Process: 305/2013-T

Date: September 18, 2014

Tax Type: IRC

Source: Original CAAD Decision

Summary

Case 305/2013-T addresses the application of Portugal's General Anti-Abuse Clause (CGAA) under Article 38(2) of the General Tax Law (LGT) to a Corporate Income Tax (IRC) assessment totaling €309,600.23 for the 2008 tax year. The claimant, A-SGPS SA, a shareholding management company established in February 2008, challenged the Tax Authority's assessment which alleged abusive tax practices in connection with share transactions involving Company B. The factual pattern involved a transformation of Company B from a private limited company to a public limited company in 2008, followed by capital increases and merger incorporations. In 2009, the majority shareholder (Shareholder 1) sold 84,570 shares (87.19%) of Company B to A-SGPS for €2,186,980.00. These shares had been held for more than one year, making them exempt from Personal Income Tax (IRS) under Article 10(2)(a) of the Personal Income Tax Code (CIRS). The Tax Authority argued that the legal business transactions were essentially directed toward tax reduction through abuse of legal forms, constituting grounds for applying the anti-abuse rule. The authority's decision referenced Article 63 of the Tax Procedure Code (CPPT) in conjunction with the CGAA. The arbitral proceedings were conducted under the Administrative Arbitration Regime (RJAT - Decree-Law 10/2011), with a collective tribunal constituted on February 26, 2014, composed of three arbitrators appointed by the Ethics Council. The claimant requested full annulment of the assessment and compensatory interest (juros indemnizatórios). Both parties waived the oral hearing under Article 18 of RJAT and additional evidence production. The case exemplifies the Portuguese Tax Authority's increasing scrutiny of corporate restructurings and share transactions involving holding companies (SGPS), particularly where common shareholders exist between transacting entities and where timing suggests tax optimization strategies. The tribunal extended its decision deadline under Article 21(2) of RJAT, demonstrating the complexity of anti-abuse clause applications in corporate tax matters.

Full Decision

ARBITRAL DECISION

Case No. 305/2013-T

The arbitrators, Judge Dr. José Poças (presiding arbitrator), Dr. José Nunes Barata and Dr. António Rocha Mendes, appointed by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 26-02-2014, decide as follows:

I. REPORT

  1. SGPS, SA, Tax Identification Number …, (hereinafter also referred to as "claimant" and "A"), with registered office at …, has, pursuant to Articles 2, paragraph 1, subparagraph a), 10, paragraph 1, subparagraph a) and 10, paragraph 2, of Decree-Law No. 10/2011 of 20 January (hereinafter "RJAT") submitted to the appreciation of an Arbitral Tribunal the legality of the assessment of Corporate Income Tax (IRC) in the total final amount of €309,600.23, including compensatory interest, relating to the year 2008, by application of the general anti-abuse clause (CGAA), provided for in Article 38-2 of the General Tax Law (LGT), on the grounds of abusive application of said tax regime.

The reasoning of the challenged assessment is that contained in the decision of 14 December 2012 on the application of the anti-abuse clause, notified to the claimant through official letter No. …, of 18.12.12, which constitutes the reasoning of the tax act in question (document No. 3), contained in the tax audit report.

The claimant concludes requesting the allowance of the challenge and, consequently, determining the full annulment of such tax assessment and other legal increases (compensatory interest) and further requests that the Tax and Customs Authority be condemned to payment of indemnificatory interest.

The Tax and Customs Authority is the respondent.

The claimants opted for non-designation of an arbitrator.

Pursuant to the provisions of subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of the RJAT, in the wording introduced by Article 228 of Law No. 66-B/2012 of 31 December, the Ethics Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the appointment within the applicable period.

The parties were notified and did not manifest willingness to refuse the appointment of the arbitrators, pursuant to the combined provisions of Article 11, paragraph 1, subparagraphs a) and b) of the RJAT and Articles 6 and 7 of the Code of Ethics.

Thus, in accordance with the provisions of subparagraph c) of paragraph 1 of Article 11 of the RJAT, in the wording introduced by Article 228 of Law No. 66-B/2012 of 31 December, the collective arbitral tribunal was constituted on 26-02-2014.

The Tax and Customs Authority submitted a response in which it defended the non-allowance of the claims.

With the consent of both parties, the meeting provided for in Article 18 of the RJAT was waived, as well as the production of additional evidence and final arguments, oral or written.

By order of the Tribunal of 18-7-2014, the deadline for the arbitral decision was extended, for the reasons stated, pursuant to the terms and for the period of 2 months provided for in Article 21-2 of the RJAT.

