CAAD 315/2014-T: IRS Anti-Abuse Clause on Company Transformation Capital Gains

Arbitral Award

Process No. 315/2014-T

The arbitrators José Poças Falcão, president arbitrator of the collective Arbitral Tribunal, José Coutinho Pires and João Menezes Leitão, arbitrator members, appointed by the Deontological Council of the Centre for Administrative Arbitration to constitute this Arbitral Tribunal, hereby agree:

I. Report[1]

1. A…, taxpayer no. … and B..., taxpayer no. … (hereinafter, the Claimants), residents at Rua … Coimbra, filed on 01.04.2014, pursuant to article 2, no. 1, subsection a) of Decree-Law no. 10/2011, of 20 January, as amended (Legal Regime for Tax Arbitration, hereinafter LRTA), a request for arbitral pronouncement, in which the Tax and Customs Authority (hereinafter, Respondent or TA) is required, relating to the tax act of assessment of Income Tax on Individuals (IRS) no. 2013 …, relating to 2009, respective demonstration of interest calculation and account reconciliation, with balance determined to be paid of €811,603.95.

2. In accordance with articles 5, no. 3, subsection a), 6, no. 2, subsection a) and 11, no. 1, subsection a) of the LRTA, the Deontological Council of this Centre for Administrative Arbitration (CAAD) appointed as arbitrators of the collective Arbitral Tribunal Mr. Judge Dr. José Poças Falcão, with the functions of President Arbitrator, and Messrs. Drs. José Coutinho Pires and João Menezes Leitão, as arbitrator members, who accepted the appointment.

3. Pursuant to subsection c) of no. 1 and no. 8 of article 11 of the LRTA, as per communication from the President of the Deontological Council of CAAD, the Arbitral Tribunal was constituted on 11.06.2014.

4. In the request for arbitral pronouncement (hereinafter initial petition or IP), the Claimants request the annulment of the IRS assessment act no. 2013 … and respective demonstration of interest calculation no. 2013 … and demonstration of account reconciliation no. 2013 …, with respect to the taxation of capital gains obtained in 2009 from the sale of participations held by the Claimants in company C...-…, SA, on the ground of a defect of legal violation, due to error regarding the factual and legal presuppositions, inasmuch as they consider that the legal requirements on which the application of the general anti-abuse clause provided in article 38, no. 2 of the General Tax Law are not met.

5. The TA presented a reply, requesting dismissal, for non-proof, of the request for arbitral pronouncement.

6. On 15.12.2014, as recorded in the respective minutes, witness testimony was produced, with the examination of witnesses D... and E..., called by the Claimants.

7. The Claimants and the Respondent presented successive written submissions respectively on 6.1.2015 and on 20.1.2015.
   With their submissions, the Claimants presented two documents, and the Respondent objected to their joinder to the record, on the ground that "the supervening nature and/or impossibility of joining such documents at the appropriate moment, that is, with the presentation of the arbitral petition, was not raised by the Claimants and therefore their joinder should be denied (cf. article 10, no. 2, subsections c) and d) of the LRTA, as well as article 423, no. 1 and 3 of the CPC and article 86, no. 1 of the CPTA)" (cf. no. 23 of their respective submissions).
   It is verified, however, that the documents thus presented by the Claimants, as invoked in their respective submissions (no. 29), result from the testimony given at the hearing (the witness D... having been specifically questioned by the TA about the existence of any proof of the failure of C...-…, SA's submission to the tender opened by the Coimbra Municipal Council), and therefore, as they are relevant to the decision of the case, their joinder to the record is admitted, pursuant to article 16, subsection e) of the LRTA and article 423, no. 3 of the Code of Civil Procedure (CPC), applicable by virtue of article 29, no. 1, subsection e) of the LRTA.

8. The Arbitral Tribunal fixed, lastly, pursuant to no. 2 of article 21 of the LRTA, as the time limit for rendering and serving the final decision the date of 11.04.2015.

9. The Arbitral Tribunal is competent to judge the request for arbitral pronouncement (article 2, no. 1, subsection a) of the LRTA), the parties have judicial personality and capacity, have standing (articles 4 and 10, no. 2 of the LRTA and article 1 of Ordinance no. 112-A/2011, of 22 March) and are properly represented, no nullities occur nor exceptions have been raised, and therefore nothing prevents judgment on the merits.

II. Thema Decidendum

1. The thema decidendum concerns ascertaining, in order to assess the legality of the tax act of IRS assessment no. 2013 … and respective demonstration of interest calculation and account reconciliation, the concrete verification of the requirements established in no. 2 of article 38 of the General Tax Law (GTL) for the application of the general anti-abuse clause in relation to the onerous sale of social participations held by the Claimants in company C...-…, SA to company C... – …, Lda, as per the correction made by the TA, based on the disregard of the change of corporate form of that company C...-…, SA, which led to the taxation of the corresponding capital gains in accordance with the results of the indicated additional IRS assessment.

III. Decision on Matters of Fact

1. With respect to matters of fact, it is important to observe, as a preliminary matter, in light of the various allegations contained in the IP, that the relevant factuality is delimited in light of the various plausible solutions of the legal question that should be considered disputed (to resort to the apt formulation that appeared in no. 1 of article 511 of the former Code of Civil Procedure), and therefore the tribunal need not rule on all allegations made, but rather select the facts that are effectively relevant to the decision and discriminate the proven facts from the unproven facts (cf. article 123, no. 2 of the Code of Procedure and Tax Procedure (CPPT) and article 607, nos. 3 and 4 of the CPC, applicable by virtue of article 29, no. 1, subsections a) and e) of the LRTA).

a) Proven facts:

1. In these terms, having examined the documentary evidence presented, the witness testimony produced and the administrative tax proceeding annexed (hereinafter, AP), the tribunal fixes the facts considered proven as follows:

I. The commercial company limited by quotas "C... – …, Lda.", NIPC …, was established on 21.10.1998, with the corporate purpose of manufacturing, trading and certification of electrical and electronic components, with share capital of PTE 400,000$00 (€1,995.19), represented by four quotas with the nominal value of PTE 100,000$00 (€498.80) each, belonging to shareholders A... (herein Claimant), B... (herein Claimant), F... and G... (cf. copy of permanent certificate attached both as doc. no. 4 and as doc. no. 15 to the IP).

II. On 25.10.1999, shareholders F... and G... transferred their respective quotas in the aforementioned "C... – …, Lda", respectively to Claimant A... and to Claimant B..., who thus became the sole shareholders of the company (as per docs. nos. 4 and 15 to the IP).

III. On 27.11.2001, the company "C... –, Lda." proceeded to increase, by incorporation of profits, and to redenominate in euros, its share capital, which was distributed in four equal quotas, with the nominal value of €1,250.00 each, belonging to the Claimants (cf. the aforementioned certificate attached as docs. nos. 4 and 15 to the IP, entry 4).

IV. On 22.06.2004 a new increase of the company's share capital was made, which went from €5,000.00 to €200,000.00, being distributed in four equal quotas of €50,000.00 each, belonging to the Claimants (cf. the aforementioned certificate attached as docs. nos. 4 and 15 to the IP, entry 5).

V. The company C...- P… S.A., NIF …, which had as shareholders "C... - …, Lda" and Claimants A... and B... was transformed into a joint-stock company by resolution of 28.2.2007, as per entry 6 - AP. 7/2007… in its respective commercial register (cf. certificate attached as doc. no. 14 to the IP).

VI. By contract of division and transfer of quotas dated 11.12.2009, as per document at pages 93 et seq. of the AP and certificate attached as docs. nos. 4 and 15 to the IP, the Claimant husband transferred to H... (father of Claimant wife) one quota in "C... – …, Lda.", valued at €100.00, at a price identical to the nominal value, and Claimant wife transferred two quotas in "C... – …, Lda." to I..., valued at €100.00, and to J... (mother of Claimant wife), valued at €100.00, at prices identical to their respective nominal values, and the share capital of "C... – …, Lda", prior to its transformation into a joint-stock company, came to have the following distribution:

VII. By contract of transfer of shares dated 28.12.2009, Claimant A... sold 99,900 shares of which he held in "C... – …, SA" to "C... – G…, Lda" for the price of €3,596,400.00 (€36.00 for each share of €1) payable within a maximum period of 24 months from the date of execution of the contract (cf. the contract of transfer of shares attached as doc. no. 18 to the IP and at pages 161 and 162 of the AP).

VIII. By contract of transfer of shares dated 28.12.2009, Claimant B... sold 99,800 shares of which she held in "C... –…, SA" to "C... – G…, Lda" for the price of €3,592,800.00 (€36.00 for each share of €1) payable within a maximum period of 24 months from the date of execution of the contract (cf. the contract of transfer of shares equally attached as doc. no. 18 to the IP and at pages 163 to 164 of the AP).

