Summary
Full Decision
ARBITRAL AWARD
The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. A. Sérgio de Matos and Dr. Ricardo Gomes Pedro (arbitrators-members), designated by the Ethics Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 30-06-2017, agree as follows:
1. REPORT
A…, S.A., a joint-stock commercial company registered under the single registration number, registered at the Commercial Registry Conservatory and identification of collective person…, with headquarters at Avenue …, no. …, …., …, with share capital of € 32,500,000.00 (hereinafter, simply A… or Claimant), came, pursuant to articles 2.º, no. 1, a) and 10.º, nos. 1 and 2, and 17.º-A of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter designated only as LRAT), to submit a request for constitution of a collective arbitral tribunal, in which the TAX AUTHORITY AND CUSTOMS AUTHORITY is Respondent, with a view to the annulment of the additional Corporate Income Tax assessment relating to the fiscal year 2012 bearing number 2016… and the consequent act of assessment of compensatory interest bearing number 2016…, embodied in the demonstration of account adjustment bearing number 2016…, in the part deriving from the correction constituted by the disregard of financial charges borne by the Claimant, with restitution of the amounts paid, in order to proceed to the immediate and full restoration of legality.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Authority on 28-04-2017.
Under the terms of subsection a) of no. 2 of article 6.º and subsection b) of no. 1 of article 11.º of LRAT, in the wording introduced by article 228.º of Law no. 66-B/2012, of 31 December, the Ethics Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the charge within the applicable period.
On 14-06-2017 the parties were duly notified of this designation, having expressed no will to refuse the designation of the arbitrators, under the combined terms of article 11.º no. 1 subsections a) and b) of LRAT and articles 6.º and 7.º of the Ethics Code.
Thus, in accordance with the provision of subsection c) of no. 1 of article 11.º of LRAT, in the wording introduced by article 228.º of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 30-06-2017.
The Tax Authority and Customs Authority responded, arguing that the request should be judged unfounded.
On 10-10-2017 the meeting provided for in article 18.º of LRAT was held, in which witness testimony was produced and it was decided that the case should proceed with written arguments.
The Parties submitted arguments.
The arbitral tribunal was duly constituted and is materially competent, in light of the provision of articles 2.º, no. 1, subsection a), and 10.º, no. 1, of DL no. 10/2011, of 20 January.
The parties are duly represented and enjoy legal personality and capacity, are legitimate and are represented (articles 4.º and 10.º, no. 2, of the same statute and article 1.º of Ordinance no. 112-A/2011, of 22 March).
The case does not suffer from nullities and no exceptions were invoked.
Thus, there is no obstacle to the examination of the merits of the case.
2. MATTER OF FACT
2.1. Facts Established
Based on the elements contained in the case file and in the administrative process attached to the records, the following facts are considered established:
· The Claimant is a joint-stock company, taxed since 17-01-1966, having as its purpose, in accordance with point 1 of article 3.º of the Company's Bylaws, the "exercise of the textile industry, being able to exploit any other branch of industrial or commercial activity that the General Assembly decides and is permitted by law, assemble or acquire other factories, establish branches or subsidiaries".
· Point 2 of article 3º of the company's bylaws adds that "the company may also acquire capital holdings in other limited liability companies, whatever their corporate purpose, and also acquire capital holdings in companies regulated by special laws and in complementary business groupings".
· The Tax Authority and Customs Authority carried out a tax inspection action on the Claimant in compliance with Service Order no. OI2016…, in which the Tax Inspection Report was prepared, a copy of which is attached with the request for arbitral determination, the content of which is given as reproduced and which states, among other things, the following:
III. Description of facts and grounds of purely arithmetic corrections
III. - 1. Corporate Income Tax
III. - 1.1. Financial charges and stamp tax arising from third-party capital
Financial investments - loans/financing/loans granted
In the SNS accounts, relating to the period of 2012:
a. "-41130000 INV.FIN - LOANS GRANTED - SUBSIDIARIES";
b. - "41230000 INV. FIN - LOANS GRANTED - ASSOCIATED INVESTMENTS",
c. - "41410000 INV. FIN - CAPITAL HOLDINGS - OTHER COMPANIES""; and.
d. - "41420000 INV.FIN - LOANS GRANTED - OTHER COMPANIES"
the orders for transfer of funds on B… (B…), C… (C…), D… (D…) and E… (E…), to various subsidiary companies, were recorded, as demonstrated in the table below, whose data were extracted from the accounting Saf-t:
(...)
