CAAD 333/2017-T: Deductibility of Financial Charges Under IRC and EBF Article 32(2) – SGPS Tax Group

ARBITRAL DECISION

The arbitrators Counsellor Fernanda Maçãs (Arbitrator-President, designated by the other arbitrators), Master Ricardo da Palma Borges and Professor Doctor Manuel Pires (Adjunct Arbitrators), designated, respectively, by the Claimant and the Respondent to form the Arbitral Tribunal, constituted on 10 August 2017, hereby agree as follows:

REPORT

The Claimant A…, SGPS, S.A., legal entity no. …, with registered office at …, no. …, Lisbon, with share capital of €534,000,000.00, parent company of a group ("Group B…" or "Fiscal Group B…") subject to the special tax regime for groups of companies provided for in articles 69 and et seq. of the Corporate Income Tax Code ("IRC"), came, pursuant to articles 2, no. 1, subpara. a), and article 10, nos. 1 and 2, all of Decree-Law no. 10/2011, of 20 January (hereinafter abbreviated as "RJAT" – Legal Framework of Tax Arbitration), to request the constitution of an Arbitral Tribunal, for which purpose it filed a request to that end, on 19 May 2017.

The subject matter of the request for arbitral pronouncement consists of (i) declaration of the illegality and annulment of the deemed rejection of the hierarchical appeal that occurred on 19 February 2017 and, also, of the rejection of the preceding official review request no. …2015… of 11 November 2016, insofar as they refused to annul the illegal part of the IRC self-assessment, concerning the tax year 2010, thereby violating the principle of legality; (ii) declaration of the partial illegality of this self-assessment (and consequent annulment), in the part corresponding to the amount of €3,056,662.62; and (iii) consequent recognition of the right to reimbursement of this amount and, also, of the right to compensatory interest for the payment of tax wrongly assessed, counted from 31 May 2011.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 22 May 2017.

In exercise of the option to designate an arbitrator provided for in subpara. b) of no. 2 of article 6 of RJAT and in compliance with the provisions of subpara. g) of no. 2 of article 10 and no. 2 of article 11, equally of RJAT, the Claimant designated as Arbitrator Master Ricardo da Palma Borges.

Pursuant to the provisions of subpara. b) of no. 2 of article 6 and no. 3 of article 11 of RJAT, with the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, and within the time limit provided for in no. 1 of article 13 of RJAT, the head official of the service of the Tax Administration designated as Arbitrator Professor Doctor Manuel Pires.

In accordance with the provisions of nos. 5 and 6 of article 11 of RJAT, His Excellency the President of CAAD notified the Claimant of the designation of the Arbitrator by the head official of the service of the Tax Administration on 7 July 2017, and notified the arbitrators designated by the parties to designate the third arbitrator who assumes the quality of arbitrator-president.

On 19 July 2017 the arbitrators designated by the parties communicated to CAAD the designation of Her Excellency Counsellor Maria Fernanda dos Santos Maçãs as Arbitrator-President.

Pursuant to the terms and for the purposes provided for in no. 7 of article 11 of RJAT, His Excellency the President of CAAD informed the Parties of this designation on 26 July 2017.

Thus, in conformity with the provisions of no. 7 of article 11 of RJAT, with the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, once the time limit provided for in no. 1 of article 13 of RJAT had elapsed, the collective Arbitral Tribunal was constituted on 10 August 2017.

In these terms, the Arbitral Tribunal is regularly constituted to hear and decide the subject matter of the case.

To support the request for arbitral pronouncement, the Claimant alleges, in summary, the following:

• That it proceeded, in its capacity as parent company of the aforementioned Fiscal Group B…, to the self-assessment of IRC, state surcharge and consequent municipal surcharge with respect to the tax year 2010 by means of filing of declaration Model 22, having also filed an identical replacement declaration without changes in what is here discussed;

• On 28 May 2015 the Claimant filed a request for official review of the aforementioned self-assessment concerning the tax year 2010, rejected by order of 11 November 2016 of Her Excellency the Deputy Director-General of the Tax Management Area – Income Taxes, notified on 21 November 2016;

• In reaction to this rejection, the Claimant filed a hierarchical appeal on 21 December 2016, with no decision to date, the deemed rejection occurring on 19 February 2017 (article 66, no. 5, of the Code of Tax Procedure and Process – "CPPT");

• It seeks to have declared both the illegality of the deemed rejection of the hierarchical appeal and consequently of the preceding rejection of the request for official review, and the partial illegality of the aforementioned self-assessment act – and that it be consequently annulled in that part – pursuant to article 2, no. 1, subpara. a), of Decree-Law no. 10/2011, of 20 January, more specifically with respect to the part of the aforementioned self-assessment act that reflects the non-deduction from tax of financial charges in the amount of €12,226,650.46 (in particular with respect to a portion of €10,816,990.43, as will be seen below), to which corresponds an amount of tax wrongly assessed in the tax year 2010 in the value of €3,056,662.62 (€2,704,247.61, with respect in particular to the portion of €10,816,990.43);

• This departure in the tax year 2010 from the tax deduction of financial charges in the amount of €12,226,650.46 was effected pursuant to the provisions of Circular no. 7/2004, of 30 March, of DSIRC, having been allocated by the shareholdings (or capital shares) held by A… SGPS with which they were conceptually related in light of the methodology of the aforementioned Circular, as per the table below:

• No financing obtained by A… SGPS was contractually intended for the acquisition of the aforementioned shareholdings.

• Some of the shareholdings held by A… SGPS, in particular the most significant ones among those listed above, were not even subject to acquisition that generated any consumption or mobilization of resources (financing), own or otherwise.

• This is the case, in particular, of the shareholding held in C…, which represents approximately 49% (€5,942,431.12) of the total value (€12,226,650.46) of the financial charges added to taxable profit in Model 22 (i.e., not deducted for tax purposes) here in question, as is reported hereinafter:

• The Claimant, now denominated A… SGPS, was incorporated on 18 August 1994, then under the corporate name C…, S.A., by requirement of Decree-Law no. 131/94, of 19 May, following a spin-off process of (then so denominated) N…, S.A. (N…), with its (...) share capital having been "paid in kind and by the patrimonial values resulting from the appraisal provided for in that same" decree.

• It is to be highlighted that the patrimonial assets transferred then (1994) by spin-off from N… to A… SGPS corresponded to the assets relating to the National Electricity Transmission Network, which was the subject of Decree-Law no. 99/91, of 2 March.

• In 2006 there was a restructuring of the energy sector in accordance with the guidelines established through Resolution of the Council of Ministers no. 169/2005, of 24 September, giving rise to Group B….

• On that occasion, to the electricity transmission infrastructure that it already held (by spin-off of N… in 1994), the Claimant added to it in 2006 the natural gas transmission infrastructure, through the acquisition of natural gas assets held by Group O… and the execution of a concession agreement with the Portuguese State for a period of 40 years for the exercise of regulated activities in the natural gas sector, including its transportation, storage and reception – which became known as the natural gas business unbundling process.

• Now, to keep the electricity activity separate from that of natural gas, the Claimant (which at the time was not yet an SGPS), as determined by Resolution of the Council of Ministers no. 85/2006, of 30 June, proceeded at the end of tax year 2006 to the incorporation of P…, S.A. (current C…).

• And at the beginning of 2007 the Claimant proceeded to a capital increase of this company which it subscribed, precisely, by contributing as payment in kind the assets of the National Electricity Transmission Network, as determined in point 3, subpara. c), of Resolution of the Council of Ministers no. 85/2006.

