Process: 326/2014-T

Date: January 3, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Arbitral Award 326/2014-T addresses the tax neutrality regime for corporate spin-off operations under Portuguese IRC law. The case involves A..., SGPS, SA challenging an additional IRC assessment of €... for tax year 2009, arising from a spin-off operation where AA..., SA separated its shareholdings in F..., SA to create a new holdings management company. The claimant contested the assessment on multiple grounds: (i) error in applying the fiscal neutrality regime under Articles 67(2)(a), 67(4), and 68(1) of the IRC Code; (ii) absence of a taxable event and violation of constitutional principles of contributive capacity, legality, and fiscal neutrality; (iii) breach of the principle of material truth; and (iv) deficient legal reasoning. The Tax Authority's assessment treated the spin-off as generating positive equity variations subject to IRC, while the claimant argued the operation should benefit from tax neutrality provisions. The arbitral tribunal, constituted under Decree-Law 10/2011 and composed of three arbitrators, examined witness testimony and documentary evidence to determine whether the spin-off qualified for neutral tax treatment. The case highlights critical issues in Portuguese corporate reorganizations: when spin-offs trigger immediate taxation versus deferral under neutrality rules, how equity variations are characterized for IRC purposes, and the evidentiary burden in tax arbitration. The tribunal's analysis focused on whether the legal requirements for neutrality were met, including proper asset transfer, valid corporate purpose, and compliance with formal requirements. This decision provides important guidance on challenging IRC assessments based on errors in legal qualification of restructuring operations and the application of constitutional and procedural guarantees in tax arbitration proceedings.

Full Decision

Arbitral Award

Case No. 326/2014-T

The arbitrators Counsellor Doctor Jorge Lopes de Sousa (Arbitrator President), Dr. João Menezes Leitão and Dr. Jaime Carvalho Esteves, who constitute the present Arbitral Tribunal, agree as follows:

I. Report

A..., SGPS, SA, legal entity No. ..., with registered office in … (hereinafter the Claimant), filed on 9 April 2014, pursuant to the provisions of Article 10 of Decree-Law No. 10/2011, of 20 January, as amended (Legal Regime for Tax Arbitration, hereinafter LRTA), a request for arbitral ruling, in which the Tax and Customs Authority (hereinafter, Respondent or TCA) is requested, concerning the tax act of additional assessment of Corporate Income Tax (CIT) with No. ..., in the amount of € ... and assessment of compensatory interest No. …, in the amount of € ..., all concerning the tax year 2009 and in the total amount of €..., as per note No. …, account adjustment No. … (see last page of the administrative file attached to the case) and compensation document No. … in the said amount of Euro....

  1. In the request for arbitral ruling, pursuant to the provisions of Article 6, No. 2, paragraph b) and in accordance with what is established in Article 10, No. 2, paragraph g) and in Article 11, No. 2, all of the LRTA, the Claimant appointed as arbitrator Mr. Dr. Jaime Carvalho Esteves. In turn, pursuant to the provisions of paragraph b) of No. 2 of Article 6 and No. 3 of Article 11 of the LRTA, the Respondent appointed as arbitrator Mr. Dr. João Menezes Leitão. After the request of the arbitrators appointed by the parties, pursuant to the provisions of the second part of paragraph b) of No. 2 of Article 6 of the LRTA, the President of the Deontological Council of CAAD appointed as arbitrator-president Mr. Counsellor Doctor Jorge Lopes de Sousa.

Pursuant to No. 7 and No. 8 of Article 11 of the LRTA, as per communication from the President of CAAD, the Arbitral Tribunal was constituted on 3 July 2014.

  1. In its request for arbitral ruling (hereinafter initial petition or IP), the Claimant requested the annulment of the tax act of additional assessment of CIT and compensatory interest to which corresponded the compensation with No. ..., concerning the tax year 2009, in the amount of €..., on the grounds of illegality arising from: i) error as to the factual and legal assumptions, both as to the regime of neutrality of the spin-off operations, and as to the regime of positive patrimonial variations; ii) violation of the principle of material truth; iii) defect of reasoning, all with consequent iv) illegality of the assessment of compensatory interest.

  2. The TCA presented a reply, requesting the rejection of the request for arbitral ruling, with consequent maintenance in the legal order of the tax act, as the defects pointed out by the Claimant to the impugned act do not exist.

  3. On 21 October 2014, as appears from the corresponding minutes, witness testimony production took place, with examination of witnesses B..., C..., D... and E... called by the Claimant, the Respondent having dispensed with examining the witnesses called by it. The parties subsequently produced the corresponding oral arguments.

  4. The arbitral tribunal fixed 15 December 2014 as the deadline for the final decision, which was subsequently extended to 3 January 2015.

