CAAD 320/2014-T: General Anti-Abuse Clause in IRS Capital Gains on Share Sales

ARBITRAL DECISION

The arbitrators Jorge Lopes de Sousa (arbitrator president), Ana Maria Rodrigues and Ricardo Rodrigues Pereira, designated by the Deontological Council of the Center for Administrative Arbitration to form the Arbitral Court, agree as follows:

I. REPORT

1. On 4 April 2014, A, TIN ..., and B, TIN ..., both with tax domicile at ... (hereinafter, Claimants), filed a request for constitution of an arbitral court, under the combined provisions of articles 2º and 10º of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by article 228º of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of partial illegality of IRS assessment no. 2013.... relating to the year 2009, and of the assessment of compensatory interest no. 2013...., for defect of violation of law, with AT – Tax and Customs Authority (hereinafter, Respondent or AT) being respondent. The Claimants submitted 9 (nine) documents and listed 4 (four) witnesses.

In substance and in brief summary, the Claimants alleged the following:

The Claimants were subject to an inspection action, carried out by the Tax Inspection Services of the Finance Directorate of Lisbon, which had as its objective, according to what is stated in the respective Tax Inspection Report, "to assess compliance with tax obligations in IRS matters, in general, of the said taxpayers, with respect to the tax year 2009, and in particular, the control of operations involving the transfer of corporate units and the application of the general anti-abuse rule provided for in no. 2 of art. 38º of the General Tax Law, with respect to the sale of quota (shares) by taxpayer A and the acquisition by company C, NIPC ...".

Following that inspection action, corrections were proposed to the amounts declared by the Claimants in their IRS income tax return for the year 2009, in the total amount of €4,979,561.59, to which corresponds a tax amount of €497,956.16, to which are added €66,848.90 in compensatory interest calculated for the period from 29/05/2010 to 04/10/2013, at the rate of 4%.

The total amount of corrections made has two distinct sources, namely:

a) The amount of €3,930,250.00, to which corresponds tax of €393,025.00, relates to the increase in income of category G – capital gains, determined by application of the general anti-abuse clause provided for in article 38º of the GTL; and

b) The amount of €1,049,311.59, to which corresponds tax of €104,931.16, relates to the increase in income of category G – capital gains, resulting from corrections of an arithmetic nature to the amounts already declared in annex "G" relating to the transfer of corporate units, without recourse to the general anti-abuse clause.

Once the respective additional IRS assessment was made, the Claimants were notified to pay the total amount of €564,805.06.

Neither the Tax Inspection Report nor the notifications sent to the Claimants contain a breakdown of the amount of €66,848.90 in compensatory interest corresponding to each of the aforementioned portions of tax resulting from the corrections made. However, by proportional division, the Claimants estimate that the amount of €393,025.00 in tax corresponds to the value of €52,762.25 in compensatory interest.

The Claimants challenge only the IRS assessments and compensatory interest assessments resulting from the application of the general anti-abuse clause, requesting that their illegality be declared, that is, they challenge the amount of €393,025.00, as regards the assessed tax, and the amount of €52,762.25, regarding the assessed compensatory interest.

The Claimants invoke that the factual and legal presuppositions for the application of the general anti-abuse clause, provided for in article 38º of the GTL, are not fulfilled; and moreover, AT incurs a defect in its reasoning in assessing the existence or otherwise of these presuppositions.

The Claimants further allege that the interpretation that AT makes of the rule contained in article 38º of the GTL is unconstitutional, by violation of the principles of the Democratic Rule of Law and the freedom of private initiative and business organization.

The Claimants conclude their request for constitution of an arbitral court by formulating the following conclusions:

"A) The transformation of company "D, Lda." into a public limited company was determined by criteria of a managerial nature and of an economic and financial nature and not for the purpose of obtaining tax advantages for its partners;

B) Artificial or fraudulent means were not used, with abuse of legal forms, directed at the reduction, elimination or deferral of taxes or the obtaining of improper tax advantages;

C) The presuppositions are not met that would enable the application of the general anti-abuse rule provided for in no. 2 of art. 38º of the GTL;

D) AT incurs a defect in reasoning in assessing the existence or otherwise of these presuppositions;

E) The application of this rule thus constitutes an illegality;

F) Even if the transformation of company D, Lda. were motivated by exclusively fiscal reasons – which is not the case and only for the sake of argument is being considered – the activation of the general anti-abuse clause provided for in no. 2 of art. 38º of the GTL would continue to suffer from illegality, in light of the legislative choices in force at the time to which the facts relate;

G) Consequently, the assessments effected on the basis of the application of the general anti-abuse clause provided for in no. 2 of art. 38º of the GTL are also vitiated by illegality;

H) If the interpretation of the rule of art. 38º-2 of the GTL intended by AT were to prevail, the same would always suffer from unconstitutionality, by violation, in particular, of the constitutional principles that apply both to citizens and to legal entities (see art. 12º-1-2 of the CRP), of the Democratic Rule of Law (art. 2º of the CRP) and of the freedom of private initiative and business organization (arts. 61º-1 and 80º/c of the CRP)."

1. The request for constitution of the arbitral court was accepted and automatically notified to AT on 8 April 2014.

2. The Claimants did not proceed to appoint an arbitrator, whereupon, under the provisions of paragraph a) of no. 2 of art. 6º and paragraph b) of no. 1 of art. 11º of the RJAT, the President of the Deontological Council of CAAD appointed as arbitrators of the collective arbitral court Counselor Jorge Lino Alves de Sousa (president arbitrator), Prof. Dr. Ana Maria Rodrigues and Dr. Ricardo Rodrigues Pereira (member arbitrators), who communicated their acceptance of the charge within the applicable time period.

3. On 26 May 2014, the parties were duly notified of this appointment and did not manifest a desire to refuse the appointment of the arbitrators, in accordance with the combined terms of art. 11º, no. 1, paragraphs a) and b) of the RJAT and arts. 6º and 7º of the Deontological Code of CAAD.

4. Thus, in conformity with the provisions of paragraph c) of no. 1 of art. 11º of the RJAT, the collective Arbitral Court was constituted on 16 June 2014.

5. On 2 September 2014, the Respondent, duly notified for that purpose, filed its Response in which it specifically contests the arguments raised by the Claimants and concludes for the dismissal of the present action, with its consequent absolution from the claim. The Respondent did not submit any documents, having listed one witness. At the same time, the Respondent attached to the proceedings the respective administrative file (hereinafter, abbreviated as AF).

In substance and also in brief form, it is important to extract the most relevant arguments on which the Respondent based its defense:

There was no reason of an economic or financial nature that could justify the change in the legal nature of "D, Lda." from a limited liability company to a public limited company.

The transformation of company "D, Lda." into "D, S.A." merely enabled Claimant A to effect the transfer of his participation for the amount of €4,030,000.00, with the benefit of the exclusion from taxation of the capital gain obtained by virtue of the provisions of article 10º, no. 2, paragraph a), of the CIRS, as in force at the time of the facts; with this operation, Claimant A obtained, therefore, a tax saving, embodied in the non-taxation of the capital gain resulting from the transfer of corporate units.

