CAAD 296/2017-T: IRS Anti-Abuse Clause (Art. 38/2 LGT) on SGPS Dividend Distribution

ARBITRAL DECISION

The arbitrators Maria Fernanda Maçãs (arbitrator-president), José Rodrigo de Castro and Américo Brás Carlos (arbitrator members), appointed pursuant to article 6, no. 2, subparagraph b), and article 11, no. 6, of the Legal Regime for Arbitration in Tax Matters (LRAT), approved by Decree-Law no. 10/2011, of 20 January, hereby agree as follows:

ARBITRAL DECISION

1. Report

The company A…, SA, with tax identification number…, and registered office at Street…, no.…, …, …-… Loures, filed a petition for arbitral decision pursuant to subparagraph a) of no. 1 of article 2 and article 3 of the LRAT, requesting the declaration of illegality and consequent annulment of the following withholding tax assessments on personal income tax (IRS):

in the total amount of 787,780.92 Euros, with the Tax Authority and Customs Authority (TA) being cited as respondent.

In summary, company A…, SA (Petitioner) argues that said contested assessments are vitiated by illegality, based on:

• Lack of notification of the decision applying the general anti-abuse clause for the purpose of prior hearing to B… (hereinafter, B…) and C… (hereinafter, C…), as alleged beneficiaries of the tax advantages.

• Improper application of the general anti-abuse clause and consequent violation of law due to error in the material and legal premises, by virtue of the non-cumulative verification of the elements - means, result, intellectual, and normative - contained in no. 2 of article 38 of the General Tax Code (LGT);

• Inapplicability to the Petitioner, as a tax substitute, of the disregard of tax effects resulting from the application of the general anti-abuse clause.

The petition for constitution of the arbitral tribunal was accepted by the President of CAAD and followed its normal proceedings, namely with notification to the TA. All arbitrators communicated their acceptance within the applicable period. The parties manifested no wish to challenge the appointment of the arbitrators.

The tribunal was constituted on 11/7/2017, and pursuant to no. 2 of article 21 of the LRAT, the period for delivery of the arbitral decision was extended by two months.

The Respondent argues for the dismissal of the petition because, in summary, by virtue of no. 2 of article 38 of the LGT, the constitution and maintenance of the Holding Companies for Share Ownership, D…– SGPS, S.A., and E…- SGPS, S.A., held by brothers B… and C…, at the time the sole shareholders of the Petitioner, must be disregarded for tax purposes.

According to the Respondent, the creation and maintenance of such SGPS allowed B… and C…, through the instrumentalization of these holding companies as mere vehicles, to obtain tax advantages related to concealing the distribution of dividends from the Petitioner company (actual transaction) subject to withholding at source pursuant to article 5, no. 2, subparagraph h) of the Personal Income Tax Code (CIRS), under the appearance of payments of the price of shares alienated by them (apparent transaction) excluded from taxation under personal income tax.

With no further evidence to be produced and no issues raised as exceptions, the meeting provided for in article 18 of the LRAT was dispensed with.

Written submissions were presented by the Parties, the Respondent limiting itself to referring to the inspection report and response.

The arbitral tribunal was properly constituted and materially competent.

The parties have legal capacity and personality, are legitimate parties, and are properly represented.

The process is not vitiated by nullities and there is no obstacle to the examination of the merits of the case.

1. Statement of Facts

2.1. Proven Facts

The following facts relevant to the decision are considered proven:

a) The Petitioner's corporate object is "frozen food industry and commerce" and is covered by the general regime of Corporate Income Tax (IRC), with its taxable profit determined pursuant to no. 1 of article 17 of the Corporate Income Tax Code (CIRC).

b) In 2001, B… and C… held, respectively, 49% and 51% of the capital of the Petitioner and were its administrators.

c) In December 2001, A… was subject to an appraisal by an Authorized Auditor (ROC) firm, which set its global value between € 16,465,986.63 and € 16,919,084.20;

d) In 2001, B… alienated his participation in the Petitioner to company F…, SGPS, which he constituted, and repurchased the same shares in 2003 for €7,619,137.87.

e) In 2001, C… alienated his participation in the Petitioner to company G…, SGPS, which he constituted, and repurchased the same shares in 2003 for €8,105,465.83.

f) The capital gains resulting from the sale and repurchase of said shares were not, at the time, subject to taxation for any of the entities involved, by virtue of article 10, no. 2 of the CIRS and article 31 of the Tax Benefits Statute (EBF), then in force.

g) At the beginning of 2004, B… and C… held, respectively, 49% and 51% of the capital of the Petitioner and were, and continued to be, its administrators.

h) In 2004, B… constituted D…, SGPS, SA to whom he sold 47% of the capital of the Petitioner for €7,619,137.87 (the same value for which he repurchased the shares from F…, SGPS), retaining 2% of the capital of the Petitioner in his personal sphere; and C… constituted E…, SGPS, SA, to whom he sold 50% of the capital of the Petitioner for €8,105,465.83 (the same value for which he repurchased the shares from G…, SGPS), retaining 1% of the capital of the Petitioner in his personal sphere.

i) In the purchase and sale contracts indicated in the preceding subparagraph, in addition to their quality as sellers, B… and C… also participated as representatives, respectively, of D…, SGPS and E…, SGPS, in their capacity as sole administrators thereof.