  5. The arbitral tribunal is competent to judge the request for arbitral ruling (Article 2, No. 1, paragraph a) of the LRTA), the parties have legal personality and legal capacity and have standing (Articles 4 and 10, No. 2 of the LRTA and Article 1 of Ordinance No. 112-A/2011, of 22 March), and no nullities occur nor were exceptions raised, therefore nothing prevents judgment on the merits.

II. Questions to be Decided

  1. Given the positions assumed and the grounds alleged by the parties within the scope of the present arbitral proceedings, as they emerge from the IP of the Claimant and the reply of the Respondent, the questions to be decided, in consideration of the legal provisions applicable ratione temporis to the facts (year 2009)[1], relate to the assessment of the following defects attributed to the additional assessment of CIT impugned:

i) error as to the factual and legal assumptions in the qualification of the spin-off operation occurred concerning the regime of fiscal neutrality applicable in accordance with what is established in Articles 67, No. 2, paragraph a) and No. 4 and 68, No. 1 of the CIT Code (Articles 73, No. 2, paragraph a) and No. 4 and 74, No. 1 of the CIT Code as written by Decree-Law No. 159/2009, of 13 July);

ii) absence of taxable event (Articles 104, No. 2 of the Constitution, 17, No. 1, 20 and 21, all of the CIT Code) and violation of the principles of contributive capacity and, further, of legality (Articles 13, 165, No. 1 paragraph i) and 103, No. 2, always of the Constitution and 8, No. 1 of the General Tax Law) and fiscal neutrality;

iii) violation of the principle of material truth (Article 58 of the General Tax Law);

iv) violation of the duty to state reasons (Articles 268, No. 3 of the Constitution, 77 of the General Tax Law and 125, No. 1 of the Administrative Procedure Code).

III. Decision on Matters of Fact

  1. Regarding the matters of fact, in view of the various allegations contained in the IP, it is important to note, preliminarily, that the relevant factuality is delimited by reason of the various plausible solutions of the question(s) of Law that should be considered contested (to resort to the apt formulation that was contained in No. 1 of Article 511 of the previous Code of Civil Procedure), therefore the tribunal does not have to pronounce itself on all the allegations made, but rather to select the facts that are effectively relevant to the decision and to discriminate the proven matter from the unproven (see Article 123, No. 2, of the Tax Procedure Code and Article 607, Nos. 3 and 4, of the Civil Procedure Code, applicable ex vi Article 29, No. 1, paragraphs a) and e), of the LRTA).

The choice of relevant facts is measured by their legal relevance, which is provided by their respective connection with each of the plausible solutions of the questions of Law. These are thus the terms in which, in consideration of the legal questions to be decided above listed (see above No. 8), the subsequent delimitation of the relevant matter of fact is carried out.

a) Proven Facts

  1. Having examined the documentary evidence presented, the administrative tax file attached (hereinafter, AF) and the witness testimony produced, the Tribunal fixes the facts that are considered proven as follows:

I. A..., SGPS, SA is a commercial corporation, with share capital of €..., fully paid up at the time and as a result of the spin-off operation referred to below, whose corporate purpose is the "management of shareholdings in other entities" (see permanent certificate at pages 21 et seq. of the AF).

II. The Board of Directors of AA..., SA, a commercial corporation, with share capital of €..., legal entity No. …, with registered office in …, prepared the simple spin-off plan, dated 12 December 2008, in accordance with which part of the assets of AA..., SA (the spinning-off entity) was highlighted corresponding to the shareholdings held in the subsidiary company F...-., SA, in order to constitute with them a new management company for shareholdings, under the form of a commercial corporation (the beneficiary company and here Claimant).

III. AA..., SA was the holder of 77,545 shares of the capital of F...-., SA, each with a nominal value of 5 euros, which were recorded in the balance sheet of AA..., SA in accordance with the cost method, in the amount of ... euros.

IV. The said F... had registered office at the place of …, with tax identification No. ….

V. That asset (77,545 shares representing part of the capital of F...-., SA) also appears, for the same amount, in the balance sheet, with reference to the date of 30 September 2008, duly approved by the shareholders of AA..., SA, for purposes of the spin-off plan.

Both entities intended to benefit from the fiscal neutrality regime provided in Article 68 of the Corporate Income Tax Code.

VI. The planned spin-off operation was approved by resolution of the General Shareholders' Meeting of AA..., SA, on 2 February 2009.

VII. The said spin-off, in the form of "simple spin-off, by highlighting part of its assets to constitute another shareholding management company", was registered in the corresponding commercial register, giving rise to a reduction in the share capital of AA..., SA and to the constitution of the Claimant, with share capital equivalent to the value of the reduction just referred to.

VIII. With the simple spin-off of the spinning-off company AA..., SA, the shareholding held in company F..., SA was thus transferred and highlighted to the Claimant, corresponding to 64.62% of its respective share capital.