• The financial charges added to taxable profit in the Model 22 Declaration in application of the formula of Circular no. 7/2004 resulting from the Claimant's shareholdings in D… and E… (€4,100,960.71 and €773,598.61, respectively, in a total of €4,874,559.32) represent approximately 40% of the total value (€12,226,650.46) of financial charges added by the Claimant to its fiscal result of the period of 2010 (i.e., not deducted for tax purposes):

• These shareholdings also resulted from an asset contribution operation, in these two cases assets related to concessions related to the natural gas business, as determined by the aforementioned Resolution of the Council of Ministers no. 85/2006, of 30 June, in particular in subpara. a) of its point 3;

• The Claimant became holder of the shares of D… through the transfer for the realization of its share capital of the assets related to the national high-pressure natural gas transmission network;

• The Claimant became holder of the shares of E… through the transfer for the realization of its share capital of assets related to the underground storage of natural gas.

• It invokes the arbitral decision rendered in case no. 663/2015-T which, with respect to the tax year 2011, was ruled in favor of a request by the Claimant that is identical in the reasons and facts invoked, to argue that, following consolidated jurisprudence with respect to no. 2 of article 32 of the Tax Benefits Statute ("EBF"), the «financial charges incurred with their acquisition» do not contribute to the formation of taxable profit, referring to the capital shares, whereby it is manifest that its literal meaning indicates that only the financial charges that are connected with the acquisition of shareholdings are covered by the non-deductibility established therein;

• It thus alleges that article 32, no. 2, of EBF was violated, since Circular no. 7/2004, of 30 March, of DSIRC, when it establishes a notional method, using proportions based on the value of assets, for the determination of financial charges supposedly (notionally) incurred with the acquisition of capital shares, as opposed to a criterion of direct (or specific) and real allocation, goes beyond the applicable legal basis and, thereby, infects with the vice of violation of law the tax assessments effected in obedience to such generic guidance (invoking diverse doctrine and jurisprudence to that effect);

• It invokes that the formula of the aforementioned Circular, in refusing the method of direct, or real, allocation, is found to be in violation of the principle of equality and contributory capacity in not admitting proof or demonstration to the contrary (cf. the principle of proportionality, adopted by articles 2 and 18, nos. 2 and 3, of the Constitution of the Portuguese Republic ("CRP"));

• It further contends that the application of the methodology of the Circular on segregation of financial charges supposedly incurred with the acquisition of capital shares not only violates article 32, no. 2, of EBF, but also, in the unequivocal terms of the aforementioned decision, violates the constitutional principle of parliamentary reservation of law for matters of tax incidence;

• In this manner, it contends that, given that the capital shares in the three aforementioned companies, whose added financial charges are representative of 89% of the total value of the financial charges added by A… SGPS with reference to the tax year here in question (shareholdings in C…, in E… and in D…), resulted from operations of capital contribution in kind, it will necessarily follow, in light of the Tax Authority Doctrinal Sheet relating to Case no. 2799/2009, resolved on 19 November 2011, that one is not, in this case, faced with acquisitions for purposes of article 32, no. 2, of EBF, whereby it will be improper the departure from the tax deduction of any charges allegedly incurred (in fact only notionally incurred, pursuant to the methodology of Circular no. 7/2004) with the acquisition of those shareholdings - in particular, it will be improper for one more reason the departure from the tax deduction of the amount of €10,816,990.43 (relating to financial charges added with reference to C…, E… and D…).

• It further invokes that while article 32, no. 2, of EBF, mandates that financial charges incurred with the acquisition of capital shares not be deducted, the aforementioned Circular departs from the deduction of financial charges in proportion to the assets corresponding to capital shares.

• It also contends for the organic unconstitutionality of no. 2 of article 32 of EBF in the supposed interpretation endorsed by nos. 7 and 8 of the Circular of DSIRC no. 7/2004, of 30 March, due to violation of the constitutional principle of parliamentary reservation of law for the Assembly of the Republic for matters of tax incidence, contained in articles 103, nos. 2 and 3, and 165, no. 1, subpara. i), of the Constitution;

• It further alleges the substantive unconstitutionality of the law in the interpretation pretended for it by nos. 7 and 8 of Circular no. 7/2004, in particular of the norm contained in no. 2 of article 32 (previously 31) of EBF, in the interpretation according to which it would authorize the segregation of financial charges (allegedly) non-deductible according to the formula contained in points 7 and 8 of the Circular of DSIRC no. 7/2004, without admission of proof to the contrary;

• The aforementioned formula would violate the provisions of article 73 of the General Tax Law ("LGT") and contravenes the constitutional principle of taxation "fundamentally of real income" and, with it, the principles of equality, contributory capacity and neutrality (articles 2 – as emanations of the democratic rule of law – 13, 103, no. 1, and 104, no. 2, of the CRP), suffering for this reason the legal norm interpreted in this manner – no. 2 of article 32 of EBF – from substantive unconstitutionality, also in light of the doctrine opposed to irrebuttable presumptions in the field of taxes, established by the decision of the Constitutional Court no. 348/97, rendered in case no. 63/96.

• In the concrete case, the formula attributes 89% of the financial charges that it associates with capital shares whose acquisition, in the circumstances of the case and by definition, did not imply any financing (and which did not result, either, even from an acquisition in light of the concept that the Tax Authority itself adopts for article 32 of EBF in its Doctrinal Sheet relating to Case no. 2799/2009);

• Finally, the Claimant requested that it be recognized the right to compensatory interest, pursuant to article 43 of LGT, as it corresponds to the realization of a right with constitutional basis, provided for in article 22 of CRP, alleging that there is error attributable to the Services, pursuant to no. 2 of article 78 of LGT, according to the version in force at the time of the presentation of the request for official review of the self-assessment act here in question;

By arbitral order of 14 August 2017, the Tribunal notified the Respondent to, pursuant to the provisions of nos. 1 and 2 of article 17 of RJAT, within a period of 30 days, submit an answer and, should it wish, request the production of additional evidence, adding that a copy of the administrative case should be remitted to the Arbitral Tribunal within the time limit for submission of the answer, the provisions of no. 5 of article 110 of CPPT applying in the event of failure to remit.

The Respondent presented an answer on 2 October 2017 (and likewise remitted a copy of the administrative case) agreeing with the factual matters and defending itself by exception, invoking in summary:

• That the Arbitral Tribunal is incompetent to annul the IRC self-assessment in the specific amount of €3,056,662.62 and condemn the Respondent to its reimbursement, having regard to the competence of arbitral tribunals provided for in no. 1 of article 2 of RJAT as well as of Regulation no. 112-A/2011, of 22 March, under article 4 of RJAT, which constitutes a dilatory exception that prevents the continuation of the case, leading to the dismissal of the claim as to the pretension in question, in accordance with the provisions of articles 576, no. 2, 577, subpara. a), of the Code of Civil Procedure ("CPC"), applicable under article 29, no. 1, subpara. e) of RJAT.

• That the Arbitral Tribunal is materially incompetent as a function of the value underlying the arbitral claim, since the value of the arbitral claim that should actually be considered amounts to €12,226,650.46 or, if regard is had to the lesser of the values claimed, to €10,816,990.43 (corresponding to the financial charges not deducted for tax purposes), pursuant to article 4, no. 1, of RJAT and articles 1 and 3, no. 1, both of Regulation no. 112-A/2011, which constitutes a dilatory exception preventing the examination of the merits of the case, which determines the dismissal of the claim in accordance with the provisions of articles 576, no. 2, 577, subpara. a), of the CPC, applicable under article 29, no. 1, subpara. e), of RJAT.

• It further defended the material incompetence of the Arbitral Tribunal to hear decisions on rejection of requests for official review, since pursuant to subpara. a) of no. 1 of article 2 of RJAT it is determined that the competence of arbitral tribunals comprises the hearing of the declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account.