  1. The Arbitral Tribunal was regularly constituted and is competent.

The parties possess legal personality and capacity and are legally entitled (Articles 4 and 10, paragraph 2 of the same statute and Article 1 of Ordinance No. 112-A/2011 of 22 March).

The proceedings do not suffer from nullities.

II. GROUNDS

  1. Factual Matter

3.1. Proven Facts

The following facts are considered proven:

a) On 19.05.1993, company B was established, with Tax Identification Number …, hereinafter designated as (B), having as its object "the provision of consulting services and official accounting and financial assistance, projects and company management, national and foreign representations," with quotas valued at € 5,000.00, with the following shareholders:

  • Shareholder 1, Tax Identification Number … (quota in the amount of € 3,750.00);
  • Shareholder 2, Tax Identification Number … (quota in the amount of € 1,250.00).

b) On 26.06.2008, a capital increase was carried out, through incorporation of reserves [€447,000] and cash [€300.00], from € 5,000 to € 50,000.00 and transformation of the private company B into a public limited company (joint-stock company).

c) The capital increase of € 300.00 was subscribed by the entry of new shareholders, with € 100.00 each, being:

  • Shareholder 3, Tax Identification Number …;
  • Shareholder 4, Tax Identification Number …;
  • Shareholder 5, Tax Identification Number ….

d) The capital thus consisted of 50,000 shares, with the nominal value of € 1.00.

e) On 18.12.2008, there was a further capital increase to € 96,995.00 and incorporation by merger of company C, Tax Identification Number ….

  • Number of shares: 96,995;
  • Nominal value: € 1.00.

e) As a consequence, the capital of B, after the incorporation of C, was distributed as follows:

  • Shareholder 1, Tax Identification Number ... (quota in the amount of € 84,570.00);
  • Shareholder 2, Tax Identification Number ... (quota in the amount of € 12,425.00).

(…)

f) In 2009, the majority shareholder of B, Mr. Shareholder 1, sold the 84,570 shares (87.19%) which he held in this company to SGPS, which had been established on 28.02.2008, with the acquisition value realized by SGPS being € 2,186,980.00.

(…)

g) Company A is a Management Company of Shareholdings, with the corporate name A – SGPS, SA, Tax Identification Number …, established on 28.02.2008, being legally regulated by Decree-Law No. 495/88 of 30 December, with new wording given by Decree-Law No. 318/94 of 24 December, by Decree-Law No. 378/98 of 30 December and by Law No. 109-B/2001 of 27 December and has as its corporate object "the management of shareholdings in other companies, as an indirect form of exercise of economic activities – Economic Activity Code 64202."

h) A was established with share capital of € 50,000.00, corresponding to 50,000 bearer or registered shares with the nominal value of € 1.00, belonging to the following shareholders:

  • Shareholder 7, Tax Identification Number ...(participation in the amount of € 49,996.00);
  • Shareholder 3, Tax Identification Number ...(participation in the amount of € 1.00);
  • Shareholder 4, Tax Identification Number ...(participation in the amount of € 1.00);
  • Shareholder 5, Tax Identification Number ... (participation in the amount of € 1.00);
  • Shareholder 6, Tax Identification Number ...(participation in the amount of € 1.00).

i) [According to the tax audit report at page 6], there are common shareholders to both companies [A and B], as described therein, which are hereby reproduced for all legal purposes.

j) The TA considered that in "the year 2008, legal business transactions were identified which were essentially or mainly directed, by official means and with abuse of legal forms, to the reduction of taxes that would be due without the use of such means, which, in our opinion, constitute grounds for applying the anti-abuse legal rule provided for in paragraph 2 of Article 38 of the General Tax Law (LGT)."

k) Such legal business transactions which are described on pages 8 et seq. of the report, were summarily as follows:

l) On 28.12.2009, Mr. Shareholder 1 proceeded to sell part of the available shares of company B, Tax Identification Number …, to company A SGPS, Tax Identification Number …, pursuant to the contract for purchase and sale of shares which were attached as Annex 1 to the report, having been declared by the selling shareholder in Annex G1 of the Model 3 Declaration, of the year to which it refers.

m) These shares had been held by the shareholder for more than one year [whereby their sale was excluded from taxation under Personal Income Tax (IRS) pursuant to subparagraph a) of paragraph 2 of Article 10 of the Corporate Income Tax Code (CIRS) (wording given by Decree-Law No. 228/2002 of 31 October)].

n) On 28.12.2009, a contract for transfer of shares was entered into, attached as Annex 1, in which Mr. Shareholder 1, Tax Identification Number …, sold to A, SGPS, 84,570 shares of company B, for the value of € 2,186,980.00, corresponding to a unit price of € 25.86 (€ 2,186,980.00 / 84,570 shares).