j) The purchasers D…, SGPS and E…, SGPS did not make their respective payments of the price of shares of the Petitioner at the time of signing the contracts, as contractually provided, generating debts in these companies equal to the amounts of the acquisition prices, owed to the sellers, respectively, B… and C….

l) The debt of D…, SGPS to B… was amortized over the years and was € 5,354,271.87 at the beginning of 2012 and € 4,709,271.87 at the beginning of 2013; and the debt of E…, SGPS to C…, after some amortization over the years, was € 5,791,733.26 at the beginning of 2012 and € 5,096,733.26 at the beginning of 2013 and 2014.

j) During the fiscal years 2004 to 2013, the companies D…-SGPS and E…-SGPS held no other share participations, other than the shares of the Petitioner which they acquired, respectively, from B… and C….

k) B… and C… held domain and control, respectively, of D…-SGPS and E…-SGPS, with 99.9925% of the share capital, being in 2012 and 2013 their sole administrators, cumulatively with the exercise of administrative functions, pursuant to a written contract.

l) From 2004 to 2010, the Petitioner did not distribute dividends to its shareholders, whether to the SGPS or to individual shareholders, having nevertheless obtained accumulated profits in the amount of €7,617,085.16, which, added to those of previous years, totaled €12,524,020.38.

m) Company A… during the years 2004 to 2013 made payments of gratuities to its administrators – B… and C…- and to staff, as follows:

[Table of gratuities to administrators and staff from 2004-2013]

n) Regarding each of the fiscal years 2011 and 2012, € 1,000,000.00 of dividends were distributed; and regarding fiscal year 2013, dividends in the amount of € 1,650,000.00 were distributed.

o) The distribution of said dividends resulted from resolutions in general shareholders' meetings of the Petitioner, with B… and C… present, and despite the constitution of D…-SGPS and E…-SGPS, it was recorded in the respective minutes that these shareholders represented the totality of the capital.

p) Throughout the fiscal years 2004 to 2013, it was verified that the income recorded by D…-SGPS and E…-SGPS were the dividends distributed by the Petitioner in 2011, 2012 and 2013, and the income related to the provision of technical administration and management services provided by these holding companies to the Petitioner company.

q) On 1 September 2004, a service provision contract was entered into between company D…-SGPS represented in that act by its sole administrator, B…, and the Petitioner company, represented by its administrators C… and B…, whereby that holding company "undertakes to provide technical administration and management services" to the Petitioner.

r) Also on 1 September 2004, company E…-SGPS entered into a service provision contract, in terms similar to that entered into between company D…-SGPS and the Petitioner company, whereby E…-SGPS, represented by its sole Administrator, C…, undertakes "to provide technical administration and management services" to the Petitioner, represented by its administrators C… and B….

s) It was reported by D…-SGPS that the "provisions of technical administration and management services" contracted "had special prominence in the level of intervention of administrators in the level of strategic planning and business expansion of A….

t) In both contracts, the payment of quarterly counterperformances was established, which were invoiced by each of these companies (D… and E…) to the Petitioner company, in the amount of €68,100.00 plus VAT at the legal rate in force, with the value updated according to clause 4 of said contracts.

u) In the fiscal years 2004 to 2011, regarding staff expenses, neither D…-SGPS nor E…, SGPS had collaborators, declaring only expenses with their corporate bodies.

v) In 2012, D…-SGPS hired the following workers: I…, J…, and K…, all with family connections to the majority shareholder B….

w) In 2012, E…-SGPS hired L…, daughter of its majority shareholder and sole administrator C….

x) On 19.09.2013, company E…-SGPS acquired 47% of the capital of the Petitioner from D…-SGPS for €6,714,285.71 and 2% from B… for €285,714.29, coming to hold 99% of the capital of the Petitioner company.

y) From 2004 to 2013, the Petitioner had the following history of revenues/business volume:

[Table of annual revenues from 2004-2013]

z) From 2004 to 2013, the Petitioner had the following history of Net Results and Distributed Profits:

[Table of net results and distributed profits from 2004-2013]

aa) For the exercise of the right to prior hearing regarding the contested assessments, only the Petitioner was notified and not its shareholders B… and C….

bb) The application of no. 2 of article 38 of the LGT was previously authorized pursuant to no. 7 of article 63 of the Code of Tax Procedure and Process (CPPT).

2.2. Unproven Facts

There are no facts with relevance to the examination of the merits of the case that were not proven.

2.3. Justification for the Determination of Facts

The proven facts were based on critical appraisal of the procedural position assumed by each of the parties, as well as critical analysis of the documents presented and official information joined to the process, whose authenticity and truthfulness were not contested by any of the parties.

1. MATTER OF LAW

REGARDING THE ILLEGALITY OF THE ASSESSMENTS

In the case at hand, the personal income tax assessments nos. 2016…, of the year 2012, in the amount of € 282,150.41 and 2016…, of the year 2013, in the amount of € 505,630.51, are being challenged, the legality of which is contested based on the following grounds:

• Lack of notification of the decision applying the General Anti-Abuse Clause (GAAC);

• Improper application of the GAAC and consequent violation of law, due to error in material and legal premises; and

• Inapplicability to the Petitioner, as a tax substitute, of the disregard of tax effects resulting from the application of the GAAC.