Resolutions of ancillary and supplementary payments in subsidiary companies
F… SA, NIPC…
On 2012-12-20, the General Assembly of company F… SA met, minutes no. …, through which was proposed and approved by the representative of the sole shareholder A… SA, the formalization of the constitution of Ancillary Contributions, in cash, free of charge, statutorily subject to a regime identical to that provided for in articles 211º to 213º of the Commercial Companies Code, in the total amount of € 24,500.00 (twenty-four thousand five hundred euros), already previously delivered to the company", to meet "the needs arising from the activity currently developed by the company, in the course of this year and of the year of 2011, the sole shareholder A… SA, was disposed to constitute Ancillary Contributions, having, for this purpose, delivered to the company, throughout the year of 2011, the amount of € 10,000.00 (ten thousand euros) and, throughout 2012, the amount of € 14,500.00 (fourteen thousand five hundred euros) ..." (our emphasis) (Annex I).
G… SA, NIPC…
On 2012-12-17, the General Assembly of company G… SA met, minutes no. …, in which was approved by the representative of the sole shareholder A… SA, "...the formalization of the constitution of Ancillary Contributions, in cash, free of charge, statutorily subject to a regime identical to that provided for in articles 211º to 213º of the Commercial Companies Code, in the total amount of € 2,238,015.67 (two million, two hundred and thirty-eight thousand, fifteen euros and sixty-seven cents), already previously delivered to the company", to meet "the needs arising from the activity currently developed by the company, in the course of this year and of the year of 2011, the sole shareholder A… SA, was disposed to constitute Ancillary Contributions, having, for this purpose, delivered to the company, throughout the year of 2011, the amount of € 1,883,000.00 (one million, eight hundred and eighty-three thousand euros) and, throughout 2012, the amount of € 355,015.67 (three hundred and fifty-five thousand fifteen euros and sixty-seven cents" (our emphasis) (Annex II).
H… SA, NIPC…
In the Minutes bearing no. … of the General Assembly of H… SA, held on 2012-12-19, there appears the resolution approved unanimously, regarding the formalization of the constitution of ancillary contributions, which emphasizes that "...the company, in the course of this year the sole shareholder A… SA, not only was disposed to deliver, but did so throughout the year, the amount of € 640,824.38 (six hundred and forty thousand, eight hundred and twenty-four euros and thirty-eight cents) to the company for constitution of Ancillary Contributions, which now needs to be formalized. In this context, the representative of the sole shareholder A… SA proposed and immediately approved the formalization of the constitution of Ancillary Contributions, in cash, free of charge, statutorily subject to a regime identical to that provided for in articles 211º and 213º of the Commercial Companies Code, in the said amount of € 640,824.38 (six hundred and forty thousand, eight hundred and twenty-four euros and thirty-eight cents, already previously delivered to the company.," (our emphasis) (Annex III).
It should be noted that the value contained in the minutes is higher than that determined in account 41230000 by 5.00 EUR, this value corresponding to the acquisition price of the subsidiary with a view to holding 100% of it.
I… SA, NIPC…
On 2012-12-20, the General Assembly of company I… SA met, minutes no. …, through which was proposed and approved by the representative of the sole shareholder A… SA, the "... formalization of the constitution of Ancillary Contributions, in cash, free of charge, statutorily subject to a regime identical to that provided for in articles 211º to 213º of the Commercial Companies Code, in the total amount of € 13,000.00 (thirteen thousand euros), already previously delivered to the company", to meet "the needs arising from the activity currently developed by the company, in the course of this year and of the year of 2011 and 2006, the sole shareholder A… SA, was disposed to constitute Ancillary Contributions, having, for this purpose, delivered to the company, throughout the year of 2008, the amount of € 5,000.00 (five thousand euros), throughout 2011, the amount of € 2,500.00 (two thousand five hundred euros) and, throughout 2012, the amount of € 5,500.00 (five thousand five hundred euros) ,. ." (our emphasis) (Annex IV).
J… LDA, NIPC…
On 2012-12-17, the General Assembly of J…, LDA met, having been drawn the minutes no. …, in which was approved the resolution regarding the formalization of the realization of Supplementary Contributions in the total amount of 1,153,628.75 EUR, in the amount of 477,000.00 EUR relating to the year 2010, in the amount of 333,000.00 EUR relating to the year 2011 and in the amount of 343,628.75 EUR relating to the year 2012, effected by partner A… SA, to meet "...the needs arising from the activity developed by the company, in the course of this year, of the year 2010 and of the year 2011, the partner A… SA, was disposed to constitute Supplementary Contributions, having for this purpose, delivered to the company, and, throughout the year of 2012 the amount of € 343,628.75 (three hundred and forty-three thousand, six hundred and twenty-eight euros and seventy-five cents) ..." (our emphasis) (Annex V).
From the content of the aforementioned minutes it results that A… SA effected - Ancillary Contributions to its subsidiaries: F… SA, G… SA, H… SA and I… SA, having in relation to the same resolved, as regards interest, remuneration and restitutions, to apply to it a regime identical to that of supplementary contributions.
