the Claimant became aware of the procedure in question, on 19.12.2012

PPPP. Falling away, his allegation relating to the statute of limitations of the procedure for application of the CGAA provided for in Article 38(2) of the General Tax Law, since, even if one were to consider the version of Article 63(3) of the Tax Code of Procedure and Process applicable in the year 2009 (which is herein examined without conceding), the Claimant manifestly became aware of the procedure in question before the 3 years that are provided therein, and which, in casu, as was referred to, would only end on 31.12.2012.

QQQQ. It should further be noted that the Claimant cites Counselor Jorge Lopes de Sousa in Article 184 of the Arbitration Request, thereby seeking to ground his theory that the period of 3 years applicable for the beginning of the procedure for application of the CGAA would be counted from the performance of the act or celebration of the legal transaction, however, as the same refers, the citation in question is contained in the Code of Procedure and Tax Process Annotated, Volume I, 5th Edition, that is, of the year 2006.

RRRR. Now, if the Claimant had verified what was mentioned in that same annotation to Article 63, regarding the version in force (at least) at the time of the facts, he would have concluded that his thesis could never succeed, neither as to the version of the rule at the date of the transformation of the company and the sale of the shares, nor as to the starting term of the period for opening the proper procedure.

SSSS. For which reason, it is reiterated:

• Even if one were to consider the version in force when the facts occurred (which is herein examined without conceding), the starting term, contrary to what the Claimant refers, would always be counted from the beginning of the civil year following the year in which the legal transaction was performed, and therefore by this route neither would the statute of limitations of the procedure have occurred, since he himself acknowledges that he became aware of the same on 19.12.2012.

• The version of Article 63 of the Tax Code of Procedure and Process in force on the date of opening of the procedure, which is the one actually applicable to the situation at hand, no longer provided any period for the beginning of such procedure, and therefore the statute of limitations period of the procedure in question, would always be that of 4 years provided for in Article 45 of the General Tax Law, since the procedure would be aimed at the exercise of the Tax Authority's right to assessment.

• Being the proper procedure timely, whether one considers the version of Article 63(3) of the Tax Code of Procedure and Process at the time of the facts, or one considers such version on the date of the beginning of the said procedure.

TTTT. For which reason, also by this route, no vice of violation of law is verified, and the respondent should therefore have the proceeding dismissed.

UUUU. From Document 1 presented by the Claimant, pages 2 and 3, it results that the duty of substantiation of the assessment of compensatory interest is shown to be fulfilled.

VVVV. The Claimant, by not exercising the right of hearing in the administrative proceedings, allowed the decision to apply the CGAA to project itself into his legal sphere.

WWWW. Thus, responsibility for costs cannot be attributed to the Respondent, which only in the arbitration proceedings was confronted with arguments which, according to the allegations of the applicants, could, if demonstrated, lead to the decision of non-application of the CGAA.

XXXX. Consequently, the Claimant should be condemned to pay the arbitral costs resulting from the present request for arbitral decision, in accordance with Article 527(1) of the New Code of Civil Procedure ex vi Article 29(1)(e) of RJAT, in line, moreover, with a similar question decided under proceeding No. 72/2013-T, which took place in this arbitration center.

In these terms and in all other respects of the law, and with the most erudite supplementation of Your Excellencies:

The present request for arbitral decision should be judged without merit as unproven, and consequently the Respondent should be absolved of all requests, all with the proper and legal consequences.

The Arbitral Tribunal was duly constituted and is competent.

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

The proceeding does not suffer from nullities and no exceptions have been raised nor is there any obstacle to the examination of the merits of the case

2. Factual Matters

2.1. Proven Facts

The following facts are considered proved:

a) Company B, S.A., Tax Identification Number … (hereinafter B) was established on 11-07-1996, as a limited liability company, with the following partners and respective quotas:

[Partners and quotas table with redactions]

b) The management was at the date exercised by the majority partner, and now Claimant, A;

c) The purpose of the company consisted of the provision of services and elaboration of studies and projects of architecture, design and urbanism;

d) A capital increase of B was effected, on 15-11-2006, in the amount of € 2,500.00, with the entry of partner N (Tax Identification Number …), thus the company capital became € 65,000.00;

e) On 08-07-2009, partner N, who held a quota of € 2,500.00, divided his quota and transferred € 200.00 thereof to O and P, in equal shares, leaving that former partner with a quota of € 2,300.00;

f) The price of the transfer of quotas was the respective nominal value, in accordance with minutes No. 32 of the General Meeting of the day 22-11-2009;

g) On 16-11-2009, the report identified in the above title was prepared in order to comply with the provisions of Article 99(6) and Article 132(3) of the Commercial Companies Code (CSC), in which is referred, among other things, the following:

"The limited liability company, as a type of organizational model of the corporate legal structure, still retains a personalist characteristic in the framework of capital companies. Now, the joint-stock company already encloses a purely capitalist aspect, more suited to the structure of a company, such as B which is intended in continued development, by way, namely, of the concentration of management powers in the administrative body.