3.1-b. Improper Application of the GAAC and Consequent Violation of Law, Due to Error in Material and Legal Premises.

The central question raised focuses on whether or not the prerequisites for applying the GAAC are met, which must be assessed first.

The Petitioner argues that the assessment made is vitiated by illegality due to improper application of the GAAC and consequent violation of law due to error in the premises.

To this end, it invokes that the GAAC, the application of which is provided for in no. 2 of article 38 of the LGT, "depends on the verification of four cumulative requirements, which if verified allow the respective establishment of the norm, the sanctionary element, and which Gustavo Lopes Courinha, in the cited work identifies as the means element, the result element, the intellectual element and the normative element, uniformly adopted by jurisprudence as the 'tests' to which the respective application must be submitted: if one of them fails, the anti-abuse norm is not capable of being applied."

And the Petitioner elaborates on each of the referred requirements, emphasizing that, in its understanding, no means qualified as artificial or fraudulent and with abuse of legal forms were used, since this will only exist "if the reality of the facts is masked, to achieve subjection of its situation to a more favorable tax provision."

The Respondent understands that "it makes no sense for the existence of these (D… and E…) SGPS without any added value, without workers and without investments, loans or any contribution to company A…, S.A. except supposed administration services, by the administrators of A…, S.A. who are already remunerated in A… for this service, that is, for being administrators."

It further states that "To fall within the cited normative provision, it is necessary that the 'structure' sub judice had as its determining purpose to avoid the taxation that would be due in the case of an act of equivalent economic substance."

And further that "Legitimate tax planning, that is, acting intra legem in its entirety aimed at tax savings objectives, does not constitute prohibited behavior under law, but abusive tax planning does, constituting its combating the reason for enactment of the GAAC."

And that "Evasive practices frequently take advantage of gaps in the law or deficiently formulated legal provisions, but it also frequently happens that they serve the letter of the law for purposes different from those the legislator had in mind."

And the TA reinforces its thesis with the conclusion that "it is safe to affirm that the legislator did not have in mind to allow the practice of a set of acts that resulted in a requalification of payment of a debt artificially created by the shareholders with the company they controlled into dividends."

Thus, assessing:

First, it is important to cite the norm of article 38, no. 2, of the LGT:

"Acts or legal transactions that are essentially or mainly directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to obtaining tax advantages that would not be achieved, wholly or partially, without the use of such means, are ineffective within the tax sphere, and taxation shall then be applied with the norms applicable in their absence and the referred tax advantages shall not be produced."

As is apparent, the present norm is composed of two distinct parts, the first relating to the requirements for application of the GAAC and the second relating to the consequences of application of said clause.

As for the first part of the norm, four conditions can be distinguished in it, namely:

a) That there has been a conclusion of acts or legal transactions;

b) That as a result of the same there has been a fiscal gain (reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose or to the obtaining of tax advantages that would not be achieved, wholly or partially, without the use of such means);

c) That the conclusion of the same occurred with the intent that is essential or main to obtain such gain; and

d) That said acts or legal transactions were concluded by artificial means and with abuse of legal forms.

The referred requirements have a cumulative nature and make it possible to assess – as if it were a test – the verification of an activity that can be characterized as abusive tax planning.

This analysis, as Gustavo Lopes Courinha writes, cannot be viewed in a sealed manner: "the fixation of one element may, in practice, depend on another", wherefore these "will frequently not cease to assist, mutually."

It is emphasized that, in accordance with the provision of article 74, no. 1, of the LGT, the Tax Administration always bears the burden of proving the facts constituting the right it invokes. It therefore falls upon it, not only the burden of alleging, but also of demonstrating the verification of the said requirements.

Indeed, in light of the provision of article 63, no. 3 of the CPPT, it further follows that the mentioned requirements or elements must be contained in the Draft and Decision applying the GAAC.

It therefore falls to evaluate whether the TA complied with the aforementioned legal provisions, that is, the burden of alleging and demonstrating the verification of the mentioned requirements.

1. Means Element – which corresponds to the requirement mentioned in the previous subparagraph a) and relates to the path freely chosen by the taxpayer to obtain the sought gain or tax advantage, such path coinciding with the practice of acts or legal transactions – isolated or as parts of a structure of sequential, logical and planned acts or legal transactions, organized in a unitary manner.

In the case of the present proceedings, there is no chain of legal transactions that would permit resort to the so-called "step-by-step transaction doctrine."

There are acts or legal transactions that ultimately lead to a certain "temporal deferral of taxes," but there is no temporal sequence of acts or transactions, given that there is a large interval of time between the various acts or transactions that occurred.

Consider, therefore, the chain of acts or legal transactions performed during the period referred to by the TA as elusive:

1st – In 2000, B… and C…, were shareholders of A…, SA, each holding, respectively, 49% and 51% of its share capital, in the amount of € 153,846.00 and € 169,639.00.

