Summary
Full Decision
ARBITRAL DECISION
A..., taxpayer no. ..., and B..., taxpayer no. ..., both with tax residence at Rua ..., no. ..., ... - ... Vila Nova de Gaia, filed a request for arbitral pronouncement aiming at the annulment of the IRS assessment, relating to the year 2010, no. 2015..., in the amount of € 590,837.81, as well as that of the compensatory interest assessment no. 2015..., in the amount of € 87,700.38, from which resulted a total amount payable of € 675,650.38.
The Tax Authority (Autoridade Tributária e Aduaneira) is the Respondent.
The Applicant, in accordance with legal terms, opted to appoint an arbitrator, indicating for such purposes Mr. Prof. Rui Duarte Morais. The Respondent appointed as arbitrator Mr. Dr. Jorge Carita, with the presiding arbitrator, Mr. Justice Macaísta Malheiros, being appointed by consensus between them.
The arbitral tribunal was constituted on 07/08/2015.
The Tax Authority submitted its response in a timely manner.
A meeting took place on 07/01/2015, as provided for in article 18 of the RJAT, as well as the hearing of witnesses called by the Applicant, whose testimonies were recorded. Due to illness, the hearing of the witness called by the Respondent only took place, by videoconference, on 5/02/2016, which determined the extension of the deadline for the decision by two months (cf. respective minutes).
By consensus of the parties, successive written pleadings followed, which determined the extension of the deadline for rendering the arbitral decision to 6-04-2016 (cf. minutes of witness examination on 5/02/2016), to which followed another extension, until 7/06/2016 (arbitral order of 7/04/2016).
I - REPORT
The tax assessment now challenged results from the Tax Authority understanding that the tax neutrality regime for the exchange of equity shares, provided for in article 77 of the IRC Code, is not applicable to the exchange carried out by the Applicant, by considering that it did not have as its principal objective the restructuring or rationalization of the activities of the companies involved, but rather fiscal motivations that materialized and are demonstrated in the clear fiscal advantage obtained with the sale of the quota in 2011, determining a capital gain substantially lower than that realized with the exchange operation (2010), not being, therefore, in question here, a mere deferral in the taxation of capital gains (2010 and 2014), but rather the effective and significant reduction of such taxation, which determined the application of the provisions of no. 10 of article 73 of the IRC Code, by reference of paragraph b) of no. 9 of article 10 of the IRS Code.
The Applicants attribute to the tax assessment challenged the following defects, each one of which, in their view, is capable of determining its annulment:
a) Expiration of the right to initiate special proceedings aiming at the application of an anti-abuse clause;
b) Expiration of the right to assess;
c) Error in subsuming the facts to the provisions of no. 10 of article 73 of the IRC Code;
d) Unconstitutionality of the interpretation of such norm, as made by the Tax Authority;
e) Lack of substantiation of the decision to apply such specific anti-abuse clause.
They also invoke the
f) Illegality of the assessment of compensatory interest.
They further request the condemnation of the Tax Authority to the payment of compensation due by reason of the provision of undue guarantee and the reimbursement of the part of the tax paid, plus compensatory interest.
We will analyze, regarding each of these questions, the arguments presented by the parties.
The request for arbitral pronouncement is timely, the parties are legitimate and are duly represented, there are no nullities or exceptions that need to be addressed.
II - PROVEN FACTS
The following facts are considered proven, considered to be of interest for the proper decision of the case:
II. 1 - Relating to the inspection procedure
a) The challenged assessments resulted from an inspection procedure classified by the Tax Authority as having external nature, initially of limited scope, through Service Order no. OI2014..., which began on 3 September 2014, with the purpose of verifying compliance with the corresponding tax obligations for the fiscal year 2010;
b) On the same date, the Applicant was personally notified to send to the Services certain clarifications/documents, namely the proven demonstration of the economic reasons underlying the capital contribution for the realization of the capital stock of C..., SGPS, through the delivery of equity shares of D..., SA, and the documentary demonstration that, if applicable, they continued to value for tax purposes the new equity shares at the value of the old ones, which they did.
c) Once the Applicants verified an oversight in the indication of the value of their equity shares, they sent to the inspection services a new document, in order to correct the oversight made and requesting, consequently, that be considered, instead of the first, the new schedule that was presented through that means, also making available the copies of the purchase and sale contracts of 1,500 shares of D..., S.A. (See article 21 and documents no. 7 and 8, contained in the Arbitration Request);
d) On 13 November 2014, the Applicants were notified of the "alteration of the external tax inspection procedure that is ongoing from limited – in the context of IRS – to general", according to new Service Order;
e) By initiative of Applicant B..., contacts and delivery of documents were made at Tax Authority facilities or via email;
f) The inspection procedures ended on 14 January 2015;
g) On 19 January 2015, the Applicants were notified of the Draft Report, and exercised the right to prior hearing, having subsequently submitted written statements of witnesses that they had indicated there, alleging the impossibility of presenting them on the date for which they had been notified;
h) The Applicants were notified of the Final Inspection Report on 26/02/2015, in accordance with article 232 of the CPC, which was followed by the sending of registered letters on 4 March 2015;
i) In the scope of the inspection action above mentioned, the Tax Authority calculated and proceeded to the calculation of IRS that it considered to be lacking, having concluded that the Applicants failed to assess and did not remit to the State's coffers the amount of € 590,837.81 plus € 87,700.38, as compensatory interest, which gave rise to the assessments now challenged, dated 10/03/2015;
j) The application of the provisions of no. 10 of article 73 of the IRC Code (sectoral anti-abuse clause) was not preceded by the procedure regulated in article 63 of the CPPT.