These ancillary contributions did not earn interest, nor would they be remunerated in any form and would only be restituted when the net position of the subsidiary companies so permitted.
- Supplementary Contributions to J…, LDA.
From the minutes it can also be drawn that the reason for the constitution, whether of ancillary contributions, or of supplementary contributions, made by partner A… SA to its subsidiaries, was to meet the needs arising from the activity developed by the subsidiary companies.
Annex to the Balance Sheet and Statement of Results (ABSR)
On 2012-12-31, the loans granted by the taxpayer to its subsidiaries amounted to 23,154,531.47 EUR, taking into account the values determined in the previous period plus the movements that occurred in the period and were previously identified.
During 2011, A… SA made ancillary contributions to companies F… Lda., K…, S.A., G… S.A., I…, S.A. and H…, S.A., in the amount of 10,000.00 EUR, 172,000.00 EUR, 1,883,000.00 EUR (recorded in account 41130000, totaling 2,065,000.00 EUR), 2,500.00 EUR (recorded in account 41410000) and 198,505.79 EUR (recorded in account 41230000), respectively, and supplementary contributions to company J… Lda., in the amount of 333,000.00 EUR (recorded in account 41420000).
Activity of A… SA
The activity of A… SA consists of the "exercise of the textile industry, being able to exploit any other branch of industrial or commercial activity that the General Assembly decides and is permitted by law, assemble or acquire other factories, establish branches or subsidiaries", in accordance with point 1 of article 3º of the company's bylaws (Annex VI).
Point 2 of article 3º of the company's bylaws adds that "the company may also acquire capital holdings in other limited liability companies, whatever their corporate purpose, and also acquire capital holdings in companies regulated by special laws and in complementary business groupings" (Annex VI).
Loans obtained/financings obtained
On 2012-12-31, the taxpayer has recorded in the SNS account "25 - Financings Obtained", the total amount in credit of 42,314,483.42 EUR, as determined by the movements and balances contained in the accounting Saf-t file.
According to the documents supporting the accounting records associated with these accounts, the purposes of the loans obtained are diverse, namely: investment, support and restructuring of the functional structure of the productive units with reduction of staff, strengthening of the company's working capital and financing of exports. However, it was not possible to carry out a direct association between the loans obtained by A… SA and the ancillary contributions and supplementary contributions in its subsidiaries.
Financial charges and Stamp tax arising from loans obtained
Due to resorting to loans obtained, the taxpayer bore financial charges and Stamp tax.
Interest
On 2012-12-31, the financial charges with the loans obtained, recorded in the SNS accounts "69111000 - GPF - BANK LOANS", "69116000 - GPF - COMMERCIAL PAPER", "69117000 GPF - FACTORING INTEREST", "69118000 GPF - CONFIRMING INTEREST" and "69180000 GPF - OTHER INTEREST", amounted to the amount of 2,932,368.77 EUR, as determined by the movements and balances contained in the accounting Saf-t file.
Banking services
The banking services associated with these loans obtained, in the year 2012, recorded in the SNS account "62270001 - FSE - BANKING SERVICES", amounted to 1,172,195.06 EUR, as determined by the movements and balances contained in the accounting Saf-t file.
Stamp Tax
Moreover, the stamp tax borne by the taxpayer, in the year 2012, recorded in the SNS account "68120002 - IND. INDIRECT TAX - STAMP TAX", amounted to 216,213.08 EUR, as determined by the movements and balances contained in the accounting Saf-t file.
Considering that A… SA,
-
Granted ancillary contributions subject to a regime identical to that provided for in articles 211º to 213º of the Commercial Companies Code and supplementary contributions, non-remunerated, to its subsidiaries;
-
In turn resorted to loans;
-
Due to resorting to loans bore financial charges and stamp tax,
-
Through the analysis of accounting it was not possible to identify which loans in concreto were affected to the realization of ancillary contributions and supplementary contributions,
It is important to quantify what the weight of the value of loans granted in the total of loans obtained, for purposes of determining the financial charges and stamp tax inherent in the realization of ancillary contributions and supplementary contributions, according to the table below.
Analysis of the operation from a tax perspective
Under analysis are the financial charges and stamp tax arising from the resort to third-party capital intended either to finance the activity of A… SA, or the granting of supplementary contributions and ancillary contributions, non-remunerated, to its subsidiaries.
Article 23º of the Corporate Income Tax Code (CIRC) constitutes a general clause, in which the rules of deductibility of expenses for tax purposes are established, and which according to António Moura Portugal "Doctrine has chosen two requirements as essential for accounting cost to be accepted as tax cost: proof (justification) and indispensability. To these, we understand to add a third, normally not autonomized, which is the connection to income subject to tax..."