o) Resulting from this sale, a credit was recognized to the shareholder of A, SGPS which originated the movement of accounts in this company, as per the journal entry in Annex 7 (point 4) to the tax audit report.

p) The TA further verified that company B, despite presenting positive results in the years 2008 to 2010, did not distribute to its shareholders any profit in those years, as per Statement of Declarations, made on 13.09.2012.

q) And that only on 14 January 2011, that is, after the completion of the operations described – establishment of SGPS and actual acquisition of B – did it proceed to the distribution of dividends, as per minutes No. 22, attached to the tax audit report, where the distribution of dividends to the sole shareholder A SGPS SA was approved in the year 2011.

r) Having, subsequently, proceeded to analyze the monetary flows in the period under analysis of A SGPS SA, the TA concludes that various financial flows were verified between the various entities involved, as described on pages 12 to 14 of the report, which is hereby reproduced for all legal purposes.

s) The TA came, after analysis of these flows, to consider that the facts are subsumed under paragraph 2 of Article 38 of the LGT considering that its four requirements are met, namely, the elements: means, result, intellectual and normative, as described in the tax audit report on pages 17 et seq., which is hereby reproduced for all legal purposes;

t) In consequence, it proceeded to the additional assessment of Corporate Income Tax, in the total final amount of €309,600.23, including compensatory interest, relating to the year 2008, by application of the general anti-abuse clause (CGAA);

u) Such assessment was determined by decision of 14 December 2012, notified to the claimant on 18-12-2012.

3.2. Unproven Facts

  • It was not proven that the operations or business transactions described in subparagraphs k) to s) of the proven facts were carried out solely for the purpose of obtaining tax advantages for the participants.

3.3. Motivation

The facts were considered proven on the basis of the documents submitted by the claimant, the Tax Inspection Report and the documents contained in the procedural file, with further consideration of the circumstance that there is no controversy between the parties concerning the factual and objective framework described by the claimant.

  1. Grounds (continued)

The Law

Article 38, paragraph 2, of the General Tax Law establishes a general anti-abuse clause, pursuant to which "acts or legal business transactions essentially or mainly directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal business transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, wholly or partially, without the use of such means, are ineffective within the tax scope, with taxation then being effected in accordance with the applicable rules in their absence and the said tax advantages not being produced."

In the case at hand, the Tax Administration decided to apply the general anti-abuse clause considering that the legal business transactions which should be disregarded for taxation purposes are the sales/transfers to the claimant A, SGPS, by the shareholder/shareholder Shareholder 1 of the shares held for more than 12 months in the share capital of company B, an operation which allowed the seller to finance his own purchase and to become a creditor for payment of the shares transferred and, with this operation arranged, when B distributes dividends to A, it is exempt from any tax burden in view of the provisions of Article 32-1 of the Statute of the Tax Benefits System [this benefit in SGPS never reaches dividend and, consequently, there is no taxation under Personal Income Tax (IRS) in the sphere of the shareholders/shareholders]. That is: without the operations described and the use of A, SGPS, the financial flows would reach the shareholders in the form of dividends, subject to Personal Income Tax (IRS) and not, as happened, in the form of credit reimbursement without taxation at the level of Personal Income Tax (IRS).

The Tax and Customs Authority understood that the said operations carried out in the above-mentioned framework are abusive, in that they sought to conceal dividend distributions, which is why it decided to apply the general anti-abuse clause and to consider the amounts received as if they were dividends.

4.1. Legitimate and Illegitimate Tax Planning[1]

In the definitions elaborated by Saldanha Sanches ([2]): legitimate tax planning "consists of a technique of reduction of the tax burden by which the taxpayer renounces a certain behavior because this is linked to a tax obligation or chooses, among the various solutions that are offered by the legal system, that one which, by intentional action or omission of the tax legislator, is accompanied by fewer tax burdens"; while illegitimate tax planning "consists of any behavior of undue reduction, because it contravenes principles or rules of the legal and tax system, of the tax burdens of a certain taxpayer."

Within the framework of tax planning we can thus distinguish situations in which the taxpayer acts against the law, outside the law and within the law.

When he acts against the law, his action is frontal and unequivocally unlawful, as it directly infringes the tax law, and constitutes tax fraud ([3]) liable, moreover, to be subject to administrative offense procedures or criminal liability.