II.2 - Relating to the challenged assessments
a) E..., Lda, with capital stock of 150,000 euros, was established on 29 September 2000, by A... and by F..., each holding 50%, having as its corporate purpose the manufacture, commercialization, import and export, representation, placement of environmental equipment, preparation and management of environmental projects and waste management;
b) In November 2007, E... was transformed into a joint-stock company, with capital stock of 240,000 euros, integrally held, in equal parts, by A... and by F...;
c) Applicant A... was, in 2010, holder of 17% of the equity shares representing the capital of G..., SL, a Spanish law company;
d) G... was established by the Applicant, by the aforementioned F... and by two other Spanish partners, H... and I..., holding, respectively, 17%, 17%, 49% and 17% of the capital stock;
e) G... was holder of an equity share representing 100% of the capital stock of another company, also under Spanish law, J..., SL.;
f) On 6 May 2008, A... and F... sold the equity shares they held in the capital stock of G... to D..., S.A;
g) On 18 August 2010, a limited liability company was established between Applicant A... and F... under the name "K..., SGPS, LDA.", NIPC..., with capital stock, fully subscribed and realized, of € 6,000,000.00, represented by two equal quotas of € 3,000,000.00 each, held by each of the partners F... and A...;
h) The capital stock was realized through the delivery of all 240,000 shares held by the signatories, in equal parts, representing the capital stock of the company D..., SA., NIPC...;
i) The aforementioned shares, with a nominal value of 240,000 euros, were valued at € 12,000,000.00 (twelve million euros), to which corresponded a share premium of €6,000,000.00 (six million euros), as a result of an assessment carried out by L... – SROC, performed on 16 June 2010;
j) The assessment criterion used was based on "predictable future revenues of the company", estimated calculated based on "results of the last two fiscal years", with the assumption being made that "the revenues of the company will be continued (in 2010 and 2011), sales are estimated, respectively, at 12.6M€ and 13.6M€ and services rendered at 1.4M€ and 2.8M€, remaining constant in the following years and variable costs indexed to revenues". The value of such shares was estimated at € 12,123,809.00, the intermediate value between those resulting from an assessment by cash-flows on terminal value from the investor's perspective and from the company's perspective;
k) A... and F..., due to disagreements between them, decided to end their business relations;
l) Therefore, on 30 September 2011, following a promise of sale of quotas agreement executed on 14 September, a contract of division and sale of quotas was executed, whereby the quota of F..., representing 50% of the capital stock of K... SGPS, Lda., was divided into two quotas – one with a nominal value of € 2,400,000.00 and another with a nominal value of € 600,000.00 – which, immediately after, were sold to A..., for the price of 1,000,000 Euros, with retention of ownership until full compliance with what was provided in such contract, namely regarding full payment of the price;
m) On the same date, A... sold to M..., for the price of € 1,300,000, the quota with a nominal value of € 2.4 million that A... had acquired for the price of € 800,000.00;
n) On 01/08/2014, A... divided the quota of which they were holder with a nominal value of € 3,000,000.00 into two new quotas: one with a nominal value of € 1,562,604.00, which they sold to the company N... AD (a Bulgarian law company) for the price of € 182,304.00; and another, with a nominal value of € 1,437,396.00, which they reserved for themselves;
o) Following this, the partners of C..., SGPS resolved to increase the capital stock of the company from € 6,000,000.00 to € 7,550,000.00, through new cash contributions, with A... making a contribution of € 182,303.77, corresponding to the subscription of a new quota of equal nominal value;
p) On 04/08/2014, A... sold to the company "N... AD" a quota with a nominal value of € 122,310.00, resulting from the division of the quota of € 182,303.77 of which they were holder, for the price of € 50,000.00, having reserved for themselves the remainder (€ 59,993.77);
q) C..., SGPS was established with a view to concentrating all the equity shares held by Applicant A... and by the aforementioned F..., in a single company, with a view to the restructuring and rationalization of their respective activities;
r) C... SGPS acquired the following equity shares: on 11/02/2011, 50% of O..., P..., Ltda; on 27/04/2012 and 22/06/2012, respectively, 30% and 70% of Q..., Lda; on 10/07/2012, 51% of R..., SL; on 14/01/2013, 74.9% of S..., SL.;
s) It was still its intention that the partners of G..., mentioned in c), should come to participate in the capital of C..., SGPS, possibly through another exchange, which would allow the integration of that company and its subsidiary J... (mentioned above in d)) in the group.