2nd – In December 2001, A… was subject to an appraisal by an Authorized Auditor firm, which set its global value between € 16,465,986.63 and € 16,919,084.20;

3rd – Still in 2001, shareholders B… and C…, alienated their participations in A… to SGPS F… and G…, with start of activity on 31/12/2000;

These alienations were made by said shareholders, respectively, for € 7,619,137.87 and € 8,105,465.83, to the said F… and G…, having been, as mentioned above, the respective acquisition value, respectively, of € 153,846.00 and € 169,639.00.

These alienations did not generate taxation of the capital gains obtained in the person of the shareholders, as they benefited from the exclusion provided in the former article 10, no. 2 of the CIRS – onerous alienation of shares held for a period exceeding 12 months, according to the TA.

According to the Petitioner, the realized capital gains were not subject to taxation because, approximately 70% benefited from tax exclusion, as they had been acquired before 1989 (Transitional regime provided in article 5 of Decree-Law no. 442-A/88, of 30/11) and the remaining 30%, those indeed, for being held for a period exceeding 12 months (article 10, no. 2 of the CIRS).

4th – Shareholders B… and C… reacquired for the same value, in 2003, from companies F… and G…, the shares previously alienated to these SGPS;

5th – In 2004, shareholder B… alienated to the newly constituted company D…, SGPS, part of his shares held in A… for the value of his prior acquisition from SGPS F…, of € 7,619,137.87, and shareholder C… alienated part of his shares held in A… to E…, SGPS, for the value at which he had reacquired them from G…, SGPS, of € 8,105,465.83.

D…, SGPS was constituted with share capital of € 200,000,000.00, being held to 99.9925% by shareholder B…, coming to hold 47% of the share capital of A… and shareholder B… with 2%.

E…, SGPS was constituted in 2004, also with share capital of € 200,000,000.00, being held by shareholder C…, coming to hold 50% of the share capital of A… and shareholder C… with 1%.

6th – These companies became debtors to their shareholders, respectively, of € 7,480,945.46 and € 7,967,273.42, debts which the SGPS amortized over the years of at least 2004 to 2012 and 2004 to 2013, respectively.

It is notable that it was in 2001 that shareholders C… and B… alienated the participations they held in A… to SGPS F… and G….

And that, still in 2001, A… proceeded to reappraise its assets, resulting in an appreciation of the respective shares, as noted in the facts established in the proceedings.

In 2003, the same shareholders C… and B…, reacquired their shares from SGPS F… and G… for values much higher than the sale price, due to the appreciation of A… in 2001.

In 2004, the same shareholders proceeded to alienate, respectively, 50% and 47% of their participations to SGPS E… and D…, which generated capital gains excluded from taxation, as they had been held for more than one year.

7th – During the years 2004 to 2010, A… did not distribute dividends to its shareholders, whether to SGPS or to individual shareholders, having, however, obtained accumulated profits in said period in the amount of € 7,617,085.16, which added to those of previous years totaled € 12,524,020.38, which could have been distributed.

8th – During the years 2011 to 2013, the following profits were obtained and dividends were distributed to its shareholders, as follows:

[Table of results and dividends distributed]

9th – A…, during the years 2004 to 2013, made payments of gratuities to its administrators and staff.

The TA alleges that the acts or transactions referred to above, namely the creation of the 4 SGPS referred to, and particularly the creation of companies D… and E…, were the means used for abusive purposes, since these are static companies, there were no economic reasons for their constitution.

It further alleges that they were instrumental to the shareholders to obtain tax advantages, in a logic of tax planning and used as "mere vehicles" to conceal the distribution of dividends from A…, over 2004 to 2013, under the "guise of payment of the price of shares, with exclusion from personal income tax."

First, the corporate form chosen, having as its object the holding of shares or participations, is legitimate, even if only a financial participation is held.

Moreover, technical administration and management services were provided by said companies to A…, as noted in the information contained in annual statements and simplified business information, itemized as showing annual amounts from 2004 onwards totaling € 2,804,400.00 for each of D… and E….

And, in the years 2004 to 2010, inclusive, A… could have distributed dividends, given its accumulated profits of € 12,524,020.38 and did not do so.

Also, as to the payment of the debt resulting from the purchase of shares by said SGPS, this only resulted from the fact that A… was subject to an appraisal in 2001, by an Authorized Auditor firm, three years before the constitution of these companies, at a date, therefore, that it is not legitimate to suppose that SGPS D… and E… would come to be created.

It is not demonstrated that the sale of shares was carried out at a price that indicates an attempt to transfer capital gains to the SGPS.

It does not appear, therefore, that the facts or legal transactions practiced, in view of the reasons invoked and given their temporal misalignment, were a means used for abusive purposes of tax evasion or aggressive tax fraud.

Terms in which the intellectual element is also not shown to be verified.

As to the Result Element – it should be understood that with the obtaining of the tax advantage, following from the means element, an advantage that should be assessed by considering the tax burden that would have occurred had the acts or legal transactions of equivalent economic effect been practiced and not liable to generate application of the general anti-abuse clause.

Comparing, thus, the tax burden resulting from the acts or legal transactions practiced, with what would have resulted in the absence of the same, it is seen that, regarding the years 2004 to 2010, as there was no distribution of dividends by A… to its shareholders, in one way or another there would not, during this long period of seven years, be any taxation, despite the existence at the end of 2010 of accumulated profits of € 12,524,020.38, which could have reached the partners of D… and E… without any taxation.