In an analysis of the content of article 23º of CIRC, Tomás de Castro Tavares sustains that "various requirements are isolated that preside over the tax deductibility of business costs: first of all, as a basic presupposition, there must exist an economic expense, that is, the assumption as consideration for the acquisition of any production factor. Then, that the said subtraction from income is not precluded by an express legal provision. Thirdly, certain formal requirements determine an adequate proof of the negative components of income. Finally, an intimate relationship of causality (indispensability) between charges and benefits or in view of the maintenance of the productive source".
According to the same author "The legal notion of indispensability is thus delimited, on an economic-business perspective, by direct or indirect fulfillment, of the ultimate motivation for contribution to obtaining profit. Indispensable costs are equivalent to expenses incurred in the interest of the company or, in other words, in all acts abstractly subsumed in a profit profile. This desideratum deliberately brings together, economic and tax categories, through a primarily logical and economic interpretation of legal causality. The indispensable expense is equivalent to all cost made in order to obtain income and that represents an economic decline for the company".
The tax deductibility of cost depends on a causal and justified relationship with the activity exercised by the company. Outside the concept of indispensability remain acts at odds with the corporate purpose.
This same understanding is shared by António Moura Portugal, who emphasizes that "Indispensability should thus be assessed from a positive judgment of subsumption in corporate activity, which, by nature, should not be reviewable by Tax Law, which should not interfere, much less evaluate the business decisions of the taxpayer. Only this conception is in accordance with the principles of freedom of business management and, at the same time, respects specific interests of tax law (which are at the base of the express limitation made to the deductibility of certain charges).
Indispensable costs are thus equivalent to expenses incurred in the interest of the company. The tax deductibility of cost should depend only on a justified relationship with the company's productive activity and this indispensability is verified "whenever by operation of the theory of the specialty of collective persons the corporate operations fit within its capacity, by subsumption to its corporate purpose and, especially, since they connect with the obtaining of profit even if in an indirect or mediate form"
This author has an interpretation of indispensability based on the corporate object and the activity actually developed by the company itself.
This same position is held by author Vítor Faveiro, considering that "the tax concept of indispensability of costs must be reported to the elements and economic or integral data of the object of each situation, costs being only subject to direct correction, under the terms of article 23º of CIRC, when it is facts which, by nature and univocity are objectively evidenced as foreign to the object and to the economic and managerial purpose of the company".
Thus, indispensability must be interpreted based on the concrete corporate object and the activity actually exercised.
It is important, then, to assess whether the expenses in question are indispensable for the realization of the productive activity of A… SA.
The activity of A… SA consists of the "exercise of the textile industry, being able to exploit any other branch of industrial or commercial activity that the General Assembly decides and is permitted by law, assemble or acquire other factories, establish branches or subsidiaries", in accordance with point 1 of article 3º of the company's bylaws. Point 2 of article 3º of the company's bylaws adds that "the company may also acquire capital holdings in other limited liability companies, whatever their corporate purpose, and also acquire capital holdings in companies regulated by special laws and in complementary business groupings". In these terms, it cannot be considered that the granting of ancillary contributions and supplementary contributions to its subsidiaries, with a view to financing their activity, integrates an act of its normal and current activity; Such amounts are not directly and fully related to any activity of the taxpayer inscribed in its corporate object.
The financial charges and stamp tax in question are not associated with third-party capital obtained to affect, in their entirety, the activity exercised by it, which consists of the exercise of textile industry and, consequently, to the obtaining of income derived from it.
The ancillary contributions and the supplementary contributions granted, free of charge, to its subsidiaries, benefit directly the activity pursued by the subsidiaries themselves, not being indispensable for the obtaining of income or for the maintenance of the productive source of A… SA. In light of the foregoing, it is verified that A… SA financed itself from financial institutions, applying a portion of that financing in the granting of ancillary contributions and supplementary contributions, non-remunerated, to its subsidiaries, whereby the part of the financial charges and stamp tax corresponding to that portion does not constitute an expense with tax relevance in the sphere of A… SA.
Thus, and considering the determination made in table 7, a positive correction to the taxable profit / tax loss for the period of 2012 is proposed, under the terms of article 23º of CIRC, in the amount of 2,364,333.84 EUR.