t) The exchange of equity shares was the form chosen for the initial capitalization of C..., SGPS, because it did not imply any need for additional financing on the part of A... and F... and, having also in account the fiscal rationality, through the use of the tax neutrality regime for the exchange of equity shares...............
u) The exchange also allowed that C..., SGPS be established with a high capital stock, by virtue of the (re)assessment that was made for that purpose of the equity shares in the capital of D..., SA.;
v) The activity of D..., SA in Abu Dhabi had significant weight, as it was a rapidly expanding market;
w) The majority of the invoicing of D..., SA, in 2010, was the result of its activity in Abu Dhabi;
x) At the beginning of 2011, the valuation of D..., SA underwent a major reduction with the restrictions imposed on its national clients by the economic and financial assistance program and with the non-compliance of the Abu Dhabi client;
The IRS return of Applicant A... relating to the year 2014 did not show any capital gain regarding the paid sale of part of the equity share held in C..., SGPS with origin in D..., SA.
The facts given as proven relating to the inspection procedure (II.1), as well as those enumerated above in a) to r) are documentarily proven and are confirmed by the tax inspection report.
The proof of facts s) to x) of II.2 results from documentation attached to the case file and from the testimony of the witnesses called by the applicants, who, in the opinion of the Arbitral Tribunal, answered with impartiality, truthfulness and clarity.
No relevant facts were given as unproven for the assessment of the case.
II – ORDER OF ADDRESSING THE DEFECTS OF THE CHALLENGED ASSESSMENTS
Given that several defects are pointed out to the challenged assessments, all of them capable, in the view of the Applicants, of leading to their annulment, it is left to the prudent discretion of the judge the order of their assessment, and should prioritarily address those whose merit determines more stable or effective protection of the injured interests (article 124 of the CPPT).
It is understood, thus, that one should begin by assessing the "error in subsuming the facts to the provisions of no. 10 of article 73 of the IRC Code", since this is the cause of action that most directly refers to the legality of the challenged assessments.
III - THE SUBSUMING OF FACTS TO THE PROVISIONS OF ARTICLE 73, NO. 10, OF THE IRC CODE
Article 73, no. 10, of the Income Tax Code, in the version at the date of the facts, provided that the special regime established does not apply, totally or partially, when it is concluded that the operations covered by it had as their principal objective or as one of their principal objectives tax evasion, which may be considered verified, in particular, in the cases where the intervening companies do not have all of their revenues subject to the same IRC taxation regime or when the operations were not carried out for valid economic reasons, such as the restructuring or rationalization of the activities of the companies that participate in them, proceeding then, if applicable, to the corresponding additional tax assessments.
The Portuguese tax legislator intended, with this clause, to combat situations of tax evasion in the context of operations under the tax neutrality regime. This, because article 10, no. 8, of the IRS Code establishes a special regime of tax neutrality that removes from taxation the capital gains obtained with the sale of equity shares provided for in paragraph b) of no. 1 of the same legal provision, from which results the attribution to the partners of securities representing the capital stock of the acquiring company to the partners of the acquired company.
It is important to emphasize that this norm does not apply only to exchanges of equity shares, but also to mergers, divisions and contributions of assets, that is, to the different operations provided for in subsection IV of section VI chapter III of the IRC Code, as, somewhat unnecessarily, came to be clarified by subsequent redaction of the norm.
For its part, article 77 of the IRC Code, provides in its no. 1: the attribution, as a result of an exchange of equity shares, as this operation is defined in article 73, of securities representing the capital stock of the acquiring company, to the partners of the acquired company, does not give rise to any taxation of the latter if they continue to value, for tax purposes, the new equity shares at the value assigned to the old ones, determined in accordance with what is established in this Code.
Portuguese law results from the transposition of Directive 2009/133/EC, of the Council, of 19 October 2009, known as the Merger-Division Directive, although it covers other operations, in what interests us exchanges of equity shares.
The objective of such Directive (and, in keeping with Portuguese law) is to facilitate corporate reorganizations, eliminating fiscal obstacles to their happening, since such operations frequently lead to the calculation of positive equity variations, taxable in the spheres of the intervening parties.
The solution found was that of non-attribution of any fiscal effects to the corporate reorganization operations provided for therein. Such neutrality does not mean non-taxation, but rather the deferral of taxation, which only happens at the moment when the equity shares received as a result of the exchange are sold. Then, the capital gains realized will be taxed, corresponding such gain, roughly, to the difference between the value of the sale of such shares and the value of the "old" securities, that is, those given in exchange.
However, a specific anti-abuse clause was introduced, the aforementioned no. 10 of article 73 of the IRC Code.