If Claimant A had opted for the usual and normal form of transfer of his quota for the amount in question, he would have obtained a capital gain of €3,930,250.00, subject to IRS at the rate of 10%, in accordance with the provisions of article 10º, no. 1, paragraph b) and article 72º, no. 4, both of the CIRS; thus resulting in tax to be paid in the amount of €393,025.00.

Thus, the amounts declared by the Claimants in Annex G1 (relating to non-taxed capital gains) were duly annulled, and the operation in question was increased in Annex G (relating to capital gains and other increases in net worth) of the income tax return Form 3 – IRS for the year 2009.

In this way, the requirements provided for in article 38º, no. 2, of the GTL are fully met in the case at hand.

Moreover, the decision to apply the general anti-abuse clause fully complies with the provisions of article 63º of the CPPT, pointing to factual matters and concrete points of fact in order to demonstrate the existence of acts or legal transactions essentially or mainly directed, by artificial or fraudulent means and with abuse of legal forms, at the reduction, elimination or deferral of taxes or the obtaining of improper tax advantages.

On the other hand, the rights of freedom of enterprise and economic initiative are not absolute rights and cannot, in any event, be exercised in an abusive manner, in order to subvert the spirit of the rules of taxation and the granting of tax benefits, and, in that way, achieve a result contrary to the Law.

Thus, as the freedom of choice of the taxpayer in the configuration of his transactions is not at issue, that is, the exercise of his private autonomy is not at issue, what is limited is the possibility of the taxpayer's will being relevant with respect to the degree of his tax burden, whereby the interpretation of the rule contained in article 38º, no. 2, of the GTL, carried out by AT, is in accordance with the Constitution.

The Respondent concludes that the assessment acts challenged do not suffer from any illegality.

1. As there were no matters susceptible of discussion at the meeting referred to in article 18º of the RJAT, the Arbitral Court, by order issued by its President, dispensed with the holding of that same meeting.

In the same order, the parties were invited to specify in writing, within 10 (ten) days, the specific points of fact not proven by documentation, in order to decide on the admissibility or not of witness evidence, as requested by both parties.

Only AT responded to that invitation from the Arbitral Court, having indicated, albeit imperfectly, the topics of evidence on which it intended to produce witness testimony.

1. On 2 October 2014, a meeting of the Arbitral Court took place in order to produce witness evidence, at which only the Illustrious Legal Scholars designated by AT were present.

On that occasion, the Arbitral Court, considering that the proceedings already contains all the factual elements for the legal solution, rendered moot, as unnecessary, the production of witness evidence.

1. The Arbitral Court dispensed with the presentation of any arguments by the parties.

2. By order of the President of the Deontological Council of CAAD, issued on 3 November 2014, the replacement of the president arbitrator of this collective Arbitral Court, Counselor Jorge Lino Alves de Sousa, was determined by Counselor Jorge Lopes de Sousa, owing to the former being temporarily prevented, for reasons of health, from the proper exercise of his functions.

II. SANITY CHECK

The Arbitral Court was regularly constituted and is materially competent.

The proceedings do not suffer from any nullities.

The parties possess legal personality and capacity, are duly represented and are legitimate.

III. LEGAL ANALYSIS

III.1. PROVEN FACTS

With regard to the factual matters, it is important, first and foremost, to highlight that the Court does not have to pronounce itself on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish the proven matter from the unproven matter (see art. 123º, no. 2, of the CPPT and art. 607º, nos. 3 and 4, of the CPC, applicable by virtue of article 29º, no. 1, paragraphs a) and e), of the RJAT). In this manner, the facts relevant to the adjudication of the case are chosen and delineated according to their legal relevance, which is established in light of the various plausible solutions of the question(s) of Law.

Within this framework, taking into account, in particular, the positions assumed by the parties, the documentary evidence produced and the AF attached to the proceedings, the following facts are considered proven as relevant to the decision:

1. On 25/09/2006, the commercial limited liability company with the firm "D, Lda.", NIPC ..., was established, with registered office at ..., in …, having as its business purpose the "sale of non-prescription medicines", with share capital of €5,000.00, corresponding to the sum of 3 quotas [article 23 of the PI, accepted by agreement; see doc. no. 8 with the PI; see p. 7 of the Tax Inspection Report (file PA2.pdf)]:

1. On 25/03/2008, "D, Lda." acquired from G and her husband, H, for the price of €1,500,000.00, the quota, with nominal value of €5,000.00, which they held in the commercial limited liability company with the firm "I" (article 25 of the PI, accepted by agreement; see deed of transfer of quota and appointment of manager, attached as Annex II (pp. 36 to 39) to the Tax Inspection Report (file PA3.pdf)]).

2. For that purpose, "D, Lda." contracted, at ..., a loan of the same value as the price of the acquisition (article 26 of the PI, accepted by agreement; see doc. no. 4 with the PI).

3. The company "I" engaged in the activity of pharmacy, for which it had a license issued by Infarmed, commercially operating a pharmaceutical establishment located at ..., in the parish of ... and municipality of ... (article 27 of the PI, accepted by agreement).

4. On 01/04/2008, an increase in the share capital of "D, Lda." was resolved, from €5,000.00 to €150,000.00, by means of in-kind contribution in the form of capital contributions, in the amount of €145,000.00, subscribed and paid in by all partners, in proportion to their quotas, with the share capital thus being divided [article 24 of the PI, accepted by agreement; see p. 7 of the Tax Inspection Report (file PA2.pdf)]:

1. On 31/07/2008, "D, Lda." entered into a contract with the company "J…, S.A." for the development of its activities in the shopping center called "... Shopping" (article 27 of the PI, accepted by agreement; see doc. no. 5 submitted with the PI).

2. In the said contract is not stipulated the obligation for "D, Lda." to resolve its transformation into a public limited company.

3. On 23/03/2009, an Extraordinary General Meeting of "D, Lda." was held at which all partners were present, and the following was resolved [see Minutes no. 7 attached as Annex I (pp. 29 to 35) to the Tax Inspection Report (file PA3.pdf)]:

a) To approve the merger project by incorporation of company "I" into "D, Lda.";

b) To carry out a capital increase in the amount of €1,000.00, by means of the entry of two new partners;

c) Transformation of the limited liability company into a public limited company, with the same to be designated as "D, S.A.".

1. The merger by incorporation came to be effected and was registered on 28/04/2009, with 01/01/2009 being set as the date from which the operations are considered to have been carried out on behalf of the incorporating company [see p. 7 of the Tax Inspection Report (file PA2.pdf)].

2. The new partners of "D, Lda." each holding a quota of €500.00, are B, spouse of partner A and K, spouse of partner E [see Minutes no. 7 attached as Annex I (pp. 29 to 35) to the Tax Inspection Report (file PA3.pdf)].