· As a result of the inspection action, the Tax Authority and Customs Authority issued the additional Corporate Income Tax assessment no. 2016…, relating to the period of 2012, the assessment of compensatory interest no. 2016… and the demonstration of account adjustment no. 2016…, copies of which are attached with the request for arbitral determination, the content of which is given as reproduced;
· On 27-04-2017, the Claimant presented the request for constitution of an arbitral tribunal that gave rise to this case, in which it challenges only the assessments of Corporate Income Tax and compensatory interest in the part in which they rest on the said correction in the amount of € 2,364,333.84, which is embodied in the tax disregard, in light of the provision of no. 1 of article 23.º of the Corporate Income Tax Code, of part of the financial charges and Stamp Tax borne in the fiscal year 2012, with bank financing;
· The Claimant financed its subsidiaries, all held directly or indirectly at 100%, through supplementary contributions and ancillary contributions subject to the regime of supplementary contributions to avoid the negative consequences that would result for it from the insolvency of those, in terms of reputational and credit analysis;
· The Claimant has an integral activity of production and commercialization of textiles divided among its subsidiaries, covering the complete production of fabrics (from spinning, weaving, finishing, dyeing), clothing manufacturing and direct sales to the public through its own brand, which the Claimant acquired;
· The commercialization of items by subsidiary companies allows increasing the Claimant's production activity;
· The Claimant is the parent company that manages the entirety of production and commercialization;
· In addition to production and direct commercialization to the public through subsidiaries, the Claimant also exports and produces for other companies and brands;
· F… in 2012 was already inactive, but it was important to it to maintain the facilities as they have a property that is for sale and the Claimant expects to sell for a high value, so as to later dissolve that company;
· F… despite being inactive had charges to bear with the management and maintenance of its property, whereby it needed to be financed as it had no possibility to generate means to support them;
· The Claimant did not want F… to be declared insolvent, as it would run the risk of squandering value if its property were sold at a loss;
· I… was already inactive in 2012, the only assets it has are real property (estates);
· I… was intended to cede land for the spinning of the Claimant and provide the Claimant with the possibility of capturing water from wells which the estates have, which it uses for energy production and in the production process, which implies great water consumption;
· The Claimant understands that the properties of I… have a value of about € 500,000, intending to sell them, for which it has already made efforts;
· The investment that the Claimant made in it in 2012, of about €5,500 was intended for the maintenance of the property in terms of use and to prevent it from losing market value;
· H… was inactive in 2012 and has already been dissolved, dedicating itself to the production and commercialization of clothing holding the brand of direct commercialization to the public;
· The investment in H… was related to the maintenance of the … brand, in which the Claimant believed, as well as the maintenance of the direct public sales sector which it understood had potential, and also, for reputational reasons, the Claimant did not want the company and brand to fail;
· The Claimant was a heavily leveraged company, resorting intensively to credit, being under intense attention from banks and by companies providing financial information that assign ratings, whereby it had interest in preventing companies dominated by it from becoming insolvent, because that would have negative impact on the conditions of obtaining credit by the Claimant (which already had high spreads, in 2012) and on the payment of credit insurance;
· The Claimant was convinced that, if it had not made the investments in subsidiaries it would have suffered more losses than by making them;
· The Claimant did not make the said capital contributions with interest, because the subsidiaries could not pay them;
· If it had not made the investments in subsidiaries, the Claimant would not necessarily have reduced its debts to banks, as it could have increased its investments or made other expenses;
· On 25-01-2017, the Claimant paid the amount assessed (document no. 3 attached with the request for arbitral determination, the content of which is given as reproduced).
2.2. Facts Not Established
It was not proven that the bank loans contracted by the Claimant were related to the investments made in its subsidiaries.
On this point, the Tax Authority and Customs Authority itself recognized in the Tax Inspection Report that «through the analysis of accounting it was not possible to identify which loans in concreto were affected to the realization of ancillary and supplementary contributions» (page 9).
2.3. Reasoning for the Determination of the Facts
The established facts are based on the Tax Inspection Report and the documents attached with the request for arbitral determination and on witness testimony [the latter as regards the facts of subsections F) to W)].
The witnesses appeared to testify with impartiality and with knowledge of the facts on which they testified.
3. MATTER OF LAW
3.1. Positions of the Parties
The Tax Authority and Customs Authority carried out an inspection of the Claimant, relating to fiscal year 2012, in which it ascertained that supplementary contributions and ancillary contributions were made by it to its subsidiaries, with the regime of supplementary contributions, earning no interest.
In the same fiscal year, the Claimant bore financial charges relating to loans and financings obtained from banking entities, intended for «investment, support and restructuring of the functional structure of the productive units with reduction of staff, strengthening of the company's working capital and financing of exports».
But, the Tax Authority and Customs Authority concluded that «it was not possible to carry out a direct association between the loans obtained by A… SA and the ancillary contributions and supplementary contributions in its subsidiaries».
In this context, the Tax Authority and Customs Authority understood that «it is important to quantify what the weight of the value of loans granted in the total of loans obtained, for purposes of determining the financial charges and stamp tax inherent in the realization of ancillary contributions and supplementary contributions».
To effect this quantification, the Tax Authority and Customs Authority determined, with reference to 31-12-2012, the percentage of «loans granted» (ancillary contributions in the amount of € 23,154,531.47) in the total of «loans obtained» (€ 42,314,483.42), obtaining the value of 54.72%.
Then, the Tax Authority and Customs Authority determined the total amount of financial charges and Stamp Tax borne and applied the aforementioned percentage, arriving at the value of € 2,364,333.84.