Acting outside the law occurs when the taxpayer abusively takes advantage of the law to arrive at a more favorable tax result, despite not directly violating it. This adopts "a behavior that has as its exclusive or principal purpose to circumvent one or several legal and tax rules, so as to achieve the reduction or suppression of the tax burden" ([4]). It being the case that from such rule or rules one should detect an attempt to circumvent "a clear intention to tax affirmed by the structuring principles of the system" ([5]). This type of action is commonly referred to as "fraud against tax law" but, as Saldanha Sanches warns, intending to better illustrate and distinguish these situations from tax fraud, also called "abusive avoidance of tax burdens," "abusive tax avoidance" or even "tax avoidance" ([6]).

Only action within the law appears to be legitimate – and thus legitimate tax planning or non-abusive – . Indeed, the obtaining of a tax saving does not constitute behavior prohibited by law, provided that the action does not fall within the aforementioned action outside the law ([7]).

Doctrine and case law have come to deconstruct the wording of the rule by pointing to five elements contained therein. Corresponding one of the elements to the enactment of the rule, the remaining four appear to be cumulative requirements that allow assessment – as if it were a test – as to the verification of an activity characterizable as abusive tax planning ([8]).

These elements, around which both parties moreover construct their arguments, consist of:

– the means element, which concerns the freely chosen avenue – act or legal business transaction, isolated or part of a structure of acts or legal business transactions sequential, logical and planned, organized in a unitary manner – by the taxpayer to obtain the desired tax gain or advantage ([9]);

– the result element, which concerns the obtaining of a tax advantage, by virtue of the choice of that means, when compared with the tax burden that would result from the practice of "normal" acts or legal business transactions and of equivalent economic effect ([10]);

– the intellectual element, which requires that the choice of that means be "essentially or mainly directed [...] to the reduction, elimination or temporal deferment of taxes" (Article 38, paragraph 2 of the LGT), that is, which requires not mere verification of a tax advantage, but rather that an objective assessment be made of whether the taxpayer "intends an act, a legal transaction or a given structure, only or essentially, for the prevailing tax advantages that they provide" ([11]);

– the normative element, which "has as its primary function to distinguish cases of tax avoidance from cases of legitimate tax saving, in consideration of the principles of Tax Law, being that only in cases where an intention of law is demonstrated to be contrary or not legitimizing of the result obtained can one speak of that" ([12]);

– and, finally, the sanctioning element, which, presupposing the cumulative verification of the remaining elements, leads to the sanction of ineffectiveness, in the exclusive tax scope, of the acts or legal business transactions deemed abusive, "with taxation then being effected in accordance with the applicable rules in their absence and the said tax advantages not being produced" (final part of Article 38, paragraph 2, of the LGT).

Despite this deconstruction, the analysis of the elements cannot be compartmentalized, as Courinha emphasizes, "the determination of one element may, in practice, depend on another," which is why these "will not infrequently [...] come to assist one another" ([13]).

Let us assess, having this aspect in consideration, the elements of the general anti-abuse clause considering the reasoning of the decision, the proven facts, and the legal arguments of the parties.

4.2. Analysis of the Situation

In this analysis, one must proceed from the assumption that the reasoning of the act that decided the application of the general anti-abuse clause that must be assessed is only that contained in the act itself and elements to which it refers, as the tax arbitration process, as an alternative means to the judicial challenge process (paragraph 2 of Article 124 of Law No. 3-B/2010 of 28 April), is, like this, a procedural means of mere legality, in which the aim is to eliminate the effects produced by illegal acts, annulling them or declaring their nullity or non-existence [Articles 2 of the RJAT and 99 and 124 of the Tax Procedural Code, applicable by force of the provisions of Article 29, paragraph 1, subparagraph a) of that]. For this reason, the acts which are the object of the proceedings must be assessed as they were carried out, the tribunal not being able, on finding that an illegal ground is invoked as support for the administrative decision, to assess whether its action could be based on other grounds.

In the case sub judice, the claimant disputes that the aforementioned commercial operations constitute abusive tax planning, that is, the transformation of company B, from a private company into a public limited company and the subsequent credit sale to the claimant A, SGPS, of the respective shares, without taxation of the respective capital gains, considering the holding of those participations for more than 12 months so that, when B distributes dividends to A – SGPS, no tax charges are due in view of the provisions of Article 32-1 of the Statute of the Tax Benefits System, with that benefit never reaching dividend with the consequent subjection to taxation under Personal Income Tax (IRS).

But will all this sequence of operations have aimed solely and exclusively at evading taxation of income subject to it or, on the contrary, was not that the sole or main reason?

Let us see:

The general anti-abuse clause (abbreviated as CGAA) was introduced into the Portuguese tax system during the nineteen nineties, when some other special anti-abuse measures also began to be adopted in Portugal within the scope of taxes on income.