Such norm establishes two situations in which it is presumed that the operation in question had as principal objective or as one of the principal objectives tax evasion:
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the intervening companies do not have all of their revenues subject to the same IRC taxation regime;
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the operations were not carried out for valid economic reasons, such as the restructuring or rationalization of the activities of the companies that participate in them, proceeding then, if applicable, to the corresponding additional tax assessments.
It is important, therefore, to ascertain whether, in the specific case, any of these conditions are verified:
A) Valid economic reasons
As given by proven, with the establishment of C..., SGPS, A... and F... intended to ensure the integrated management of the shareholdings of which they were holders and those that they might acquire in the future; it was still their intention that the partners of G... should come to participate in the capital of C..., SGPS, possibly through another exchange, which would allow the integration of that company and its subsidiary J... in the group; the exchange of equity shares was the form chosen for the initial capitalization of C..., SGPS, because it did not imply any need for additional financing on the part of A... and F...; the exchange also allowed that C..., SGPS be established with a high capital stock, by virtue of the (re)assessment that was made for that purpose of the equity shares in the capital of D..., SA.
There seems to be no doubt that both the objectives that presided over the creation of C..., SGPS coincide with those pointed out by the legislator upon creating the figure of equity share holding companies: to provide entrepreneurs with a legal framework that allows them to gather in a company their equity shares, in order for their centralized and specialized management (preamble of Decree-Law no. 495/88, of 30-12-1988).
Also, there seems to be no doubt as to the fact that the activity of C..., SGPS was directed to what the legislator points to such companies, that is, the management of equity shares in other companies, as an indirect form of exercise of economic activities, moreover in an increasing form, through the acquisition, after its establishment, of shareholdings in four other companies (besides D..., SA, acquisition of shareholdings in O... Brasil, Q..., R... and S...).
The Tax Authority itself does not deny that the establishment of D..., SA had valid economic reasons. We transcribe, from the Tax Authority's response presented in this proceeding:
"65- As to the alleged valid economic reasons inherent to the process of restructuring or business reorganization, it should be noted that, in the course of the inspection procedure, the possible existence of such reasons was not put in question.
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In that sense, and contrary to what is alleged in the P.I., the corrections proposed in the inspection report are not based on any "vehicle", "artifice", "stratagem" or "expedient" used by the Applicants.
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Furthermore, even if this were not understood, the acknowledgment of the possible existence of valid economic reasons from the perspective of the entities involved, does not prevent the conclusion that the operation carried out had as its principal objective (or as one of its principal objectives) a motivation of a predominantly fiscal nature."
B) Non-subjection of all revenues of the intervening companies to the same IRC taxation regime.
This legal presumption of the operation having as principal objective or as one of the principal objectives tax evasion is invoked by the Tax Authority as one of the grounds of the tax assessment now challenged: being D..., SA, and C..., SGPS, subject to different IRC taxation regimes, as the latter took advantage of what was then provided for in article 32 of the EB, this legal presumption of the fiscally abusive character of the exchange in question would be verified.
It is important to begin by highlighting the error of reasoning in which the Tax Authority falls: neither D..., SA, nor C..., SGPS, were intervening parties in the exchange operation in question. Such operation involved shareholdings in the capital stock of both companies, that is, these were, indirectly, the object of such transaction, but not parties to it.
In reality, the only intervening parties in the legal transaction that tax law qualifies as exchange were A... and F..., which results very clearly from the fact that they, in their personal capacity, executed the contract that gave rise to the establishment of C..., SGPS.
The Tax Authority's error results from the fact of reasoning as if what was in question was an exchange contract as understood for purposes of civil law, which, notwithstanding the lack of legal definition, we can consider, intentionally simply, to be a form of paid sale that consists in the exchange of one asset for another asset (and not for money).
What happens is that the fiscal concept of exchange, for purposes of application of the tax neutrality regime, has a broader scope, not necessarily involving a true "exchange".
In accordance with no. 5 of article 73 of the IRC Code, an exchange of equity shares is considered to be the operation by which a company (acquiring company) acquires a shareholding in the capital stock of another (acquired company), which has the effect of conferring on it the majority of the voting rights of the latter (...),
In this case, the exchange (in fiscal sense) consisted of a capital contribution in kind, effected by A..., for the capital stock of C..., SGPS, materialized through the transfer to the assets of this company of the shares it held in D..., SA, that is, by the "replacement" of a direct shareholding in the capital of this company by an indirect shareholding, of equal value.
Since the application of article 73 of the IRC Code, in the specific case, results from the reference made by paragraph b) of no. 9 of article 10 of the IRS Code, we have that where it says company we should read individual.
That is, the applicability of the provisions of no. 5 of article of article 73 of the IRC Code would only happen if the "new" equity shares of which A... became holder (those of C..., SGPS) came to be subject, in IRS, to a taxation regime different from those to which the "old" shares were subject, that is those of D..., SA, which does not happen.