The Tax Authority and Customs Authority considered that this amount cannot be accepted as an expense for tax purposes, as, in short, there is lacking a causal and justified relationship of these with the activity exercised by the company, the expenses not having been borne in the interest of the Claimant: «it is verified that A… SA financed itself from financial institutions, applying a portion of that financing in the granting of ancillary contributions and supplementary contributions, non-remunerated, to its subsidiaries, whereby the part of the financial charges and stamp tax corresponding to that portion does not constitute an expense with tax relevance in the sphere of A… SA».
In this case, the Claimant argues, in short,
– that the thesis of the Tax Authority and Customs Authority that bank financings benefited only the said subsidiaries, whereby they cannot be considered indispensable for the Claimant collides with the fact that there is no nexus of connection between the bank loans contracted by A… and the amounts contributed to the subsidiaries;
– that the assessment being challenged is illegal, first of all, insofar as it violates the constitutional principles of taxation by real income and of contributive capacity, and the principles of legal certainty and protection of legitimate expectations, insofar as in making the calculation of the virtual allocation of financial resources obtained by the Claimant to the investment in subsidiary companies it resorted to elements relating to fiscal years as to which the right to assessment had already expired;
– even if the Claimant had in fact used the amounts that were loaned to it to strengthen the financial situation of its subsidiaries it cannot be concluded that the financial charges corresponding were dispensable in the tax-legal sphere of the Claimant, as in strengthening the patrimonial situation of the companies dominated by it, the Claimant strengthened also the value of its asset (financial) which are the corresponding corporate holdings, which belonged to it exclusively;
– it is not relevant that the Claimant is not a holding company, as it is not in light of the concrete corporate object that indispensability of an expense should be assessed, but in view of the activity actually exercised by the inspected company, and in the case, the Claimant actually exercised the activity of management of its subsidiaries;
– the ancillary or supplementary contributions made were to the extent of the strictly necessary to ensure the viability of the subsidiaries – i.e., the maintenance of the asset held by the Claimant, of its productive source - and, consequently, the future gains that the Claimant expects (with good reason) to extract from them and also aimed to safeguard the Group and the Claimant itself from the disastrous consequences that would certainly result from the failure of (only one!) of the mentioned subsidiaries, especially in the context of economic crisis and of profound bank leverage in which the Claimant found itself.
The Tax Authority and Customs Authority maintained the position assumed in the tax inspection report and argues, in short, the following:
– the synergies between the companies find full justification within the scope of freedom of management, and notwithstanding the centralized management and the existence of shared logistics, as well as the interest of the Claimant in not allowing any of the subsidiaries to fall into bankruptcy, such fact, which embodies a perfectly legitimate management option of the Claimant, does not alter the existence of distinct legal entities and indispensability as a tax criterion, enshrined in article 23º of CIRC, to assess the tax deductibility of charges incurred, which is determined by the principle of legality, justice and equality in taxation;
– the tax deductibility of cost depends on a causal and justified relationship with the activity exercised by the company, remaining outside the concept of indispensability acts at odds with the corporate purpose, as is the case with financings to subsidiaries, as well as the obtaining of «potential advantages»;
– the corrections only had impact in the fiscal year 2012 and not in previous ones, whereby there is no violation of the principle of legality;
– as regards quantification the criteria used are clear and objective, respecting the principle of legality;
– expenses provided for in article 23.º of CIRC must respect, first of all, the taxpayer company itself, that is, for a certain amount to be considered an expense of it it is necessary that the respective activity be exercised by it itself, not by other companies, and that this activity consists in the implementation of its corporate object;
– the fact that the Claimant is the holding company, the head of an economic group, does not mean that the activities exercised by the companies within the group lose their autonomy, all the more so since the activity of management of corporate holdings does not form part of its corporate object and it should not be said that this is an irrelevant matter, as if this activity is exercised, it is exercised in breach of the law, being faced with a de facto modification of its corporate object that can only produce effects within the group;
– although it is understood that the existence of these structures objectively aims to minimize the commercial or financial costs of the group, these cannot be superseded by the principles of the tax legal order, which in this case in concreto lead to the tax disregard of the financial charges relating to the financing of the Claimant's associated entities, as they have been used in their activity, while autonomous entity.
3.2. Assessment of the Issue
Under the terms of article 23.º of the Corporate Income Tax Code (in the wording in force in 2012), «are considered expenses those that are proven to be indispensable for the realization of income subject to tax or for the maintenance of the productive source».
The concept of indispensability has been repeatedly assessed by arbitral jurisprudence, in particular as regards the strengthening of the investment by a company in its subsidiaries, whereby the jurisprudence will generally be adopted, in particular the grounds of the award of 13-02-2015, handed down in case no. 585/2014-T.