And, in the essence of the amendments introduced to the initial wording of the CGAA by Law No. 100/99 of 26 July, is the "importation" of the German doctrine of missbrauch von formen [abuse of forms or possibilities of legal configurations of business transactions][14]

Its reason for being and principal motivation is found in the need to establish means of connection – and, also, of prevention – which are more appropriate to repress these behaviors deemed "contrary to law," although lawful, requiring that the Tax Administration prove the concrete verification of the legal requirements that allow triggering their own consequences.

Enormous difficulties of successful application are foreseen and verified, of which the scarcity of judicial decisions in favor of the Tax and Customs Authority gives evidence.[15]

In these, the so-called step transaction doctrine was adopted, according to which the anti-abuse provision can and should be applied taking into account the decisive and final moment of the operations in question.

The principle underlying the CGAA is that of the prevalence of economic substance over the legal form of acts or legal business transactions, without, however, reaching the point of removing practical scope from the principles of legality and exhaustive typicality of taxes.

This is why, for the full functioning of the CGAA, one should, at the limit, conclude for the existence of a "clothing" of legal forms intended solely and exclusively to conceal economic realities which, without that "clothing," would be taxed.

If, on the contrary, taxpayers are guided by other concerns or reasons when they choose an avenue that results in exemption or reduction of taxation, then it will prove excessive to conclude for the obligation of the taxpayer's choice of the avenue that implies a greater worsening in taxation.

Subsuming:

The transformation of the private company B, into a public limited company is a normal act that falls within the field of general management and tax freedom, with expression in the freedoms of economic initiative and enterprise, normally intended to strengthen the corporate structure and allow the opening of its capital.

The following act of increase in share capital and incorporation, by merger, of company C, falls within this line of management and business strategy, with necessary increase in the structure of clientele, competencies and business prospects.

The pressing and essential question is whether the aforementioned objectively legal steps adopted and which were (or also were) ultimately directed to an objective tax saving can or should be considered legally "artificial or fraudulent."

First and foremost, the sale of shares without subjection to taxation (the regime then in force until the repeal of Article 10-2 of the CIRS) cannot be seen as something abusive or prohibitive: if there existed that so-called "conscious lacuna of taxation[16]," the seller availed himself of it legally, understandably and legitimately.

It is true that some doubts may be raised concerning the aforementioned factual framework; however, by force of the provisions of Article 100 of the Tax Procedural Code, subsidiarily applicable ex vi Article 29, paragraph 1, subparagraph c) of the RJAT, any such hypothetical doubt would always have to be valued procedurally in favor of the Claimant, which is equivalent to considering not proven that exclusive or mainly fiscal reasons were the determining factors for the aforementioned operations.

Therefore, the use of the aforementioned and legal legal forms cannot be considered as use of artificial or fraudulent means, for the purposes of Article 38, paragraph 2, of the General Tax Law, nor can any abuse of legal forms be discerned in the execution of such operations.

On the other hand, the fact that to these operations there is associated a tax advantage cannot be considered an obstacle to the acceptance of the option for tax purposes, as taxpayers are not obligated to opt for business transactions that are fiscally more burdensome, when the law provides them with more than one means to achieve the ends they pursue in the restructuring and management of companies.

Thus, the requirements provided for in Article 38, paragraph 2, of the LGT being cumulative for application of the general anti-abuse clause, it must be concluded that the action of the claimant cannot be considered illegitimate tax planning intended to avoid the assessment (withholding) of Personal Income Tax (IRS).

  1. Conclusion

It is concluded, therefore, that one of the factual requirements on which the application of the general anti-abuse clause depends is not met, which is that the act or legal transaction was essentially or mainly directed to the reduction, elimination or temporal deferment of taxes that would be due.

In light of Article 38, paragraph 2, of the LGT, when this rule states that, for application of the general anti-abuse clause, the legal transactions must be directed to the reduction, elimination or temporal deferment of taxes that would be due, it is not sufficient that tax advantages be obtained, but rather it is indispensable that the obtaining of these was an essential or principal objective pursued by the taxpayer.

Now the proof of the essentiality of that objective for the purposes of lower taxation is, in this case, at least not evident.

And, even if some doubts could be raised as to whether or not it was that essential or principal purpose of the commercial operations objectively carried out, the truth is that such doubt would always have to be valued in favor of the taxpayer in light of the provisions of Article 414 of the Code of Civil Procedure.

Therefore, the request for annulment of the Corporate Income Tax assessment acts for the year 2008 and compensatory interest which are the object of these proceedings must be held to be allowable.