We thus find it useful and opportune, considering the activity exercised by our company, the modification of its legal structure, transforming the Company into a joint-stock company, with all the advantages and responsibilities that such transformation entails.

To give expression and viability to what is set out, it is necessary, in compliance with legal requirements, to increase the number of partners to five.";

h) The above Management Report was submitted for approval to the General Meeting by the majority partner and sole manager A, having the remaining partners (H and N) dispensed with the examination of the "Justifying Report of the Transformation of the Company" by an external Certified Public Accountant to the company (cf. minutes No. 32 of the General Meeting;

i) On 30-11-2009, by deliberation of the General Meeting of B, Ltd., the entry of the new partners was determined, the company coming to meet the minimum legal requirements, in order to be able to be transformed into a joint-stock company;

j) With the transfer of the above quotas, company B, Ltd. came to be held by the following partners and respective quotas:

[Partners and quotas table with redactions]

k) On 05-12-2009, the transformation of the limited liability company into a joint-stock company was effected, the company coming to be designated "B, S.A.";

l) The number of shares of B, S.A. amounts to 65,000 with a nominal value of €1.00, their nature being nominative or bearer;

m) A was designated as sole administrator of B, S.A.;

n) It was deliberated in the said minutes No. 32, the conversion of the quotas of the partners into an equivalent number of shares with a nominal value of € 1.00 each;

o) On 05-12-2009, on the same day of the transformation of the company, a contract for the purchase and sale of shares was celebrated between A (purchaser), P (seller), O (seller) and N (seller), having as its object the capital shares of company B, S.A.,;

p) As a result of said contract, P, O and N, sell to A 100 shares, 100 shares and 2,300 shares, respectively, for the unit value of € 1.00, which they held in said company, the company coming to have the partners A and H, in the following terms:

[Shareholders and shares table]

q) Pursuant to the fourth clause of said contract, the sellers delivered to the purchaser the certificates with numbers 3, 4 and 5, representative, respectively, of shares numbers 62,501 to 64,800, 64,801 to 64,900, and 64,901 to 65,000;

r) Company E SGPS, S.A., Tax Identification Number …, was established on 15-12-2009, having as its purpose the management of shareholdings of other companies, as an indirect form of exercise of economic activities;

s) The share capital of E SGPS, S.A. was at the date composed of € 50,000.00 and constituted by 10,000 shares, with a nominal value of € 5.00, the nature of the shares being nominative or bearer and reciprocally convertible;

t) The partner of E SGPS, S.A., A, was designated as sole administrator;

u) On the day 21-12-2009, H, sold the 6,250 shares he held in company B, S.A., to company E SGPS, S.A. for the value of € 97,000.00, that is, for the unit value of € 15.52,

v) On 22-12-2009, a contract for the purchase and sale of the shares of company B, S.A., was celebrated between A and company E SGPS, S.A.;

w) By said contract, A sells 56,250 shares for the total value of € 13,000,000.00, that is, the unit value of each share amounts to € 231.111;

x) By point 3 of clause two of the contract celebrated between A and E SGPS, S.A., the price of the shares was determined based on the independent valuation report prepared by Bank G;

y) For the same shares, transacted on the day immediately preceding, between H and E SGPS, S.A., no valuation is referred to;

z) In the course of 2008, a reputed company of the real estate market, C, contacted the Claimant in order to discuss the possibility of coming to acquire a shareholding in company B which was still a limited liability company (document No. 14 attached with the request for arbitral decision, whose content is given as reproduced, and testimony of witness J)

aa) C intended to acquire approximately 25% of the share capital of B and its entry into the share capital of the company would allow obtaining the necessary financing for the expansion of the company and launching of new projects (document No. 14 attached with the request for arbitral decision, whose content is given as reproduced, and testimony of witness J);

bb) C established as a condition for the acquisition of share capital the transformation of B into the type of joint-stock company (document No. 14 attached with the request for arbitral decision, whose content is given as reproduced, and testimony of witness J);

cc) The sale of shares of company B had as its objective to reorganize the manner of holding of the shareholdings of the Claimant and to realize his intention to group the set of shareholdings in a company specifically dedicated to their management (testimony of witness Q);

dd) Before the reorganization referred to, B was a company in growth, which had rapid success and had projects to internationalize and open its capital to third parties;

ee) The Claimant understood that the form of joint-stock company was more advantageous in international terms, for being a model of company generalizedly known;

ff) B acquired a company in Brazil and associated itself with companies locally, in Algeria and Equatorial Guinea;

gg) The presence of the company abroad afforded it an advantage in relation to foreign companies that did not have local representations (testimony of witness I);