As we already had the opportunity to mention, the segment of no. 10 of article 73 of the IRC Code - according to which it is presumed that operations had as principal objective or as one of the principal objectives tax evasion when the intervening companies do not have all of their revenues subject to the same IRC taxation regime - is not in the Merger and Division Directive and is applicable to mergers, divisions, contributions of assets and exchanges of equity shares.
Now, regarding mergers and divisions, the intervening parties will always be two companies, and may or may not be in operations of contributions of assets and exchanges of equity shares. That is, there are operations of exchange (fiscal) in which the intervening parties can be one or more individuals or even only a company.
Moreover, to understand that the fiscal regime of neutrality in exchanges of equity shares is not applicable whenever someone, an individual, participates in the establishment of an SGPS through the delivery of equity shares that, in their individual capacity, they held in another company (not another SGPS), would be to create a major fiscal obstacle both to the purpose of the Merger and Division Directive, which is, precisely, to prevent such operations from not happening because of the fiscal consequences that, otherwise, could take place (because they would give rise to immediately taxable revenues), and would further frustrate, in a frontal manner, the objectives of the national legislator upon creating the legal regime of SGPS, which, in the words of the already cited preamble of Decree-Law no. 495/88, of 30 December is to provide entrepreneurs a legal framework that allows them to gather in a company their equity shares, in order for their centralized and specialized management. That is, there is reason to conclude that the legislator clearly had in mind to encourage entrepreneurs (first of all, individuals) to create SGPS, which clearly would not happen if by reason of such establishment they were taxed on unrealized capital gains.
We have, therefore, that in the specific case, it is not possible to presume the intentionality of tax evasion under the provisions of no. 10 of article 73 of the IRC, in what it provides regarding the different fiscal regime of the intervening companies.
b) The fiscal advantage obtained by the Applicant
Not being fulfilled the hypotheses of the legal presumptions of the fiscally abusive character of the transaction, such does not prevent the Tax Authority from proving directly facts that should lead to that conclusion, regarding the exchange of equity shares in question in the present case.
There being no fiscal advantage to A... (not having such even been alleged) regarding the revenues (dividends) that they may obtain due to the holding of quotas representing C..., SGPS, compared to what would happen if the exchange operation had not taken place (i.e., if they continued to be a holder of shares of D..., SA), there is a need to know whether they obtained or may obtain a fiscal advantage at the moment when they alienate such shareholdings.
That is, it is repeated, what is not in question is comparing the fiscal regime of C..., SGPS, with that of D..., SA, even regarding the alienation of equity shares of which they are holders, first of all because these companies are not party in this proceeding.
As was proven, A..., subsequently to 2010, sold part of the shareholdings in the capital stock of C..., SGPS (and yet another, subsequently acquired) for a value lower than that which had been attributed to them for purposes of the exchange. However, it is not within the scope of this proceeding to assess whether such alienation values are correct (e.g., whether they correspond to their respective fair market value, at the time), whether there are the discrepancies evidenced by the Tax Authority between the price declared in these various operations, nor even whether A... complied with the declaratory obligations that fell upon them regarding the revenues obtained with the alienation of such shares. Such could eventually be grounds for additional IRS assessments relating to the years in which each of the alienations happened.
What is in question in this proceeding is only the alleged fiscally abusive character of the exchange of equity shares carried out in 2010. The subsequent facts are only relevant to the extent that they may lead to the conclusion that that operation was a "first step" in order to obtain an abusive fiscal advantage.
Now, it is clear that A... did not obtain nor will obtain any fiscal advantage due to the exchange carried out if, at the time of the calculation of the gain or loss realized at the moment of the alienation of the C..., SGPS quotas, they do not assign them a higher fiscal value ("acquisition value") than that which the exchanged securities (the D..., SA shares) had immediately before the exchange. Whether A... did so or not is, something that, as we have said, is not within the scope of this proceeding, and it is, moreover, certain that the evidence brought to the proceeding does not allow any safe conclusion on this point.
Assuming that this condition will be verified, we have that for A... it will be totally indifferent, from the fiscal point of view, the alienation of the shareholdings in C..., SGPS, or the alienation of the shareholdings they would have in D..., SA, if the exchange had not taken place.
In both cases, the gain or loss realized will correspond, roughly, to the difference between the historical value of the D..., SA shares, which, by exchange, gave rise to the D..., SA quotas, alienated and the price received from the alienation. In fact, it can be seen that in all cases of alienation of the D..., SA quotas, which came to the holding of A... due to the exchange operation, there was the realization of a taxable capital gain.
Thus, it is asked: what is the objection of the Tax Authority, what is the reason why it considers the exchange "fiscally abusive"?
The answer is simple: the Tax Authority understands that if A..., instead of having carried out in kind (through the "delivery" of D..., SA shares) its contribution to the capital stock of C..., SGPS, had done so in cash and, then, C..., SGPS, had acquired the D..., SA shares, for the amount corresponding to the value for which such shares were valued for purposes of exchange, would have realized a much higher capital gain, the tax that would have been assessed would have been much higher (in the amount of the assessment now challenged).