IX. No other material or human resources were transferred with the spin-off to the company resulting from the spin-off.

All as appears from the tax inspection report that gave rise to the tax act in question and that is contained in the AF (see pages 9 et seq.) and does not constitute a matter of dispute between the parties.

X. It emerges from the witness testimony produced that the highlighting of the shareholding resulting from the spin-off was motivated by the desire to prevent F..., SA, given the difficult economic situation it was going through, with a drop in sales, from negatively affecting the image and financial situation of the spinning-off company.

XI. In the three-year periods 2006-2008 and 2009-2011, … were members of the Board of Directors of the spinning-off company and were likewise, in the four-year period 2009-2012, administrators of the Claimant (see AF).

XII. This, in its activity, used an office with desk, computer, files and staff of AA... SA for secretarial services (testimony of the witnesses called by the Claimant B..., C..., D... and E...).

XIII. Under Service Order No. …, notified to AA..., SA on 11 June 2013, an external tax inspection action was carried out on this Company.

XIV. In the context of the inspection action, that Company was notified to present and provide the following elements and clarifications (see the notification contained in the AF):

"The simple spin-off registered on 08/05/2009 in the Commercial Register office of …, does not meet the provisions of paragraph a) of No. 2 and No. 4 of Article 73 of the CIT Code, as there is no existence of an autonomous economic unit, with a set of personnel and material resources, in which the same constitute a business organization necessary for the development of the activity, which is transferred and which it is intended to continue in the beneficiary, with the consequent implications for the non-existence of the requirements for the existence of fiscal neutrality in this operation.

Consequently, if the said fiscal regime does not apply, with respect to the transfer of the shareholding, from AA..., SA to A... SGPS, it should be subject to the general taxation regime, with the application, namely of the provisions of No. 3, paragraph d) of Article 46 of the CIT Code, determining the corresponding gains and losses, in the sphere of the spinning-off company or transferor, AA..., SA.

Article 46, No. 3, paragraph d) of the CIT Code provides that in the case of a spin-off the "fair market value of the elements of the fixed assets transferred as a result of such acts" is considered as the realization value, as of the date to which those operations refer.

Therefore, it is requested that you indicate, with justification, what the fair market value of the 64.62% shareholding in the capital of F..., ., SA, Tax ID …, reported to that value at the date of the spin-off operation is".

XV. The spinning-off company (AA..., SA) replied to the notification indicated in the previous point, by the communication that is found in the AF, which is here reproduced, from which the following steps stand out:

  • "1-In the year 2009 a spin-off was carried out, with the constitution of a new SGPS, by separation of its shareholding assets of 64.62%, in company F..., ., S.A.

2-We will not discuss at this point the question of fiscal neutrality of this operation. Note that the State considers the activity of the SGPS a business for taxation purposes, but for spin-off purposes, does not. Indeed the spin-off carried out ensured in the company resulting from the spin-off the same shareholding that the shareholders held in the spinning-off company, among which stands out the existence of own shares of 10% of the share capital. Therefore, as a result of the spin-off AA..., SA, remained shareholder of the new company in 10%. Therefore the shareholding "transferred" to third parties was 58.158%, making no sense to determine gains and losses with a transfer from AA..., S.A. to itself".

  • "4-Regarding the supposed fair market value of F..., SA it will be important to refer to the following:

4.1-Aiming to determine what the eventual fair market value at the time of the Spin-off, for purposes of negotiation an evaluation study was carried out by our Official Auditor (which is attached), with reference to the date of 31.12.2008, being determined a value for the company of about ... euros".

  • "5-Taking into account the perspectives of the Boards of AA..., S.A. and F...-., S.A., which foresaw difficult times for F..., the separation by spin-off of the shareholding in F..., SA, aimed to withdraw such shareholding from the sphere of A..., as if F... had serious economic difficulties, such would affect the life of AA..., SA itself, namely at the level of its financing.

For this reason, for the Board of AA..., SA, the value that best expresses the fair market value of F...-, SA, as of 31.12.2008, is a value not exceeding its book value of ... (sic)".

XVI. The Claimant did not exercise the right to be heard regarding the draft tax inspection report that was timely sent to it.

XVII. The inspection procedure carried out culminated in the corresponding Tax Inspection Report and included in the AF, the content of which is here reproduced, and from which it appears, in very brief summary, that:

  • in 2009 a simple spin-off operation of AA…, SA occurred, which gave rise to the constitution of the Claimant;

  • that spin-off occurred by highlighting (solely) a shareholding in F...;

  • and contrary to what was intended by the parties, it does not benefit from the special regime of neutrality contained in the CIT Code;

  • because in the operation only one asset was highlighted, the said shareholding, without other material or human resources, alongside the said shareholding;

  • reason why a branch of activity cannot be configured in the sense of the fiscal neutrality regime provided for in the CIT Code, thus not meeting one of the prerequisites for the application of that regime;

  • having the shareholding been transferred at its book value, as recorded in the accounts of the spinning-off company and corresponding to its historical cost, its fair market value was determined, in the terms considered appropriate and corresponding to an average among various valuation criteria;

  • that value was considered as a positive patrimonial variation to be added to taxable income, pursuant to Article 21 of the CIT Code;

  • whereby the taxable income of the fiscal year was increased by an equal amount.