IX. The value of the sale of the aforementioned shares (in the total amount of €7,189,200.00), which remained to be paid in 24 months, was not paid to the Claimants to the present date (fact recognized in no. 38 of the IP).

X. Neither the Claimants, as sellers, nor C... – G…, Lda., as purchaser, delivered form 4 provided for in article 138 of the CIRS (cf. indication, not contested, contained in the draft application of the anti-abuse clause at page 34 of the AP).

XI. Following AP.1/2010…, based on minutes of the General Meeting dated 21.12.2009, which are attached at pages 96 et seq. of the AP, there was the registry entry of the transformation of "C... –…, Lda", NIPC …, into a joint-stock company with the name "C... – …, SA", with the corporate bylaws contained in the AP at pages 109 to 113, as well as at pages 242 to 246, with share capital of €200,000.00 and registered office at Rua …, lot …, …, in … (cf. the aforementioned certificate attached as docs. nos. 4 and 15 to the IP, entry 8).

XII. In the Justifying Report of the Transformation of "C...– …, Lda." into "C... – ..., SA", dated 20.10.2009 (cf. doc. no. 25 attached to the IP and pages 103 et seq. of the AP), the following was set forth, under the heading "Reasons":

"There are various reasons that justify the transformation of the company into a joint-stock company.

The transformation of the company into a joint-stock company and consequent reformulation of its shareholder structure is aligned with intentions of growth and seeks to adapt to the new challenges with which the company has been faced.

The joint-stock company is the characteristic type of the larger-sized company especially aimed at the movement of large volumes of capital. At the same time, it is governed by legal discipline that provides broad flexibility, both in terms of its shareholder structure and in terms of options concerning its administration. In fact, the law confers upon holders of social shares, in this type of company, a margin of maneuver in the very regulation of their company that does not occur in other types of commercial companies, namely in limited companies.

In fact, the advantages derived from maintaining the simplified administrative structure underlying a limited company do not outweigh the advantages that could be achieved by creating a more operational entity at all levels.

This important change is part of a context of readaptation of the company to the market in which it operates and to its intentions of sustained growth, with a view to increasing its activity in the national and international market. This change will not, however, affect the activity of the company, its relationship with employees, suppliers and customers and with others who collaborate with it, directly or indirectly.

It should also be added that, in addition to the advantages enjoyed in our market by the type of "Joint-Stock Company", due to greater commercial credibility, providing new and better business possibilities, the transformation appears as a legal adequacy to the current circumstances in which C...-…, Lda. finds itself."

XIII. According to the Report and Accounts of 2009 of C... - …, SA, dated 31.12.2009, there was in 2009 a decrease in sales, with a reduction of approximately 22% of sales volume (cf. the Report and Accounts of 2009 attached as doc. no. 5 to the IP).

XIV. On 28.05.2010, the Claimants submitted their periodic statement of income Model 3 of the IRS, relating to the fiscal year 2009, together with annex G1, in which the sale of 199,700 shares of C... – C… S.A. is mentioned, at the unit price of €36.00, totaling €7,189,200.00, with acquisition value of €57,500.00, considering that the capital gain is excluded from IRS taxation pursuant to article 10, no. 2, subsection b) of the IRS Code, by force of the provision of article 43, no. 6, subsection b) of the same Code (cf. doc. no. 20 attached to the IP).

XV. Following AP.118/2010…, there was the registry entry of the change of name of the company "C... – …, SA", NIPC …, to C...-C…, SA (cf. the aforementioned certificate attached as docs. nos. 4 and 15 to the IP, entry 9).

XVI. As per entry 12, AP14/2012…, the company C...- C…, SA, NIPC …, changed its corporate purpose to "Development, industrialization, manufacturing, putting on the market and/or placing into service or installation in construction work, of electrical and/or electronic products that are eco-efficient" (cf. the aforementioned certificate attached as docs. nos. 4 and 15 to the IP).

XVII. By notice of procedure no. …/2012, published in the DR, II Series, of ….3.2012, the Municipality of Coimbra launched a public tender for the concession of public works, with a base price of €26,886,792.45, with a contract period of 180 months, the object of which consisted of the "financing, design and execution of public works for retrofitting the public lighting of the Municipality of Coimbra, with the concessionaire to: - Replace all luminaires installed in the public lighting network with equipment using "Light Emitting Diode (LED)" technology; - Integrate all new luminaires into a centralized management system that allows operating schedules to be maneuvered, control luminosity, detect faults, in each individual luminaire or for groups of luminaires; - Maintain and conserve the replaced equipment during the concession period; provision of energy services, during the concession period" (cf. doc. no. 11 attached to the IP).

XVIII. "C... – C… S.A." was unable to participate in the public tender indicated in the previous paragraph due to a failure in the submission of the proposal on the Vortal platform resulting from not having a qualified certificate due to lack of completion of the respective request process (cf. the communication from Vortal Info PT of 26.12.2014, attached as doc. no. 1 to the Claimants' submissions).

XIX. The company "C... – G…, Lda", NIPC …., which until 2012 had as sole shareholders the Claimants and as corporate purpose "Purchase, sale and exchange of real property and resale of property acquired for that purpose and as ancillary activities the leasing of own or third-party property; management of own or third-party real property. Real estate development. Rental of machines and industrial equipment", was subject to transformation, by resolution of 25 September 2013, into a joint-stock company managing social shares with the name "C... –…, SGPS, S.A.", with the corporate purpose of managing social participations in other companies as an indirect form of exercising economic activities and with share capital of €50,000.00 (cf. the certificate attached as doc. no. 17 to the IP, entry 4 AP38/2013…).

XX. The company C... - …, SA, later called C...- C… SA, NIPC …, is part of an informal group of companies led by the Claimants with the following composition (cf. fact recognized in nos. 11 and 27 of the IP, accepted in no. 4.4 of the reply):

XXI. In compliance with Service Order no. 012012…, from the Coimbra Finance Directorate, the Claimants were subject to an inspection action to analyze the operations involving the sale of capital shares carried out in the fiscal year 2009 (cf. document at pages 32 et seq. of the AP and service order at page 75 of the AP; cf. also what is stated in nos. 45 and 46 of the IP).

XXII. Following this inspection action, the Claimants were notified, on 13.12.2012, by Official Letter no. …, of 7.12.2012, of the draft application of the general anti-abuse clause and to exercise, within 30 days, the right to prior hearing (cf. doc. no. 21 attached to the IP and pages 80 et seq. of the AP).

XXIII. In this draft application of the anti-abuse clause, the following is stated in particular:

"2. The acts or legal transactions hereinafter described, as well as the submission of Model 3 IRS for 2009, in which they declared the capital gains obtained, occurred between Bill Proposal 16/XI of 22/04/2010 and Law no. 15/2010 of 26/07, approved on 09/06/2010, which introduces the change to the regime of taxation of capital gains on securities.

1. The sales of quotas made to the parents of B..., H... and J..., as well as the sales of quotas to I... were made through a private document dated 11 December 2009, but were only registered with the registry on the date of 20 May 2010. The certification of the photocopies presented was also made on the date of 20 May 2010, through the Online Registry of Acts of Lawyers.

2. The Minutes no. 27, of the transformation into a joint-stock company, is dated 21 December 2009, but was registered at the 2nd Registry of Property and Commercial Registration of … on the date of 20 May 2010, when pursuant to no. 2 of article 15° of the Commercial Registry Code the deadline for registration of such acts is 2 months. The certification of the documents presented in this registration was also made on the date of 20 May 2010, through the Online Registry of Acts of Lawyers.

3. The documents attached to the minutes of transformation of the company and which are mandatory under the Commercial Companies Code present various inconsistencies, particularly the "Justifying Report of the Transformation of C...- …, Lda. into C...- … S.A" dated 20 October 2009, particularly as to the dates on which they allegedly occurred and the dates that appear in the documents:

5.1. In point 1. Preamble it states that the share capital is divided into 4 equal quotas with nominal value of € 50,000.00 each, divided equally between shareholders A... and K... when, in subsection a) of point 5. Description of the operation it states that the transformation into a joint-stock company maintains share capital of €200,000.00, represented by 200,000 ordinary registered shares, allocated to the quota holders being divided by A... (99,900 shares), K... (99,800 shares), I... (100 shares), J... (100 shares) and H... (100 shares).