3. The company "D, Lda." was transformed from a limited liability company into a public limited company, coming to be designated "D, S.A." and the share capital of €151,000.00 came to be represented by 30,200 shares, with a nominal value of €5.00 each, with the same being allotted to the partners, now shareholders, in the following manner by the incorporating company [see p. 7 of the Tax Inspection Report (file PA2.pdf)]:

1. In the said Extraordinary General Meeting, the corporate bodies were elected for the first term, the four-year period 2009 to 2012, and the following were appointed to the board of directors [see Minutes no. 7 attached as Annex I (pp. 29 to 35) to the Tax Inspection Report (file PA3.pdf)]:

• A, as president;

• E, as member;

• F, as member.

1. On 23/09/2009, shareholders L and K transferred their 200 shares – 100 shares each – which they held in D, S.A. to company "M, S.A.", NIPC …, at the respective nominal value, that is, €5.00 per share [see p. 8 of the Tax Inspection Report (file PA2.pdf)].

2. Following that transfer, the capital of company D, S.A. was thus distributed:

1. By share purchase and sale agreement, executed on 22/12/2009, A sold to company "C", NIPC ..., the 19,950 shares he held in the share capital of company "D, S.A.", for the price of €4,030,000.00 [see Share Purchase and Sale Agreement attached as Annex III (pp. 40 and 41) to the Tax Inspection Report (file PA3.pdf)].

2. The same A held 95% of the share capital of company "C", with the remaining 5% belonging to his spouse L [see p. 6 of the Tax Inspection Report (file PA2.pdf)].

3. On 02/10/2009, A and his spouse, L, transferred the participations they held in the share capital of company "C" to company "N, S.A.", NIPC ..., with A remaining as manager of that company [see p. 6 of the Tax Inspection Report (file PA2.pdf)].

4. It was A who represented company "C" in the execution of the aforementioned Share Purchase and Sale Agreement in 15. [see Share Purchase and Sale Agreement attached as Annex III (pp. 40 and 41) to the Tax Inspection Report (file PA3.pdf)].

5. Between 2008 and 2011 company "D" presented the following structure and level of activity [see pp. 8 and 9 of the Tax Inspection Report (file PA2.pdf); see Annexes V (p. 44), VI (p. 45), XIII (pp. 79 and 80) and XIV (pp. 81 and 82) to the Tax Inspection Report (files PA3.pdf and PA5.pdf)]:

1. The increase in the level of activity and financial structure of company "D" in 2008, 2009, 2010 and 2011 resulted from the merger by incorporation of company "I", as well as from the increase in the debts of partners to the company and the increase in the debts of the company to suppliers [see Annexes V (p. 44), VI (p. 45), XIII (pp. 79 and 80) and XIV (pp. 81 and 82) to the Tax Inspection Report (files PA3.pdf and PA5.pdf)].

2. The transformation of company "D, Lda." into a public limited company and the redenomination of its respective share capital into shares, enabled Claimant A to effect the transfer of the participation he held in the capital of that company, for the amount of €4,030,000.00, with the benefit of the exclusion from taxation of the capital gain obtained, by virtue of the legal regime in force at the time of the facts.

3. By Service Order no. OI... of 2013/05/09, an external inspection action was determined against the Claimants, who were notified of the warning letter with the exit number ... of 13/05/2013, through registered mail with number RC ... PT [see p. 5 of the Tax Inspection Report (file PA2.pdf)].

4. The inspection action began on 17/06/2013 (date of signature of the Service Order by the Claimant spouse), concluding the inspection acts on 19/07/2013 (with his signature) [see p. 5 of the Tax Inspection Report (file PA2.pdf)].

5. The inspection procedure had as its objective to assess compliance with tax obligations in IRS matters, in general, of the Claimants, with respect to the tax year 2009, and in particular, the control of the operations involving the transfer of corporate units and the application of the general anti-abuse rule provided for in no. 2 of art. 38º of the GTL, with respect to the sale of quota (shares) by the Claimant spouse and the acquisition by company "C", NIPC ... [see p. 5 of the Tax Inspection Report (file PA2.pdf)].

6. The Claimants were notified through office number ... of 26/07/2013 of the Finance Directorate of Lisbon, as evidenced by the record of CTT no. RC ... PT, of the following [see p. 19 of the Tax Inspection Report (file PA2.pdf); see Annex XI (pp. 65 to 67) to the Tax Inspection Report (file PA4.pdf)]: "Pursuant to the provisions of nos. 4 and 5 of art. 63º of the Code of Tax Procedure and Process, you have a period of 30 days within which, if you so wish, to make a statement, in writing or orally, on the content of the Draft Application of the General Anti-Abuse Clause, provided for in no. 2 of art. 38º of the General Tax Law, to which reference is made in point 3.1 of the attached Report."

7. The Claimant spouse exercised that right to be heard, in writing, in accordance with the reply delivered to the Finance Service of …, on 28/08/2013, which corresponds to entry number ... of 04/09/2013 of the Finance Directorate of Lisbon [see p. 19 of the Tax Inspection Report (file PA2.pdf); see Annex XII (pp. 68 to 78) to the Tax Inspection Report (file PA4.pdf)].

8. The Claimants were notified through office number … of 22/11/2013 of the Finance Directorate of Lisbon, as evidenced by the record of CTT no. RC …PT, of the Tax Inspection Report (see files PA2.pdf, PA3.pdf, PA4.pdf and PA5.pdf).

9. In the Tax Inspection Report it is affirmed that, in the course of the said "inspection procedure, legal transactions were analyzed that were essentially or mainly directed by artificial means and with abuse of legal forms, at the reduction of taxes that would be due without the use of these means, which in our opinion constitute grounds for proceeding with the application of the anti-abuse legal rule provided for in no. 2 of article 38º of the General Tax Law (GTL)." [see p. 6 of the Tax Inspection Report (file PA2.pdf)]

10. In the Tax Inspection Report the following is concluded with respect to the transformation of company "D, Lda." into a public limited company [see pp. 9, 11 and 12 of the Tax Inspection Report (file PA2.pdf)]:

"12 – The facts described allow for the admission that:

12.1 – There is no reason of an economic or financial nature that could justify the change in the legal nature from limited liability company to public limited company since the increase in the level of activity and financial structure in 2009, 2010 and 2011 resulted from the acquisition in March 2009 and subsequent incorporation of company "I" (Annexes I and II) as well as from the increase in the debts of partners to the company and consequent increase in the debts of the company to suppliers (Annexes V and VI), not being therefore the result of the change in its legal nature.

12.2 – The composition of shareholders does not reveal that the intention was the creation of any economic unit that would justify the use of the figure of public limited company since the two new shareholders are the respective spouses of the main partners/shareholders, A and E, who subscribed only symbolic amounts, with the shareholders who were already partners maintaining practically the same participation structure, that is, despite the formal existence of 5 subscribers of capital, in reality there is one who holds 66.06% of the capital and another 28.31% which totals 94.37%, plus symbolically 2 close family members and another with 4.97%.