«The legal notion of indispensability is delimited (...) on an economic-business perspective, by direct or indirect fulfillment, of the ultimate motivation for obtaining profit. Indispensable costs are equivalent to expenses incurred in the interest of the company or, in other words, in all acts abstractly subsumed in a profit profile.» (…) «Indispensability is subsumed in every act carried out in the interest of the company (…) The legal notion of indispensability represses, thus, acts at odds with the corporate purpose, not insertable in the corporate interest, especially because they do not aim at profit». [1]
«Indispensability does not mean, thus, a mandatory nexus of causality with income/benefits, nor that, a posteriori, favorable economic effects deriving from such expenses necessarily must be verified or proven. As long as expenses result from management acts which, based on information known when executed, could have as objective the expected obtaining of income or the maintenance of the productive source (physical, intangible, financial or other) such should lead to the acceptance of its deductibility». [2]
It is stated in the award handed down in case no. 585/2014-T the following:
«Indispensability emerges as a determining factor for the admissibility of costs. Its delimitation is, thus, fundamental for assessing whether the charges were incurred in the interest of the participating company.
One should not always exclude the possibility of deduction of investment costs of companies in their subsidiaries.
The concept of indispensability contained in article 23.º of CIRC should correspond to costs incurred in the interest of the company, to expenses borne in the context of activities covered by its statutory purpose, in the case of a company.
It is not, thus, necessary a connection to benefits, a mandatory nexus of causality between expenses and benefits. On the other hand, judgments by the Tax Administration on the correctness of management decisions are not relevant for that purpose, it being sufficient that the same are taken within the scope of the company's interest.
The Central Administrative Court of the South, in case no. 06754/13 CT - 2º Judicial Office of 16.10.2014 points to the following solution "It is the understanding of jurisprudence and doctrine that the Tax Administration cannot assess the indispensability of costs in light of criteria focusing on the opportunity and merit of the expense. A cost is indispensable when it relates to the company's activity, with costs foreign to the company's activity being only those in which it is not possible to discern any causal nexus with benefits or gains (or with income, in the current expression of the code - cfr. article 23, no. 1, of C.I.R.C.), explained in terms of normality, necessity, congruence and economic rationality (cfr. Award S.T.A. - 2nd Section, of 21.04.2010, case no. 774/09; Award S.T.A. - 2nd Section, of 13.02.2008, case no. 798/07; Award T.C.A. South - 2nd Section, of 17.11.2009, case 3253/09).
Now, an «asset is a resource controlled by the entity as a result of past events and from which it is expected that economic benefits will flow to the entity» - point 49 (a) of the Conceptual Framework of the Accounting Standards System homologated by the dispatch published in Notice no. 15 652/2009, Official Gazette, II Series, of 7 September.
Thus, the "activity" of a company does not end with the set of productive or operational operations. "Activity" is also the set of operations that have as purpose the realization of investments or the alienation of assets, the acquisition of financial holdings and their later alienation, the application of liquidity in investments or short-term securities and their management, the receipts and payments resulting from operational or non-operational income and expenses, and many others. Both will be activity the management of a physical asset, as that of an intangible asset, as that of a non-current asset held for sale, as that of a financial asset.
The business activity that generates deductible costs must be the one that results in operations that have a purpose, an intent of obtaining income or the purpose of maintaining the potential of a productive source of income.
In cases of investment by a company in its subsidiary, financing from the parent company will be made in the interest of that case serve so that from it results an expectation of future income directly deriving therefrom.
The deductibility of interest borne by the parent company will depend on the fact that the financings contribute to, according to normal management rules, increasing the expectation of future benefits or to maintain the productive source (financial asset).
The fact that decisions taken in the sphere of the parent company influence the property of the subsidiary does not mean that they are carried out in the interest of third parties. They are taken from the interest of the parent company in ensuring the operationalization and profitability of its investment in the subsidiary.
The subsidiary uses funds that are contributed to it, but that contribution of funds is made in the interest of the parent company, that is, in the context of normal acts of management that can be encompassed in its scope or profit-seeking purpose.
In situations where the parent company holds the entirety of the capital of the subsidiary and, therefore, holds total possibility of intervening in the management of the subsidiary and ensuring that the investment is used in its interest, the investment in the subsidiary recurs to the management of the holding and constitutes indirect exercise by the parent company of the economic activity that the subsidiary carries out, whose positive or negative reflexes end up being repercussed entirely in the legal sphere of the parent company through the valorization or devalorization of its holding, whereby the charges necessary to ensure the investment enhancing the obtaining of future benefits fit within the concept of economic indispensability, with the referred sense of expenses integrally effected in the interest of the company.»
The situation of the Claimant and its subsidiaries is fundamentally identical to that assessed in this award, as all subsidiaries are held, directly or indirectly, by the Claimant, at 100% and, therefore, all effects of the investments made end up being repercussed in the patrimonial sphere of the Claimant, through the valorization or devalorization of the holdings whereby its interest is obvious.