XVIII. The corresponding corrections to taxable income (and to taxable matter) of 2009 of the Claimant were thus made, in the amount of €... (see the Tax Inspection Report of the AF and rulings of 29/10/13).

XIX. The Claimant was subject to the already identified additional assessment and account adjustment of CIT and compensatory interest.

b) Unproven Facts

  1. There are no other facts relevant to the assessment of the merits of the case.

c) Reasoning of the Decision on Matters of Fact

  1. The Tribunal's conviction regarding the matters of fact resulted from the documents attached to the case by the Claimant, the documents contained in the AF, the acknowledgment of facts assumed in the procedural submissions of the parties and the witness testimony produced.

IV. On the Law

  1. Preliminarily, it should be noted that the Tribunal is not bound by the order in which the alleged defects, or their grounds, are presented by the parties (see Article 124 of the Tax Procedure Code, ex vi of Article 29 of the LRTA), being able to analyze preliminarily those that better protect the interests at stake.

Now, it is certain that the Claimant's thesis rests, first, on the applicability of the fiscal neutrality regime to the spin-off operation in question, a regime that was at the time provided for in Articles 67 et seq. of the CIT Code and, therefore, also to the patrimonial increase verified in the beneficiary of the spin-off and here Claimant. However, it is equally certain that the applicability of the said special regime will be absolutely irrelevant, if the general taxation regime applicable to the operation in question does not support the tax act here contested. That is, if even without application of the said special regime of neutrality, the taxable income of the fiscal year 2009 of the Claimant is properly calculated. In other words, the applicability of the special regime will only be relevant if the general regime supports the assessment in question.

For that reason, the analysis of the tax act will begin, precisely, with the applicability of the general regime, that is, what was referred to above corresponds, in the formulation of the Claimant, to the absence of a taxable event (Articles 104, No. 2 of the Constitution, 17, No. 1, 20 and 21, all of the CIT Code) and violation of the principles of contributive capacity and, further, of legality (Articles 13, 165, No. 1 paragraph i) and 103, No. 2, all of the Constitution and also 8, No. 1 of the General Tax Law) and fiscal neutrality.

a) The General Regime of Merger and Spin-off Operations

  1. Convinced of the necessity of not making mandatory corporate restructuring operations more fiscally burdensome, the legislator introduced into the CIT Code a special taxation regime applicable to merger, spin-off, asset contribution and share exchange operations, inspired by the work that would give rise to Directive 90/434/EEC on the common fiscal regime applicable to mergers, spin-offs, asset contributions and share exchanges between companies of different Member States. In fact, the spin-off is a common form of "adaptation of companies to new realities; all these operations constitute optimizing solutions that seek to increase the efficiency of forms of business organization[2]" as referred to by Saldanha Sanches.

It is known that the general regime applicable to these operations suffered from various weaknesses, which moreover motivated profound changes in the recent corporate income tax reform approved in 2013.

However, such difficulties did not arise in the transfer of assets of fixed assets by effect of a merger or a spin-off, given the wording of paragraph d) of No. 3 of Article 43 of the CIT Code. And, strictly speaking, it does not appear that they should also arise with respect to the patrimonial increase that results from such operations for the entities that are beneficiaries of a spin-off or merger operation[3].

b) Positive Patrimonial Variations

  1. As is clear, the operation sub judice constitutes a simple spin-off by highlighting shareholdings to constitute the Claimant (a shareholding management company), in accordance with the provisions of paragraph a) of No. 1 of Article 118 and paragraph a) of No. 1 of Article 124, both of the Commercial Companies Code.

Simple spin-off is a specific operation, with its own autonomy, unified, although complex, by which a company highlights part of its assets to constitute with them another company (see Article 118, No. 1, paragraph a) of the Commercial Companies Code – CSC).

In the case, the gross assets highlighted correspond to the net assets, given the absence of other active and passive elements highlighted, with the exception of the identified shareholding, having as counterpart a reduction in the share capital of the spinning-off entity of a value equal to the book value of that asset. And to that patrimonial decrease of the spinning-off company there corresponded, in the beneficiary, the realization of initial share capital of equal amount.