5.2. For the transformation of the company it does not present, in the justifying report, normal reasons for such acts, such as capital increase, through entry of new investors, capital dispersion, or independent management. On the contrary, with the change in the corporate form under consideration, there was no change whatsoever in the company's operations, maintaining the same activity, the same capital, the same capital ownership, which is perfectly identifiable since the shares are registered and, also maintaining the same management, since the managers of the limited company are equally the administrators of the joint-stock company, A... and K....

5.3. The Justifying Report of the transformation, dated 20 October 2009, analyzes and annexes, according to the subscriber, a balance sheet specially prepared for the purposes of the transformation, relating to 30 October 2009, that is relating to a time period not yet occurred, given the dating of the same Report.

Thus, either the Balance Sheet does not have 30 October 2009 as its reference or the report was not prepared on 20 October 2009.

1. Although the transformation into a joint-stock company was supposedly carried out on the date of 21 December 2009, the term of acceptance of the appointment to the position of sole auditor was only made on the date of 18 May 2010 by the company of Official Auditors.

2. By the transfer of shares of A... and B... to C... – G …, Lda, both the ownership of capital and the management of the company remained with the same persons, inasmuch as the shareholders and managers of the acquiring company are the taxpayers, A... and B.... (...)

3. The value of the contracts was not paid on the date of their execution, remaining to be paid in full within a maximum period of 24 months from the date of their execution on 28 December 2009. Having analyzed the annual statement of accounting and tax information (IES) of the company C...- G…, Lda, NIPC …, for the fiscal year 2011, it was found that these amounts were still outstanding on the date of 31 December 2011, which proves that these movements were merely bookkeeping entries.

The company C...- G …, Lda is classified with the activity of buying and selling real property, CAE 68100, since 2008-09-24, but since its establishment no purchase of any real property has been identified, nor does any indication of the exercise of the activity appear in the annual statements of accounting and tax information, but it is verified in the fiscal year 2011 that it earned income from dividends derived from the participation of capital.

1. The transformation of the limited company with simplicity of form, into a joint-stock company with complex and costly structure did not have the objectives common to this type of transformation, such as independent management of capital holders, capital dispersion or its increase through the entry of new investors, but had as its objective the exclusion of taxation of the sales of social participations, which would not happen if the company maintained the type of limited company. To this conclusion contributed the fact that the acts performed by the taxpayers were registered after knowledge of the bill proposal, which changed the taxation of capital gains on securities, of not having been validated by entities or persons external to the company, dispensing with the intervention of the official auditor, as per the resolution in Minutes no. 27 and also due to the inconsistencies described above between the dates contained in the documents attached to the registration.

Concluding, we find that, through a series of operations and legal acts that led to the change in corporate form, the income obtained in these sales was excluded from taxation, which would not have happened if the companies maintained the type of limited company."

"The sales of social shares held by the taxpayers, had the corporate form not been changed, would have resulted in capital gains subject to taxation pursuant to subsection b) of no. 1 of article 10° of the Code on Income Tax on Individuals in the amount of €7,131,700.00, taxed at the rate of 10%, pursuant to article 72° of the same law. Due to the effect of the transformation of the company no capital gains are calculated, given that they were considered as excluded from taxation pursuant to no. 2 of article º 10° of the CIRS for being shares held by their holders for more than 12 months, by referral of subsection b) of no. 6 of article º 43° of the same code."

XXIV. The Claimants exercised on 8.1.2013 the right of prior hearing as per doc. no. 22 attached to the IP, which is here reproduced.

XXV. By order of 20.09.2013, the Deputy Director-General of the Tax and Customs Authority (in legal substitution of the Director-General of the Tax and Customs Authority) authorized the application of the general anti-abuse clause, with a view to the disregard of the operation of transformation of the company "C...-…, Lda." into a joint-stock company and consequently to the taxation in the sphere of IRS of the capital gains of the Claimants, derived from the sale of shares in this company, pursuant to information no. …, of 04.06.2013, of DSPCIT (cf. doc. at pages 45 et seq. of the AP and annex 2 in doc. no. 23 attached to the IP).

XXVI. On 06.11.2013, the Claimants were notified of the final inspection report ("RIT"), which determined taxes owing (IRS), in the amount of € 713,170.00, resulting from the taxation of capital gains income, for the fiscal year 2009, at the special rate of 10% (cf. notification at page 1 of the AP and RIT attached at pages 21 et seq. of the AP and as doc. no. 24 to the IP), of whose content it is important to highlight the following passages with relevance to the decision (cf. pp. 25 to 27 of the AP):

Taxpayers A... and B... declared in annex G1 of model 3 of IRS for fiscal year 2009, intended for non-taxed capital gains, the onerous sale of shares held for more than 12 months in the value of € 7,189,200.00. For this reason this sale was excluded from taxation in the sphere of IRS, pursuant to article 10°, no.° 2, subsection a) of the CIRS, by force of the provision of article 43°, no. 6, subsection b) of that code.

With date of 28 December 2009, A... and B..., as managers of C... – G…, Lda, enter into with themselves, a contract of transfer of the shares they held in the company C... - …, S.A., NIPC …. The shares sold derived from quotas acquired in 1998 and 1999, and from their capital increases in 2001 and 2004, with such shares having been transformed into shares with report date of 21 December 2009.

Although the sale of the aforementioned shares were carried out by private document, contract of transfer of shares, and for that reason were carried out without the intervention of notaries, registrars and officers of the court or credit institutions and financial companies, neither the sellers nor the purchasers of the aforementioned shares delivered form 4 to which they were obligated, pursuant to article 138° of the CIRS.

Consulted the data from the Registry of Property and Commercial Registration of …, there was verified the increase in the number of shareholders to 5 (necessary for the transformation of the company), the justifying report of the transformation of the company, the transformation of the company limited by quotas into a joint-stock company, as well as the remaining mandatory procedures for its transformation were all registered on the date of 20 May 2010.

On the other hand, the documents attached to the minutes of transformation present date inconsistencies that indicate that the same were performed on dates later than those inscribed therein, such as, for example, the justifying report dated 20 October 2009 analyzes and annexes the balance as of 30 October 2009.

Although the transformation was registered with the date of 21 December 2009, the acceptance for the position of Sole Auditor by the company of official auditors was only made on 18 May 2010, 2 days before the date of registration with the registry.

From the aforementioned transformation of limited companies into a joint-stock company, there are no normal reasons for this type of transformation, particularly independent management of capital holders, capital increase, entry of new investors or capital dispersion, since there was no capital increase and both the capital and management remained in possession of the same persons, A... and B..., since they are also the administrators in the company that now holds the shares.

Also noteworthy is the fact that, in the contracts of transfer of shares dated 28 December 2009, the payment period for those amounts (€7,189,200.00) is 24 months, when by analyzing the annual statement of Accounting and Tax Information (IES) of the company C... – G…, Lda, NIPC …, for the fiscal year 2012, these amounts were still outstanding on the date of 31 December 2012.

The acts or legal transactions described above, as well as the submission of model 3 of IRS for 2009, in which the taxpayers declare the capital gains with these sales, were registered between Bill Proposal no. 16/XI of 22/04/2010 and Law no. 15/2010 of 26/07, approved on 09/06/2010, which introduces the change to the regime of taxation of capital gains on securities.

As it is verified that the taxpayers under analysis, through a series of operations and legal acts, coordinated among themselves, that led to the change in corporate form, sold capital shares which, having been excluded from taxation would not have been if the company maintained the corporate form of limited company, we conclude that we are faced with an abuse of legal norms. (...)

From the facts exposed it follows that the income from capital gains obtained by the taxpayers shall be subject to taxation, by force of the provision of subsection b) of no. 1 of article 10° of the CIRS, by the positive difference between the value of realization, determined in accordance with the rules established in article 44° and the value of acquisition, determined pursuant to articles 45° and 48°, plus the necessary and actually incurred expenses with the sale, as per article 51°, all of the CIRS.

Thus, the amounts declared in annex G1 of model 3 of IRS for 2009 should be disregarded, as the onerous sale of non-taxed shares and corrected as taxed capital gains in annex G of the said statement.