«The subsidiary is not some alien entity to the activity and interests of the parent company. There is no expense in the sphere of the latter that has nothing to do with its corporate interest. The expense with interest incurred with capital obtained and, subsequently contributed to the subsidiary, is made in the interest of the parent company, in a direct consequence of its activity of management of an asset that emerges from a holding, which is real or potentially a producer of income».[3]
In the case at hand, it results from the evidence produced that the investments were made by the Claimant to alleviate economic difficulties of the subsidiaries, so as to keep their property in conditions that allow obtaining better prices in future sales of that same property or to maintain the possibility of obtaining benefits in the future, whereby it must be concluded that the Claimant has its own interest in making those investments.
On the other hand, it results from the evidence produced that the Claimant had its own interest in preventing the declaration of insolvency of companies which it controls at 100%, because of the reputational damages it would suffer and which, inclusively, could imply difficulties or worsening of conditions in obtaining credit, to which the Claimant resorted intensively, being a heavily leveraged company, under intense attention from banks.
Thus, the investments in subsidiaries appear as necessary or, at least, convenient not only for the direct pursuit of the interests of each of the subsidiary companies but also, even directly, for the pursuit of the purpose of the Claimant at the level of «realization of income subject to tax» (namely, with the improvement of its results through the maintenance of the current or even obtaining of better conditions with the Bank with the avoidance of reputational damages in case of insolvency of any of its subsidiaries), as well as the maintenance of the productive source, in which are included the benefits that can derive from the alienation of property by the financial assets (subsidiaries), where it strengthened its investment through the granting of ancillary contributions subject to the regime of supplementary contributions.
From the foregoing it follows that the correction made relating to the deductibility of the financial charges borne by the Claimant in 2012 to finance its subsidiaries violates article 23.º, no. 1, of CIRC, which constitutes a vice of violation of law, which justifies the annulment of the assessment, in the part corresponding to that correction.
3.3. Questions of Prejudiced Knowledge
The request for arbitral determination should proceed for the reasons stated, whereby the knowledge of the remaining questions is prejudiced, by being useless.
4. RESTITUTION OF THE AMOUNT PAID
The Claimant paid the amount assessed (document no. 3 attached with the request for arbitral determination), whereby it has the right to the reimbursement of the amount paid in excess, corresponding to the correction whose legality is being challenged in this case.
The Claimant indicates as the value of the case the amount of € 726,538.62 (corresponding to the sum of [Corporate Income Tax rate in 2012, namely 25% * 2,364,333.84 amount of the correction made = € 591,083.46] + [municipal levy rate applicable to the Claimant in 2012, namely 1.20% * value of the correction made = € 28,372.01] + compensatory interest, in the proportion that respects the correction being challenged, namely, € 107,083.15]).
Thus, the amount to be reimbursed is € 726,538.62.
5. DECISION
Whereby the Arbitral Tribunal agrees on:
– to judge the request for arbitral determination well-founded;
– to annul the additional Corporate Income Tax assessment relating to fiscal year 2012 bearing no. 2016… and the assessment of compensatory interest bearing no. 2016…, in the part deriving from the correction in the amount of € 2,364,333.84, relating to the disregard of financial charges and Stamp Tax borne by the Claimant;
– to judge well-founded the request for restitution of the amount of € 726,538.62, (being € 591,083.46 of Corporate Income Tax, € 28,372.01 of municipal levy and € 107,083.15 of compensatory interest) and to order the Tax Authority and Customs Authority to pay that amount to the Claimant.
6. VALUE OF THE CASE
In accordance with the provision in article 306.º, no. 2, of the Civil Procedure Code and 97.º-A, no. 1, subsection a), of the Tax Procedure Code and 3.º, no. 2, of the Costs Regulation in Tax Arbitration Proceedings the value of the case is fixed at € 726,538.62.
7. COSTS
Under the terms of article 22.º, no. 4, of LRAT, the amount of costs is fixed at € 10,710.00, under the terms of Table I attached to the Costs Regulation in Tax Arbitration Proceedings, to be borne by the Tax Authority and Customs Authority.
Lisbon, 28-11-2017
The Arbitrators
(Jorge Lopes de Sousa)
(A. Sérgio de Matos)
(Ricardo Gomes Pedro)
[1] TOMÁS TAVARES, "On the relationship of partial dependence between accounting and tax law in determining the taxable income of collective persons: some reflections at the level of costs", in Tax Science and Technique, no. 396, 1999, pages 136-137.
[2] Arbitral Award of 21-04-2015, handed down in case no. 644/2014-T, relating to a situation of free financings to subsidiaries.
[3] Arbitral Award of case no. 264/2016-T.
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