The Tax Authority intends, in essence, that the fiscal value of the C..., SGPS quotas, to be considered for purposes of the calculation of capital gains obtained by A..., should not be the value for which these were actually alienated, but rather the value that was assigned to them at the time of the exchange. To achieve such a goal, it intends to disregard the fiscal neutrality regime under which the exchange was carried out and, therefore, to tax, immediately (with reference to 2010), as capital gains, the difference between the historical value of the C... shares and the value that was assigned to them for purposes of exchange.
It will be important to have here in consideration still the following:
First, it can never be considered fiscally abusive the conduct of a taxpayer who, aiming to obtain a certain economic result and having for such the possibility of entering into different legal transactions, opts for the entering into the transaction which, by express intentionality of the legislator, is fiscally less onerous.
That is, even if it were practically possible for the Applicant to establish C..., SGPS through cash contributions and, then, this company to acquire its shareholdings in D..., SA (see, in this respect, the fact given as proven in u), the fact is that its conduct cannot be fiscally disapproved in opting for the carrying out of an exchange, even if such is only due to the objective of obtaining a temporal deferral in the taxation of capital gains. This is because, as we have emphasized, both the transfer of equity shares from individual entrepreneurs to an SGPS, as well as the fiscal neutrality of this operation correspond to express options of the legislator, who intended to stimulate the establishment of such types of companies by holders, in their individual capacity, of equity shares and, for such, removed the fiscal obstacles that, otherwise, would exist.
Second, as we have seen, the accounting value of equity shares object of exchange, at the moment in which such transaction happened, is fiscally irrelevant from the perspective of the taxation of gains obtained by the respective holder when from a subsequent alienation. That is, there is a need not to confuse the fiscal value of the shareholdings in question with their accounting value in a given moment.
Third, the valuation, made by assessment, of an equity share made in a given moment, does not mean that that value will not come to change in a later moment due to various circumstances, namely relating to the reality of the continuation of the activity of the company. This is what happened in the specific case, given the fact given as proven in x), this independent of any judgments on the amount of the respective fair market value at the time of alienation.
Finally, we cannot ignore that it is a basic principle of our system of taxation of capital gains in IRS that only realized capital gains are taxed and never potential capital gains. This is because, beyond other reasons, the taxation of potential capital gains would always imply the refund of tax paid, if the realization value (of sale to third parties) were to prove to be lower.
To accept the Tax Authority's thesis would be equivalent to taxing the applicants for a potential capital gain that never materialized (that cannot be realized) due to the depreciation of the business of D..., SA (of the company that at the time constituted the only assets of C..., SGPS).
The Tax Authority's thesis amounts to the claim to tax someone for a contributory capacity that, as was proven, never existed, to legitimize a taxation based on a theoretical revenue (gain) and not on the gain actually earned, which can only be determined when the actual transaction of the asset occurs.
Such an interpretation of no. 10 of article 73 of the IRC Code when applied by reference to individuals, would be manifestly unconstitutional for violation of the principle of contributory capacity, since one would be taxing a «gain» quantified in a value that would have no correspondence with the actually obtained.
IV - FUTILITY OF ADDRESSING THE OTHER CAUSES OF ACTION
Given that, in the view of the Arbitral Tribunal, the challenged assessments suffer from an error of law by not verifying the requisites that would determine the applicability of the provisions of no. 10 of article 73 of the IRC Code -, which, without more, determines their total annulment -, it results futile the addressing of the other causes of action invoked by the Applicants.
V - COMPENSATION FOR PROVISION OF UNDUE GUARANTEE
The Applicants petition for the compensation provided for in article 171 of the CPPT and in article 53 of the General Tax Law, in the event that it be judged undue any guarantee that the challenging party may have presented or comes to present with a view to the suspension of the execution process initiated due to the debt whose legality is now contested.
Article 53, nos. 1 to 3, of the General Tax Law provides:
1 - The debtor who, to suspend execution, offers bank guarantee or equivalent will be compensated totally or partially for the losses resulting from its provision, if they have maintained it for a period greater than three years in proportion of the accrual in administrative claim, impugnation or opposition to execution that have as their object the debt guaranteed.
2 - The deadline mentioned in the preceding number does not apply when it is verified, in administrative petition or judicial impugnation, that there was error attributable to the services in the assessment of the tax.
3 - The compensation mentioned in no. 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of compensatory interest provided for in the present law and may be requested in the very process of administrative petition or judicial impugnation, or independently.
Being in question additional assessments (therefore, of the exclusive initiative of the services), now integrally annulled, it is verified that there was "error attributable to the services" which grants the Applicants the right to be totally compensated, within the legal limit, for the costs incurred with the guarantees that they have offered to suspend the execution.
However, since the information contained in the documents submitted by the Applicants on 23/09/2015, relating to the costs incurred with the provision of guarantee is, necessarily, outdated, the question will, necessarily, have to be postponed to execution of judgment.