• And having regard to article 2, subpara. a), of Regulation no. 112-A/2011, for the present Arbitral Tribunal to be able to pronounce itself, there was always required a compulsory prior recourse to the administrative procedure of voluntary settlement pursuant to the provisions of no. 1 of article 131 of CPPT.

• It further defended that any other interpretation, including in the authorization granted the administrative procedure of official review, would be manifestly unlawful, since from the various hermeneutic elements it is reached that the Tax Authority only bound itself, pursuant to Regulation no. 112-A/2011, to the jurisdiction of arbitral tribunals if the request for declaration of illegality of self-assessment act had been preceded by recourse to the voluntary settlement administrative procedure.

• Furthermore, the aforementioned understanding, that disputes which have as their object the declaration of illegality of self-assessment acts, as occurs in the situation sub judice, are excluded from the material competence of arbitral tribunals, if not preceded by voluntary settlement pursuant to article 131 of CPPT, is imposed by force of the constitutional principles of rule of law and separation of powers (cf. articles 2 and 111, both of the CRP), as well as of the right of access to justice (article 20 of the CRP) and of legality [cf. articles 3, no. 2, 202 and 203 of the CRP and also article 266, no. 2, of the CRP], in its corollary of the principle of indisposability of tax claims inherent in article 30, no. 2, of LGT, which bind the legislator and all activity of the Tax Authority.

• It further concludes thus by the impossibility of the present Arbitral Tribunal deciding the present dispute, insofar as the dilatory exception of material incompetence is verified, from which follows the dismissal of the claim by the Respondent, pursuant to the combined provisions of articles 278, no. 1, subpara. a), and 576, nos. 1 and 2, of the CPC, applicable under article 29, no. 1, subpara. e), of RJAT.

The Respondent further defended itself by impugnation, invoking in summary:

• In decision no. 663/2015-T, concerning the IRC self-assessment of 2011, which the Claimant cites in its favor (not yet having become final), the following was stated (cf. point 3.2 of that decision):

«No evidentiary judgment is made on the form of acquisition of the shareholdings held by A… SGPS and financial charges possibly incurred by it with their acquisition, since such matter was not appreciated in the decision on the voluntary settlement that is the immediate object of the case and whose content limits the powers of cognition of the Tribunal in contentious annulment.»

• The burden of proof lies with the Claimant (citing various jurisprudence to that effect), and the latter has joined nothing new to the record in order to prove what is alleged by it, in particular to prove that no financing obtained by A… SGPS was contractually intended for the acquisition of the aforementioned shareholdings.

• The Claimant merely alleges that 89% (40% + 49%) of the added financial charges relate to shareholdings in which supposedly there is no financing whatsoever associated, coming, however, to petition, finally, the annulment of 100% of the charges added, without advancing any other justification for the supposed invalidity of this addition of 11% (100% - 89%), other than the (in)applicability of the Circular.

• The regime of no. 2 of article 32 of EBF does not require that the financing be intended «contractually» for the acquisition of shareholdings, but only that, directly or indirectly, it be intended for the aforementioned acquisitions, incumbent upon the Claimant to demonstrate such intent.

• If the special regime established in article 32 of EBF was directed to all SGPSs without distinction, there would be lacking reasons for, finally, only subjecting to the non-deductibility of financial charges those companies in which it would be possible to establish a specific identification between financings and the acquisition of shareholdings. Besides, it would be poorly understood that, in the formulation of the parameters delimiting this tax benefit, the legislator had the intention to impede the adoption of the indirect method for the determination of non-deductible financial charges, since, if it did so, it would be, in practice, circumscribing the application of the last part of no. 2 of article 32 to SGPSs that acted as pure holdings, that is those whose activity was strictly reconducted to the holding and management of shareholdings.

• The declarations of the Claimant's statutory auditor do not have evidentiary value, all the more so because the accounting elements that would support such affirmations were not presented.

• In relation to 11% of the added financial charges (which would correspond, in its calculations, to €1,409,660.03), the Claimant does not even seek to justify the supposed invalidity of the addition, merely invoking the illegality of the provisions of Circular no. 7/2004 to ask the Tribunal to "authorize" it to deduct for tax purposes all and any financial charges incurred with financings related to acquisitions of shareholdings.

• The Claimant makes no proof that 89% of the added financial charges (which it computes at €10,816,990.43) concern the shareholdings that it refers to.

• The legal and constitutional conformity of Circular no. 7/2004 is defensible, since, on the one hand, no. 2 of article 31 of EBF in the wording given by Law no. 32-B/2002, of 30/12 (in the wording applicable at the time, no. 2 of article 32 of EBF), does not determine what method is to be used for the allocation of financial charges, and with a view to interpreting and giving effect to the law - whose scope intends to penalize interest related to the acquisition of capital shares (and not other loan interest, which could even be generators of taxable income, such as those related to loans granted, but which, in the absence of the relation of indispensability, would not be tax deductible), and with a view to obviating the difficulties that had emerged in the meanwhile, was issued, by DSIRC, Circular no. 7/2004, of 30/03, which intends nothing more than to give effect to the law, determining the method and form of calculation of financial charges incurred with the acquisition of capital shares.

• The Respondent did not proceed to the creation of any norm of tax incidence, limiting itself the understanding contained in Circular no. 7/2004, of 30/03, to attempting to clarify the emerging doubts about the tax regime applicable to SGPSs and SCRs, provided for in article 32 of EBF, whereby it will likewise be a matter of disregarding a supposed violation of the principle of taxation by real income invoked by the Claimant, which would be the result of the application of the method of allocation of financial charges contained in Circular no. 7/2004, of 30/03.

• It appears unconstitutional article 32, no. 2 of EBF when interpreted in the sense that the exclusion of the deduction of financial charges is limited to those incurred with the obtaining of financing specifically related to the acquisition of capital shares, insofar as such is violative of the principle of tax equality and of the principle of contributory capacity, inherent in articles 13, 103 and 104, no. 2, of the CRP.

• An SGPS that develops activities not covered by the special regime provided for in no. 2 of article 32 of EBF, by force of the combination of this provision with subpara. b) of no. 3 of article 17 of the IRC Code, is bound by the compliance with the duty of separation or autonomization of activities subject to differentiated tax regimes, which, in the context of the special tax regime of the SGPS, implies the identification of financial charges directly or indirectly related to the acquisition of the capital shares envisioned by the exclusion of deduction for purposes of proceeding, where appropriate, to their respective addition to taxable profit.

• As to the request for compensatory interest, although it may be admitted, which is done by caution and duty of representation, without conceding, its computation is ascertained pursuant to subpara. c) of no. 3 of article 43 of LGT and not pursuant to nos. 1 and 2 of that legal provision, as results from what is petitioned by the Claimant.

• Consequently, pursuant to subpara. c) of no. 3 of article 43 of LGT, the same are only due one year after the presentation of the request for voluntary settlement[1] (presented on 2015-05-28), that is, as from 2016-05-29.

By arbitral order of 10 October 2017, the Tribunal notified the Claimant to respond to the matters of exception, within a period of ten days. The Claimant submitted its response to the matters of exception, invoking the following:

• The Tribunal is competent to partially annul the act of assessment consisting in a concrete amount of tax and determination of its reimbursement, since the segregation of the amount of the part of the tax act that is subject to annulment and the condemnation of the Tax Authority to its reimbursement consequential to that annulment does not constitute any interference in the area of competence of the Tax Authority, and is among the powers of any Tribunal that has competence to annul tax acts, wholly or partially.

• Furthermore, it is irreconcilable with the recognition (to which the Tax Authority also adheres) that among the powers of the Tribunal is that of condemnation for interest, the denial of the power, logically prior, of condemnation for the reimbursement of the amount of the annulled tax.