  1. Indemnificatory Interest

Pursuant to Article 43 of the General Tax Law, the requirements for the right to indemnificatory interest are as follows:

  • That there be an error in an act of assessment of a tax;

  • That it be imputable to the services;

  • That the existence of such error be determined in a process of gracious claim, judicial challenge or arbitral pronouncement;

  • That from such error there has resulted the payment of a tax debt in an amount greater than that legally due.

With respect to Article 100 of the General Tax Law, it is required that:

  • There be a decision of total or partial allowance of a gracious claim, judicial challenge or appeal, which results in the annulment of a tax act;

  • That indemnificatory interest not be due with respect to a period prior to the end of the term for execution of the annulling decision; and

  • That the decision to be executed is not a judicial decision.

The General Tax Law does not generically refer to the initial and final terms for counting indemnificatory interest.

We find, however, some cases in which there is an indication of the initial term: this is the case of subparagraph b) of paragraph 3 of Article 43 of that Law, where it is provided that indemnificatory interest is due from the 30th day following the Tax Administration's decision to annul the tax act on its own initiative, and of subparagraph c) of the same paragraph and article, from which it results that, in the case of revision of the tax act at the taxpayer's initiative - outside the situations of gracious claim that can be framed in paragraph 1 of the same article - , indemnificatory interest is only due from one year after the submission of the revision request and, even in this case, may be counted from a later moment if the delay is not imputable to the tax administration.

In cases not provided for, the counting should be made on the basis of the nature of these interest and of the situations that generate the debt, and should, in principle, correspond to the beginning of the period in which the taxpayer is deprived of sums that should be in his possession if an illegal situation did not

exist.

Thus being and concluding:

  • If the indemnificatory interest is caused by the existence of an error imputable to the services (see Article 43, paragraphs 1 and 2 of the General Tax Law), it will be due from the moment the excess amount was paid or withheld until the moment the credit note is prepared that allows the taxpayer to receive the sum of which he

was wrongfully deprived;

  • If the indemnificatory interest is due to non-compliance with the deadline for official restitution of taxes (see Article 43, paragraph 3, subparagraph a) of the General Tax Law), the indemnificatory interest will be due from the end of the legal deadline for restitution until the moment the credit note is prepared.

Regarding the rate, pursuant to paragraph 4 of Article 43 of the General Tax Law, the rate of indemnificatory interest is identical to that of compensatory interest, that is, the rate fixed pursuant to Article 559 of the Civil Code, by force of the provisions of paragraph 10 of Article 35 of the General Tax Law.

In the case, the claimant paid the challenged assessments.

Thus, in light of the foregoing, it has the right to be reimbursed of the amount paid plus indemnificatory interest counted from that date of payment until the moment of issuance of the respective credit note.

  1. Value of the Case

In accordance with the provisions of Article 306, paragraph 2, of the Code of Civil Procedure and Article 97-A, paragraph 1, subparagraph a) of the Tax Procedural Code and Article 3, paragraph 2 of the Rules of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 309,600.23.

III. DECISION

  1. In accordance with the foregoing, the arbitrators in this Arbitral Tribunal agree in:

a) To hold the request for arbitral pronouncement fully allowable and to determine the annulment of the tax assessment that is the object of these proceedings and other increases (compensatory interest); and

b) To condemn the TA to payment of indemnificatory interest to the claimant A SGPS, SA, from the moment in which the assessed tax and increase were paid, until the date on which the credit note is issued by the Tax and Customs Authority.

  1. Costs

The Tax and Customs Authority shall bear the costs, with the respective amount being fixed at € 5,508.00 (five thousand five hundred and eight euros), pursuant to Article 22-4 of the RJAT and Table I attached to the Rules of Costs in Tax Arbitration Proceedings.

Lisbon, 18-9-2014

The Arbitrators

(José Poças Falcão)

(José Nunes Barata)

(António Rocha Mendes)

[1] This closely follows the Case Law of the CAAD on this matter, published on its website and, most especially, the Decision rendered in Case No. 311/2013-T (Counselor Jorge Lopes de Sousa).

[2] See Saldanha Sanches, J.L., Os Limites do Planeamento Fiscal, Coimbra Editora, Coimbra, 2006, p. 21.

[3] See Decision of the Central Administrative Court of Southern Portugal of 12-02-2011, Case No. 04255/10.

[4] See Jónatas Machado and Nogueira da Costa, Curso de Direito Tributário, Coimbra Editora, Coimbra, 2009, pp. 340-341.

[5] See Saldanha Sanches, J.L., Os Limites..., p. 181.