The same applies to the partial payment, in the amount of €180,000.00, which the Applicants will have made (cfr. request submitted by them on 29/06/2015), of which they have the right to be reimbursed, plus the respective compensatory interest (article 43 of the General Tax Law).
VI – DECISION
Under these terms, the Arbitral Tribunal decides:
a) To judge illegal the challenged assessments, annulling them in their entirety, with all legal consequences, namely regarding the reimbursement of the part of the tax paid, plus compensatory interest and compensation for provision of undue guarantee, in amounts to be determined in execution of judgment.
The value of the proceeding is fixed at € 675,650.38.
Costs by the Applicant, in accordance with article 5, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings.
Lisbon, 27 May 2016
The Arbitrators
Macaísta Malheiros (joined statement of vote)
Rui Duarte Morais (Reporter)
Jorge Carita (dissenting, in accordance with the statement of vote which they joins)
STATEMENT OF VOTE
I voted for this decision because I fully agree with its reasoning and furthermore because it implements, based on the facts determined, the principles enshrined in article 104, nos. 1 and 2 of the Constitution of the Portuguese Republic and in articles 5, no. 2 and 11, no. 3 of the General Tax Law.
M L Macaísta Malheiros
DISSENTING VOTE
With due respect, which is considerable, I disagree with the decision taken by majority of the Tribunal, and fundamentally, for the following reasons:
The fiscal neutrality regime, adopted by the Portuguese legislator with the approval and publication of the Income Tax Code (Decree-law no. 422-B/88, of 30 November), gains community dimension with the Merger Directive (Directive no. 90/434/CEE of the Council, of 23 July 1990), granting to Member States, upon their transposition to domestic law, freedom of choice as to the form and the means through which they will prescribe their special fiscal regime applicable to internal restructuring operations (cfr. article 288 TFEU – positive harmonization).
In this context, under the current wording of article 15 of the Merger Directive, Member States may, exceptionally, and in specific cases, refuse to apply, in whole or in part, what is provided for in this Directive or withdraw the benefit of such provisions – a benefit which, in Portuguese legislation, will be that of not considering in the determination of taxable profit any result resulting from the transfer of equity elements as a consequence of the restructuring operations defined in article 73 of the Income Tax Code, with taxation being deferred to the moment when the beneficiary entities come, themselves, to alienate the equity elements received, outside the scope of those operations – whenever the operation of merger, division, partial division, contribution of assets or exchange of equity shares, has as their principal objective or as one of their principal objectives fraud or tax evasion, even if the requisites provided for in law are met (cfr. article 15, no. 1, paragraph a), of the Merger Directive).
For this purpose, the Portuguese legislator adopts the anti-abuse clause provided for in no. 10 of article 73 of the Income Tax Code.
Taking into account the situation of the present case, the application of fiscal neutrality to an operation of exchange of equity shares presupposes, by definition, that the partners of the target company continue to value, for tax purposes the shares of capital received by the same value as the old ones (cfr. article 10, no. 8 of the IRS Code). That is, that the share of capital held in K..., SGPS, Lda. (50%), realized through the delivery of 120,000 shares held by the Applicant representing 50% of the capital stock of D..., S.A at the value of € 6,000,000.00 to which corresponded a share premium of € 3,000,000.00, in accordance with the valuation made by L... – SROC, on 16 June 2010, continues to be valued in such manner.
What, in the specific case, according to the proven facts, did not happen. In truth, from the date of the realization of the assessment on 16 June 2010, which provided for the continuation of the revenues of the years 2010 and 2011, estimated at 12.6M€ and 13.6M€, respectively, as regards sales and at 1.4M€ and 2.8M€ for services rendered, and the date of the end of the business relations between the Applicant and their partner on 30 September 2011, there was not a maintenance, for tax purposes, of the original acquisition value that should be assessed by the partners. Still, it must be taken into account that none of the acquisitions described in l) to p) of the proven facts reflected any appreciation, as on the contrary, we verify an unexplained discrepancy regarding the amount of their respective fair market value at the moment of such alienations.
In addition to the compliance with the formal conditions and valuation just set out, under no. 10 of article 73 of the Income Tax Code, the fiscal neutrality regime will cease to apply, proceeding to the corresponding additional tax assessments, when it is concluded that the restructuring operations covered by the regime had as their principal or one of their principal objectives tax evasion. The foresight of the anti-abuse clause by the Portuguese legislator was linked to the fact of safeguarding the taxation that, in normal circumstances, would be due, since by force of the application of the fiscal neutrality regime is suspended, until the subsequent transmission of the equity elements object of the restructuring operation, the taxation, not being able such deferral of taxation to be converted into a total or partial lack of the tax that would be due if the fiscal neutrality regime were not applied.