13 – The act or legal transaction of the transformation of company D, Lda. into a public limited company did not result, as the facts demonstrate, from the need to adjust its legal nature to any change in its operational structure. However, it enabled the partner/shareholder A to effect the transfer of the participation he held in the capital of that company, after the transformation into a public limited company and redenomination of the capital into shares, for the amount of 4,030,000.00 with the benefit of the exclusion from taxation of the capital gain obtained, by virtue of the provisions of paragraph a) of no. 2 of art. 10º of the IRS Code.

14 – In accordance with the applicable rules of incidence, if the taxpayer had opted for the "normal" form of transfer of his quota for the amount in question, he would have obtained a capital gain of 3,930,250.00 (4,030,000.00 – 99,750.00), subject to IRS in accordance with the provisions of paragraph b) of no. 1 of art. 10º of the CIRS, at the rate of 10% as established by no. 4 of art. 72º of the same Code, as follows:

Number of "shares" transferred = 19,950

Nominal value of "shares" transferred = 19,950 x 5.00€ = 99,750.00

Sale price of "shares" = 4,030,000.00

(…)

In light of all the foregoing (…) it is understood that the conditions are met for resorting to the mechanism provided for in no. 2 of article 38º of the GTL (…).

It follows thus (…) that the presuppositions and procedures provided for in no. 3 of art. 63º of the Code of Tax Procedure and Process for application of the provision provided for in no. 2 of article 38º of the GTL are fulfilled, specifically:

a) Description of the legal transaction entered into or the legal act performed and the transactions or acts of identical economic purpose, as well as an indication of the rules of incidence that apply to them; and

b) The demonstration that the entry into the legal transaction or the performance of the legal act was essentially or mainly directed at the reduction, elimination or deferral of taxes that would be due in the case of a transaction or legal act with identical economic purpose, or at the obtaining of tax advantages."

1. From the aforementioned inspection action resulted corrections, in IRS matters, in the sphere of the Claimants, relating to the taxation period of 2009, embodied in the following [see p. 5 of the Tax Inspection Report (file PA2.pdf)]:

a) Increase in income of category G – Capital gains, resulting from corrections of an arithmetic nature, determined by application of the general anti-abuse clause provided for in articles 38º of the GTL and 63º of the CPPT, in the amount of €3,930,250.00;

b) Increase in income of category G – Capital gains, resulting from corrections of an arithmetic nature without recourse to the general anti-abuse rule, in the amount of €1,409,311.59.

1. The amounts declared by the Claimants in Annex G1 (relating to non-taxed capital gains) were annulled by AT, and the operation in question was increased in Annex G (relating to capital gains and other increases in net worth) of the income tax return Form 3 – IRS for the year 2009, in the following terms [see p. 12 of the Tax Inspection Report (file PA2.pdf)]:

1. On 25 November 2013, AT issued the challenged assessments, with the voluntary payment deadline being 06.01.2014 (see docs. nos. 1, 2 and 3 submitted with the PI).

2. On 4 April 2014, the Claimants filed the request for arbitral determination that gave rise to the present proceedings (see administrative case management computer system of CAAD).

III.1.2. UNPROVEN FACTS

The following facts were not proven:

1. The transformation of company "D, Lda." into a public limited company was aimed at providing it with more effective instruments for the realization of investments and correlative financing, at the level of fixed assets and working capital needs, enhancing its development and sustainability.

2. The transformation of company "D, Lda." into a public limited company was intended to provide the company with corporate bodies more appropriate to its size, in order to enable it to face with greater security the challenges of the future.

3. The banking sector, in particular "BANCO ..., S.A.", invoked the difficulty of granting more credit to "D, Lda.", because it was a recent company and because of its size, advising its transformation into a public limited company, which would allow it to increase the degree of credibility before financial institutions, namely because the audit of accounts by an accredited statutory auditor is mandatory and it is subject to more stringent requirements in terms of management.

4. Given the type of activity that "D, Lda." was developing, the running account credit granted by suppliers, particularly by pharmaceutical product distribution companies, was of paramount importance for the development of the business.

5. It was entirely convenient to free the transfer of corporate participations by the partners of "D, Lda." from the constraints contained in the Partnership Agreement, with the same thus being valued, also providing the capital participants with better and more credible means of guarantee that would allow them to obtain capital themselves with which they could finance the company.

6. The option for the corporate form of public limited company would contribute to "D, Lda." being able to resolve its financing problems and provide a quick response to the requests and modifications peculiar to its business.

7. The decision to transform "D, Lda." into a public limited company was determined by criteria of a managerial nature and of an economic and financial nature.

III.1.3. MOTIVATION REGARDING FACTUAL MATTERS

With respect to the proven factual matters, the Court's conviction was based on the statements made in the pleadings, in the points indicated, where the adherence to reality was not called into question and on the documents attached to the proceedings, referenced in relation to each one of the points, whose correspondence to reality was not questioned.

With respect to the factual matters not proven, these were thus considered as a result of the absence of any evidentiary elements capable of unequivocally proving them.

III.2. LAW

As results from the factual matters fixed, a tax inspection was carried out, following Service Order no. OI..., with a view to controlling the elements declared by the Claimants in the Form 3 IRS return, relating to the tax year 2009, and, in particular, the control of operations involving the transfer of corporate units, in particular with respect to the capital gains obtained from the transfer of shares representing the capital of company D, S.A..

From this inspection action, corrections were proposed to the amounts declared by the Claimants in their IRS income tax return for the year 2009, in the total amount of €4,979,562.59, to which corresponds a tax amount of €497,956.16, as per IRS assessment note no. 2013…, to which are added compensatory interest, for the period from 29/05/2010 to 4/10/2013 at the rate of 4%, in the amount of 66,848.90.

Of that total value of €4,979,562.59, the amount of €1,409,311.59 resulted from corrections of a purely arithmetic nature without recourse to the general anti-abuse rule, and which was not challenged, nor were the respective compensatory interest, by the claimants in the context of the present proceedings.

Of that total value of corrections resulting from the inspection action, corrections resulting from the application of the general anti-abuse clause provided for in articles 38º of the GTL and 63º of the CPPT were made, which the claimant challenged, in the amount of €3,930,250.00 and respective compensatory interest in the amount of €52,762.25.

The amount of €3,930,250.00 arose from a capital gain realized as a consequence of the transfer to company C SGPS, Lda. of 19,950 shares of company D, S.A., for the amount of €4,030,000.00. From the realization of that capital gain, tax to be paid resulted in the total amount of €393,025.00, to which are added the respective compensatory interest, as mentioned above.

III.2.1. Question of violation of the presuppositions of the application of the general anti-abuse clause (GAAC).

In the first place, the Claimants contend that the presuppositions, factual and legal, on which the application of the GAAC depends are not fulfilled, with the Tax and Customs Authority, through incorrect interpretation and application, violating article 38º, no. 2, of the GTL, and articles 10º, nos. 1, paragraph b), and 2, paragraph a), and 43º, no. 4, paragraph b), of the CIRS.