• It is consequently unconstitutional the interpretation of the norm, in particular of article 2, no. 1, and more specifically still, of its subpara. a), of RJAT, which sees therein implicit these exclusions, due to violation of the principle of democratic rule of law and of the principle of effective judicial protection (articles 2, 20, nos. 1, 4 and 5, and 268, no. 4, of the Constitution).

• With respect to competence ratione valoris, the Claimant formulated a request for annulment of tax assessment in the amount of €3,056,662.62 and the limit of competence of tax arbitration is €10,000,000, there being a confusion on the part of the Tax Authority between claim and cause of action.

• As to the competence ratione submissionis of the self-assessment to a prior administrative procedure for appreciation of its legality, the Regulation binding the Tax Authority is subject to the same interpretative rules to which all laws and legal norms are subject.

• The question of the interpretation of article 2, subpara. a), of Regulation no. 112 A/2011, of 22 March, is not exclusive to this norm. It is much older, and dates, at least, from the approval of CPPT, where appears article 131, to which the provision of the Regulation here in question refers, whereby one has difficulty in understanding how, in face of the procedural means parallel to judicial impugnation that is tax arbitration, and before referral by the Regulation binding the Tax Authority to the arbitration to article 131 of CPPT, one might wish to receive this norm in the arbitration, but reject the acquis jurisprudenciel that formed around it and that tells us that, notwithstanding its formulation, the act of assessment preceded by the administrative procedure of official review is not unimpeachable, being thus a question of unity of the legal system.

Also by arbitral order of 25 October 2017, the Tribunal dispensed with the holding of the hearing provided for in article 18 of RJAT, the case proceeding to the phase of final submissions, and both parties were notified to, within a period of fifteen days, from the notification of the present order, produce, should they wish, written submissions in successive manner. The date of 10 February 2018 was also designated as the time limit for rendering the arbitral decision in the name of the principle of cooperation of the parties, requesting the sending of the procedural files in Word version.

The Claimant presented its written submissions on 7 November 2017, maintaining, in essence, the arguments set forth in the initial pleadings and response to exceptions, adding, however, the following:

• It contends that it is an established point in the jurisprudence of the Supreme Administrative Court ("STA") that even in the case of a self-assessment that has applied Circular no. 7/2004, the burden of demonstrating, and of demonstrating always by reference to the circumstances of the concrete case, that there is no alternative to the formulaic-presumptive method of the Circular, lies with the Tax Authority.

• It further notes that such conclusion concerning the burden of proof results from the fact that the part of a self-assessment commanded by what the Tax Authority determines in Circular no. 7/2004 is materially speaking from the entire responsibility of the Tax Authority, being on this material or substantive plane on the same footing as an assessment initiated by the Tax Authority itself.

On 22 November 2017, the Claimant joined a decision of the Constitutional Court, which ruled unfounded a question of unconstitutionality raised by the Respondent in terms identical to those raised in the present case (decision of the Constitutional Court no. 750/2017, concerning the arbitral decision rendered in case no. 663/2015-T).

The Respondent presented successive written submissions on 24 November 2017, maintaining, in essence, the arguments set forth in the initial pleadings, by referral thereto, adding further that from the decision rendered by the Constitutional Court, joined by the Claimant in a subsequent request after its submissions, there does not follow what is pretended by it.

On 6 February 2018, an arbitral order was rendered extending the time limit of the arbitration by two months and indicating as the final date for rendering the decision the date of 10 April 2018, under article 21, no. 2, of RJAT, since it was not possible to render an arbitral decision within the time limit of six months (as established in no. 1 of the same article) as this includes periods of judicial holidays and given the complexity of the case itself.

PRELIMINARY MATTERS

1. The parties have standing and judicial capacity, show themselves to be legitimate and are regularly represented (article 4 and no. 2 of article 10 of RJAT and article 1 of Regulation no. 112-A/2011, of 22 March).

13.1. Competence of the Tribunal.

The Respondent raises, in its answer, the exception of incompetence of the Arbitral Tribunal: i) to hear a request for condemnation for reimbursement; ii) ratione valoris; iii) to hear decisions on rejection of requests for official review.

Analysis and decision must be made.

Regarding the exception of material incompetence of the Arbitral Tribunal to hear a request for condemnation for reimbursement

The Respondent raised, in its defense, the incompetence of the Arbitral Tribunal to annul the IRC self-assessment in the specific amount of €3,056,662.62 and condemnation to its reimbursement, in view of the provisions of no. 1 of article 2, and article 4 of RJAT and Regulation no. 112-A/2011, of 22 March.

The Respondent alleges that the competence of arbitral tribunals is, from the outset, circumscribed to the matters indicated in no. 1 of article 2 of RJAT, the competence of these deriving not only from that legal provision but, also, from Regulation no. 112-A/2011, of 22 March, under article 4 of RJAT. Thus, beyond the competence for the direct hearing of legality of requests of this type, arbitral tribunals functioning in CAAD may hear acts of second or third degree which have as their object the hearing of legality of acts of those types, in particular acts which decide gracious settlements and hierarchical appeals, as results from the references of subpara. a) of no. 1 of article 10 of RJAT to no. 2 of article 102 of CPPT, which refers to judicial impugnation of gracious settlements, and to the "decision of the hierarchical appeal".

Now, it is manifest to it that there is not inserted within the scope of these competencies the hearing of the request for recognition of the right formulated by the Claimant, in the part in which it appraises and petitions, with reference to 2014, the return of the eventual tax corresponding to corrections to the assessable base that it wishes to see granted in its favor (added of the corresponding compensatory interest).

There exists, in the opinion of the Respondent, no legal support that permits that judgments other in nature than those resulting from the powers fixed in RJAT be rendered, even though they constituted consequence, at the level of execution of judgments, of the declaration of illegality of tax acts.

As results from the provisions of article 24 of RJAT, the definition of the acts in which the execution of arbitral judgments should be concretized is incumbent, in the first place, on the Tax Authority, with possibility of recourse to tax tribunals to require coercively the execution, within the scope of the execution of judgments process, provided for in article 146 of CPPT and articles 173 et seq. of the Code of Procedure in Administrative Tribunals.

It is concluded, thus, that the material incompetence of the Tribunal for the hearing of the request identified above constitutes a dilatory exception which prevents the continuation of the case, leading to the dismissal of the claim as to the pretension in question, in accordance with the provisions of no. 2 of article 576, and subpara. a) of article 577 of the CPC, applicable under subpara. e) of no. 1 of article 29 of RJAT.

Confronted with the exception of incompetence of the Tribunal, ratione materiae, the Claimant presented a response invoking, in summary, that it has in its favor hundreds of arbitral cases where there have been seen hundreds of condemnations of the Tax Authority for reimbursement of the annulled tax (when it has been paid, naturally), whereby the matter is settled in the sense of the competence.

According to the Claimant "it is not conceived that the Tribunal is not invested with powers to condemn for reimbursement, since, evidently, the parties indicate to it in concrete the amount of the assessment whose legality is discussed, otherwise will have to be deferred for execution of judgment the determination of the exact amount to annul and to reimburse. But only in that case.

And the Tax Authority has every right to contest that quantification, if it understands that it was wrongly made, either in the preceding administrative phase, or in the present arbitral phase, and then the Tribunal will decide, with or without further requests for explanation on the calculation of which it has need, and if it does not become clear on that eventual controversy relating to quantification, but only in that case, should then defer to execution of judgment the better clarification of the same. (…)"

The Claimant concludes that "This vision, this interpretation of the powers of the Arbitral Tribunal, the norm contained in no. 1 of article 2 of RJAT in this interpretation of the Tax Authority, that it would prevent the Arbitral Tribunal from either annulling a concrete amount of tax or condemning the Tax Authority to its reimbursement, is unconstitutional, due to violation of the principles of democratic rule of law and of the principle of effective judicial protection (articles 2, 20, nos. 1, 4 and 5, and 268, no. 4, of the Constitution)".