Indeed, the spin-off of companies corresponds to a process of division of corporate assets between one or more companies, originating a modification of the companies involved by economic deconcentration. The process is thus characterized "by the separation of parts of the patrimonial element of the companies involved intended for their autonomization … with the consequent assignment to the shareholders of the spinning-off companies of shareholdings in the beneficiary companies[4]".

And this element serves to well illustrate what is characteristic of the spin-off (and what allows it to be differentiated from the asset contribution operation, also provided for in the CIT Code): in the spin-off there is always a patrimonial impoverishment of the spinning-off company, as the asset highlighting does not correspond to any counterpart. Differently, what occurs in asset contribution in which the contributing company is remunerated with shares of capital of the beneficiary entity. But, naturally, the absence of counterpart for the spinning-off company does not correspond to an impoverishment of its shareholders, as they are compensated with the assignment of shareholdings in the beneficiary company of the spin-off.

Thus, whereas asset contribution allows the realization of capital of the beneficiary by the contributor, in the case of the spin-off such realization of capital with assets of the spinning-off company is realized mediately by the shareholders thereof, since it is the assets that indirectly belong to them (by holding the shareholdings of its holder) and that concretizes their realization. For that reason the new shareholdings enter the legal sphere of the shareholders of the spinning-off company, and not in the legal sphere of this (once more, in opposition to what occurs in the asset contribution operation).

Thus the impoverishment of the spinning-off company is always inevitable, seeing it necessarily reduced in its assets. However, this does not occur with respect to its shareholders, as the value of the sum of the assets of spinning-off and beneficiary will be identical to the assets of that before the spin-off.

In this framework, it is well understood, as today expressly appears in the CIT Code, following the said corporate income tax reform (see Article 21, No. 1, paragraph e), that the patrimonial increase verified in the beneficiary does not contribute to the formation of the taxable income of the fiscal year. And it does not appear that the new paragraph comes to innovate in this matter, as moreover appears from the preparatory work and from the inclusion of the reference to "merger and spin-off" operations alongside the mention of "asset contributions and share exchange" operations, in which in no way could there ever be, legitimately, any doubt regarding the irrelevance of the corresponding patrimonial increase for the calculation of taxable income of the beneficiaries.

  1. However, it is known that from the administrative doctrine, of which the tax act in question is a concrete expression, a different understanding arose, in accordance with which the company beneficiary of a spin-off or merger operation would determine a positive patrimonial variation, concurrent for the determination of its taxable income, pursuant to Article 21 (1) and (2) of the CIT Code, if the operation in question could not be framed within the special regime of fiscal neutrality. Thus, the TCA understands that with the normative in force until 2013, inclusive, the beneficiary companies of a spin-off, as in this case, determine a positive patrimonial variation that contributes to the determination of their taxable income, pursuant to Article 21 (1) and (2) of the CIT Code as written in force until 31.12.13.

But from this understanding would result taxation in the sphere of the spinning-off company (at least for the elements of fixed assets highlighted), in the sphere of the beneficiary company (by the patrimonial increase, as if it were a gratuitous transfer from the contributor) and still taxation in the sphere of its shareholders (by the exchange of shareholdings), thus leading to a triple, and excessive, taxation of the spinning-off company, taxation of the shareholders and taxation of the beneficiary[5].

But this excessive taxation does not appear consistent with the normative text, nor with the system of taxation of corporate income. This is because the legislator already then (2009) expressly excluded from tax relevance the capital contributions made by the shareholders, even though it did not expressly state, as it does today, that neither do the increments of the own capital of the beneficiary verified in spin-off operations contribute.

And it is well understood that this should be so as the contribution is, according to the nature of the operation, at least mediately or indirectly, made by the shareholders of the spinning-off company (and who by the operation become shareholders of the beneficiary). The mediate patrimonial impoverishment of these, resulting from the direct patrimonial impoverishment of the spinning-off entity, is directly compensated by the shareholdings that necessarily receive from the company constituted by the simple spin-off process.

Now, the understanding of the TCA would presume we are dealing with a patrimonial transmission operated gratuitously, which manifestly does not occur. To the patrimonial loss of the spinning-off company does not correspond a patrimonial loss of its shareholders, as the spin-off corresponds yes to a mere reorganization of the corporate structure of indirect exercise of one or more economic activities by the shareholders. For that very reason, as a rule, we will find in the spin-off operation the issuance of new shareholdings by the beneficiary (or the increase of its nominal value), corresponding to its initial share capital or the increase of the pre-existing, intended precisely to remunerate the shareholders of the spinning-off company for their previous mediate patrimonial amputation, which is thus neutralized.

And that fact leads, as is now expressly recognized, but in a non-innovative manner, to the applicability of the exception contained in the regime of Article 21.