Article 38º, no. 2, of the General Tax Law establishes a general anti-abuse clause, in the terms of which "acts or legal transactions which are essentially or mainly directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or deferral of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, in whole or in part, without the use of these means, are ineffective in the tax field, with taxation then being effected in accordance with the rules applicable in their absence and the aforementioned tax advantages not being produced."

In the case at hand, the Tax Authority decided to apply the general anti-abuse clause considering that the legal transactions of transformation of the limited liability company D, LDA into a public limited company should be disregarded for purposes of taxation in IRS, because the Claimants intended with that transformation to benefit from the non-taxation of the capital gains which, at the time, was applicable to the transfer of shares of commercial companies, but not to the transfer of quotas.

The Tax and Customs Authority understood, in summary, that the Claimants:

– by proceeding, on 23-03-2009 – about 90 days before the transfer of corporate participations, to the transformation of the limited liability company D, Lda. into a public limited company, D, S.A.,

– if they had not opted for the transformation of the company type and had only proceeded with the onerous transfer of the quotas of company D, Lda., the capital gains obtained would be taxed at the special rate of 10% provided for in no. 4 of art. 72º of the CIRS;

– the Tax and Customs Authority understands that the only rational justification for carrying out the transformation of the limited liability companies into public limited companies (legal act performed) must be sought in the obtaining of the aforementioned tax advantages, not being justified by criteria of a managerial, economic and financial nature;

– that is, taxpayers with the act of transformation of the limited liability companies into public limited companies seek in a premeditated and artificial manner – through a sequence of acts leading to the transformation of company D from a limited liability company into a public limited company before the transfer – and with abuse of legal forms – the option for the figure of public limited company and in detriment of the maintenance of the limited liability company proves to be superfluous to the transaction and to the legal form of the companies in light of the constraints associated with that legal form – to exclude the capital gains from taxation in IRS;

– an exclusion that would not happen if, in a simpler manner (without the transformation of the company type), they transferred the limited liability company – an act of identical economic purpose – subjecting them to taxation in IRS.

III.2.2. Legitimate and illegitimate tax planning

In the definitions elaborated by Saldanha Sanches[1]: legitimate tax planning "consists of a technique of reducing the tax burden by which the taxpayer renounces a certain behavior because it is linked to a tax obligation or chooses, among the various solutions provided to him by the legal order, the one which, by deliberate action or omission of the tax legislator, is accompanied by less tax burdens"; while illegitimate tax planning "consists of any behavior of improper reduction, by contradicting principles or rules of the legal-tax order, 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 legem, extra legem and intra legem.

When he acts contra legem, his action is frontal and unequivocally unlawful, since it directly violates tax law, and constitutes tax fraud[2] capable, furthermore, of being subject to administrative offense or criminal proceedings.

Extra legem action occurs when the taxpayer abusively exploits the law to achieve a more favorable fiscal result, albeit without directly violating it. He adopts "a behavior that has as its exclusive or main purpose to circumvent one or several legal-tax norms, so as to achieve the reduction or suppression of the tax burden"[3]. Being that from that or those legal-tax norms there should be detected an attempt to circumvent "a clear intention to tax affirmed by the structuring principles of the system"[4]. This type of action is commonly designated as "abuse of tax law" but, as Saldanha Sanches alerts, intending to better illustrate and distinguish these situations from those of tax fraud, also designated as "abusive avoidance of tax burdens", "abusive tax avoidance" or also "tax evasion"[5].

Only the intra legem action appears legitimate – and, thus, legitimate tax planning or non-abusive – is to be considered so. Indeed, the obtaining of a tax saving does not constitute behavior prohibited by law, as long as the action does not fall within the aforementioned extra legem action[6].

Sub judice, succinctly, the Claimants contest that the transformation of a limited liability company into a public limited company constitutes abusive tax planning, because they understand that there is no abuse of legal forms and that the legislator deliberately opted for an exceptional and favorable treatment of capital gains from the transfer of corporate participations in public limited companies, excluding them from taxation, and that the fiscally less burdensome result is admitted, tolerated and encouraged by the law and/or by the tax system in general, whereby the acts and legal transactions performed by the Claimants cannot be condemned and framed within the GAAC, due to the absence of abuse of the rules in question.

The Tax and Customs Authority understands that such behavior constitutes abusive tax planning, in that through that transformation into a public limited company, which it considers unnecessary and fiscally motivated, and subsequent sale of shares (instead of quotas), the Claimants avoid the taxation of capital gains in IRS.

Thus, the question posed to this court, in the context of the procedure for applying the general anti-abuse clause — one of the legal mechanisms to which the legislator resorts to respond to behaviors of abusive tax planning — lies in determining whether the taxpayer's action falls intra or extra legem, that is, whether the tax planning he adopted is legitimate or illegitimate, whether it is non-abusive or abusive.

III.2.3. Elements of the general anti-abuse clause

Under the heading "Ineffectiveness of acts and legal transactions", article 38º, no. 2 of the GTL provides concerning the so-called general anti-abuse clause (GAAC) in tax law.

The wording provided by Law no. 30-G/2000, of 29 December, became the following:

"Acts or legal transactions which are essentially or mainly directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or deferral of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, in whole or in part, without the use of these means, are ineffective in the tax field, with taxation then being effected in accordance with the rules applicable in their absence and the aforementioned tax advantages not being produced."

This rule is complemented by the extensive article 63º of the CPPT, which contains a set of provisions that specify the parameters governing the procedure for application of the anti-abuse provisions.

Doctrine and case law have been deconstructing the wording of the rule by pointing out five elements within it. Corresponding to one of the elements the enactment of the rule, the remaining four appear to be cumulative requirements that allow assessing – as if it were a test – the verification of an activity characterizable as abusive tax planning[7].

These elements, around which both parties incidentally construct their argument, consist of:

– the means element, which concerns the path freely chosen – act or legal transaction, isolated or part of a structure of sequential, logical and planned acts or legal transactions, organized in a unitary manner – by the taxpayer to obtain the desired fiscal gain or advantage[8];

– the result element, which has to do with 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 performance of the "normal" acts or legal transactions and of equivalent economic effect[9];

– the intellectual element, which requires that the choice of that means be "essentially or mainly directed [to] [...] the reduction, elimination or deferral of taxes" (article 38º, no. 2 of the GTL), that is, which requires not merely the verification of a tax advantage, but rather that it be assessed objectively whether the taxpayer "intends an act, a transaction or a given structure, only or essentially, because of the prevailing tax advantages it provides"[10];

– the normative element, which "has as its primary function to distinguish cases of tax evasion from cases of legitimate tax savings, in consideration of the principles of Tax Law, it being that only in cases in which it is demonstrated an intention of law contrary to or not legitimizing the result obtained can one speak of that"[11];

– and, finally, the sanctioning element, which, presupposing the cumulative verification of the remaining elements, leads to the sanction of ineffectiveness, in the exclusive tax field, of the acts or legal transactions deemed abusive, "with taxation then being effected in accordance with the rules applicable in their absence and the aforementioned tax advantages not being produced" (final part of article 38º, no. 2, of the GTL).