Pursuant to article 72° of the CIRS the rate of 10% is applied to the capital gain obtained, calculating tax owing, in the amount of € 713,170.00, thus obtained:

XXVII. In December 2013, the Claimants were notified of the IRS assessment act no. 2013 …, the demonstration of interest calculation no. 2013 …, and the demonstration of account reconciliation no. 2013 …, relating to the fiscal year 2009, with balance due in the amount of €811,603.95 and due date of payment on 02.01.2014 (cf. docs. nos. 1 to 3 attached to the IP, which are reproduced herein).

b) Unproven facts:

1. With relevance to the decision, the following facts are considered unproven:

i) Given the drop in sales volume of "C... - …, Lda.", which had been occurring since the year 2008, and which worsened during 2009, resulting largely from the decrease in orders from its main customer (L… Portugal, which in 2009 represented 87.75% of its sales volume), as well as the growth plan defined for the business group in which this company was included, the Board of Directors of "C... -…, Lda." felt the need to define a new strategy for the company – allegation subject to no. 15 of the IP.

ii) In view of the scale that the "informal" group of companies in which "C... - …, Lda." was included intended to reach, with a view to moving to a sales volume of 40/50 million euros by 2015, which, for this to happen, would require the group to secure a major business that would give it visibility, it was advisable to change the corporate form of the limited companies to joint-stock companies, as a matter of market image – allegations contained in nos. 27, 28, 30 and 31 of the IP.

iii) The companies in the group began to be prepared, even before 2009, to attract external investments and consequently transfer capital share – allegation contained in no. 32 of the IP.

iv) The sale, at the overall price of € 7,189,200.00, of the shares that the Claimants held in "C...-…, S.A." to the company "C... – G…, Lda." "was intended to allow "C... – G… Lda.", now "C...-…, SGPS, S.A.", to attract external investment, since the purchase of that company would be nothing more than a tool to credibilize/enhance its assets and thus achieve more and better investors" – allegation contained in nos. 36 and 37 of the IP.

v) The fact that C...- C…, SA was unable to complete its application to the aforementioned public tender, due to the reasons mentioned above (see proven fact sub XVIII), meant that, "on the one hand it did not generate the expected profit to be distributed to shareholders, particularly to "C... – …, SGPS, S.A.", and on the other hand it did not appreciate, which prevented its principal shareholder ("C... – …, SGPS, S.A.") from attracting external investments, and consequently from settling its debt to the Claimants" – allegations contained in nos. 42 and 43 of the IP.

c) Motivation of the decision on matters of fact

1. The decision regarding the facts established as proven resulted from the examination of the documents and official information in the record and the administrative tax proceeding, as well as from the recognition of facts by the Claimants in the IP, all as specified in the points of the evidence listed above.

2. As for the facts established as unproven, it should be noted preliminarily that, as was stated in the judgment of TCA Norte of 12.2.2015, proc. no. 00122/02-Coimbra (where other case law is invoked), "evidence cannot result from a fragmented, isolated assessment, but rather must undertake a global assessment with all connections and combination between the means of proof presented" – "the judge must assess and evaluate the evidence in its entirety, establishing connections, combining the different means of proof and not disregarding simple, natural or hominis presumptions, which are logical means of assessing evidence and forming conviction".

Well then, the documents in the record and the testimony of the witnesses called by the Claimants, D..., an employee of C...- C…, SA since 2003, as Production Director and Manager of products related to lighting, and L..., Registered Auditor of the companies that are part of the C... group, properly analyzed and connected in the terms of a global assessment, do not permit any conclusion other than the non-demonstration of the facts to which the allegations of the Claimants indicated in no. 13 refer, as will now be explained.

1. Thus, as regards the allegations of the definition by the "Board of Directors" (sic) of C... - …, Lda of a "new strategy for the company", of a "growth plan defined for the business group" (subsection i) of the unproven facts), and the achievement of a "major business" that would give visibility to the company (subsection ii) of the unproven facts) as a determining factor in the corporate transformation carried out (subsection ii) of the unproven facts), let it first be noted that documents nos. 6 and 13 presented to that effect by the Claimants prove insufficient and inconsistent to support such assertions.

Doc. no. 6 attached to the IP is simply the general trial balance of 2009 of the company "C... – …, Lda", and therefore evidences nothing regarding a growth plan or a new strategy for the company (in what could speak to the drop in sales verified in 2009 by C... – …, Lda, the matter is already established as proven in no. XIII of the evidence).

Doc. no. 13, with which the Claimants attempt to prove the "growth strategy" of the "informal" group "sustained on External Investments" and "the goal of achieving a sales volume of 50 million euros, by 2015", for which it was advisable to "change the corporate form of the limited companies to joint-stock companies, as a matter of market image" (cf. nos. 29 and 31 of the IP), is a presentation, allegedly made to Caixa Geral de Depósitos, dated 29.11.2010. In this way, this documentary element is subsequent to the date (December 2009) on which, according to the configuration by the Claimants, the acts of corporate transformation of C... – …, Lda and sale of shares took place (cf. the proven facts under VII, VIII and XI), and therefore has no value for proving the invoked motivations underlying the corporate transformation. Thus, this document contains no reference whatsoever to the corporate transformation of C... – …, Lda as a relevant and/or significant element within the scope of the growth plan or investment strategy. This document also gives no special emphasis to public lighting (cf. proven fact under XVII), which is treated together with other eco-efficient solutions that would be developed by the business group, which prevents corroborating the allegation of a major business that would give visibility to the company and that would lead to the need to change its legal form (subsection ii) of the unproven facts). Similarly, in this doc. no. 13 there is not even a mention of C... – G…, Lda as a component company of the relevant business group (the "C... Universe") by which external investments would be attracted (cf. subsection iv) of the unproven facts). Finally, there is no reference to external investors, but simply to investment plan "Equity Self-financing: 5,841,584€" and "Liabilities (Bank): Debts to Credit Institutions: 402,836€" and to "systems of incentives for Research and Technological Development" and "systems of incentives for innovation".

Add to this that the Justifying Report of the Transformation (which is, in any case, a document prepared by the Claimants themselves, as such insufficient for demonstrating the reality of the statements made therein) makes only generic mentions of the reasons justifying the adoption of the joint-stock company form, without indication of specific and concrete elements determining the corporate transformation of C... – …, Lda. (see the fact in no. XII of the evidence).

In this context, it is also proper to summon the testimony of the witnesses called by the Claimants, D... and L.... When the first was questioned about whether, in the meetings with the Coimbra Municipal Council in which he participated, the question of corporate transformation had been addressed, he stated that it had not[2]; when asked whether "was there any investor who required this transformation into a joint-stock company?", the second declared that: "That required, that required it did not. I have no knowledge that any investor required the transformation into a joint-stock company"[3].

Following this line, the allegation that "the companies in the group began to be prepared, even before 2009, to attract external investments and consequently transfer capital share" (see subsection iii) of the facts established as unproven), apart from showing no consistent support in the means of proof produced[4], is incompatible with the proven facts.

First, it is important to note that, in the evidence stage, the only element to this regard pertinent concerns the transformation into a joint-stock company of C... – P… S.A., NIF … (cf. proven fact under V), which, however, occurred on 28.02.2007, which, as noted by the Respondent (see no. 13 of the reply and no. 21.3 of the submissions), is carried out at a moment prior to the year in which the drop in sales volume of C... – …, Lda occurred (cf. proven fact under XIII) which would be, in the allegation of the Claimants, the determining factor of the reorganization of the group (see subsection i) of the unproven facts). On the contrary, what the evidence shows is that, apart from the operations, dated from the end of 2009, of transformation into a joint-stock company and subsequent sale of shares of C... – …, SA (cf. proven facts nos. VII, VIII and XI), all other corporate changes verified in other Group companies occurred years later, with the establishment on 16.09.2010 of E..., S.A. (cf. proven fact under XX), and particularly with the corporate transformation of C...-G…, Lda into SGPS which only took place on 31.10.2013 (cf. proven fact no. XIX), already after the Claimants themselves received notification of the draft application of the general anti-abuse clause (cf. proven fact no. XXII).

For this reason, the declarations of witness E... were not convincing, not permitting the Tribunal to be convinced of the reality of what was stated, when he pointed to, in addition to the absence of increase in costs, as the reason for the transformation of C... – …, Lda into a joint-stock company "a matter of standardization" ("all the other companies that were subsequently established within the scope of, let's say, the group, held by the same shareholders, were already established as a joint-stock company. (...) And, therefore, I would say that in addition to the cost issue, there is also a matter of standardization, given that all the other companies held by the two shareholders who control the group, let's say, were also joint-stock companies, being that all of them were of smaller scale compared to C..."; "this was part of a broader project in which, let's say, it was intended… insofar as I understand what happened, to carry out the alignment of all companies, transforming all companies into joint-stock companies and placing them under the same parent, let's say, which would be the SGPS"). As observed, the "standardization" that would justify the corporate transformation dated December 2009 of C... – …, Lda was in fact only verified in 2013 with the transformation into a joint-stock company managing social shares of C...-G…, Lda, precisely the company that acquired the participations in C... – …, SA, already after the notification of the Claimants of the draft application of the anti-abuse clause[5].