hh) Presently approximately 70% of the activity of B is developed abroad, while in 2009 the percentage was approximately 30% (testimony of witness I)

ii) After 2009, through E, SGPS, S.A., the internationalization projects and launching of new projects were realized, through the establishment of new companies held by that company dedicated to projects in the area of architecture in Algeria, Colombia, Equatorial Guinea and China, among others (cf. document No. 6, attached with the request for arbitral decision, whose content is given as reproduced, and testimony of witnesses Q and I);

jj) Presently E, SGPS, S.A. holds directly or indirectly 17 companies (testimony of witness I);

kk) In his income tax return, Form 3 of Personal Income Tax, relating to the year 2009, the Claimant declared the capital gain as not subject to taxation given that, in his understanding, it fell excluded from taxation in accordance with the provisions of Article 10(2)(a) of the Personal Income Tax Code;

ll) The capital gain determined, not taxed, was realized in the sale of company "B, S.A." (Tax Identification Number …), by A, to company E, SGPS, S.A., (Tax Identification Number …), of 56,250 shares for the value of € 13,000,000.00, corresponding to the amount of € 231.111 per share;

mm) In compliance with internal order No. OI…, an internal inspection was effected to taxpayer A, Tax Identification Number …;

nn) Said internal procedure aimed to ascertain the compliance with tax obligations of A, with respect to the fiscal year 2009, with special focus on the inspection control of the operations of sale of shareholdings;

oo) In the course of the inspection procedure and of the analysis effected, the Tax Authority and Customs Authority understood that evidence was ascertained of legal transactions essentially or mainly directed by artificial means and with abuse of legal forms, with the objective of the reduction of taxes that would be due without the use of such means, which constitute grounds for proceeding with the application of the legal anti-abuse rule provided for in Article 38(2) of the General Tax Law;

pp) The Claimant exercised the right of hearing on a proposed application of the general anti-abuse clause;

qq) By memorandum of the Director General of the Tax Authority and Customs Authority of 01-08-2013, the application of the procedure of anti-abuse rule, referred to in Article 63 of the Code of Procedure and Tax Process, was authorized;

rr) As a result of the inspection, the Final Report was prepared which is contained in the administrative file ("PA1.pdf", whose content is given as fully reproduced, which contains, among other things, the following:

V - ASSESSMENT OF THE CONCRETE CASE

As Gustavo Lopes Courinha refers, the elements in which the general anti-abuse clause is decomposed are in number of five, corresponding four of them to the requirements of application of the general anti-abuse clause and one to the respective implementation of the rule, namely:

"- The form used - means element;

• The tax advantage and economic equivalence obtained - result element;

• The motivation of the taxpayer - intellectual element;

• The normative-systemic disapproval of the advantage obtained - normative element;

• The effectuation of the clause - sanctioning element"

Now, from the evaluation of all the elements that were made known to the procedure it is possible, in coupling with the elements or conditions referred to, to identify:

1. Means Element

In accordance with the provisions of Article 38(2) of the General Tax Law, acts or legal transactions were used that were "...essentially or mainly directed...to the reduction, elimination or deferral in time of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose...".

The means element corresponds to the route chosen by the taxpayer to obtain the desired fiscal gain or advantage, i.e. the act(s) or legal transaction(s) celebrated whose structure is determined according to a given fiscal result.

Thus, as to the means element, the entry of two new partners was verified through the subdivision of a single quota, which permitted the fulfillment of the minimum requirements of partners, in order to be able to modify the corporate type, transformation of limited liability company into joint-stock company, in accordance with the provisions of Article 273 of the Commercial Companies Code.

Thus, the necessary number of partners was obtained to reach that minimum limit, having the same subscribed, each one, only a quota in the value of € 100.00.

Subsequently, and after the transformation operations, the taxpayer, in a space of ten days, proceeded to the sale of almost all of his shares in company B, S.A., benefiting from the regime of exclusion of taxation of the capital gains obtained, in accordance with Article 10(2)(b) of the Personal Income Tax Code, contrary to the transfer of quotas subject to taxation in accordance with Article 10(2)(b) of the Personal Income Tax Code.

1. Result Element

In accordance with Article 38(2) of the General Tax Law, the acts or legal transactions "anomalous" should be "essentially or mainly directed...to the reduction, elimination or deferral in time of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to obtaining tax advantages that would not be achieved, wholly or partially, without use of such means."

The operations realized which materialized in the transformation of the limited liability company into a joint-stock company, permitted the sale of shares held for more than 12 months, with the exclusion of taxation operating in the sphere of capital gains, by virtue of the provisions of Article 43(6)(b) of the Personal Income Tax Code: "The acquisition date of the shares resulting from the transformation of the limited liability company into a joint-stock company is the acquisition date of the quotas from which they originated". Thus, as to the economic result, the shares which had a nominal value of € 56,250.00 underwent a valuation which provided to its holder, a capital gain in the amount of € 12,943,750.00 (13,000,000.00 - 56,250.00). This valuation resulted from an independent valuation report prepared by Bank G, as is referred to in point three of clause two of the contract of purchase and sale of shares, drawn up on 22-12-2009. See page 3 of Annex I.