Let us see.

As we have seen, in the initial petition, the Claimant ends formulating the following request: "In these terms, there must be declared the illegality of the deemed rejection of the hierarchical appeal and of the expressed rejection of the aforementioned request for official review and, also, the partial illegality of the IRC self-assessment of fiscal group B… relating to the tax year 2010, in what regards the amount of €3,056,622.62, with its consequent annulment in this part, given the manifest illegality of the assessment in this part, with all legal consequences, in particular the reimbursement to the claimant of this amount, added of compensatory interest at the legal rate counted from 31 May 2011 until complete reimbursement".

In the legislative authorization on which the Government relied to approve RJAT, granted by article 124 of Law no. 3-B/2010, of 28 April, it is proclaimed, as the primary directive of the institution of arbitration as an alternative form of jurisdictional resolution of conflicts in tax matters, that "the tax arbitration process should constitute an alternative procedural means to the judicial impugnation process and to the action for recognition of a right or legitimate interest in tax matters".

The judicial impugnation process is a procedural means which has as its object acts in tax matters, aiming at hearing their legality and deciding whether it should be annulled or its nullity or non-existence be declared, as results from article 124 of CPPT.

By analysis of articles 2 and 10 of RJAT, it is verified that only issues of the legality of acts of assessment or acts of fixing the taxable base and acts of second degree which have as their object the hearing of the legality of acts of those types, acts which appreciation is inserted within the scope of judicial impugnation processes, as results from subalpha. a) to d) of no. 1 of article 97 of CPPT, were included in the competencies of arbitral tribunals functioning in CAAD.

The legislator did not implement in the legislative authorization insofar as it concerned the part in which was foreseen the extension of the competencies of arbitral tribunals the issues that are heard in tax tribunals through action for recognition of a right or legitimate interest.

But, in harmony with the intention underlying the legislative authorization to create an alternative means to the judicial impugnation process, should it be understood that, as to the requests for declaration of illegality of acts of the types referred to in its article 2, the arbitral tribunals functioning in CAAD have the same competencies that state tribunals have in judicial impugnation process, within the limits defined by the binding which the Tax and Customs Authority came to make through Regulation no. 112-A/2011, of 22 March, under no. 1 of article 4 of RJAT.

Although the judicial impugnation process has as its primary object the declaration of nullity or non-existence or annulment of acts of the types referred to, it has been pacifically understood that therein can be rendered judgments condemning the Tax and Customs Authority to pay compensatory interest and indemnification for wrongful guarantee.

In fact, despite there not existing any express norm to that effect, it has been pacifically understood in tax tribunals, since the entry into force of the codes of the tax reform of 1958-1965, that a request for condemnation for the payment of compensatory interest can be accumulated in judicial impugnation process with the request for annulment or declaration of nullity or non-existence of the act, since in those codes it is referred that the right to compensatory interest arises when, in gracious settlement or judicial process, the administration is convinced that there was fact error attributable to the services[2]. This regime was, subsequently, generalized in CPPT, which established in no. 1 of article 24 that "there shall be a right to compensatory interest in favor of the taxpayer when, in gracious settlement or judicial process, it is determined that there was error attributable to the services", then in LGT, in whose no. 1 of article 43, it is established that "compensatory interest is due when it is determined, in gracious settlement or judicial impugnation, that there was error attributable to services from which results payment of the tax debt in amount superior to that legally due" and, finally, in CPPT, in which it was established, in no. 2 of article 61 (to which corresponds no. 4 in the wording given by Law no. 55-A/2010, of 31 December), that "if the decision which recognized the right to compensatory interest is judicial, the time limit for payment is counted from the beginning of the time limit for its spontaneous execution".

Thus, similarly to what occurs with tax tribunals in judicial impugnation process, this Arbitral Tribunal is competent to hear requests for reimbursement of the amount paid and for payment of compensatory interest.

It is also unequivocal that in judicial impugnation processes it is possible to hear requests for condemnation for the payment of indemnification for provision of wrongful guarantee, since article 171 of CPPT, establishes that "indemnification in the case of banking guarantee or equivalent wrongfully provided shall be requested in the process in which the legality of the executable debt is disputed" and that "indemnification should be requested in the settlement, impugnation or appeal or in case its ground is subsequent within a period of 30 days after its occurrence".

Thus, it is unequivocal that the judicial impugnation process encompasses the possibility of condemnation for payment of wrongful guarantee and is even, in principle, the adequate procedural means for formulating such request, which is justified by evident reasons of procedural economy, since the right to indemnification for wrongful guarantee depends on what is decided regarding the legality or illegality of the tax assessment act.

The request for constitution of the Arbitral Tribunal has as its corollary the consequence of becoming the arbitral process the forum in which will be discussed the "legality of the executable debt", whereby, as results from the express tenor of that no. 1 of the aforementioned article 171 of CPPT, "the arbitral process is also the adequate means for hearing the request for indemnification for wrongful guarantee".

On the other hand, as the Tax and Customs Authority well refers, the competence to execute the judgments rendered by the arbitral tribunals functioning in CAAD lies, in the first place, with the Tax and Customs Authority itself, as results from the express tenor of no. 1 of article 24 of RJAT in saying that "the arbitral decision on the merits of the pretension of which no appeal or impugnation lies binds the tax administration as from the end of the time limit provided for appeal or impugnation, this administration being required to...".

This separation constitutes a characteristic of purely annulment contentious as is that of CPPT and, in the case of arbitral processes, finds special foundation in the fact that arbitral tribunals have no competence to hear disputes that occur in the phase of execution of judgments (which happens, also, in relation to arbitral tribunals in general).

Thus, should there be disagreement between the Tax and Customs Authority and taxpayers on the form of execution of judgments, it is the tax tribunals that are competent to hear them, since competencies are not attributed to the arbitral tribunals functioning in CAAD in processes of execution of judgments and the arbitral tribunals dissolve in the sequence of the arbitral decision, as results from article 23 of RJAT.

This said, within the limits fixed, the arbitral tribunals have competence to hear requests for reimbursement of tax wrongfully paid.

It constitutes pacified jurisprudence that arbitral tribunals have competence to hear requests for compensatory interest. Now, this hearing cannot fail to involve the request for reimbursement of tax wrongfully paid, having regard to the indissolubility of the same: the right to interest, should it exist, bears on the amount to be reimbursed.

Thus, when the amount to be reimbursed results clearly identified in the sequence of the annulment of the tax act, we cannot fail to admit the competence of the tribunal for the request for reimbursement, as the same is still understood within the powers of annulment.

Differently is the situation in cases in which there is disagreement as to the amount to be reimbursed, whereupon the concretization of the same should be relegated to the phase of execution of judgment, as this pertains in fact to the sphere of the Tax Authority.

Also not included in the competence of arbitral tribunals are disputes which turn on the existence or not of right to reimbursement, as this clearly concerns a request for recognition of rights.

In the present case, the Claimant indicated in concrete the amount of the assessment that it deems illegal and the Respondent did not contest it, either in the administrative phase, or in the defense, limiting itself to invoking "the incompetence of the Arbitral Tribunal to annul the IRC self-assessment in the specific amount of €3,056,662.62 and condemnation of the respondent for its reimbursement".

In this context, it appears legitimate that the Claimant demand the reimbursement of the amount petitioned in the sequence of the partial annulment of the self-assessment acts. What does not prevent that, should eventual doubt arise on the amount petitioned, the same can be resolved in the seat of execution of judgment.