This same proven fact of the transformation only in 2013 of the company C...- G…, Lda, which acquired the participations in C... – …, SA (cf. proven facts under VII, VIII, XI and XIX), led to the allegation reported in subsection iv) of the unproven facts not being established. Add to this the insufficiency of the evidence produced as the witnesses D... and L... declared they knew nothing about the matter of the sale of shares by the Claimants[6].

On the other hand, it also proved relevant to the negative answers given in subsections i), ii) and v) of the unproven facts the circumstance that the public tender on public lighting of the Coimbra Municipal Council was only launched in March 2012 (cf. proven fact no. XVII), therefore, years after the operation of transformation into a joint-stock company of C... – …, Lda and the sale of shares held in this company by the Claimants. In fact, although witness E… spoke of contacts and efforts with the Coimbra Municipal Council in 2009, the only specific element developed by C...- C…, SA that he pointed out was a "survey of the entire park, of the luminaires", of the "quantity of luminaires" – "Without the council having asked us to do anything about that. But we knew that if we did not do this survey we could never propose to the council because we did not have data…". Thus, the commitment in the area of public lighting with LED technology and, in particular, in the execution of works to retrofit the public lighting system in Coimbra is only proven in 2012 and, even then, only in terms of a failed participation in the tender opened by the Coimbra Municipal Council (cf. proven facts under XVII and XVIII), all therefore years after the completion of the operation of transformation into a joint-stock company of C... – …, Lda and the sale of shares, which would have, in the allegation of the Claimants, as the supporting justification the attraction of external investments for that purpose. The importance that the Claimants allege to possess the relationship that was to be established with the Coimbra Municipal Council for the replacement of public lighting luminaires with LED technology lamps (see subsection ii) and iv) of the facts established as unproven) proves, moreover, incompatible with the carelessness verified in the submission of the proposal on the Vortal platform due to lack of digital signature (cf. the proven fact no. XVIII).

It should be noted, still, as regards subsection v) of the unproven facts, that the witness testimony of D... presented to that effect did not prove conclusive, as when questioned about the reasons for the non-occurrence of external investments, he merely declared, in purely opinion and conjectural terms, the following: "I cannot say why the engineer […] made that decision, but from what we discussed and as time passed, the public tender was significantly delayed"; "I think it has to do with whether or not we won the tender and I think it would be added value to have investors enter after winning the tender. This is because it is also easier, I think, to negotiate the entry of those investors". For his part, witness E... merely stated regarding the fact that the debt for the price of acquisition of the shares by C...- G… had not yet been paid that the "true reason is that there is no money to draw out to pay".

For all these reasons, the Tribunal did not consider proven the allegations above indicated in subsections i) to v) of no. 13.

IV. On the Law

A. Position of the Claimants

1. To substantiate, in terms of matters of law, its request for declaration of illegality of the assessment contested, the Claimants allege, in essence, the following in its IP (and in which they persist in their respective submissions):

a) Doctrine and case law, to facilitate the analysis and applicability of the general anti-abuse clause, have broken down no. 2 of article 38 of the GTL into five elements, with four - means, result, intellectual and normative - relating to the requirements of application and the fifth (sanctioning element) to the implementation of the clause (nos. 55 to 57 of the IP);

b) In the case at hand the following are verified, in relation to the identified elements: i) as to the means element, the fiscal advantage resulted from the transformation of the limited company "C...- …, Lda." into a joint-stock company, prior to the sale by the Claimants of the social participations in the aforementioned company (no. 60 of the IP); ii) as to the result element, "if we compare the transaction carried out (sale of shares after transformation of the company into a joint-stock company) with the equivalent transaction of sale of quotas (which could have been done without the prior transformation of the company), we find that the former resulted, to the subjection of that sale to a more advantageous tax regime" since "the prior transformation of the company "C...- … Lda." into a joint-stock company had as a consequence that the capital gain resulting from the sale of shares by the Claimants was excluded from IRS taxation, pursuant to the provision of article 10°, no. 2 of the IRS Code, with the wording given by Decree-Law no. 228/2002, of 31 October" (nos. 62 and 63 of the IP).

c) The other elements relating to the anti-abuse clause are not, however, verified, since, firstly, the intellectual element is not verified, given that "the transformation into a joint-stock company, of the company "C...- …, Lda." was a legal transaction inserted in a vast set of acts and legal transactions executed within a business reorganization, which aimed at the growth of the group" (no. 66), "which aimed at the attraction of investment, which has evident economic justification" (no. 70 of the IP), and that "the intention to restructure the "informal" group of companies in which "C...- …, S.A." is included, manifested itself through other acts, notably the transformation of "W… - …, Lda." into a joint-stock company, the establishment of "M... S.A. "and the transformation of "C...- G…, Lda." into SGPS, facts to which the Tax Authority attributed no relevance" (no. 68 of the IP).

d) Similarly, the normative element is not verified, since "considering the coexistence, until fiscal year 2009, in the tax-legal order of taxation in the sphere of IRS of gains derived from the sale of quotas with non-taxation in the sphere of that tax of gains resulting from the sale of shares, it seems there is no unequivocal intention to tax, with regard to capital gains in the sale of social shares" (no. 80), and thus, "the transformation of a limited company into a joint-stock company, followed by the sale of shares without subjection to taxation is not a situation susceptible to application of the general anti-abuse clause, since "if the legislator, while taxing capital gains from the sale of quotas, leaves untaxed the capital gains from shares or taxes them at a lower rate, one cannot fail to accept fiscally the transformation of a commercial company into a company of shares even if the transformation is motivated by exclusively fiscal reasons (cf. J.L SALDANHA SANCHES Os Limites do Planeamento Fiscal, Coimbra Editora, Coimbra, 2006, page 182)" (no. 81 of the IP).

e) "As to the sanctioning element, given that its application depends on the cumulative verification of the remaining elements, which does not occur in the case under analysis, given the lack of intellectual and normative elements, the Tax Authority could not have applied the general anti-abuse clause, under penalty of violation of the provision of article 38°, no. 2 of the GTL, which determines the illegality of the order that permits the application of the same, as well as of the acts now contested, resulting from the application of the aforementioned clause" (no. 84).

B. Position of the Respondent

1. For its part, the Respondent considers, in its reply (and reiterates in its submissions), that "the requirements for application of the general anti-abuse clause, provided for in article 38º of the CPPT, are met" (no. 28 of the reply), for which it invokes the following:

a) "As to the means element and result, the Claimants accept that in the case at hand these requirements of application of the general anti-abuse clause are verified, relating to the fiscal advantage that would not have been obtained without that prior corporate transformation prior to the aforementioned sale, since without the prior transformation of the limited company into a joint-stock company the Claimants would not have gained a fiscal advantage of € 713,170.00, corresponding to the tax that would fall on the sale of their quotas (10% on the capital gain obtained from the sale at the price of € 7,189,200.00 relating to shares acquired at the price of € 57,500.00)", since "the sale of that social share at a later moment than that of corporate transformation subjected it to a more favorable tax regime in that it could benefit from the exclusion of taxation provided for in article 10º, nº 2, subsection a) of the CIRS, compared to the taxation of the capital gain that would be calculated in the sale of quotas of the aforementioned company, subject to the special autonomous tax rate of 10%, pursuant to no. 4 of article 72º of the CIRS, in the wording of Decree-Law nº 192/2005, of 07/11" (nos. 31 and 32 of the reply).

b) As to the intellectual element, which "presupposes that the obtaining of the fiscal advantage was the principal motivation of the taxpayer for the corporate transformation in question" (no. 33 of the reply), and in which "it is the responsibility of the taxpayer to prove, with a minimum of reasonableness, that the circumstances normally associated with that transformation also verify themselves in the situation under analysis, so that it can be concluded that if there is any fiscal intention this appears to be merely secondary" (no. 39 of the reply), it is verified that "in the situation at hand no such circumstances susceptible to justifying the alleged economic advantages associated with business reorganization, the search for new markets and the attraction of investment occurred, everything remaining as if the corporate transformation had not occurred, nor the subsequent sale of shares" (no. 40 of the reply).

c) "In contrast, and as regards fiscal motivation (...) its urgency results especially revealed by the following": i) "The particular interests of the now Claimants, in the sphere of IRS, are superimposed, unequivocally, over the interests of the companies of which they are sole shareholder-managers"; ii) "As to the timing of the operation, neither any economic advantage justifies that the transformation occurred at a moment prior to the sale of the aforementioned social shares to C... – G…, Lda., particularly because": "this company would not fail to carry out the purchase even if the corporate form remained under quotas, all the more so as that is its own legal regime; (...) this transaction is a transaction entered into with themselves, with the Claimants simultaneously in the capacity of sellers and representatives of the purchaser (they are both shareholders and managers of C... – G…, Lda.); (...) the informal family group remains, led by the Claimants" "[without prejudice to the creation of a liability of more than 7 million euros in C... Lda. in their favor" iii) "Moreover, the Claimants do not identify what external investments were attracted by the Group nor the capital shares transfers intended, occurring before and after 21/12/2009, which does not permit proving, on the one hand, that the corporate change was effectively inserted in the realization of a Group plan and, on the other, its timeliness given the moment at which it occurred" (no. 42 of the reply).