If the transaction had been celebrated without the preceding transformation of the company, the economic result achieved would have been the same, simply quotas would have been sold subject to taxation.

If the transformation of the company into a joint-stock company had not been realized, the partner would proceed to the sale of quotas which would determine taxation in Personal Income Tax, at the special rate of 10% - Article 72(4) of the Personal Income Tax Code.

Concluding, there does not exist an equivalent tax burden in the two hypotheses: the route which the taxpayer followed eliminated the tax burden entirely, maintaining the desired economic effects.

1. Intellectual Element

Still in accordance with Article 38(2) of the General Tax Law, the acts or legal transactions must have been "...essentially or mainly directed...".

In accordance with the rule transcribed, it is required that the choice and form adopted by the taxpayer be fiscally directed (tax driven) to the obtaining of the tax advantage.

Thus, it will be demonstrated below that the choice of the form, made by the taxpayer, was motivated by tax reasons, that is, only the tax reasons explain the option followed by the taxpayer.

The operation of transformation of the limited liability company into a joint-stock company, immediately before the decision of the sale of the shares of the taxpayer, permitted the making available of financial resources to the holder of the capital, supressing the tax burden, pointing to the impracticality of the actual alteration of the organizational structure that the company underwent with its transformation into a joint-stock company.

Observe the space of time elapsed between the operation of division and transfer of the single quota and the transformation of the company and the said transformation and the sale of the shares. Also observe the fact that partner A, on the very day the transformation took place, effected the acquisition of the capital shares from the partners that permitted the transformation of the limited liability company into a joint-stock company.

The corporate reorganization realized does not appear to reveal any intention of restructuring of the company, namely, at the market level, nor a strengthening in terms of competition, since the holder of majority capital proceeded to its sale immediately after its transformation.

The preparation of the justifying report, effected in accordance with Article 132 of the Commercial Companies Code, should contain the economic, commercial, and organizational reasons that justify the transformation.

From an analysis of the Management Report, see page 19 of Annex I, one of the reasons invoked is "In order to give expression and viability to what is set out, it is necessary in compliance with legal requirements, to increase the number of partners to five," with no document being verified that supports the reasons underlying the transformation of the company.

We also have that said report was signed by the majority partner, having been dispensed with the preparation thereof by a Certified Public Accountant.

The sale of all of the shareholding in the space of 10 days, does not appear to sustain the indispensability of the transformation of the company into a joint-stock company, namely for economic, commercial, organizational reasons or resizing, factors normally associated with the realization of this type of operations that could require a more complex structure that would imply an enlargement or diversification of the economic activity.

1. Normative Element

In accordance with Article 38(2) of the General Tax Law:

"...by artificial or fraudulent means and with abuse of legal forms..."

To this element underlies the non-conformity of the result obtained with the ratio legis, the spirit or purpose of the law, the principles of the Code in question or of the Tax System.

In sum, it is a matter of, in an exercise of reflection, demonstrating that, despite the letter of the law permitting that the act or transaction realized provides the desired fiscal effects, the intention of the law and/or of the Law rejects its obtainment, and as such, the result obtained.

Also as to this element, there are no doubts that the same is verified in the case under analysis, since the transformation of the company is motivated by the fiscal benefit inherent to the exclusion of taxation of the capital gains resulting from the transfer of shares, since the shareholder benefited from the exemption, provided for in Article 10(2)(a) of the Personal Income Tax Code.

The transactions object of analysis, are of an artificial nature and their use was determined essentially by tax reasons, in that:

a) The performance of the division and transfer of the single quota with the entry of two new shareholders, permitted the fulfillment of the minimum requirements of partners, to effect the transformation of the company into a joint-stock company, and consequently the redenomination of capital into shares, enabling the sale of the same, precluding their taxation in capital gains;

b) The discrepancy between the nominal value of the participation of the majority partner, A, which holds € 56,250.00 and the nominal value of the remaining participations;

c) Subsequently, and after the transformation operations, the taxpayer, in a space of ten days, proceeded to the sale of almost all of his shares in company B, S.A., to E, SGPS, S.A., of which he was sole administrator and partner, benefiting from the regime of exclusion of taxation of capital gains;

d) The acts and legal transactions practiced immediately before the decision of the sale of the shareholding, took place, essentially, for tax reasons, that is, in order to make available financial resources to their holders, by virtue of the benefit of exclusion of taxation, since the sale of quotas would determine taxation in Personal Income Tax at the special rate of 10%.

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