CAAD Case 335/2015-T: IRS Withholding Tax on Share Sales and General Anti-Abuse Clause

ARBITRAL DECISION

The arbitrators José Poças Falcão (arbitrator president), Ricardo Rodrigues Pereira and Henrique Fernando Rodrigues, appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, hereby agree as follows:

I. REPORT

1. On June 3, 2015, A…, S.A., Tax ID…, with registered office at…, …/…, …-…Porto (hereinafter, the Claimant), filed a request for constitution of an arbitral tribunal pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of January 20, which approved the Legal Regime of Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012 of December 31 (hereinafter, abbreviated as LRAT), seeking the declaration of illegality and consequent annulment of the withholding tax on IRS [Personal Income Tax] 2010 Assessment No. 2014…, in the amount of €321,533.56 and the corresponding compensatory interest assessment No. 2015…, in the amount of €50,353.03, as well as the withholding tax on IRS 2012 Assessment No. 2015…, in the amount of €99,961.98 and the corresponding compensatory interest assessments Nos. 2015… and 2015…, in the total amount of €9,157.10, as well as the condemnation of the Tax and Customs Authority to proceed with the reimbursement of the amount of €109,119.08 which was paid relating to the aforesaid 2012 assessments, increased by compensatory interest, due to a defect consisting of violation of law.

1.1. The Claimant attached 5 (five) documents, having not requested the production of any other means of proof.

1.2. The Respondent is the AT – Tax and Customs Authority (hereinafter, Respondent or AT).

1.3. In essence and in brief summary, the Claimant alleged the following:

The Claimant petitions for the annulment of the aforesaid withholding tax assessments on IRS, based on the following grounds:

a) Lack of standing of the taxpayer in relation to all assessments;

b) Expiration of the assessment relating to the 2010 fiscal year;

c) Improper application of the general anti-abuse clause and consequent violation of law due to errors in the factual and legal premises in relation to both assessments.

With respect to the first of the invoked grounds – lack of standing of the taxpayer in relation to all assessments – it is important to consider the following arguments presented by the Claimant:

• as a substitute taxpayer, the disregard of tax effects resulting from the application of the general anti-abuse clause to the acts in question is not opposable to it, with a violation of Article 38, paragraph 2, of the General Tax Law having occurred;

• Article 38, paragraph 2, of the General Tax Law is not capable of triggering the birth of ancillary tax obligations – in particular withholding tax – existing only in relation to the legal-tax reconfiguration operated in the context of the application of the general anti-abuse clause in third parties;

• its elevation to the status of obligated taxpayer in the present case translates to an erroneous interpretation by the Tax Administration of the scope of the application of Article 38, paragraph 2, of the General Tax Law – to that extent tinting the impugned assessment with illegality – since the general anti-abuse clause does not operate to bring about ancillary tax obligations – that is, to impose on third parties instrumental obligations such as the obligation to withhold and remit tax which by means of that provision becomes due by a determined taxpayer;

• the purpose of Article 38, paragraph 2, of the General Tax Law translates to the imposition of a tax obligation in principal capacity, affecting the author and beneficiary of the alleged "abuse" of legal forms;

• if there were validity to the tax obligation in question (which is not conceded), in any case the corresponding additional assessment would have to affect the principal obligated taxpayer, that is, the taxpayer B…;

• in the manner in which the assessment was imposed – against the Claimant – the tax benefit obtained remains in the ownership of whoever benefited from such benefit (the beneficiary of the dividends), with the Claimant being prejudiced, as is also perverted the true, essential purpose of the general anti-abuse clause: the elimination of the tax benefit obtained;

• to this is added the fact that there exists no legal provision allowing the Taxpayer the possibility of recovering from the real beneficiary the amount of tax that it would have to pay;

• the norm of Article 38, paragraph 2, of the General Tax Law, if interpreted as admitting the opposability of the effects of the application of the general anti-abuse clause to the substitute taxpayer, namely the imposition of the effects of non-compliance with a withholding tax obligation that did not exist in relation to the act actually performed, coupled with the infeasibility of recovering the non-withheld amounts, would be materially unconstitutional in the face of the constitutional principles of proportionality and the right to property (Articles 18, paragraph 2, and 62, paragraph 1, of the Constitution);

• the impugned acts are illegal by violation of Article 38, paragraph 2, of the General Tax Law, by defect of violation of law and by error as to the legal premises and, therefore, should be annulled.