It makes no sense that the TA would say that were it not for the payment of the debt to shareholders B… and C… by SGPS D… and E…, the latter would have received dividends, since these SGPS did not receive them during this period of 2004 to 2010 from A….

Even if, due to the application of the GAAC, the acts or legal transactions practiced were disregarded, nothing would result in different taxation between 2004 and 2010.

Indeed, it would even result in less tax, since payments of gratuities paid to shareholder-administrators C… and B…, between 2004 and 2010 and to workers, reach the amount, respectively, of € 511,000.00 and € 489,150.00, subject to taxation in personal income tax, by mandatory aggregation, as well as payments of the same nature, between 2011 and 2013, in the amount respectively of € 62,400.00 and € 409,050.00.

And it would also cease to charge corporate income tax for the provision of services by SGPS D… and E… to A…, in those years 2004 to 2013, in the amount, respectively, of € 2,804,400.00 and € 2,834,400.00, with € 990,000.00 and € 1,020,000 having been made in the years 2011 to 2013.

Only from 2011 onwards did A… distribute dividends to SGPS D… and E…, in the total amount of € 3,650,000.00, thus distributed over three years, (1,000,000.00 + 1,000,000.00 + 1,650,000.00), where there was no taxation, as they benefited from the regime of elimination of economic double taxation and, consequently, from exemption of withholding at source, by virtue of article 32 of the EBF, which was in force until the entry into force of the 2014 State Budget. Also by article 51 of the CIRC these companies benefited from the exemption, as of 2011.

Thus, there having been no distribution of dividends by A… between 2004 and 2010 – when there could have been – it cannot be concluded that from the aforementioned acts or legal transactions, tax advantages were obtained superior to those that would have resulted had the referred SGPS not been constituted.

Had the TA initiated its inspection action in 2011 or even 2012, it could not have concluded, in any way, that acts or legal transactions detrimental to the State had been practiced, having as their main objective or one of its objectives the reduction of taxes to be paid.

If thus would it be in these years, why should it be concluded differently in 2016, regarding 2012 and 2013, more than 8 years after the constitution of the SGPS in question, D… and E….

It is not plausible that one having intention of aggressive tax planning would proceed to create SGPS to not immediately receive the "said advantages." Rather they would wait to obtain advantages 8 or 9 years later, when business circumstances and life circumstances change today at great speed, including tax legislation (an entirely uncontrollable factor).

3 – As to the Intellectual Element – which is considered fulfilled when the choice of means is "essentially or mainly directed to the reduction, elimination or temporal deferral of taxes" or to obtaining tax advantages (article 38, no. 2 of the LGT), the following is to be stated.

This element, beyond requiring verification of a more advantageous tax treatment, requires that the taxpayer intended that "an act, a transaction or a particular structure," was conceived and created, "only or mainly, because of the prevailing tax advantages it provides."

That is, it is important that the means used was chosen with the main purpose of "reduction, elimination or temporal deferral of taxes," since only operations in which the objective of tax savings is the principal objective should be regarded as elusive.

Hence the demonstration of this objective constitutes difficult proof and, in certain cases impossible, due to the difficulties inherent in the subjective aspect, especially since certain motivations may have relevance in more than a single respect.

We are in the domain of intentions and, therefore, it is not easy and, at times even impossible, to demonstrate the psychological and emotional state of the agents, when performing the acts or legal transactions practiced.

Therefore, only objective motivation of the facts concretely apprehensible should be relevant, having regard to the objective conception referred to in article 63 of the CPPT, taking into account objective, factual elements, from which the inference regarding the taxpayer's intention can be drawn.

In this regard, the Petitioner argues that "if the transaction had been mainly directed to obtaining a tax advantage, then, instead, they would have been remunerated as the TA claims 'under the guise of payments of the price of shares' without any taxation, which did not happen, and evidences the non-existence of elusive intentions imputed to the shareholders."

And further states that "if the SGPS had been constituted as mere vehicles for this transaction, they would already have been dissolved and liquidated, which also did not happen."

And further clarifies that "D… ceased to be a shareholder of A…, but immediately acquired participations in a company in the real estate sector, to where it channeled its activity, and E… strengthened its position in A…."

The Respondent refers in this respect that, being the economic results achieved in fiscal years 2012 and 2013 always the same, whether or not companies D… and E… existed, "it is evident that since the constitution and maintenance of these companies, throughout fiscal years 2004 to 2013, they served exclusively as 'mere vehicles' to conceal the receipt of dividends from A…, in order to annul the amounts withheld under personal income tax withholding."

In view of all the foregoing and which has been assessed by the Court, it is understood that if it were as the TA refers, then A… would have distributed to companies D… and E…, from 2004 to 2010, accumulated dividends of more than 12 Million euros, which could have served to pay the debts of these companies to their shareholders – which did not happen.

Only from 2011 onwards, more than 7 years after the acts or legal transactions which have been referred to and assessed, did A… begin to distribute dividends and on a reduced scale, in relation to accumulated profits.

It is seen, therefore, with some difficulty, that it is possible to consider that the taxpayer intended, objectively, whether as principal or secondary, that those acts or legal transactions, or even the structures, were conceived only or mainly to obtain tax advantages that would provide it with the reduction, elimination or temporal deferral of taxes. For only operations in which the objective of tax savings is the principal objective should be regarded as elusive.