Thus, the entry in question and which underlies the intended positive patrimonial variation taxed cannot have a tax treatment different from that which resulted from the wording at the time of No. 1 of Article 21 of the CIT Code (as they constitute "capital contributions" for all tax purposes), nor does it correspond to the provision at the time contained in No. 2 of the same article ("patrimonial increments obtained gratuitously"), being thus a patrimonial variation excluded from relevance in the calculation of taxable income as "capital contributions".

And it is not to be said that the final part of paragraph a) of No. 1 of Article 21 of the CIT Code prevented such conclusion, by adding "made by the holders of capital", as the contributions are, well seen, at least mediately, made by the shareholders of the spinning-off company, who by the spin-off operation become shareholders of the beneficiary. And even if this were not so, an interpretation not strictly literal (indeed, a strictly literal interpretation is prohibited by the rules of general interpretation, equally applicable in tax law) but that attended to the spirit of the legislator, as well as to the cohesion of the tax system and to the economic interpretation of the taxable event, would imply such conclusion.

It cannot thus be left aside that those patrimonial increments are contributions of the shareholders. And Article 21 (1) (a) of the CIT Code provided that the patrimonial variations not reflected therein and that correspond to "capital contributions, including share premiums (…) made by the holders of capital" did not contribute to the formation of taxable income. And in the spin-off, as universal transmission of patrimonial assets of one company in favor of another, without any counterpart other than the assignment of shareholdings to the shareholders of the first, who thus become shareholders of the second, there necessarily results an increase of the net assets of the beneficiary, which should be qualified as "capital contributions", which, as follows from what has just been stated, are "made by the holders of capital" of spinning-off and beneficiary.

Therefore, even if there is an evident patrimonial increase in the beneficiary entity, in theory susceptible of inclusion in its taxable income by the application of the accrual income principle, the legislator was clear when it excluded such increase from tax relevance.

For, well seen, it is not the spinning-off company that contributes assets in favor of the beneficiary company, what would even be contrary to the corporate purpose due to the absence of counterpart. Differently, we have instead an "amputation" of assets decided by the shareholders, to with the thus amputated assets constitute (simple spin-off or spin-off dissolution) a new corporate entity (or strengthen its assets, in the case of spin-off-merger), therein continuing, as shareholders, the corporate purpose corresponding to the "amputated" elements and originally pursued in the spinning-off entity.

Thus, as has been explained, who effectively makes the patrimonial contribution are the shareholders of the spinning-off company, who in a mediate manner contribute assets to the beneficiary entity in exchange for parts of its capital[6].

Viewed thus, the operation is very close to a capital realization operation in kind, similar to what occurs in asset contribution, with a change however in the recipient of the counterpart, not justifying that in the beneficiary it has a different tax treatment. From which also results that the new paragraph introduced in Article 21 of the CIT Code by the corporate income tax reform, does not have an innovative nature, which clearly it does not. There was thus, already in 2009, no reason to discriminate the entries here in question for purposes of No. 1 of Article 21 of the Corporate Income Tax Code, as they constitute true "capital contributions" for purposes of qualification as a patrimonial variation excluded from taxation.

  1. In summary, the patrimonial increase that the tax act intends to include in the taxable income of 2009 of the Claimant constitutes a patrimonial variation, resulting from a capital contribution made (albeit indirect or mediately) by the holders of its capital (and, also, of the share capital of the contributor), being thus excluded from any relevance for calculation of taxable income in corporate income tax of the beneficiary entity.

It is thus certain the exclusion of taxation of the patrimonial increase in question, even if the operation does not benefit from the fiscal neutrality regime. Now, having understood differently, the tax act in question suffers from the defect of violation of law (the cited Article 21 of the CIT Code), which makes it subject to annulment, with all the further consequences.

Thus the correction to taxable matter of the year 2009 of the Claimant, corresponding to the intended inclusion of the patrimonial variation in taxable income of the fiscal year 2009 of the Claimant - A... SGPS, is improper, as well as the corresponding demand for compensatory interest.

b) Other Alleged Defects of the Tax Act

  1. The analysis of the other defects attributed to the tax act is thus prejudiced.

V. Decision

In these terms, this Arbitral Tribunal decides to deem the request for declaration of illegality that is the subject of the arbitral ruling entirely well-founded and, in consequence, to annul the tax act of additional assessment of Corporate Income Tax (CIT) and compensatory interest No. ..., concerning the fiscal year 2009 and impugned in the proceedings.

VI. Value of the Proceedings

In accordance with the provisions of Article 306, No. 2, of the 2013 Civil Procedure Code, Article 97-A, No. 1, paragraph a), of the Tax Procedure Code and Article 3, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the proceedings are valued at € 681,900.15.

Lisbon, 3 January 2015

The Arbitrators

Jorge Lopes de Sousa

Jaime Carvalho Esteves (reporting arbitrator)

João Menezes Leitão

With the declaration that I subscribe to the decision in consideration of the interpretation of Article 21 of the CIT Code, but do not follow the grounds that relate to the conceptualization of the figure of the spin-off, particularly as regards the qualifications applied to the situation of the spinning-off company.