With respect to the second of the aforementioned grounds – expiration of the assessment relating to the 2010 fiscal year – the Claimant sets forth the following arguments which it is important to extract:

• the notification relating to the assessments (of tax and compensatory interest) relating to the year 2010 (assessments No. 2014… and No. 2015…) was received by the Taxpayer's access to the electronic mailbox on 04/05/2015 (in accordance with paragraph 9 of Article 39 of the Tax Procedure Code);

• paragraph 13 of Article 39 of the Tax Procedure Code provides that its provisions do not prejudice the application of the provisions of paragraph 6 of Article 45 of the General Tax Law;

• since notifications made by electronic transmission of data are equivalent to registered postal correspondence (Article 38, paragraph 9, of the Tax Procedure Code), then the notification of the assessment, for purposes of counting the period of its expiration, is considered validly effected on 07/05/2015;

• on that date the period of expiration of the right to assess tax had already elapsed, in light of the provisions of paragraph 1 of Article 45 of the General Tax Law, the application of which to the present case results in that period terminating on 31/12/2014;

• the acts of external inspection underlying the impugned assessments commenced on 29/08/2014 and were concluded on 22/09/2014;

• even considering a suspension of the expiration period for the duration of the external inspection acts (24 days), it is imperative to conclude that the notification of the assessments relating to the tax and compensatory interest for 2010 was effected beyond the period of expiration, which determines the annulment of such assessments.

With respect to the third and last of the aforementioned grounds – improper application of the general anti-abuse clause and consequent violation of law due to errors in the factual and legal premises in relation to both assessments – it is important to underscore the following arguments presented by the Claimant:

• on 22/12/2009, C…, SGPS, S.A. acquired from its shareholder B… 325,954 shares representing approximately 93% of the capital of the Claimant, for the price of €32,595,400.00, it being agreed that such price would be paid on a deferred basis;

• C…, SGPS, S.A. paid to B… the following amounts, as amortization of the debt resulting from the purchase of the shares: €495,504.93 on 03/12/2010; €500,000.00 on 06/12/2010; €525,000.00 on 10/12/2010; €250,000.00 on 01/06/2012; and €149,847.90 on 09/10/2012;

• C…, SGPS, S.A. paid to B… a total of €1,520,504.93 in 2010 and €399,847.90 in 2012;

• the AT imposed on the Claimant an IRS assessment (tax to be withheld) of 21.5% on the amounts paid in 2010 and of 25% on the amounts paid in 2012;

• the shares representing the capital of the Claimant were transacted at the unit price of €100.00 per share, a value which was the subject of a favorable opinion from the Certified Public Accountant and Sole Fiscal Officer of C…, SGPS, S.A.;

• C…, SGPS, S.A. was established to be the parent company and to direct the concentration of a business group with various companies – the D… Group – held by various partners, and with registered office and activity in various countries, in a logic of managing participations in other companies as an indirect form of exercise of economic activities;

• the operation of acquisition from B… of the shares of the Claimant and payment of the respective price financed partially with dividends received by C…, SGPS, S.A. does not constitute resort to any artificial or fraudulent means, and much less abuse of legal forms;

• even if the motivation for the sale of the shares representing the capital of the Claimant to C… SGPS aimed, exclusively, at not subjecting dividends to taxation (which is not conceded), it would not be legitimate to apply the anti-abuse norms, in particular paragraph 2 of Article 38 of the General Tax Law;

• when taxpayers utilize conscious gaps in taxation created by the legislator, we are not dealing with any abusive use of legal forms;

• there is manifest lack of foundation in the Dispatch which authorized the application of the anti-abuse norm, as well as in the conclusions of the Tax Inspection Report which underlies the impugned assessments, imposing its revocation;

• the operations performed did not have as their sole, principal, or even determinant purpose the avoidance of taxation of dividends by B…, therefore one of the essential premises of the normative provision of paragraph 2 of Article 38 of the General Tax Law is lacking.