Thus being, it is understood that the prerequisites for the intellectual element to be objectively verified are not given.

4 – As to the Normative Element – which is embodied in the abusive requirement, according to which it is required that acts or legal transactions were concluded by artificial or fraudulent means, with abuse of legal forms.

Because all elements must be verified for the GAAC to be applied, it is also necessary in this case to assess the acts or legal transactions practiced, in order to know whether the threshold of legitimate tax planning was exceeded, when obtaining possible tax advantages.

The Petitioner's conduct must, therefore, merit a judgment of reprobation by Law, since cases of tax evasion that determine mere legitimate tax savings are not censurable.

It is obvious that all elements which have been being assessed have their own chain, and therefore all must be given as verified, for the prerequisites for application of the GAAC to be verified.

Regarding this prerequisite, it is important to know, on one hand, whether the creation of the SGPS had an organizational purpose or was dispensable, and, on the other, whether it resulted in conduct that merits reprobation.

The Petitioner argues that the constitution of the SGPS in question had the purpose that is enshrined in its respective normative framework and that the payment of the debt by them to their shareholders has no relevance to taxation, not constituting a taxable fact in the tax system.

As to the non-taxation of dividends paid by A… to the SGPS in question, D… and E…, the same was due to the manifest intention of the legislator embodied in former no. 1 of article 32 of the EBF and current 51 of the CIRC at the date of the facts, as a way of eliminating economic double taxation at the level of SGPS.

And further states that "there is not, therefore, any judgment of reprobation by law as to the acts or transactions effected."

And because the TA cannot "fictionally assume that dividends were paid by A… to the partners of the SGPS," when they were paid to these.

To do so would be "an illegitimate disregard of the legal personality of two companies, which only finds justification in the 'necessity' of placing A… in the condition of passive subject of a legal relationship of tax substitution…."

The Respondent, for its part, states that "The gains obtained by B… and C… are effectively the exclusion from taxation of the receipt of dividends (actual transaction), under the apparent transaction of payment of the price of shares."

But it happens that the creation of the SGPS resulted, on one hand, from the will of the shareholders, as instruments of participation management. Moreover, the creation of SGPS has as its purpose, according to the Petitioner, to allow the maintenance of share capital in the hands of the family.

And, on the other, from the creation of the first two SGPS, in 2001, until A… began to distribute dividends, from 2011, 8 years elapsed after the constitution of SGPS D… and E….

Thus, if A… had, from the outset, at least from 2004 or 2005, proceeded to distribute dividends to SGPS D… and E… and these did not distribute them, subsequently, to their shareholders, therefore, not occurring the taxation of the same, then we would give as verified this normative element.

But it happens that the entire organizational process previously demonstrated began in 2001 with the creation of SGPS F… and G… and continued in 2004 with the creation of SGPS D… and E…, and only in 2011, despite the enormous accumulated profits of more than 12 Million euros, did A… begin to distribute dividends.

Thus being, for all that has been said, it cannot be deduced, without more, that the said legal acts had as their purpose aggressive tax planning censured by Law.

It is further to be noted, in addition and in reinforcement, regarding the tax planning invoked by the TA, that Saldanha Sanches refers that legitimate tax planning "consists of a technique of reduction of the tax burden by which the passive subject renounces a certain conduct because this is linked to a tax obligation or chooses, among the various solutions provided to him by the legal order, that which, by intentional action or by omission of the tax legislator, is accompanied by less tax burdens"; whereas illegitimate tax planning "consists of any conduct of undue reduction, by contravening principles or rules of the tax-legal order, of the tax burdens of a particular passive subject" (The Limits of Tax Planning, Coimbra Editora, 2006, p.21).

Therefore, it cannot be said, in the case under analysis, that one is facing conduct against-law or extra-law, for the Petitioner did not have conduct that is frontally and unequivocally illicit, nor took abusive advantage of the law to arrive at a more favorable tax result.

One is, instead, facing conduct intra-law and therefore before legitimate or non-abusive tax planning, inasmuch as the obtaining of a tax savings, in itself, does not constitute conduct prohibited by law, provided that the acts or legal transactions practiced are not artificial or fraudulent – which in the opinion of the Court, by the grounds already referred to, were not.

In summary, even had the referred SGPS not been created, shareholders C… and B…, maintaining the same conduct of A…, would not have received any dividends from 2001 to 2010.

And regarding the TA's argument that the increase in the value of the shares verified in 2001 served to create debts in favor of the shareholders, which, in the opinion of the TA, such debts constitute true "disguised dividends," it could also, possibly, be concluded that thus it could have been, if indeed dividends had been distributed immediately, which did not happen.

It is not seen, therefore, that the prerequisites required by this element are verified, that is, that the entire organization of the Group was created as an artificial means and with the purpose of tax evasion, the same being to say that there was aggressive tax planning, censured by Law.

Given all the foregoing, it cannot be given as verified any of the elements that presuppose the application of the GAAC, inasmuch as:

• There is no chain of abnormal legal transactions and of unnecessary complexity or of doubtful efficacy regarding the purposes for which they were created;

• It is not shown that it was developed with the intent whether dominant or exclusive, of obtaining a fiscal result different from what would correspond to a normalcy in dealings, since nothing abnormal occurred;

• And if credits were generated in favor of the shareholders, all is due to the reappraisal of the parent company in 2001, done by an Authorized Auditor firm of recognized merit, and only in 2011 did dividends begin to be distributed to the last two SGPS created.