d) As to the normative element, it is important to conclude "whether the transformation of a limited company into a joint-stock company motivated by essentially fiscal reasons constitutes an act reprehensible in light of the tax-legal order" (no. 45). "Well, in the situation of the record, the fiscal advantage obtained derives from a corporate transformation that in substance is found to be devoid of any economic or extra-fiscal justification" (no. 49), and therefore "for purposes of no. 2 of article 38º of the GTL that obtaining of that result must be considered abusive, since the intention of the legislator was to stimulate the capital market and to contribute to its consolidation, consisting in attributing a more favorable tax treatment to capital gains that are not speculative, that is, to benefit "long-term capital gains", held for more than 12 months", "and that in substance such corporate transformation in question did not follow the public interest underlying the creation of that exclusion of taxation", rather "that effect was "defrauded" since the corporate change did not follow that public interest but, solely, the private interest in obtaining a fiscal advantage, which, in the context of the tax-legal order, appears contrary to the spirit of the law, and is therefore reprehensible for purposes of application of the GAAC" (nos. 50 to 52 of the reply).

e) "In the analysis of the normative element on which depends the application of the GAAC when the sale of social shares is preceded by its transformation into a joint-stock company, it is important to verify whether that corporate transformation corresponded to an actual transformation of the economic reality of the company, without which it cannot be concluded by the pursuit of the public interest underlying the creation of the corresponding more favorable tax treatment" (no. 64). "Precisely, it is verified that the sale of shares now disputed benefited from a tax regime of exclusion of taxation without that, in practice, the corporate transformation corresponded, even minimally, to the public interest in the creation of joint-stock companies" (no. 65). "For, as abundantly demonstrated, to that new legal form there corresponded no substantial change translatable into a new economic reality, with no new corporate form therefore existing in the terms advocated by the tax legislator" (no. 66), and therefore "the merely formal change in corporate form should be viewed as an artificial means of obtaining a fiscal advantage" (no. 67).

f) The Respondent further adds that: "the normative interpretation of no. 2 of article 38º of the GTL according to which the ineffectiveness within the tax sphere of acts or legal transactions essentially or principally aimed at the «obtaining of fiscal advantages that would not be achieved, total or partially, without use of these means (…)» implies the necessary existence of an absolute intention, of the legislator, to tax a certain tax fact, such not being verified in the situation of exclusion of taxation, in the case then provided for in articles 10º, no. 2 subsection a) of the IRS Code and which is accessed via (then) article 46º, subsection b) of the same Code (through transformation of company at a moment immediately prior to the sale), is unconstitutional, for violating the constitutional principles of equality, capacity to contribute, legality and unavailability of the tax credit (cf. respectively, articles 103º, 13º and 104º of the CRP)".

C. Legal Assessment by the Tribunal

1. The controversial matter in the present case, as delimited above, concerns verifying the presence in the situation sub judice of the elements upon which the legislator made the application of the general anti-abuse clause provided for in no. 2 of article 38 of the General Tax Law (cf. also the provision of article 63 of the CPPT).

As is well known, no. 2 of this article 38 provides that: "Ineffective within the tax sphere are acts or legal transactions essentially or principally aimed, through artificial or fraudulent means and with abuse of legal forms, at the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or at the obtaining of fiscal advantages that would not be achieved, total or partially, without use of these means, with taxation then taking place in accordance with the norms applicable in their absence and the stated fiscal advantages not being produced".

This legal provision, following the study of GUSTAVO LOPES COURINHA, The General Anti-Abuse Clause in Tax Law - Contributions to its Understanding[7], has regularly been the object of analytical application, focused on the detection, in the situation under examination, of five elements, "corresponding four of them to the requirements of application of the GAAC and one to its respective enactment of the rule" namely, "the form used – means element; the fiscal advantage and economic equivalence obtained - result element; the motivation of the taxpayer – intellectual element; the normative-systemic reprobation of the advantage obtained – normative element; the implementation of the Clause – sanctioning element", being such elements "although they should be treated autonomously, at least from the doctrinal point of view, will not infrequently (...) assist each other mutually", since the "fixation of one element may, in practice, depend on another".

In case law, one may cite as an example of the adoption of this analytical scheme the leading case represented by the judgment of 15.02.2011 of TCA South, delivered in the context of process no. 04255/10, which adopted the understanding (already the object of the first instance decision) according to which: "The provision of the rule under analysis establishes four requirements for its application, which are: 1-The means element - which has to do with the form used, therefore, with the practice of certain acts or transactions aimed, essentially or principally, at the reduction, elimination or temporal deferment of taxes; 2-The result element - which aims at the fiscal advantage as the end of the taxpayer's activity, therefore, at the reduction, elimination or temporal deferment of taxes; 3-The intellectual element - which has to do with the fiscal motivation of the taxpayer, therefore, with the fact that the acts or transactions by him practiced are essentially or principally aimed at the result that is the fiscal advantage; 4-Normative element - which has to do with the normative-systemic reprobation of the advantage obtained, therefore, the taxpayer acts with manifest abuse of legal forms (cf. article°. 63, no° 2, of C.P.P. Tax). In the enactment of the rule we will find the sanctioning element which translates into the ineffectiveness, within the tax sphere, of the acts or legal transactions in question, which become unenforceable against the Tax Authority (...). The sanctioning element corresponds, therefore, to the enactment of the rule under examination, depending its application on the cumulative verification of the requirements established in its provision".

The arbitral tax case law of this CAAD has likewise been guided by this breakdown of article 38, no. 2 of the GTL into five elements, as may be exemplified by the awards delivered in processes 139/2013-T and 106/2014-T.

Well then, it is precisely these elements that preside over the positions presented and the discussion developed by the parties in the present case, as results from the description made above (nos. 17 and 18).

Consequently, in the subsequent assessment, this Tribunal will likewise be guided by the indicated analytical scheme, which, independently of its dogmatic value, has practical utility for the framing within the general anti-abuse clause object of no. 2 of article 38 of the GTL of these operations of transformation of limited companies into joint-stock companies followed by onerous sale of shares.

It is important, however, to bear well in mind that the decisive vector in verifying the legitimacy of the application of the general anti-abuse clause is always the case-by-case assessment of the circumstances present in the fiscally relevant situation under judgment. As is stated in the cited judgment of TCA South delivered in proc. no. 04255/10 "the question of determining whether some particular expedient is "purely artificial" must be resolved in domestic courts case by case". Thus, the judgment on the resolution of the dispute depends, in a very close manner, on the factual circumstances present and the material contours of the situation sub judice, and therefore each judgment requires a specific approach in attention to the determination of the concrete case, which prevents configuring contradictory solutions since we are not in a field in which, for the decision of disputes, there operate general criteria of strict subsumption of realities to abstract legal categories.

1. In any case, without prejudice to this caveat which explains the subsequent analysis, recourse will be had here, as stated, to the indicated analytical scheme of elements of application of the anti-abuse clause, given that it is in this that the parties have molded their positions and arguments.

Well then, in this respect, what is found in essential examination in the present case, given the manner in which the parties have delimited the terms of the dispute (see above nos. 17 and 18), is the realization in relation to the situation sub judice of the intellectual and normative elements required for the application of the anti-abuse clause.

Thus, there is no controversy in the record regarding the "result element", in which it is a question of "demonstrating that the subject achieved, through his acts (...), the verification of a certain fiscal advantage and the equivalence of economic effects with those of the normal taxed act"[8]. In fact, as was cited above (no. 17), the Claimants recognize, in the IP (nos. 62 and 63), as well as in the submissions (no. 52) that: "As to the result, in itself, comparing the transaction carried out (sale of shares after transformation of C...- …, Lda. into a joint-stock company) with the equivalent transaction of sale of quotas (which would be carried out without the prior transformation of this company), there is no doubt that the option realized had as a result the application of the provision of article 10º, no. 2 of the IRS Code, in the wording of Decree-Law nº 228/2002, of 31 October, and that signified the obtaining of a more advantageous tax regime than if the legal form of the limited company had been maintained, in which case the income obtained would be considered a capital gain, pursuant to the provision of article 72º, no. 4, of the IRS Code, in the wording of Decree-Law nº 192/2005, of 7 November".