The Claimant further alleges that on 02/03/2015 it made timely voluntary payment of the assessments relating to the year 2012, in which it disbursed the total amount of €109,119.08. Thus, should those assessments be annulled, it will be entitled to receipt of compensatory interest from the date of improper payment to the date of effective restitution, in accordance with the provisions of Article 43 of the General Tax Law.

The Claimant concludes by petitioning the following:

"a) The IRS assessments and the respective compensatory interest should be annulled, as impugned, based on the following grounds, successively:

• On the non-opposability of the application of the general anti-abuse clause to the substitute taxpayer, the impugned assessments having incurred manifest error in the legal premises;

• On the expiration of the assessments relating to 2010;

• on the impossibility of subsuming the operations considered to fraudulent or artificial means and abuse of legal forms, nor to operations performed with the sole, principal or determinant objective of avoiding taxation of tax on dividends.

b) The AT should be condemned to reimburse to the Taxpayer the tax paid relating to the assessments for 2012 in the amount of €109,119.08, increased by compensatory interest in favor of the Taxpayer, calculated in accordance with legal terms from the date of payment (02/March/2015) to the date of effective restitution."

1. The request for constitution of the arbitral tribunal was accepted and automatically notified to the AT on June 15, 2015.

2. The Claimant did not proceed to nominate an arbitrator, therefore, pursuant to the provisions of subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of the LRAT, the President of the Deontological Council of the CAAD designated as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the assignment within the applicable period.

3. On July 28, 2015, the parties were duly notified of such designation, having not manifested the will to refuse the designation of the arbitrators, in accordance with the combined provisions of Article 11, paragraph 1, subparagraphs a) and b) of the LRAT and Articles 6 and 7 of the CAAD Deontological Code.

4. Thus, in accordance with the provision in subparagraph c) of paragraph 1 of Article 11 of the LRAT, the collective Arbitral Tribunal was constituted on August 12, 2015.

5. On October 1, 2015, the Respondent, duly notified for that purpose, filed its Response in which, in addition to raising matters of exception, it specifically contests the arguments presented by the Claimant, concluding for the lack of merit of the present action, with its consequent dismissal of the claim.

6.1. The Respondent attached 3 (three) documents, having not requested the production of any other means of proof.

6.2. On the same occasion, the Respondent attached to the record its respective administrative file (hereinafter, abbreviated as AF).

6.3. In essence and also briefly, it is important to extract the most relevant arguments on which the Respondent based its Response:

The Respondent begins by invoking the dilatory exception of res judicata, doing so essentially in the following terms:

• the factuality that was the basis for the issuance of the assessments now in question was already the subject of a request for arbitral pronouncement, then formulated by the company "C… SGPS S.A.", which proceeded under No. 258/2013-T;

• in the scope of that pronouncement, the Tribunal understood to establish as proven the essentiality of the factuality invoked by the AT as the basis for the tax act (then) in discussion, having considered that such factuality constituted an abusive situation that filled the legal premises enabling the application of the general anti-abuse clause provided in Article 38, paragraph 2, of the General Tax Law;

• however, the Tribunal understood that notwithstanding the verification of the premises that determined the AT's action and the tenor of the assessment undertaken, it had been carried out against the entity which, in the judgment of the Tribunal – considering the set of acts and transactions undertaken – would not be responsible, determining, accordingly, the annulment of the assessment then in dispute;

• that arbitral decision became res judicata and, consequently, the AT became bound to "perform the tax act due in substitution of the act that was the subject of the arbitral decision" and to "assess the tax obligations in conformity with the arbitral decision" – cf. Article 24, paragraph 1, subparagraphs a) and d), of the LRAT;

• circumstance that determined the issuance of the assessments that are the subject of the present request for arbitral pronouncement which are, only and solely, the implementation or execution of the prior arbitral pronouncement;

• therefore, this Tribunal is prevented from the possibility of considering anew the question of whether or not the premises for application of paragraph 2 of Article 38 of the General Tax Law are verified, as well as the factuality which, having been judged established, underlaid that consideration, with the same limitation applying with respect to the liable taxpayer that was determined by the Tribunal, in that such matters were already the subject of arbitral pronouncement that became res judicata.