Despite this deconstruction, the analysis of the elements cannot be compartmentalized, since, as Courinha emphasizes, "the fixing of one element can, in practice, depend on another", whereby these "will frequently [...] not fail to assist each other"[12].

III.3. Analysis of the situation

III.3.1. Result element

Comparing in an isolated and objective manner the legal transactions of the transformation of the company into a public limited company and the subsequent sale of the shares (acts or legal transactions performed) and the hypothetical maintenance of the company as a limited liability company and the subsequent sale of the quotas (acts or legal transactions equivalent or of identical economic purpose), it is unequivocal that the first situation benefited from a more advantageous tax regime than the second, since, while the first is not subject to taxation, in accordance with article 10º, no. 2, of the CIRS, as amended by Decree-Law no. 228/2002, of 31 October, the second is considered a capital gain, in accordance with article 10º, no. 1, paragraph b), of the CIRS, income taxed at a rate of 10%, in accordance with article 72º, no. 4, of the CIRS, as amended by Decree-Law no. 192/2005, of 7 November.

This result element is therefore verified, since the Claimants obtained a tax advantage from the transformation of the limited liability company into a public limited company.

III.3.2. Normative element

The legislator is not particularly demanding with regard to the substantiation of this aspect pertaining to the normative-systemic reprobation of the advantage obtained; however, doctrine has come to consider that this is fundamental in the distinction between legitimate and illegitimate planning.

In the words of Saldanha Sanches, it is "necessary to find, in the legal-tax order and as a sine qua non condition for application of the anti-abuse clause, the unequivocal signs of an intention to tax [...], first, because abusive tax avoidance cannot be confused with the permanent attempt of the taxpayer to reduce his taxation or to carefully weigh – non-abusive tax planning – the consequences of tax law in his business or personal activity [...], second, because in that permanent effort to reduce the tax burden we can find the exploitation by the taxpayer of what we can qualify as deliberate omissions – whether just or not, is another matter – of the tax legislator and, if that happened, it cannot be attributed to the applicator of the law the task that primarily belongs to the legislator"[13]. Indeed, he emphasizes, it must be possible to extract an "unequivocal intention to tax"[14], whereby it is not enough to have a lacuna or a less clear provision.

This Author even gives, as an example of "conscious lacuna of taxation" the situation that is here subject to application of the general anti-abuse clause (the transformation of a limited liability company into a public limited company and the subsequent sale of the shares), emphasizing that "if the legislator, at the same time that it taxes the capital gains from the transfers of quotas, leaves untaxed the capital gains from shares or taxed them at a lower rate, it cannot fail to accept fiscally the transformation of a commercial company into a company by shares even if the transformation is motivated by exclusively fiscal reasons"[15].

Indeed, "even if the transformation [were] motivated by exclusively fiscal reasons", it is the legislator that opts, expressly, to tax the sale of quotas and not to tax the sale of shares in that context, as results from the above-cited articles.

And it did so deliberately and insistently, since this is a rule that has been revised and weighed several times.

In fact, in the initial version of the CIRS, taxation in IRS of capital gains obtained from "onerous transfer of corporate units" was already provided for [article 10º, no. 1, paragraph b), as amended by Decree-Law no. 442-A/88, of 30 November], but capital gains from the transfer of "shares held by their holder for more than 24 months" were excluded [article 10º, no. 2, paragraph c)], this temporal limit having as its clear objective to avoid the exclusion from taxation as to capital gains, in the concept then in force, which were considered speculative.

This regulation was completed with that which was contained in the EBF, in the initial version, given by Decree-Law no. 215/89, of 1 July, in which the following was established:

Article 35 (EBF)

Transformation of limited liability companies into public limited companies

For purposes of no. 1 of article 5º of Decree-Law no. 442-A/88, of 30 November, of paragraph c) of no. 2 of article 10º of the IRS Code and of article 34º of this Statute, the date of acquisition of shares resulting from the transformation of limited liability companies into public limited companies is considered to be the date of acquisition of the quotas that gave rise to them.

This rule, which was intended for the transitional regime, was completed with an identical rule of permanent application, which was contained in article 18º, no. 5, paragraph a), of the EBF.

These two rules evidence the enormous dimension of legislative concern in encouraging the transformation of limited liability companies into public limited companies, reaching the point of excluding taxation in capital gains even in situations in which the taxpayer holds the new shares resulting from the transformation for a very short period, including in situations in which the sale of the new shares is made immediately following the transformation, since it is precisely situations of holding the new shares for a very short period that apply to the aforementioned rules. This evidences that, weighing the conflicting values in this situation, it was legislatively decided to forego taxation in capital gains, regardless of whether the fiscal advantage granted was the sole objective of the transformation, since it is considered to be of superior public interest the economic result achieved, from the subsequent existence of a company by shares.

With Law no. 30-B/92, of 28 December, this paragraph c) of no. 2 of article 10º came to exclude from taxation "shares held by their holder for more than 12 months", thus increasing the scope of non-taxation of the transfer of shares, or, from another perspective, restricting the concept of speculative capital gains.

Law no. 39-B/94, of 27 December, reaffirmed the validity of this regime, eliminating paragraph c) of no. 2 of article 10º, but transposing its wording to the new paragraph b).

Law no. 30-G/2000, of 29 December, eliminated the exclusion from taxation of capital gains from the transfer of shares, but limited the exclusion to shares acquired after its entry into force, expressly maintaining the previous regime for shares acquired before that date (article 4º, no. 5, of DL no. 442-A/88, of 30 November, as amended by Law no. 30-G/2000).

This new regime was never applied, since Law no. 109-B/2001, of 27 December, established, in no. 9 of its article 147º, that in 2001 and 2002 the regime prior to Law no. 30-G/2000 would be applicable and, subsequently, Decree-Law no. 228/2002, of 31 October, reintroduced the regime of non-taxation of capital gains derived from the transfer of "shares held by their holder for more than 12 months", by giving a new wording to paragraph a) of no. 2 of article 10º of the CIRS.

This wording was maintained until its revocation by Law no. 15/2010, of 26 July.

It is thus manifest that there was a deliberate legislative choice, maintained with variations since the initial version of the CIRS, towards the non-taxation of some of the capital gains from the transfer of shares, a choice which, like that of the fixing of a reduced liberatory rate, is justified by the existence of a "financial market development policy", expressly recognized in the 5th paragraph of point 12 of the Report of the CIRS.

The "Explanatory Memorandum" of Proposed Law no. 1/IX, which gave rise to Law no. 16-B/2002, of 31 May, which granted to the Government the legislative authorization necessary to approve Decree-Law no. 228/2002 is elucidative to the effect that it was recognized that the non-taxation of non-speculative capital gains from the transfer of shares was preferable to its taxation, saying:

With the entry into force of Law no. 30-G/2000, which made necessary the revision of the IRS Code carried out by Decree-Law no. 198/2001, of 3 July, the scope was extended to all capital gains of securities and the liberatory rate of 10% was eliminated.