1. Sanctionary Element

This element presupposes the cumulative verification of the remaining elements, in order to permit the application of the sanction of ineffectiveness, in strictly fiscal terms, of acts or legal transactions regarded as abusive, taxation then being carried out, in light of the provision of the final part of no. 2 of article 38 of the LGT, in accordance with the norms applicable in their absence.

In the understanding of the Petitioner it makes no sense to disregard the referred SGPS, namely D…, inasmuch as, "after the sale of its financial participation to the majority shareholder of A…, it immediately refocused its activity in the real estate sector by acquiring M… SA and, later, founding a company linked to the area of water supply networks, N… SA. It has, therefore, diversified investments, employs people and manages share participations."

The Respondent TA, for its part, understands that companies D…-SGPS and E…-SGPS should be fiscally disregarded, as well as the transactions outlined for the alienation of participations in company A… to these companies, in order to reconstruct the transactions so that they produce their true fiscal effects.

But it happens that, in the case at hand, it has been concluded, throughout the analysis of all the arguments of the parties and the acts and transactions concluded and contained in the proceedings, that they did not lead to the fulfillment of any of the elements that doctrinally constitute the GAAC, in accordance with the conclusions drawn regarding each.

Wherefore it is necessary to conclude that it is not relevant, because foreclosed, the examination of this element in the case of the proceedings.

The same is to be said regarding the question of inapplicability to the Petitioner, as a tax substitute, of the disregard of tax effects resulting from the application of the GAAC.

Only, therefore, in case it is legitimate and proper the application of the GAAC, would there be a need to proceed to the reconstruction of the situation that, for tax purposes, would have been verified, had the Petitioner not practiced the acts and legal transactions in question.

For all that has been stated, it is concluded that there is no legal basis for application of the GAAC, due to lack of verification of the respective prerequisites, namely those contained in article 38, no. 2, of the LGT.

3.1-a. Lack of Notification of the Decision Applying the GAAC

In this regard, the Petitioner argues, in essence, that the draft decision applying the anti-abuse clause, by being exclusively notified to A… and not to the passive subjects as alleged beneficiaries (B… and C…), the right to prior hearing, provided for in no. 4 of article 63 of the Code of Tax Procedure and Process, was violated.

But it happens that, this Court having found the vice of violation of law invoked by the Petitioner to be well-founded, with the consequent annulment of the contested assessments, the examination of the other vices alleged is foreclosed.

Indeed, the establishment of an order of examination of vices is only justified if the possible well-foundedness of the vices of priority examination renders unnecessary the examination of the remaining ones, for, if it were always necessary to examine all vices, the order of their examination would be irrelevant.

Terms in which, not the Respondent being correct, the Petitioner's petition must be granted.

1. INDEMNITY INTEREST

The Petitioner asks the Court to condemn the TA to pay indemnity interest, counted from the date of payment of the contested assessments, based on error imputable to the services, pursuant to article 43, no. 1 of the LGT.

Pursuant to the joint provisions of article 43, nos. 1 and 2 of the LGT and article 61, no. 5 of the CPPT, the TA will be condemned to pay indemnity interest when, due to error (of fact or law) imputable to the services thereof, the taxpayer pays an undue tax and this comes to be considered undue because the act or acts of assessment are annulled as a result of judicial challenge – as was the case.

It is further stated in the cited norms that indemnity interest is counted from the date of payment of the tax to the issuance of the respective credit note, being calculated in accordance with the application of the rate provided for in articles 43, no. 4 and 35, no. 10 of the LGT and article 559, no. 1 of the Civil Code.

In this manner, as it is verified that there are no legal prerequisites for application of the GAAC and, consequently, the personal income tax assessments in question are undue, the Petitioner's right to indemnity interest at the statutory legal rate, pursuant to the aforementioned provisions, cannot be denied.

1. DECISION

Therefore, this Court hereby agrees to:

• Find the petition for arbitral decision well-founded, as the legal prerequisites for application of the general anti-abuse clause provided for in article 38, no. 2 of the LGT are not met;

• Declare the illegality of the withholding tax assessments on personal income tax no. 2016…, of the year 2012, in the amount of € 282,150.41 and no. 2016…, of the year 2013, in the amount of € 505,630.51, with the consequent annulment;

• Condemn the Tax Authority to pay indemnity interest pursuant to law, for the deprivation of the amounts that were unduly demanded and paid by the Petitioner.

1. VALUE OF THE PROCESS

In accordance with the provisions of articles 306, no. 2, 297, no. 2 of the Code of Civil Procedure, 97-A, no. 1, subparagraph a) of the Code of Tax Procedure and Process and article 3, no. 2 of the Regulations on Costs in Tax Arbitration Proceedings, the value of the process is set at € 787,780.92.

Let notification be made.

Lisbon, 2 March 2018.