Subsequently, the Respondent argues the peremptory exception of abuse of rights (in the dimension of venire contra factum proprium) and bad faith on the part of the Claimant, with the following grounds:

• in a first moment, the AT understood that the taxation to be undertaken should be carried out by the mechanism of withholding at source and in the sphere of C…, SGPS, S.A.;

• confronted with that assessment, that company – represented in court by the illustrious counsel who signed the present request for arbitral pronouncement – in the scope of that other cited arbitral process, came to argue that the AT had erred and advocating that the impugned assessments should have been issued against the here Respondent and not against C… SGPS;

• in the present request for arbitral pronouncement - submitted by A…, S.A. following notification of acts of assessment in all respects consistent with the position previously argued by C…, SGPS - we note that the position argued - signed by the same illustrious counsel – points in a different direction, namely that the responsibility for payment of the tax should not, now, after all, fall on A…, S.A. but, rather, on Ms. B…;

• there exists, therefore, - beyond manifest bad faith - conduct susceptible of being characterized as abuse of rights – in the dimension of venire contra factum proprium –, the AT understanding that the Tribunal should proceed with such characterization and extract the consequent legal effects therefrom.

Continuing its pleadings, the Respondent advances to defensive arguments by impugning, alleging the following argument which it is important to highlight:

• it was the will of B… that determined, in particular, the execution of the contract for sale of shares and the terms of that contract, by which merely a change of direct legal ownership to indirect legal ownership was effected;

• in 2010, the Claimant paid to C… SGPS, as an advance on 2010 dividends, €1,495,504.93, having also paid to it, already in 2011, as a true-up of 2010 dividends, €3,924.68;

• in 2012, the Claimant paid to C… SGPS dividends for 2011, in the amount of €399,847.90;

• on the same dates in which it receives dividends from the Claimant, C… SGPS reforwards them to B…, doing so as payment of the debt it had with the latter, and, given the (re)qualification of the income, no withholding tax on IRS is effected when they are made available to B…;

• it was not possible to ascertain any activity or act of management of C… SGPS other than the receipt of dividends from its only participation – the participation in the Claimant – and the reforwarding of these to B… (holder of the vast majority of its capital – 98.40%);

• the argument invoked by the Claimant also fails to hold to try to justify the sale of the shares of A… SA to SGPS at the unit value of €100.00, and from the opinion of the Sole Fiscal Officer of C… SGPS does not derive justification of that value of €100.00;

• the arguments wielded by the Claimant in defense of the alleged expiration of the right to assess the tax for 2010 are lacking in merit, since the AT enjoyed the faculty of "demanding" the tax in arrears until May 5 of the year 2015, provided that it notified the taxpayer of the corresponding assessment, which it did in a timely manner;

• the operation of establishment of the SGPS, followed by the acquisition of the participation of Ana Paula Silva in the Claimant, as well as the distribution of dividends which immediately were used to pay the debt created with the acquisition of that participation, aimed at the attribution to that shareholder of dividends not subject to taxation;

• that is, such acts allowed the shareholder B… to transfer her participation in A… SA to C… SGPS, which was established solely for that purpose, and incorporate in her sphere the income originated by dividends generated and distributed by the investee and that without it entailing the IRS that was due by withholding at source;

• the structure set up thus allowed the obtainment of a result which proves fraudulent, in that it is found to be in fraud with subparagraph h) of paragraph 2 of Article 5 of the IRS Code and which, being so, cannot be admitted;

• thus, it must be concluded that all the legal premises, established in paragraph 2 of Article 38 of the General Tax Law are met for application of the general anti-abuse clause to the operation sub judice, the arguments presented by the Claimant regarding the alleged economic reasons justifying not prevailing;

• the incidence of the tax falls on whoever illegitimately obtained the tax benefits, in the present case, B…, it being considered that she is the effective beneficiary of the dividends distributed by the Claimant, and, as equally derives from Article 38, paragraph 2 of the General Tax Law, the taxation of the income of which B… is the effective beneficiary must be effected "in accordance with the applicable norms", therefore, by virtue of the provisions contained in the IRS Code, these are taxed in the form of withholding at source assuming the withholding at source rate the nature of a final tax rate – consequently, by the fact that one is dealing with a situation of substitute taxation, it befalls the substitute, A… SA, to effect the withholding of tax;