Thus, by what is set forth above, the case does not imply any violation of the limitation that results from the scope of the judicial impugnation process and arbitral processes being restricted to issues of legality of acts of the types referred to in article 2, which are covered by the binding that was made in Regulation no. 112-A/2011, not being able, in particular, to define the terms in which arbitral judgments of annulment that come to be rendered should be executed.

It is therefore ruled that the exception of material incompetence of the Arbitral Tribunal is unfounded.

B. Regarding the incompetence of the Arbitral Tribunal ratione valoris.

The Respondent invoked, in its defense, that what the Claimant seeks to submit to Tribunal "is the legality of the part of the aforementioned act of self-assessment that reflects the non-deduction from tax of financial charges in the amount of €12,226,650.46 (in particular with respect to the portion of €10,816,990.43).".

Which means that the value of the arbitral claim that should actually be considered amounts to €12,226,650.46 or, if regard is had to the lesser of the values petitioned, to €10,816,990.43, which determines the material incompetence of the Arbitral Tribunal.

In effect, it is provided in no. 1 of article 3 of Regulation no. 112-A/2011 of 22 March, which prescribes the regime of binding of the Tax Authority to the jurisdiction of arbitral tribunals, that:

«The binding of the services and organisms referred to in article 1 is limited to disputes of value not exceeding €10,000,000.».

In reply, the Claimant contended for the unfoundedness of the invocation of the aforementioned exception.

Pursuant to the provisions of article 97-A, no. 1, a), of CPPT (applicable by force of the provisions of article 3, no. 2, of the Regulation of Costs in Tax Arbitration Processes), when an assessment is impugned the value of the cause corresponds to the "amount whose annulment is sought".

In the present case the Claimant requests (in article 15 of the Request), among the rest, that there be declared, the partial illegality of the act of self-assessment, "more specifically as to the part that reflects the non-deduction from tax of financial charges in the amount of €12,226,650.46 (in particular with respect to the portion of €10,816,990.43, as will be seen below), to which corresponds an amount of tax wrongly assessed in the tax year 2010 in the value of €3,056,662.62 (€2,704,247.61, with respect in particular to the portion of €10,816,990.43)."

The Claimant ends requesting, in relation to the self-assessment relating to the tax year of IRC 2010 that there be "declared the partial illegality of this self-assessment (and consequently be annulled), in the part corresponding to the amount of €3,056,662.62".

There is no doubt that we must distinguish, on the one hand, the amount of €12,226,650.46, which corresponds to the cause of action, which is rooted in the non-consideration of financial charges in that amount, and, on the other, the amount of tax wrongly assessed and that the Claimant seeks to recover, in the amount of €3,056,662.62.

The value of the cause thus coincides with the economic utility resulting from the annulment, corresponding this to the amount of tax wrongly assessed in the tax year 2010, in the value of €3,056,662.62.

Accordingly, the exception of incompetence invoked by the Respondent is unfounded.

C. Regarding the material incompetence of the Arbitral Tribunal to hear decisions on rejection of requests for official review.

In this regard the Tax Authority sustains, in sum, that article 2, subpara. a), of Regulation no. 112-A/2011, of 22/3, through which it came to be bound to arbitral jurisdiction, excludes pretensions relating to the declaration of illegality of acts of self-assessment which have not been preceded by recourse to the administrative procedure, pursuant to the provisions of articles 131 to 133 of CPPT, therein not referring to official review provided for in article 78 of LGT.

Such understanding which, for the Tax Authority, beyond the literal element, is imposed "by force of the constitutional principles of rule of law and separation of powers (cf. articles 2 and 111, both of the CRP), as well as of legality (cf. articles 3, no. 2, and 266, no. 2, both of the CRP), as corollary of the principle of indisposability of tax claims inherent in article 30, no. 2 of LGT, which bind the legislator and all activity of the Tax Authority" (article 70 of the Answer). "Effectively, the binding of the Tax Authority to necessary arbitral protection, in which vigors the principle of irrevocability of decisions, presupposes a limitation of the situations in which it can fully decide whether or not to appeal a decision unfavorable to it, that is, the power to choose between definitively abdicating the collection of the tax claim or adopting behavior potentially adequate to seek its realization" (article 72 of the Answer).

In sum, according to the Respondent a constitutional interpretation is forbidden, by force of the aforementioned constitutional principles, that broadens the binding of the Tax Authority to the arbitral protection fixed legally.

The Claimant, in exercise of the contradiction granted to it as to the exception, defended its unfoundedness by invoking jurisprudence of CAAD in sense divergent to that sustained by the Tax Authority.

Let us see.

The competence of the arbitral tribunals functioning in CAAD is, in the first place, marked out by the matters indicated in article 2, no. 1, of Decree-Law no. 10/2011, of 20/1 (RJAT). In a second place, the competence of the arbitral tribunals functioning in CAAD is also limited by the terms in which Tax Authority was bound to that jurisdiction by Regulation no. 112-A/2011, of 22/3, since article 4 of RJAT establishes that "the binding of the tax administration to the jurisdiction of tribunals constituted pursuant to the present law depends on regulation of the members of the Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of the disputes covered".

In face of this second limitation of the competence of the arbitral tribunals functioning in CAAD, the resolution of the question of competence depends essentially on the terms and nature of this binding, since, even if one is faced with a situation encompassed in that article 2 of RJAT, if it is not covered by the binding, will be ruled out the possibility of the dispute being jurisdictionally decided by this Arbitral Tribunal. That is, "the scope (…) of arbitral processes is restricted to issues of legality of acts of the types referred to in article 2 [of RJAT] which are covered by the binding which was made in Regulation no. 112-A/2011 (…)", cf. Decision TCAS of 28/4/2016 (case 09286/16, reporter: Anabela Russo).

It happens that in subpara. a) of article 2 of Regulation no. 112-A/2011, are expressly excluded from the scope of the binding of the Tax Authority to the jurisdiction of arbitral tribunals functioning in CAAD the "pretensions relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account which have not been preceded by recourse to the administrative procedure pursuant to articles 131 to 133 of the Code of Tax Procedure and Process". That is, comparing the Regulation of binding with RJAT, that one is more exacting than this, by adding a requirement to delimit abstractly the object of the binding of the Tax Authority to arbitral jurisdiction.

As was established in the Arbitral Decision relating to Case no. 143/2016-T "With respect to the nature of the regulation there are those who understand that therein resides fundamentally a decision act of the Administration, of voluntary manifestation of consent to binding to RJAT, and in the restrictions to the object a "concrete limitation", although "manifested in terms of generic provision" (cf. was the majority understanding in Decision 236/2013 of 22/4/2014, or 364/2014 of 19/12/2014, both of CAAD). There are on the other hand those who allow to show through an understanding more regulatory (normative) of the regulation (majority jurisprudence)".

As to the sense and scope of the aforementioned Regulation can be read, among the rest, in Arbitral Decision no. 116/2016-T "(…) what lacks special labor of interpretation is the requirement of "administrative procedure" necessary (prior), "pursuant to articles 131 to 133 of the Code of Tax Procedure and Process".

From the start, in obedience to those very "terms", provided for in art. 131 CPPT, the requirement of prior administrative procedure will be only applicable to cases in which such appeal is obligatory, through gracious settlement. In fact, in the case of self-assessments, gracious settlement is required, but only in cases of errors that are not grounded exclusively in matters of law, and in which the self-assessments have been effected in accordance with generic orientations issued by the tax administration (cf. no. 1 and no. 3 of art. 131 CPPT)[3].

The useful sense of the regulation, in face of what is established in RJAT, the will of the legislator, was to assure that the taxpayer does not resort to the Tribunal "(…) before any taking of position by the administration on the situation generated with the act of the taxpayer (…) since it is not yet detectable any dispute"[4]|[5]. Thus is it understood that are excluded from the requirement of settlement the cases provided for in art. 131 no. 3 CPPT, seen that in those the Tax Authority has already pronounced itself, a priori, through "generic orientations".