The Arbitrator-President,

(Fernanda Maçãs)

The Arbitrator Members,

(José Rodrigo de Castro)

(Américo Brás Carlos)

Dissenting Opinion, as set forth in the declaration attached and forming an integral part of this award

DISSENTING OPINION

I did not vote in favor of the Award, because I understand that the prerequisites for application of no. 2 of article 38 of the LGT are met and for the consequent fiscal ineffectiveness of the constitution of the two SGPS (D… and E…), under the conditions in which they were formed.

Indeed, bearing in mind the understanding embodied in the Award of the Central Administrative Court South (TCAS) of 15.02.2011, case no. 04255/10, I conclude that in the case sub judice the elements "means," "result," "intellectual (motivation)" and "normative (normative reprobation)" are fulfilled, which, following that decision, fulfill the provision for application of the general anti-abuse clause (GAAC) contained in said article 38, no. 2 of the LGT. The consideration of the jurisprudence of the Supreme Administrative Court (STA) and of the Administrative Courts (TCA) is imposed by law by virtue of the system of appeals resulting from no. 2 of article 25 of the LRAT. The pursuit of the objectives inherent in the creation of Tax Arbitration must be made, therefore, without prejudice to the natural subjective assessment of the facts in each case, in respect for the role of shaping played by the jurisprudence of those higher courts.

The constitution of SGPS is naturally a lawful act and even encouraged by law. In the case dealt with in the proceedings, however, such constitution translated itself into an artificial means of abuse of legal forms. It has long been understood that there exists abuse of legal forms or of the possibilities of configuring civil law when the law links a tax to certain economic phenomena, facts or relations in their appropriate configuration and, to avoid that tax, one chooses inappropriately an unusual legal form. In the words of the Award of the TCAS in case 04255/10, we are in the presence of "atypical or abnormal acts and contracts aimed at circumventing the law."

In the case, each of the sole shareholders, natural persons and administrators of a parent company, with effective and profitable economic activity, constituted an SGPS to whom he sold his participation in the parent company, with the SGPS not paying and remaining indebted for the totality of the price, in the amounts of €7,619,137.87 and €8,105,465.83, respectively. It is further added that the two SGPS had no collaborators nor ever had any other asset other than the participations in the parent company that were transmitted to them by the shareholders who constituted them. Finally, the previously sole shareholders and administrators of the parent company, are the shareholders with 100% and more than 99.99% of the share capital and the sole administrators, of each of the SGPS, having remained as sole administrators of the parent company and, expressly, also with its control. All considered, the legal figure of the SGPS was artificially defunctionalized.

For verification of how far one fell from the normative motivation underlying the constitution of SGPS, one should consider some passages from the preamble of Decree-Law no. 495/88 of 30/12, concerning the introduction of SGPS into the national legal order. The introduction of the SGPS figure aimed to "facilitate and encourage the creation of economic groups, as appropriate instruments to contribute to the strengthening of the Portuguese business fabric" and "provide entrepreneurs with a legal framework that allows them to gather in one company their share participations, in order for their centralized and specialized management." Well, none of this happened. Not only was there no constitution of any economic group, nor gathering of assets and activity in a single company, but instead, each of the sole shareholders of the parent company constituted his own SGPS, and everything remained materially as it was before the constitution of the said SGPS with regard to share participations and management.

Note that the SGPS maintained as sole asset the participations that its shareholders and sole administrators had in the parent company and that were transmitted to them by these; and the sole administrators of each SGPS continued to be administrators of the parent company and to have over it control and dominion.

Regarding the fiscal advantage pursued, as a prerequisite for application of the GAAC denominated "result," it should be said that with the interposition of the SGPS between the parent company and its sole shareholders and administrators, there comes to be no taxation at the moment of payment of dividends by the parent company to said SGPS (article 51 CIRC) and, formally being, payment of a debt contracted by the SGPS in relation to its shareholders when acquiring the participations which these held in the parent company - and which those are paying over years essentially with dividends proceeding from the parent company (there is a smaller part resulting from payments by the parent company for provision of management and administration services to the SGPS, which, moreover, were already and continued to be provided by their also administrators in that capacity) - there is no taxation under personal income tax at the moment the SGPS pay to said shareholders. Absence of taxation this, resulting from the transformation of income into reimbursement of capital in debt, which compares with that which would normally occur on dividends in the absence of the SGPS: taxation in personal income tax by withholding at source at the rate of 28%, with option for aggregation.

The fiscal motivation of the passive subject, translated in the circumstance that the acts practiced are essentially or mainly directed to the tax advantage noted above, is also present. For from the constitution of the referred SGPS, in 2004, there resulted, as was seen, no change in the direction and management of the parent company, nor did the creation of these new corporate structures aim at the realization of any non-fiscal business economic objective. It is further added that nor is a relevant business economic intent perceived in the fact that each of the referred companies began its activity with debts of more than seven and eight million euros, respectively, when they do not have as objective to make other investments.

Even if it had been proven that, as the Petitioner refers, one of the SGPS had, at a date which is not known, but always after 19.09.2013, refocused its activity in the real estate sector and in water supply networks, and realized investments and admitted staff for this purpose, this would have occurred at least about ten years after its constitution and already outside the temporal parameter to which the proceedings relate.

Wherefore, all considered, I understand that the petition for arbitral decision could not have been found well-founded.

Américo Brás Carlos