And, in truth, it is undeniable that the sale of social shares after the transformation of C... – …, Lda into a joint-stock company (cf. proven facts under VII, VIII and XI) involved a manifest fiscal advantage, given the exclusion of taxation in accordance with article 10º, no. 2, subsection a) of the CIRS, in the wording of Decree-Law nº 228/2002, of 31 October, which would not have taken place in view of the maintenance of the legal form of limited company and subsequent sale of quotas, which would determine, pursuant to article 10º, no. 1, subsection b) of the CIRS, the taxation of the corresponding capital gains income at the rate of 10%, pursuant to article 72º, no. 4 of the CIRS, in the wording of Decree-Law nº 192/2005, of 7 November.

1. As concerns the intellectual element, which relates to the fiscal motivation of the taxpayer, in the sense that the acts or legal transactions practiced were essentially or principally aimed at obtaining a fiscal advantage, it must be concluded, in light of the factual matter established as proven and as unproven, that such element is satisfied in the situation sub judice.

In effect, it was not demonstrated (cf. the facts established as unproven above no. 13) that the corporate transformation of C... – …, Lda into a joint-stock company, which made possible the sale of shares to C... – G…, Lda (cf. proven facts under VII, VIII and XI) occurred in the context of a business reorganization that aimed at the growth of the informal group led by the Claimants themselves in which company C... – …, Lda was included and at the attraction of external investment. The invoked "commitment in the area of business of eco-efficient systems, based on power electronics and eco-efficient lighting systems for application in public lighting infrastructure" only found effective manifestation – and even then unsuccessful – in 2012 with the public tender opened by the Coimbra Municipal Council (cf. proven facts under XVII and XVIII). Note also that the very change in the corporate purpose of C... – C…, SA, to encompass the putting on the market and/or placing into service or installation in construction work, of electrical and/or electronic products that are eco-efficient, only occurred in 2012 (see proven fact under XVI; cf. also original corporate purpose indicated in I). Furthermore, that which, in the allegation of the Claimants (cf. moreover the fact established as unproven in subsection iv) of no. 13), would certainly be a decisive vector for such reorganization, since it concerns the very company acquiring the shares, C... – G…, Lda was only subject to transformation into a joint-stock company managing social shares on 25 September 2013 (see proven fact under XIX), as stated (see above no. 16) already after the Claimants themselves received notification of the draft application of the general anti-abuse clause (cf. proven fact no. XXII). The transformation dated December 2009 of C... - …, Lda into a joint-stock company, in light of the facts proven and unproven, did not fit, therefore, into any investment or business reorganization project.

What emerges, fundamentally, from the proven facts is that the Claimants proceeded, with date of December 2009, to the transformation into a joint-stock company of C... - …, Lda and to the sale of the respective shares to C... – G…, Lda (see proven facts under VII, VIII and XI), which then constituted a limited company, held by the Claimants, which had as its corporate purpose the purchase and sale and management of real property (see proven fact no. XIX), which makes unjustifiable the need, for reasons of "market image" and reorganization, to adopt the legal structure of a joint-stock company, since precisely the company that would be destined to the opening of its capital to external investors, for this purpose holding the relevant assets of the group (see the allegation established as unproven in subsection iv) of no. 13), did not, after all, consist of but a limited company, which moreover, by virtue of this operation, came to have a significant debt of €7,189,200.00, to date not settled (see proven fact under IX).

In these terms, with the economic motivations alleged for the operation dated December 2009 of transformation into a joint-stock company of C... - …, Lda and of sale of the respective shares to C... – G…, Lda not being proven, in re ipsa it becomes manifest the essentially fiscal scope of the operation. The acquisition of the fiscal advantage emerges, thus, as the determining factor of the operation, explaining and justifying ex se the resolution of the Claimants to the adoption of the conduct under examination.

This is, in truth, what results from the proven facts (see proven facts under VII, VIII, IX, X, XI and XIX), and it is certain that the ascertainment of fiscal motivation must be made on the basis of concrete objectively apprehensible facts, since, in the absence of express admission, only thus can subjective states be detected. Well, it is immediate and direct the apprehension, on the basis of a judgment of reasonableness and normality, to which, naturally, the Claimants were not unaware, of the evident fiscal gain, in the sphere of non-taxation of the patrimonial increase obtained, carried out with the corporate transformation of C... - …, Lda into a joint-stock company and with the subsequent sale of shares to C... – G…, Lda, a company also held by the Claimants. In the case, this fiscal motivation is particularly evident since, in fact, the registry entry of the corporate transformation of C... - …, Lda, upon which, as is known, depends its opposability to third parties (cf. article 14 of the Commercial Registry Code), only took place in May 2010 (cf. no. XI of the evidence), that is, between the presentation of Bill Proposal 16/XI, which aimed to establish "the general rule of taxation of capital gains on securities and the concomitant repeal of the regime of exclusion of taxation currently in force in the sphere of IRS" (published in DAR on 30.4.2010) and Law no. 15/2010, of 26 July, which implemented the change in the regime of taxation of capital gains on securities that appeared in subsection a) of no. 2 of article 10 of the CIRS, in the previous wording resulting from Decree-Law no. 228/2002, of 31 October.

In sum, it must be recognized that the operation carried out by the Claimants of transformation of C... - …, Lda into a joint-stock company and of subsequent sale of the respective social shares to company C... – G…, Lda, controlled by them, had as essential or principal motivation and objective the obtaining of fiscal advantages – there were, therefore, acts or legal transactions essentially or principally aimed at the elimination of taxes that would be due (article 38º, no. 2 of the GTL).

1. It must next be noted that, beyond these elements, what is absolutely decisive and, as such, of indispensable verification in the situation under judgment, is the detection of abusive action or in fraus legis, therefore, in the terms of the convoluted normative formulation contained in article 38º, no. 2 of the GTL, the adoption of "artificial or fraudulent means and with abuse of legal forms". The nodal point in the application of the provision of article 38º, no. 2 of the GTL is, in truth, the qualification as abusive or fraudulent of the conduct or operation (single or multiple) under examination. One is faced, therefore, with a practice of tax evasion, with an extra legem action of fiscal saving, which it is sought to counter through the general anti-abuse clause, when "although there is no direct violation of the law, there is the abusive exercise of a right by the part subject or the adoption by this of a behavior in fraud of the law (fraus legis), that is, a behavior which has as its exclusive or principal purpose to circumvent one or several legal-fiscal rules, so as to achieve the reduction or the suppression of tax burden"[9].

Arises here the mentioned "means element" of application of the anti-abuse clause which "corresponds to the route chosen by the taxpayer to obtain the desired gain or fiscal advantage, i.e. the act(s) or legal transaction(s) whose structure is determined as a function of a given fiscal result" and which is assessed by the "level of incongruity between the form or structure chosen and the economic-practical purpose of the taxpayer, between the end for which that form is concretely employed and the cause that is proper to it"[10].

Particularly, it is written in the IP regarding this means element, as was cited above (no. 17), the following: "for its analysis the acts or legal transactions to which the taxpayers resorted to obtain a fiscal advantage are relevant" and "[i]n the case at hand, the alleged fiscal advantage resulted from the transformation of the limited company "C...-…, Lda." into a joint-stock company, prior to the sale by the Claimants of the social shares in the aforementioned company" (nos. 59 and 60 of the IP). It seems, thus, to assume the verification in this case of this element. However, in the submissions, the Claimants, when referring to the means element, state, differently, that "as results from the proof produced, the transformation into a joint-stock company is a rational and logical act inserted within the scope of a reorganization of the group of companies led by the Claimants" and therefore "there is not seen, contrary to what the Tax Authority seeks to make believe, the existence of artificial or fraudulent means that justify the application of the General Anti-abuse Clause" (nos. 72º and 73º of the submissions).

One must, therefore, analyze this means element here, in order to the decision on the legality of the application of the anti-abuse clause.

This analysis, it should be said immediately, in order to the realization of the analytical scheme habitually adopted, and here also followed, for the application of the anti-abuse clause (see above no. 19), must, however, be accompanied, simultaneously, of the assessment of the said normative element, in which is at play the "normative-systemic reprobation of the advantage obtained". In truth, it is dogmatically untenable to attempt to maintain that, notwithstanding all means, result and intellectual elements proper to the anti-abuse provision being met, it would be possible that the said normative element not be verified[11]. Only an outdated and today inadmissible conceptualist positivism could support such an understanding, from which would derive that it would be possible to recognize, at the same time and without contradiction, the adoption by the taxpayer of artificial acts or legal transactions, with abuse of legal forms or in fraud of law, and the non-reprobation or acceptance of this conduct by the legal order. Thus, the autonomization of the normative element may be useful in order to the explanation of these matters, but dogmatically, for purposes of resolution of concrete cases, it must be borne in mind that it is but the distillation of the normative segment of article 38º, no. 2 of the GTL that concerns the "artificial or fraudulent means and with abuse of legal forms" in which it is, after all, substantiated, the means element.