Following this amendment, capital gains from securities are simultaneously aggregated and subject to the general progressive rates, which range from 12% to 40%.

Moreover, in accordance with article 3º of Law no. 30-G/2000, the aforementioned regime of taxation of capital gains applies only to securities acquired after 1 January 2001, with the previous taxation regime being maintained for capital gains as to those acquired before that date.

That tax regime was, however, temporarily amended by Law no. 109-B/2001, of 27 December (State Budget for 2002), which came to establish an exemption from taxation of capital gains relating to income less than 2,500 Euros, being done, however, the aggregation, solely for purposes of determining the rate to be applied to the remaining income.

Considering that the impact of this fiscal reform on the capital market was highly prejudicial to investors, configuring itself as a disincentive to investment, with all the inherent negative consequences for the development of a policy of economic recovery, it is urgent to revoke the regime of taxation of capital gains approved by Law no. 30-G/2000 and, subsequently, accepted by Decree-Law no. 198/2001 and, consequently, to resume the regime of application of the liberatory rate of 10%, as well as of the exclusion from taxation of capital gains from real estate held by their holder for more than 12 months, taxing only speculative capital gains.

The Preamble of Decree-Law no. 228/2002, of 31 October, which reintroduced the exclusion from taxation of capital gains from the transfer of shares held by their holder for more than 12 months is also elucidative of the existence of this legislative intention in saying:

The regime of taxation of income from capital gains derived from the onerous transfer of securities, at the time of the entry into force of the Code on Personal Income Tax, was significantly altered by Law no. 30-G/2000, of 29 December.

The most salient features of the framework then instituted consisted of the abolition of the tax exclusion that benefited capital gains from the transfer of bonds and other debt securities and from the transfer of shares held by their holder for more than 12 months, with a generalized taxation then being imposed on these incomes, attenuated by a base exemption for positive balances below a certain amount and by the consideration of positive or negative balances in a percentage varying according to the period of holding of the securities by the transferor.

By virtue of the establishment, by Law no. 109-B/2001, of 27 December, of a transitional regime of taxation applicable to these incomes in 2001 and 2002, the regime emerging from Law no. 30-G/2000, of 29 December, was never applied.

The present decree-law gives effect to the authorization granted to the Government by Law no. 16-B/2002, of 31 May, in the direction of restoring, in the IRS Code, the essential lines of the taxation regime of these incomes.

From the systematic point of view, there is added the preference manifested by the legislator for the adoption of the corporate organization model of the public limited company, whose adoption since the initial version of the CIRS intended to encourage and is evident in Decree-Law no. 76-A/2006, of 29 March, which reformed a vast set of laws related to commercial companies, with special attention to the simplification and elimination of registration and notarial acts and procedures (article 1º, no. 1) and to public limited companies (article 1º, no. 2: "the present decree-law further aims to update national corporate legislation, adopting in particular measures to update and make flexible the governance models of public limited companies").

Explaining the reasons of economic policy underlying the reform, the legislator states, in the preamble of that Decree-Law:

Thus, the main lines of the reform carried out by this decree-law are linked to the following ideas. On the one hand, the concern to promote the competitiveness of Portuguese companies, allowing their alignment with advanced organizational models. The present revision of the Commercial Companies Code is based on the assumption that the refinement of corporate governance practices serves directly the competitiveness of national companies. That is the first fundamental objective that this decree-law aims to pursue, in favor of greater transparency and efficiency of Portuguese public limited companies. By embarking on this path, Portugal will place itself on par with the most advanced European legal systems in the field of company law, with the United Kingdom, Germany and Italy standing out as countries that have similarly oriented legislative reforms on the basis of these assumptions. […] It is further important to point out the attention to the specificities of small public limited companies as a concern that was underlying the preparation of this decree-law".

In this context, a deliberate legislative choice is detected in the direction of excluding taxation of non-speculative capital gains, as an incentive for the creation of public limited companies, forms of more advanced organization, which tends to provide more professionalized and efficient management, with benefits for the economy in general and, reflexively, for the interest of taxation of business income itself.

On the other hand, it should be noted that the affirmation of the public interest in not taxing non-speculative capital gains derived from the holding of shares was consciously considered superior to that of the collection of revenues that taxation could generate and that this affirmation was made already after the General Tax Law had provided for the general anti-abuse clause, in its article 38º, no. 2.

Being thus, the Tax and Customs Authority cannot, in a Rule of Law state, based on popular sovereignty, on the principle of separation of powers and on the primacy of Law (articles 2º and 3º, nos. 1 and 2, of the Constitution of the Portuguese Republic), fail to respect the value judgments formulated legislatively, and cannot superimpose its own judgments on the management of public interests to the weighing of conflicting values carried out legislatively, even if it considers them more appropriate and balanced than those emanating from the organs of sovereignty with legislative competence.

That is, more concretely, having the legislator expressly considered the public interest of the creation of public limited companies superior to the interest in the taxation of non-speculative capital gains and materialized its preference in an incentive for the creation of public limited companies, creating for the holders of its capital a privileged tax regime in relation to the holders of capital in limited liability companies, it cannot, by way of the application of the general anti-abuse clause, be made impossible, via administrative channels, that legislative objective, applying to those who satisfied that public interest through the creation of public limited companies the regime that would apply to them if they had not satisfied it.

Or, from another perspective, perhaps more clarifying, one cannot, as a rule, in a situation of transformation of limited liability companies into public limited companies, understand that the act was essentially or mainly directed at the satisfaction of the fiscal interest of the participants (as required by no. 2 of article 38º of the GTL to activate the general anti-abuse clause), since that act, objectively and necessarily, with the will of the taxpayer or without it, is always directed at the satisfaction of the public interest of the increase in the creation of public limited companies, an interest which, from the legislative perspective, is always the essential or main one to be considered in that situation, for purposes of taxation.

Therefore, in situations of this type, of transformation of limited liability companies into public limited companies, the abuse of legal forms indispensable to enable the application of the general anti-abuse clause and the existence of an intention contrary to the legislative design are only ascertainable in situations in which the public interest in the creation of public limited companies cannot be considered satisfied, as, for example, may occur in situations in which the creation of the public limited company is not followed by its maintenance as an economic reality for an appreciable period of time.

In the case at hand, it is unequivocal that a situation of that type does not occur and, therefore, the operation of transformation of the limited liability companies into companies by shares satisfied the interest which, from the legislative perspective, is the main one to be considered, superior to that of taxation itself.