Returning to the request for arbitral pronouncement, the same arises as culmination of a process initiated with a request for official review, expressly rejected, followed by a hierarchical appeal, tacitly rejected.

In the case sub judice the taxpayer did not resort, thus, to a "gracious settlement", rather it resorted directly to the request for official review. It happens that in the cases in which a request for official review of an act of assessment is formulated, there is equally afforded to the Tax Authority, with that request, an opportunity to pronounce itself on the merits of the pretension of the taxpayer, before the latter resorts to the jurisdictional avenue. In the case here, the Respondent had still that opportunity in the hierarchical appeal.

Thus, by "coherence with the solutions adopted in nos. 1 and 3 of art. 131 of CPPT, it cannot be required that, cumulatively with the possibility of administrative appreciation within the scope of that official review procedure, a new administrative appreciation through gracious settlement be required. On the other hand, it is unequivocal that the legislator did not intend to prevent taxpayers from formulating requests for official review in cases of self-assessment acts, since these are expressly referred to in no. 2 of article 78 of LGT. In this context, allowing the law expressly that taxpayers choose between gracious settlement or official review of acts of self-assessment and being the request for official review formulated within the time limit of gracious settlement perfectly comparable to a gracious settlement[6] (…) there cannot be any reason that can explain that there cannot gain access to the arbitral avenue a taxpayer that has chosen the review of the tax act instead of gracious settlement" [7].

In face of what is set forth, it is concluded[8] that Regulation no. 112-A/2011, in expressly referring to art. 131 of CPPT as to requests for declaration of illegality of acts of self-assessment, said imperfectly what it intended. Wishing to impose the necessary administrative appreciation for the contentious impugnation of acts of self-assessment, it ended by making express reference to article 131, forgetting that this avenue does not exhaust the possibilities of administrative appreciation of those acts. The interpretation endorsed is the interpretation which best translates the will of the "legislator" and which does not collide with any constitutional principles, nor puts in crisis the "indisposability of tax claims".

"Moreover the invocation of the principle of indisposability of tax claims will possibly be a lapse, since in deciding on its competence, relevant only as a procedural prerequisite, the Arbitral Tribunal is certainly not practicing any act of disposition of a tax claim, in the sense of the invoked article 30, no. 2, LGT."

Besides, neither is it even glimpsed what claim the Tax Authority refers to, since, in the present case are only at issue acts of IRC self-assessment which have already been paid by the taxpayer, and not the pretension of collection of any tax claim. In effect, are already extinct, by payment, the claims which justified the self-assessments, and it is not alleged that there exists any other claim of the Tax Authority over the Claimant, related to the self-assessments in question.

On the other hand, to exclude arbitral jurisdiction only because the means used should have been a prior gracious settlement would be to violate the principles of access to law and of effective judicial protection.

In effect, as we have seen, the rule, for both judicial impugnation and for arbitration, is that all those acts relative to which the Tax Authority has not yet pronounced itself or still has had no intervention be submitted to its scrutiny, reason for which it should be given the opportunity to pronounce itself before the judicial or arbitral Tribunal pronounce itself as to their legality.

It is thus manifest the equivalence between the request for review of the tax act and gracious settlement on acts of self-assessment, withholding at source and payment on account. In truth, as was established in the Decision of the Supreme Administrative Court (Plenary of the section of the CT, case no. 0793/2014), of 3 June 2015, "(…) the procedural means of review of the tax act cannot be considered as an exceptional means to react against the consequences of an act of assessment, but rather as an alternative means of administrative and contentious means of impugnation (when used at a moment when those can still be used) or complementary to them (when the time limits for use of the means of impugnation of the act of assessment have already been exhausted)…".

In the wake of the aforementioned Decision, the Supreme Administrative Court decided that "the Rejection, tacit or expressed, of the request for official review is susceptible to judicial control [cf. art. 95, nos. 1 and 2, subpara. d), of LGT]".

It is, today, consolidated jurisprudence that, being able the Tax Authority, by its own initiative, to proceed to official review of the tax act, within a period of four years after assessment or at any time if the tax has not yet been paid, on the ground of error attributable to the services (article 78, no. 1, of LGT), also can the taxpayer, within that time limit of official review, request this same review with that ground.

In sum, the request for official review of the tax act is a mechanism for opening the contentious avenue perfectly comparable to the gracious settlement necessary, insofar as it serves the purpose of allowing the Tax Authority to pronounce itself on the acts of self-assessment.

By the grounds exposed the argument of the Tax Authority to the effect of the unconstitutionality of article 2, subpara. a), of Regulation no. 112-A/2011, in the interpretation endorsed by this Tribunal, is unfounded. In this sense, see among others, the Arbitral Decision rendered in case no. 577/2016-T and, also, the Arbitral Decision rendered in Case no. 668/2016-T.

Terms in which, thus, this exception of incompetence is unfounded.

ON THE MERITS

III.1. Factual Matters

III.1.1. Proven Facts

With relevance to the hearing and decision of the issues raised, the following facts are taken as settled and proven:

• The Claimant was, at the date of the facts, parent company of Group B…, having on 31 May 2011 proceeded to the submission of the declaration of income Model 22 with reference to the tax year 2010 of the aforementioned group. In that self-assessment of IRC (including state surcharge) and consequent municipal surcharge, it departed from the deduction for tax purposes of financial charges in an amount that amounted to €12,226,650.46. The Claimant further submitted a Model 22 replacement declaration without changes in what is here discussed (cf. Documents no. 2 and 3, joined to the request for arbitral pronouncement).

• On 28 May 2015, the Claimant filed a request for official review of the aforementioned self-assessment concerning the tax year 2010 (Document no. 4), such request being rejected by order of 11 November 2016 of Her Excellency the Deputy Director-General of the Tax Management Area – Income Taxes, notified on 21 November 2016 (cf. Documents no. 4, 5 and 6, joined to the request for arbitral pronouncement).

• In reaction to the aforementioned rejection, the Claimant filed a hierarchical appeal on 21 December 2016 (Cf. Document no. 7, joined to the request for arbitral pronouncement), with no decision to date.

• In its individual model 22 declaration relating to the same tax year 2010, the Claimant added, for purposes of determination of its taxable profit/fiscal result, the amount of €12,226,650.46 as a title of financial charges supposedly not tax deductible under article 32, no. 2, of EBF (cf. Document no. 8, joined to the request for arbitral pronouncement).

• Such departure in the tax year 2010 from the tax deduction of financial charges in the amount of €12,226,650.46 was effected pursuant to the provisions of Circular no. 7/2004, of 30 March, of DSIRC, and its allocation by the shareholdings (or capital shares) held by the Claimant with which they are conceptually related in light of the methodology of the aforementioned Circular, is as per the table below (cf. Documents nos. 10 and 27 joined to the request for arbitral pronouncement):

• The shareholdings held by the Claimant (whose added financial charges are representative of 89% of the total value of the financial charges added by the Claimant, pursuant to the aforementioned table) were not subject to acquisition that generated any consumption or mobilization of resources (financing), own or otherwise, which is proven in the following summary table:

• g) Company C…, S.A. was incorporated by the Claimant with capital of €50,000.00, paid in cash, wholly subscribed and deposited in a banking institution (cf. Documents 20 and 21, joined to the request for arbitral pronouncement).

15) Substantiation of Factual Matters

The proven factuality was based on the position assumed by the Parties and not contested and the analysis of the documents joined to the record by the Claimant, which were not impugned, with the exception of the declarations issued by the statutory auditor (cf. Documents nos. 10 and 27, joined to the request for arbitral pronouncement). However, it must be noted that such declarations consist of a mere explanation of the accounting underlying the completion of the individual Model 22 Declaration.