• thus, it is by virtue of Article 38, paragraph 2, of the General Tax Law, that the AT finds itself obliged, in a situation of taxation of income of dividends obtained by a natural person, to assess the tax in arrears to the substitute taxpayer, because, otherwise, one would not be effectuating the taxation in accordance with the applicable norms in the absence of artificial and fraudulent means and abuse of legal forms;

• it must be recognized that, when this is at issue in accordance with the taxation that must be effected according to the applicable norms, as determined by paragraph 2 of Article 38 of the General Tax Law, the functioning of the anti-abuse clause is entirely opposable to the substitute taxpayer, which cannot fail to be covered by its provisions;

• it is not seen how the application of the mechanism of substitute taxation, provided for that type of income in accordance with the applicable rules in the IRS Code, prevents the ceasing of production of the tax benefits referred to (Article 38, paragraph 2 of the General Tax Law, in fine) and it should not be said that such derives from the alleged non-existence of a right of recourse of the amounts which were additionally assessed to it in its capacity as substitute taxpayer, with the consequent violation of its constitutional right to property;

• it is ensured, in the scope of the figure of substitute taxation, the principle of contributive capacity, since there result from the tax system the necessary means (namely, the prior withholding at source or the subsequent right of recourse) for the definitive burden of the tax to fall, not on the substitute (in the case the Claimant), but on the substituted;

• there does not occur violation of the right of private property with the incidence of the general anti-abuse clause on the substitute for the simple reason that assets of the Claimant itself are not affected, in effective and final terms – the mechanism of substitution, by means of withholding at source or, in case of non-compliance with that obligation, by means of right of recourse, prevents the consideration of an interference with the right of property of the Claimant;

• not existing thus, for these same reasons, any violation of the principle of proportionality;

• it would be materially unconstitutional the normative interpretation of Article 38, paragraph 2 of the General Tax Law that excludes, following abusive tax planning, the possibility of the company that has the role of substitute in the tax legal relation being responsible for payment of the amounts which are understood to be due in accordance with the applicable legal norms (in the present case Articles 5, paragraph 2, subparagraph h), 71, paragraph 1, subparagraph c), 71, paragraph 6, 101, paragraph 2, subparagraph a) and 103 of the IRS Code), when from the same does not result that the taxation in accordance with the applicable norms in the absence of such planning is different from that applicable to the other situations of taxation provided in the tax legislation, because such violates the principles of tax legality, of equality in the distribution of the tax burden, of the pursuit of the satisfaction of the financial needs of the State and of other public entities, as provided in Articles 13 and 103, paragraphs 1 and 2 and 104 of the Constitution;

• in that a norm of autonomous incidence is being created, in the interpretation that is being promoted of Article 38, paragraph 2, of the General Tax Law, which would then constitute a special norm disapplying the specific norms of each Code, determining, always, the non-opposability to the substitute taxpayer, even in cases of withholding at source by way of final tax on income from dividends of natural persons, of the respective additional assessment, especially in situations in which the beneficiary of the tax benefits controlled, directly or indirectly, the substitute taxpayer at the time of the performance of the abusive acts.

1. The Tribunal dispensed with the holding of the meeting referred to in Article 18 of the LRAT.

2. Notified for that purpose, the parties presented written allegations in which, in essence, they maintained the positions and arguments presented in their respective pleadings.

II. SANITATION OF PROCEDURAL ISSUES

The Arbitral Tribunal was regularly constituted and has competence.

The proceedings do not suffer from nullities.

The parties have standing and capacity to sue, are duly represented and have a legitimate interest.

II.1. On the exception of res judicata

Article 580 of the Civil Procedure Code provides:

"1 - The exceptions of lis pendens and res judicata presuppose the repetition of a cause; if the cause is repeated while the prior one is still pending, there is lis pendens; if the repetition occurs after the first cause has been decided by a judgment that no longer admits ordinary appeal, there is the exception of res judicata.

2 - Both the exception of lis pendens and that of res judicata serve to prevent the court from being placed in the alternative of contradicting or reproducing a prior decision. 3 - (…)"

In turn, Article 581 of the same law reads as follows:

"1 - A cause is repeated when an action identical to another is brought as to the parties, the claim and the cause of action.