[6] See Saldanha Sanches, J.L., Os Limites..., pp. 21-23; and also Decision of the Central Administrative Court of Southern Portugal of 12-02-2011, Case No. 04255/10.

[7] See Saldanha Sanches, J.L., Reestruturação de empresas e limites do planeamento fiscal, As duas constituições – nos dez anos da cláusula geral antiabuso, Coimbra Editora, Coimbra, 2009, pp. 49-50, which states, in this regard: "the enactment of the general anti-abuse clause implies [...] that from its introduction it is clearly delimited what the taxpayer can and cannot do. Tax skills, fiscal dexterity are no longer possible (artificial and fraudulent operations that have as their principal or exclusive purpose the obtaining of a tax saving by fraud against law) and the taxpayer begins to have his behavior judged according to this criterion. [...] the evolution of the law is clear in the sense of providing legal basis for tax planning, provided it is practiced without the abuse of legal forms, without artificial and fraudulent legal business transactions but limited to choosing the avenue that is open and that allows him to achieve tax savings". See also Marques, Paulo, Elogio do Imposto, Coimbra Editora, Coimbra, 2009, pp. 360-364.

[8] That is, a "planned action of the taxpayer which translates into apparently lawful behavior, generating a tax advantage not admitted by the tax system" (see Courinha, Gustavo Lopes, Cláusula Geral Antiabuso no Direito Tributário: Contributos para a sua compreensão, Almedina, Coimbra, 2009, pp.15-17 and 163-165; as well as Decision of the Central Administrative Court of Southern Portugal of 15-02-2011, Case No. 04255/10, conclusions XIII and XIV).

[9] As appears from the following part of Article 38, paragraph 2 of the LGT: "acts or legal business transactions essentially or mainly directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferment of taxes."

[10] This results from the following segment of Article 38, paragraph 2, of the LGT: "reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal business transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, wholly or partially, without the use of such means." It also results from Article 63, paragraph 3, subparagraphs a) and b) of the Tax Procedural Code, in the wording given by Law No. 64-B/2011 of 30 December, which require that the Tax Administration include in its reasoning, respectively, "the description of the legal business transaction celebrated or the legal act performed and of the legal business transactions or acts of identical economic purpose, as well as an indication of the rules of incidence that apply to them" and "the demonstration that the celebration of the legal business transaction or practice of the legal act was essentially or mainly directed to the reduction, elimination or temporal deferment of taxes that would be due in case of a legal business transaction or act with identical economic purpose, or to the obtaining of tax advantages."

[11] See Courinha, Gustavo Lopes, Cláusula..., p. 180.

[12] See Courinha, Gustavo Lopes, Cláusula..., p. 211.

[13] See Courinha, Gustavo Lopes, Cláusula..., p. 165. Similarly, Saldanha Sanches, J.L., Os Limites..., p. 170, who points out a "relation of connection and interdependence in relation to the requirements exigible by law."

[14] See Saldanha Sanches, Os Limites do Planeamento Fiscal, Coimbra Editora, pp. 169-175 and Gustavo Courinha, A Cláusula Geral Anti-Abuso no Direito Tributário: Contributos para a sua Compreensão, reprint of 1st Ed, Almedina, 2009, pp. 157 et seq.

[15] The only decisions known in this sense are the Decisions of the TCAS of 15-23-2011 (Case No. 4255/10) and of 14-2-2011 (Case No. 5104/11), which can be consulted at http://www.dgsi.pt/