Now, pursuant to article 75, no. 1, of LGT, it is presumed true and in good faith both the declarations of taxpayers and the data and calculations recorded in their accounting and books, it being certain that none of the situations provided for in no. 2 of the same article occur, and that the Respondent did not place in question the veracity of such accounting (and even less satisfied the burden of proof incumbent upon it, as it invoked no indicia that would undermine such presumption), impugning only the evidentiary value of the aforementioned declarations.

It cannot equally be left out of account that pursuant to article 2 of the Code of Ethics of the Order of Certified Accountants, "In the exercise of the profession, certified accountants must respect the legal norms and accounting principles in force, adapting their application to the concrete situation of the entities they provide services to, striving for accounting and tax truth, avoiding any situation that puts at risk the independence and dignity of the exercise of the profession". Now, the Respondent presented no indicia that the statutory auditor acted in disrespect of the Code of Ethics applicable to it, demonstrating indicia of falsehood of the declarations made by it in the exercise of its profession.

Consequently, Documents nos. 10 and 27 joined to the request for arbitral pronouncement were equally admitted by this Arbitral Tribunal.

III.1.2. Unproven Facts

There are no other facts with relevance to the hearing of the merits of the case which have not been proven.

III.2. Legal Matters

III.2.1 Controversial Issues

The principal controversial issue in the case sub judice reports on the regime applicable to financial charges incurred with the acquisition of shareholdings, being divisible into the following sub-issues:

• to know whether Circular no. 7/2004, of 30 March, of DSIRC is illegal, due to violation of the provisions of article 32, no. 2, of EBF;

• to know whether even in the case of a self-assessment that has applied the aforementioned Circular the burden of demonstrating, and always by reference to the circumstances of the concrete case, that there is no alternative to the formulaic-presumptive method of the Circular, lies with the Tax Authority or the taxpayer;

• if article 32, no. 2, of EBF is unconstitutional, when interpreted in the sense that the exclusion of deduction of financial charges is limited to those incurred with the obtaining of financing specifically related to the acquisition of capital shares, due to violation of the principle of tax equality and of the principle of contributory capacity, inherent in articles 13, 103 and 104, no. 2, of the CRP;

• if the aforementioned Circular is unconstitutional, in refusing the method of direct, or real, allocation, being found in violation of the principle of equality and contributory capacity in not admitting proof or demonstration to the contrary (cf. the principle of proportionality, adopted by articles 2 and 18, nos. 2 and 3, of the CRP); and

• if the Circular is unconstitutional, due to violation of the constitutional principle of parliamentary reservation of law for the Assembly of the Republic for matters of tax incidence.

In case of procedural outcome of the request for annulment of the self-assessment sub judice, the computation of the compensatory interest petitioned by the Respondent is also a controversial issue.

Given that the Claimant has attributed diverse vices to the tax act impugned there must be determined the order of examination of the same, the order of article 124 of CPPT being to be observed, applicable by force of article 29, no. 1, subpara. a), of RJAT (Cf. Jorge Lopes de Sousa, "Commentary to the Legal Framework of Tax Arbitration", in Guide to Tax Arbitration, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2013, Almedina, Coimbra, p. 202).

The procedural outcome of any of the vices invoked by the Claimant will lead to the annulment of the tax act. In this manner, the establishment of an order of examination of vices in tax contentious, pursuant to the provisions of that article 124, has inherent the legislative understanding that, if is ruled procedurally as to any vice which confers stable and effective protection of the rights of the taxpayer, is precluded, by uselessness, the examination of other vices that are imputed to the act impugned, since, if it were always necessary to examine all the vices, the order of their examination would be indifferent.

Since the vice of violation of law is that which will lead to "more stable or effective protection of the interests damaged", insofar as its eventual procedural outcome will prevent the renewal of the act, which does not occur with the annulment resulting from the other vices, the vices will be examined in the order above.

III.2.3. Illegality of Circular no. 7/2004, of 30 March, of DSIRC, due to Violation of the Provisions of Article 32, No. 2, of EBF

Established article 32, no. 2, of EBF, in the wording in force in 2010 (the tax year to which refers the IRC self-assessment sub judice), that "The capital gains and losses realized by SGPSs, by SCRs and by ICRs of capital shares of which they are holders, provided they are held for a period of no less than one year, and, also, the financial charges incurred with their acquisition do not contribute to the formation of the taxable profit of these companies" – emphasis ours.

In turn, Circular no. 7/2004 establishes in its point 7 the following:

"Method to be used for purposes of allocation of financial charges to shareholdings

1. As to the method to be used for purposes of allocation of financial charges incurred in the acquisition of shareholdings, given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that the same would permit, such allocation should be effected on the basis of a formula that takes into account the following: the remunerated liabilities of SGPSs and SCRs should be allocated, in the first place, to loans made by remunerated companies and to other investments generating interest, allocating the remainder to the remaining assets, in particular shareholdings, proportionally to the respective acquisition cost."

As to this issue, we permit ourselves to cite the arbitral decision rendered on 25 May 2016, within the scope of case no. 663/2015-T[9], as we endorse as to what follows:

"In this no. 2 of article 32 of EBF it is established that there do not contribute to the formation of taxable profit the «financial charges incurred with their acquisition», referring to the capital shares, whereby it is manifest that its literal meaning indicates that only the financial charges that are connected with the acquisition of shareholdings are covered by the non-deductibility established therein.

Beyond being this the interpretation which results from the literal meaning, it is corroborated by the explanation for its introduction in EBF which was given in the Report of the State Budget for 2003 (Law no. 32-B/2002, of 30 December).

In truth, as is referred in Circular no. 7/2004, the regime of this norm was introduced in EBF by Law no. 32-B/2002, of 30 December, which approved the State Budget for 2003, then in article 31, whose regime came to consist of article 32 after the renumbering effected by Decree-Law no. 108/2008, of 26 June.

In the Bill no. 28-IX, which came to give rise to the Budget Law for 2003, there was contained that article 31, no. 2, with wording identical to that in force in 2011 (in article 32, no. 2), the only difference being the addition of the reference to «ICRs» (abbreviation of «venture capital investors»), which is irrelevant for the interpretation of the norm.

In the aforementioned Report of the State Budget for 2003 ( [10] ) is announced the introduction of this norm, having in view the «broadening of the taxable base and measures of moralization and neutrality», in the following terms:

«There is established the non-deductibility, for purposes of determination of taxable profit, of financial charges of financial nature directly associated with the acquisition of capital shares by SGPSs»;

It is unequivocal, thus, that it was intended that only financial charges directly associated with the acquisition of capital shares would be covered by the non-deductibility. (…)

By that express reference in the Report to the need for financial charges to be directly associated with the acquisition of capital shares (which is also expressed in the text of the norm through the reference to «financial charges with their acquisition»), it is concluded that it is not sufficient to determine the non-deductibility of financial charges the fact that the SGPS is holder of shareholdings, it being necessary to demonstrate that there is a direct relationship between certain financial charges and the acquisition of determined shareholdings.

It is corollary of this interpretation, imposed by the literal meaning of article 32, no. 2, that, if determined shareholdings were not acquired with liabilities generating financial charges, they are irrelevant for purpose of the application of that norm, in the part which refers to the non-deductibility of financial charges.

There is thus no legal support to rule out the rule of deductibility of financial charges, which consists of subpara. c) of no. 1 of article 23 of CIRC, in relation to charges which are not directly associated with the acquisition of shareholdings.

On the other hand, even if it were understood (as may be underlying in point 7 of Circular no. 7/2004, but also without support in the text of the law) that that article 32, no. 2, has inherent a presumption that there is association between financial charges and the acquisition of shareholdings, that hypothetical presumption would always be..."

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