[1] As a result, the numbering of the Corporate Income Tax Code (CIT Code) existing at the date will be used in the text, taking into account that Decree-Law No. 159/2009, of 13 July, which carried out the renumbering of the Code (Article 7, No. 1), applies only to taxation periods that begin in, or after, 1 January 2010 (Article 9). It should be noted, however, that the parties frequently resort to the new numbering, which is why the same will be encountered in the citations made.

[2] SANCHES, Saldanha, Inverse Merger and (Administration) Tax Neutrality, Fiscalidade Review, 34/April/June (2008), p. 9.

[3] On this matter see ESTEVES, Jaime Carvalho, Will It Be Possible to Stop Deferring Gains and Losses in Mergers and Spin-offs of Companies? (The Search for the Taxable Event), III Congress of Tax Law, Direction of Glória Teixeira, Economic Life, September 2013, pages 185 et seq.

[4] GONÇALVES, Diogo Costa, Code of Commercial Companies Annotated, 2nd Edition, Coordination by António Menezes Cordeiro, p. 474.

[5] From this results an evident double taxation (contributor and beneficiary) with obvious violation of the symmetry principle. The consideration of the "exit" of the assets of the contributor at market values, influencing the calculation of its taxable income of the period, could not fail to lead to a record in the beneficiary for the same value, without taxation of the corresponding patrimonial increase. This is because the patrimonial transmission resulting from the institute of merger and spin-off is carried out in the name and on account of the shareholders, who record a decrease in their assets, compensated by the corresponding patrimonial increase of the shareholding to be held, or already held, in the own capital of the beneficiary company. As such, we are not dealing with two distinct moments – integration of the shareholdings of the acquiring company in the spinning-off company and subsequent assignment, by the spinning-off company, of the shareholdings received to its respective shareholders – but only with a single moment corresponding to the direct (original) ingress in the patrimonial sphere of the shareholders of the contributing company of the shareholdings of the beneficiary company.

[6] Moreover, as referred to, only thus is it possible to reconcile the necessary asset highlighting with the corporate purpose. Viewed the operation as a whole, it corresponds to an increase of the assets placed at the disposal of the beneficiary company by its shareholders, at the expense of the impoverishment of the contributing company, of which they are likewise shareholders. Thus, not only does the value of the assets of the shareholders remain unchanged, but the pursuit of the same corporate purpose is maintained. For that reason, both such corporate purpose and its conditions of implementation only "renew", being now pursued (more efficiently, at least from the point of view of the shareholders) in another legal sphere. For that reason it is manifest that the contribution is carried out by the shareholders, who see the decrease of their assets compensated by the corresponding patrimonial increase of the shareholding to be held, or already held, in the own capital of the beneficiary company of the operation. And thus it is understood that the counterpart for the transfer of the assets of the spinning-off company to the beneficiary company is attributed not to the former but to its shareholders (without it even being necessary to presume a prior merely ideal assignment to the transferor), on whose account the patrimonial transfer is carried out. Moreover, the counterpart is not attributed to the spinning-off company (and in the case of merger such would even be impossible, given the extinction of the contributing company, as well as in the case of spin-off dissolution). There do not thus exist, in the totality of the operation, two properly said moments, a first in which the integration of the new shareholdings of the beneficiary in the contributing company would be fictionalized, and a second moment in which there would be place to the subsequent assignment, by the contributing company, of the shareholdings received to its respective shareholders. In these terms, the new shareholdings are directly received in the legal sphere of the shareholders of the contributing company.