On the other hand, it is not apparent in this action of the Claimants, in perfect harmony with the legislative design that was intended to be achieved with the creation of a more favorable taxation regime for holders of shares, the use of any artificial or fraudulent means or abuse of legal forms (as required by the application of the general anti-abuse clause) since the transformation of limited liability companies into public limited companies is expressly provided for in law as a normal means of creation of companies of this type (articles 1º, no. 2, and 130º of the Commercial Companies Code), including in the context of the taxation of income [article 43º, no. 6, paragraph b), of the CIRS]. What would surely constitute artifice or legislative fraud, incompatible with the constitutional principle of trust, inherent in the principle of democratic Rule of Law, would be to legislatively encourage taxpayers of IRS to the creation of public limited companies, through the announcement of the attribution of a tax advantage and, once the public interest intended with such incentive has been satisfied, not to recognize them the right to the promised advantage.

Consequently, a situation does not occur that can be framed in no. 2 of article 38º of the GTL, firstly because there is no act that can be considered directed essentially or mainly to the obtaining of tax advantages (since it was directed also at the creation of a public limited company because it was intended that it function with the characteristics and potentialities inherent to it), but also because no artificial or fraudulent means was used to obtain tax advantages.

This interpretation is not discordant with the Constitution, specifically with the principle of contributory capacity, equality, legality and fiscal neutrality.

Any violation of these principles could only emerge from the very difference in legal treatment between the sale of quotas and the sale of shares and not from the interpretation which is now being made, regarding the non-verification of a situation of application of the general anti-abuse clause. Furthermore, those principles do not represent absolute values, and there is no constitutional obstacle to them being limited for the pursuit of other constitutionally protected values, as occurs, in particular, with the generality of situations in which tax benefits are granted. In the case, this difference in treatment, as set forth above, results from a long and repeated path undertaken by the legislator, which has evidenced the will not to tax these situations and to privilege and promote the adoption of "governance models of public limited companies". It is framed within a legislative framework that is not limited to the dynamization of the stock market, since the creation of public limited companies, which are a more advanced form of organization of commercial companies and a potentiator of greater concentration of capital and greater economic efficiency, aligns itself with the first of the priority incumbencies of the State listed in article 81º of the CRP, which is the promotion of the increase in economic well-being and quality of life of people, which presupposes the creation of wealth and the adoption of forms of organization of companies that potentiate it.

It is concluded, therefore, that, even if the transformation of a limited liability company into a public limited company was motivated by exclusively fiscal reasons, it would not be an act that could be condemned in face of the tax legal order, since the legislator itself chose to tax in IRS matters the gains resulting from the sale of quotas and not to tax in that tax matters the gains resulting from the sale of shares.

A situation such as this, in which the legislator resisted lengthy in eliminating such regime maintaining a "conscious lacuna of taxation", does not show itself susceptible of application of the general anti-abuse clause, in situations in which the legislative purpose of creation of public limited companies was achieved, in particular, as occurs in the case at hand, in which the public limited companies created subsist as economic realities with the characteristics peculiar and potentialities different from those that would exist from the maintenance of the limited liability companies. In this context, it should be noted that, despite the purchase and sale agreements having as their basis the management by Claimant A, there is no obstacle to the public limited companies created subsisting beyond the agreements and being able to exercise, in due course, activities not included in their scope.

It should further be noted, as a legislative indication that these situations of transformation of limited liability companies into public limited companies were not foreseen as potentially generating situations of abusive tax planning, the fact that Decree-Law no. 29/2008, of 25 August, which specifically aimed to prevent the control of situations of that type, makes no allusion to them, in particular not establishing duties of communication, information and clarification to the tax authority on these transformations.

And it is not for the applicator of the law to substitute itself for the choices of the legislator to tax or not to tax certain realities formulated by the tax legislator. [16]

IV. DECISION

Pursuant to the above, this collective Arbitral Court decides:

a) To declare the claim grounded as to the part in which the declaration of illegality is requested on the basis of violation of article 38º, no. 2, of the GTL;

b) To annul, on the basis of violation of article 38º, no. 2, of the GTL:

– the partial IRS assessment no. 2013 ..., of 25-11-2013, relating to the year 2009, in the amount of €393,025.00 (three hundred ninety-three thousand and twenty-five euros);

– the partial assessment of compensatory interest no. 2013 ...31, of 25-11-2013, relating to the period from 29-05-2010 to 04-10-2013, at the rate of 4%, in the amount of €52,762.25 (fifty-two thousand, seven hundred and sixty-two euros, twenty-five cents).

CASE VALUE:

In accordance with the provisions of arts. 306º, no. 2, of the CPC, 97º-A, no. 1, paragraph a), of the CPPT and 3º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the case is assigned a value of €445,787.25 (four hundred forty-five thousand, seven hundred eighty-seven euros and twenty-five cents).

COSTS:

Pursuant to art. 22º, no. 4, of the RJAT, the amount of costs is set at €7,038.00 (seven thousand and thirty-eight euros), in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 26 November 2014.

The arbitrators,

(Jorge Lopes de Sousa)

(Ana Maria Rodrigues)

(Ricardo Rodrigues Pereira)

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

[2] See Court of Appeal (Tribunal Central Administrativo Sul) judgment of 12-02-2011, case no. 04255/10.

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

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

[5] See Saldanha Sanches, J.L., Os Limites..., pp. 21-23; also Court of Appeal (Tribunal Central Administrativo Sul) judgment of 12-02-2011, case no. 04255/10.

[6] 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 establishment 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 main or exclusive purpose the obtaining of a tax saving through the abuse of law) and the taxpayer comes to have his behavior judged according to this criterion. [...] the evolution of the law is clear in the direction of providing legal foundation for tax planning, as long as it is practiced without the abuse of legal forms, without artificial and fraudulent legal transactions but limiting itself to choosing the path that is open to him and that allows him to make fiscal savings". See also Marques, Paulo, Elogio do Imposto, Coimbra Editora, Coimbra, 2009, pp. 360-364.

[7] That is, "a planned action by the taxpayer that translates into apparently lawful behavior, generating a tax advantage not admitted by the tax legal order" (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 Court of Appeal (Tribunal Central Administrativo Sul) judgment of 15-02-2011, case no. 04255/10, conclusions XIII and XIV).

[8] As results from the following part of article 38º, no. 2, of the GTL: "acts or legal transactions essentially or mainly directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or deferral of taxes".

[9] This results from the following segment of article 38º, no. 2, of the GTL: "reduction, elimination or deferral of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, in whole or in part, without the use of these means". It also results from article 63º, no. 3, paragraphs a) and b) of the CPPT, as amended by Law no. 64-B/2011, of 30 December, which require that the Tax Authority include in its reasoning, respectively, "the description of the legal transaction entered into or the legal act performed and the 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 entry into the legal transaction or the performance of the legal act was essentially or mainly directed at the reduction, elimination or deferral of taxes that would be due in the case of a transaction or legal act with identical economic purpose, or at the obtaining of tax advantages".

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

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

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

[13] See Saldanha Sanches, J.L., Os Limites..., p. 180.

[14] See Saldanha Sanches, J.L., Os Limites..., pp. 180-181.

[15] See Saldanha Sanches, J.L., Os Limites..., p. 182.

[16] In the legal reasoning, the arbitral decision issued in Case no. 264/2014-T of the CAAD is followed closely.