The provision of no. 10 of article 73 of the Income Tax Code thus constitutes an anti-abuse norm, identical to the current wording of European Union Law imposed by the Merger Directive in its article 15, which allows the refusal of the neutrality regime, even if the requisites in law are met, whenever it is evident that the operation of merger, division, contribution of assets or exchange of equity shares has as its principal objective or as one of its principal objectives, fraud or tax evasion, which may be considered verified when the operation has not been carried out for valid economic reasons (cfr. Foggia Case, Judgment of the Court of Justice of the European Union of 10 November 2011, case no. C-126/10, in Official Journal of the European Union, of 28 January 2012, regarding the absence of valid economic reasons).
The valid economic reasons presented by the Applicant, with the establishment of K..., SGPS, Lda, relate to the intent to concentrate all the shareholdings held, together with F..., in a single company, with a view to the restructuring and rationalization of their respective activities, and also to the intention of the partners of G..., mentioned in c), to come to participate, possibly, in the capital of K..., SGPS, SA, which would allow the integration of that company and its subsidiary J.... From the outset, it is difficult to understand such intention when, on 6 May 2008, the Applicant and F... sold the equity shares they held precisely in the capital of G... to D..., SA, when the partners of G... could, from the start, participate in the establishment of K..., SGPS, Lda, integrating, in this manner, J....
Still, we can acknowledge that the objectives that presided over the creation of K..., SGPS, Lda. coincide with those pointed out by the legislator, that is, the management of equity shares in other companies, as an indirect form of exercise of economic activities.
What we cannot deny is that the exchange of equity shares in D..., SA did not have as its principal objective or as one of its principal objectives fraud or tax evasion, when, in 2010, the capital gain resulting from the exchange operation carried out on 18 August 2010 was not taxed, corresponding to the difference between the historical acquisition value of the 120,000 shares held in D..., S.A delivered in exchange for the shareholding in the capital stock of C..., SGPS and the value of the new equity share attributed to the Applicant. That is, the difference between € 120,000.00 (120,000 shares with the nominal value of € 1.00 each) as being the acquisition value, and € 6,000,000.00 as to the realization value, in these terms, € 5,880,000.00 as being the gain of capital gains in accordance with the report presented by SROC (fact i)).
Precisely because of the disregard mentioned, the tax legislator felt the need to create anti-abuse clauses, like the one now before us. We cannot ignore the explanation of Lima Guerreiro "(…) making prevail over the certainty and security of legal-tax relations interests of a public nature that in the case are drawn of clearly superior relevance, as their injury would put in question the foundations of taxation in general". In this context, referring to the general anti-abuse clause, with the principle similar to that resulting from no. 10 of article 73 of the Income Tax Code, defends that "the anti-abuse clause does not represent any offense to the principle of typicality. The constitutional guarantee of typicality must continue to be respected in relation to the act or legal transaction of equivalent economic result, whose frustration the author of the conduct intended to avoid"[1].
Now, the reasoning defended in this arbitral decision, that "it can never be considered fiscally abusive the conduct of a taxpayer who, aiming to obtain a certain economic result and having for such the possibility of entering into different legal transactions, opts for the entering into the transaction which, by express intentionality of the legislator, is fiscally less onerous" incurs in a clear violation of law, since it would prevent any application of any anti-abuse clause since, or the conduct is expressly prohibited by law, or it would suffice to be a lacuna/provision less clear, that the taxpayer could "manipulate" the teleology of the norm.
It is read in the Judgment of the Administrative Court of the South, case no. 04255/10, of 15/02/2011 that the reason for being of anti-abuse norms is founded on the need to establish adequate 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, no. 1, of the Constitution of the Portuguese Republic).
In the perspective of the existence of conflicting rights, it further states that, however much the freedom of choice of taxpayers is respected regarding the forms of business management aiming to obtain all possible fiscal advantages, such freedom can never and should never prevail facing the social relationship that is intended to be just and balanced facing the obvious finding of the existence of conflicting rights (cfr. article 18, no. 2, of the Constitution of the Portuguese Republic).
Concluding that, "One of the limits to the freedom of business management, is that of the subsistence and maintenance of the tax system aiming at the satisfaction of the financial needs of the State and other public entities within the framework of a fair distribution of income and wealth created (cfr. article 103, no. 1, of the Constitution of the Portuguese Republic), the law establishing, for that purpose, mechanisms of tax planning, at the same time that it aims to prevent the occurrence of situations of evasion and tax fraud for reasons of social justice in that measure justifying the adoption of decisions of legitimate limitation of rights, freedoms and guarantees in confrontation.".
In truth, the operation of exchange of capital shares in reference did not respect the continuity of valuation, by the Applicant, for tax purposes, of the capital shares received by the same value as the old ones.
Still, we cannot conceive that by the application of the fiscal neutrality regime, the capital gain generated as a result of the exchange operation converts itself into a deferral of taxation because they are within the scope of a restructuring, until, who knows, the deadline for expiration of the right to assess passes!!!
For all this, with due respect for the position assumed by majority, I vote dissenting from this arbitral pronouncement.
[1] LIMA GUERREIRO, General Tax Law Annotated, Editor Rei dos Livros, pp. 186 to 188.
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