Frequently Asked Questions

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What is the tax neutrality regime for corporate demerger (cisão) operations under Portuguese IRC law?
Under Portuguese IRC law, the tax neutrality regime for corporate demergers (cisão) is governed by Articles 73-74 of the IRC Code (formerly Articles 67-68). This regime allows qualifying spin-off operations to occur without immediate taxation, deferring tax consequences. To benefit from neutrality, the operation must meet specific requirements: (i) assets transferred must be properly allocated to the beneficiary company; (ii) the transaction must have valid business purposes beyond tax avoidance; (iii) shareholdings received must maintain the tax basis of the contributed assets; and (iv) formal notification requirements must be satisfied. Article 73(2)(a) specifically addresses spin-offs where part of the spinning-off entity's assets are transferred to create new companies. Neutrality means no taxation occurs at the time of reorganization; instead, the tax basis carries over, preserving future tax obligations. However, if conditions are not met, the Tax Authority may treat the operation as generating taxable income, triggering IRC assessment on any positive equity variations deemed to arise from the transaction.
How are positive equity variations (variações patrimoniais positivas) treated for IRC purposes in demerger transactions?
Positive equity variations (variações patrimoniais positivas) in IRC demerger transactions are generally governed by Articles 20-21 of the IRC Code. Normally, increases in company equity constitute taxable income under Article 20. However, when a spin-off qualifies for tax neutrality under Articles 73-74, positive equity variations resulting from the reorganization are not immediately taxable. The key distinction is whether variations arise from: (i) genuine operational gains subject to normal IRC taxation, or (ii) structural reorganizations eligible for neutral treatment. In Case 326/2014-T, the dispute centered on whether equity increases from transferring F... shareholdings constituted taxable variations or fell within the neutrality regime. The Tax Authority argued the operation generated taxable positive variations, while the claimant contended the spin-off met neutrality requirements, precluding immediate taxation. The characterization depends on proper application of the cost method for shareholding valuation, compliance with corporate law requirements for spin-offs under the Commercial Companies Code, and satisfaction of IRC neutrality conditions. Incorrect characterization constitutes an error in legal assumptions justifying annulment of the assessment.
What grounds can be used to challenge an additional IRC tax assessment before the CAAD arbitral tribunal?
Additional IRC assessments before the CAAD arbitral tribunal can be challenged on several grounds established in the LRTA (Decree-Law 10/2011): (i) error regarding factual assumptions - when the Tax Authority bases the assessment on incorrect or incomplete facts; (ii) error regarding legal assumptions - misapplication of IRC provisions or incorrect legal qualification of transactions; (iii) violation of constitutional principles including contributive capacity (Article 104 CRP), legality (Article 103 CRP), and equality; (iv) breach of the principle of material truth (Article 58 LGT) - when the assessment fails to reflect economic reality; (v) deficient legal reasoning (Article 77 LGT, Article 268(3) CRP) - inadequate explanation of the assessment basis; (vi) procedural violations affecting taxpayer rights; and (vii) violation of specific IRC provisions governing particular transactions. In Case 326/2014-T, the claimant invoked all these grounds, arguing the assessment erroneously denied neutrality treatment, lacked factual foundation, violated constitutional guarantees, and was insufficiently reasoned. The tribunal examines both substantive legality (correct application of tax law) and procedural regularity (compliance with formal requirements). Successful challenges result in assessment annulment; unsuccessful ones maintain the tax liability.
What is the role of the principle of material truth in Portuguese tax arbitration proceedings?
The principle of material truth (princípio da verdade material) plays a fundamental role in Portuguese tax arbitration as established in Article 58 of the General Tax Law (LGT). This principle requires that tax assessments reflect actual economic reality rather than mere formal appearances. In CAAD proceedings, the tribunal has the duty to investigate facts ex officio to ensure taxation corresponds to genuine transactions and their substance. Unlike civil proceedings where parties control fact-finding, tax arbitration demands the tribunal actively pursue truth. This involves: (i) analyzing all available evidence, not just party submissions; (ii) examining the administrative tax file comprehensively; (iii) hearing witnesses to clarify factual circumstances; (iv) evaluating whether the Tax Authority's factual findings align with documentary and testimonial evidence; and (v) determining if legal characterizations match economic substance. In Case 326/2014-T, the claimant alleged violation of this principle, arguing the Tax Authority failed to properly investigate the spin-off's true nature and incorrectly characterized it as generating taxable variations. The tribunal heard four witnesses to establish factual circumstances surrounding the operation. Material truth ensures assessments are not based on erroneous factual premises and that taxation reflects actual economic capacity to contribute, linking to constitutional principles of contributive justice.
How does the CAAD arbitral tribunal evaluate the legal reasoning (fundamentação) of IRC tax assessments?
The CAAD arbitral tribunal evaluates legal reasoning (fundamentação) of IRC assessments by examining compliance with the constitutional and statutory duty to provide adequate grounds for administrative acts. Article 268(3) of the Portuguese Constitution, Article 77 of the LGT, and Article 125 of the Administrative Procedure Code require tax authorities to explain the factual and legal basis for assessments. The tribunal assesses whether: (i) the reasoning identifies the factual circumstances supporting the assessment; (ii) the applicable legal provisions are correctly cited and interpreted; (iii) the logical connection between facts, law, and conclusions is articulated; (iv) the taxpayer can understand why they were assessed and mount an effective defense; and (v) the reasoning addresses specific circumstances of the case rather than using generic formulas. Deficient reasoning constitutes a substantive defect causing assessment annulment, as it violates due process and the right to effective judicial protection. In Case 326/2014-T, the claimant challenged the assessment's reasoning as inadequate for failing to properly explain why the spin-off did not qualify for neutrality and how positive variations were calculated. The tribunal reviews the assessment notice and administrative file to verify if reasoning meets legal standards, ensuring transparency and accountability in tax administration while enabling meaningful appellate review.