1. Returning now to the concrete case sub judice, whose case-by-case determination, as stated, is the decisive element in the application of the anti-abuse clause, it is necessary to ascertain, to conclude for an abusive practice, therefore, for an operation realized "through artificial or fraudulent means and with abuse of legal forms" as such object of normative-systemic reprobation, on one hand, whether one is faced with a purely artificial arrangement, devoid of economic reality, carried out with the sole aim of obtaining a fiscal advantage, and, on the other hand, whether, despite the formal respect of the conditions provided for in the regulation in question, the objective intended by that regulation was achieved[12]. These two elements, in effect, make it possible to verify the anomalous or artificial character of the set of acts or legal transactions practiced, in attention to their non-conformity with the economic reality presupposed in such negotiation forms, and the censure of the legal order.

Well then, as already results from what was expounded above (no. 21), the economic-business justifications presented for the transformation of C...-…, Lda into a joint-stock company entirely lack. Having in attention the facts established as proven and as unproven (see above nos. 12 and 13), it is not possible to consider, as the Claimants wish, that the corporate transformation realized constitutes a rational and logical act inserted within the scope of a reorganization of the informal group of companies, given that everything was limited to the transformation, dated 2009, of the limited company C...-…, Lda into a joint-stock company, for immediate onerous sale of the shares, but without settlement of the corresponding price, to another limited company held by the Claimants, C... – G…, Lda, which only came to assume the form of a joint-stock company managing social shares after notification for application of the anti-abuse clause. There was not, in effect, any change in the management and functioning of C... - …, since its activity was maintained, administration by the Claimants, and there did not occur the opening of capital through entry of investors or new external investments. Thus, what is concluded is that the transformation of C... - …, Lda into a joint-stock company and the subsequent sale of the respective social shares to the company C... – G…, Lda, controlled by the Claimants, constituted an artificial arrangement, alien to a business or economic interest, exclusively created to avoid the taxation that would be due by the sale of social shares if that corporate transformation had not occurred in the form and with the date that the Claimants gave it.

As regards the normative-systemic reprobation of the fiscal advantage obtained, this is assessed by virtue of a comparison between the concrete configuration of the operation realized and the designs of the legislator underlying the norm of "exclusion of taxation" then provided for in subsection a) of no. 2 of article 10 of the CIRS. In effect, since this norm possesses a well-marked and clearly evidenced purpose by the legislator, it is essential that the transformation of the limited company into a joint-stock company satisfy the propriety consistency and the material interests underlying the incentive in the adoption of this corporate form.

The purpose of the exclusion of taxation of capital gains from the sale of shares held for more than 12 months, as results from article 10, no. 2, subsection a) of the CIRS (with the wording of Decree-Law no. 228/2002, of 31 October), was to encourage the capital market and to contribute to its consolidation, constituting in attributing a more favorable tax treatment to non-speculative capital gains, i.e. to benefit "long-term capital gains" held more than 12 months.

This objective, as expressed in its regulation, presupposes necessarily that the capital transaction of the shares in question has been effected as a result of a substantial transformation of the economic reality of the company – as such corresponding to the proper aims of the joint-stock company form, which consists precisely in the openness to the market and to the movement of capital. The incentive regime, therefore, contemplates an actual and substantial change in the company's capital structure, a real opening of the company to the market or to new forms of capitalization.

On the contrary, what verifies itself in the situation sub judice is that the corporate transformation of C... - …, Lda into a joint-stock company represented purely a formal change in its legal structure, in the complete absence of any substantial modification of its economic reality. All remained identical: the activity, the administration, the capital structure and composition – the very persons who were sole shareholder-managers of the limited company became administrators of the joint-stock company, and the capital, far from being opened to external investors or new forms of capitalization, was immediately sold to another company, also controlled by the Claimants, with such sale payment being due years later.

That such is the case is evidenced, moreover, by the Justifying Report of the Transformation, which, as remarked above (no. 16), makes only generic references to the reasons for adopting the joint-stock form, lacking any concrete and specific element demonstrating the need for such transformation. The report mentions "growth" and "market adaptation," but such references remain at an abstract level and are, moreover, entirely devoid of any concrete substantiation in the facts.

If the true purpose of the exclusion regime is the encouragement of capital transactions involving real economic restructuring and market opening of companies, then necessarily the application of this regime presupposes that the corporate transformation represent a genuine and substantial change responsive to such aims. Where such change does not occur – where, as in the present case, the company's economic reality remains entirely unaltered – then the beneficiary of the exclusion regime has acted in disregard of the legislative intent and in fruition of the regime in a manner contrary to its purposes.

The tax benefit contemplated by the exclusion of taxation of capital gains, when it results from a corporate transformation that is merely formal and deprived of any economic substance, cannot but be considered as obtained in abuse of the legal forms through which it was effectuated, and therefore reprehensible in light of the tax-legal order. Such conduct represents a deviation from the purposes of the law – a defrauding of the legislative intent – inasmuch as it uses the legal form provided by the legislator for one purpose (encouraging capital markets through real economic restructuring) to achieve an entirely different purpose (tax avoidance through purely formal reorganization).

Thus, it is beyond doubt that the transformation of C... - …, Lda into a joint-stock company and the subsequent sale of shares, in the concrete circumstances of the case, must be considered as realized through "artificial or fraudulent means and with abuse of legal forms", being as such reprehensible from the normative-systemic perspective of the tax legal order.

1. In light of all the foregoing, and in particular the determinations made regarding the intellectual element (no. 21) and the means and normative elements (no. 23), it follows that all the requirements for the application of the general anti-abuse clause provided for in no. 2 of article 38 of the GTL are satisfied in the situation sub judice.

Specifically:

• The element means is verified – the corporate transformation and subsequent sale of shares constitute the form employed by the Claimants to obtain the desired fiscal advantage;

• The element result is verified – a manifest fiscal advantage was obtained, consisting in the exclusion from taxation of capital gains that would otherwise have been taxed at 10%;

• The element intellectual is verified – the operation was essentially and principally aimed at obtaining this fiscal advantage;

• The element normative is verified – the corporate transformation, being merely formal and devoid of economic substance, does not correspond to the legislative purposes underlying the exclusion regime and therefore constitutes an abuse of legal forms;

• The element sanction is therefore applicable – the acts in question are rendered ineffective within the tax sphere, with taxation proceeding according to the norms that would have applied absent the transformation.

Therefore, the decision of the Respondent to apply the general anti-abuse clause to the situation under examination was legally correct.

1. The application of the general anti-abuse clause, in accordance with the foregoing, results in the disregard of the formal transformation of C... - …, Lda into a joint-stock company, with the capital gains from the sale of shares being taxed as if such transformation had not occurred.

Thus, the sale of the participations at issue is to be considered as the sale of quotas in a limited company, subject to the regime established in article 10, no. 1, subsection b) of the CIRS, with application of the tax rate of 10% to the capital gains, pursuant to article 72, no. 4 of the CIRS, as was done in the assessment act contested herein.

The calculation of the tax owed is therefore correct:

Capital gains: €7,189,200.00 - €57,500.00 = €7,131,700.00
Tax at 10%: €713,170.00

To this is added the late payment interest calculated in accordance with applicable rules.

The total amount owed, as indicated in the assessment act, is €811,603.95.

1. As for the question of constitutionality raised by the Respondent in its final submission (subsection f) of no. 18), this Tribunal considers that such question, which concerns the interpretation of a legislative provision in light of constitutional principles, falls outside the scope of its competence as an arbitral tribunal constituted under the LRTA. Such questions are properly the domain of the Constitutional Court, and the Tribunal is not empowered to resolve them. The Tribunal therefore does not pronounce on this matter.

V. Decision

For all the foregoing reasons, the Tribunal:

Declares null and void the request for arbitral pronouncement presented by A... and B..., rejecting their request for annulment of the IRS assessment act no. 2013 …, the demonstration of interest calculation no. 2013 …, and the demonstration of account reconciliation no. 2013 …, relating to fiscal year 2009.

Thus decided and signed electronically.

Coimbra, 31 March 2015

José Poças Falcão
(Signed electronically)

José Coutinho Pires
(Signed electronically)

João Menezes Leitão
(Signed electronically)