[16] Saldanha Sanches, Cited Work

Frequently Asked Questions

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What is the General Anti-Abuse Clause (CGAA) under Article 38(2) of the Portuguese LGT?
The General Anti-Abuse Clause (CGAA) under Article 38(2) of the Portuguese General Tax Law (LGT) is a legal mechanism that allows the Tax Authority to disregard or recharacterize legal acts or business transactions when they are essentially or mainly directed, through artificial means and with abuse of legal forms, to reduce, eliminate or defer taxes that would otherwise be due. The clause requires three cumulative elements: (1) legal business transactions that produce tax advantages, (2) such transactions being carried out by artificial means or with abuse of legal forms, and (3) the essential or main purpose being tax reduction. In Case 305/2013-T, the Tax Authority applied the CGAA to share sale transactions between related parties, arguing that the corporate restructuring of Company B and subsequent sale of shares to the SGPS holding company constituted an abusive arrangement designed to avoid taxation on capital gains that would otherwise be taxable under IRC.
How does the CAAD arbitral tribunal apply the anti-abuse clause to IRC corporate tax assessments?
The CAAD (Centre for Administrative Arbitration) arbitral tribunal applies the anti-abuse clause to IRC assessments through a rigorous multi-step analysis. First, the tribunal examines whether the Tax Authority properly identified specific legal business transactions that generated tax advantages. Second, it evaluates whether these transactions were carried out through artificial means or abuse of legal forms, requiring evidence that the legal structure deviates from normal business practices without valid economic justification. Third, the tribunal assesses whether tax reduction was the essential or main purpose, rather than merely an incidental benefit. In Case 305/2013-T, the tribunal was constituted as a collective tribunal under RJAT, composed of three arbitrators appointed by the Ethics Council. The tribunal must analyze the factual circumstances including the timing of corporate transformations, the existence of common shareholders between transacting entities, and whether legitimate business reasons existed beyond tax optimization. The burden of proof falls on the Tax Authority to demonstrate all elements of the anti-abuse clause, and the tribunal maintains independence in evaluating whether the reconstruction of legal facts under Article 38(2) LGT is justified.
What are the procedural requirements for challenging an IRC tax assessment under the RJAT (Decree-Law 10/2011)?
The procedural requirements for challenging an IRC tax assessment under the RJAT (Decree-Law 10/2011) include several formal steps. Under Articles 2(1)(a) and 10(1)(a) of RJAT, taxpayers can submit claims to administrative arbitration regarding the legality of tax assessments. The claimant must file a request for arbitration identifying the challenged act and its legal basis. According to Article 10(2) of RJAT, the taxpayer can either appoint an arbitrator or opt for non-designation, as occurred in Case 305/2013-T. The Ethics Council then appoints arbitrators under Article 6(2)(a) and 11(1)(b) of RJAT (as amended by Law 66-B/2012). Parties have the right to challenge arbitrators under Articles 6 and 7 of the Code of Ethics. The arbitral tribunal must be constituted formally, and the Tax Authority must submit a response defending its position. Under Article 18 of RJAT, parties may waive the oral hearing by mutual consent. The tribunal may extend decision deadlines under Article 21(2) of RJAT for justified reasons, as occurred in this case. The proceedings must respect principles of legal personality, capacity, and standing (Article 4 and 10(2) of RJAT and Ordinance 112-A/2011).
Can a taxpayer claim compensatory interest (juros indemnizatórios) after annulment of an IRC assessment?
Yes, a taxpayer can claim compensatory interest (juros indemnizatórios) after annulment of an IRC assessment under Portuguese tax law. In Case 305/2013-T, the claimant A-SGPS specifically requested that the Tax and Customs Authority be condemned to payment of indemnificatory interest in addition to the full annulment of the tax assessment. Compensatory interest is governed by Article 43 of the LGT and serves to compensate taxpayers for financial losses resulting from unlawful tax collection. When an arbitral tribunal or court determines that a tax assessment was illegal and annuls it, the taxpayer is entitled to reimbursement of amounts paid plus compensatory interest calculated from the date of payment until the date of reimbursement. The right to compensatory interest is automatic upon annulment and does not require separate proof of damages, as it is presumed that the taxpayer suffered financial loss by being deprived of funds that were unlawfully collected. The interest rate is established by ministerial order and is intended to place the taxpayer in the financial position they would have occupied had the illegal assessment not occurred. This mechanism is essential to ensuring effective judicial protection and deterring unlawful tax assessments.
How does Article 63 of the CPPT interact with the General Anti-Abuse Clause in Portuguese tax law?
Article 63 of the CPPT (Tax Procedure Code) interacts with the General Anti-Abuse Clause by establishing the procedural framework for applying Article 38(2) of the LGT. Article 63 of CPPT governs the determination of the taxable amount and tax base when the Tax Authority exercises its powers to combat tax avoidance and evasion. When applying the CGAA under Article 38(2) LGT, the Tax Authority must follow the procedural safeguards in Article 63 CPPT, which include providing detailed reasoning for the reconstruction of legal facts, identifying the specific artificial arrangements or abusive forms employed, and explaining how the tax would be calculated absent such arrangements. In Case 305/2013-T, the Tax Authority's decision of December 14, 2012 applying the anti-abuse clause was contained in the tax audit report and notified via official letter, demonstrating compliance with Article 63 CPPT's requirement for reasoned administrative acts. Article 63 CPPT ensures that taxpayers receive adequate notice and explanation of why their transactions are being recharacterized, enabling effective judicial review. The substantive standard of Article 38(2) LGT (abuse of forms, artificial arrangements, tax avoidance purpose) must be applied through the procedural mechanism of Article 63 CPPT, creating a coherent legal framework that balances the Tax Authority's enforcement powers with taxpayer rights to due process and judicial protection.