2 - There is identity of parties when the parties are the same from the point of view of their legal status.

3 - There is identity of claim when in both causes the same legal effect is sought to be obtained.

4 - There is identity of cause of action when the claim deduced in the two actions proceeds from the same legal fact. In real actions the cause of action is the legal fact from which the real right derives; in constitutive actions and for annulment it is the specific fact or the specific nullity invoked to obtain the desired effect."

Preliminarily, it should be noted that res judicata is formed with respect to the decision and not with respect to its grounds.

Applying the law:

The Respondent bases the exception of res judicata alleging, in essence:

• the factuality that was the basis for the issuance of the assessments now in question was already the subject of a request for arbitral pronouncement, then formulated by the company "C… SGPS S.A.", which proceeded under No. 258/2013-T;

• in the scope of that pronouncement, the Tribunal understood to establish as proven the essentiality of the factuality invoked by the AT as the basis for the tax act (then) in discussion, having considered that such factuality constituted an abusive situation that filled the legal premises enabling the application of the general anti-abuse clause provided in Article 38, paragraph 2, of the General Tax Law;

• however, the Tribunal understood that notwithstanding the verification of the premises that determined the AT's action and the tenor of the assessment undertaken, it had been carried out against the entity which, in the judgment of the Tribunal – considering the set of acts and transactions undertaken – would not be responsible, determining, accordingly, the annulment of the assessment then in dispute;

• that arbitral decision became res judicata and, consequently, the AT became bound to "perform the tax act due in substitution of the act that was the subject of the arbitral decision" and to "assess the tax obligations in conformity with the arbitral decision" – cf. Article 24, paragraph 1, subparagraphs a) and d), of the LRAT;

• circumstance that determined the issuance of the assessments that are the subject of the present request for arbitral pronouncement which are, only and solely, the implementation or execution of the prior arbitral pronouncement;

• therefore, this Tribunal is prevented from the possibility of considering anew the question of whether or not the premises for application of paragraph 2 of Article 38 of the General Tax Law are verified, as well as the factuality which, having been judged established, underlaid that consideration, with the same limitation applying with respect to the liable taxpayer that was determined by the Tribunal, in that such matters were already the subject of arbitral pronouncement that became res judicata.

It is evident that there is no foundation whatsoever for the invocation of the exception of res judicata.

And it is so first and foremost because there is no identity of Claimants in that in the aforesaid previously judged litigation the Claimant was the company C…, SGPS, SA whereas in the present proceedings the Claimant is A…, SA.

On the other hand, the cause of action in both actions is different: in the first case they were acts of assessment different from those being analyzed in this process.

There one specifically asked for the annulment of the tax acts of assessment of withholdings at source on IRS 2010 No. 2013… in the value of €326,908.56, the assessment of compensatory interest No. 2013… in the value of €32,063.90, the assessment of withholdings at source on IRS 2012 No. 2013… in the value of €99,961.98, and the assessments of compensatory interest Nos. 2013… and 2013… in the value of €3,307.28.

And in the present proceedings one asks for the declaration of illegality and consequent annulment of the assessment of withholding at source on IRS 2010 No. 2014…, in the amount of €321,533.56 and the corresponding assessment of compensatory interest No. 2015…, in the amount of €50,353.03, as well as the assessment of withholding at source on IRS 2012 No. 2015…, in the amount of €99,961.98 and the corresponding assessments of compensatory interest Nos. 2015… and 2015…, in the total amount of €9,157.10, as well as the condemnation of the Tax and Customs Authority to proceed with the reimbursement of the amount of €109,119.08 which was paid relating to the aforesaid assessments for 2012, increased by compensatory interest, due to a defect consisting of violation of law.

The question to be decided (and decided) in the arbitral process No. 258/2013-T [See Doc 1, attached with the AT's Response] was, in summary, whether withholding at source should have occurred under IRS on payments made by the then Claimant (C…, SGPS, S.A.) to its shareholder B…, by application of the general anti-abuse clause.

And, as is clear from the decision that was rendered in that process and attached to the record, in addition to considering the premises for application of the general anti-abuse clause, the Arbitral Tribunal was called upon to consider also the question it referred to as "erroneous notification of the impugned assessments to the person of the Claimant, C…SGPS".

It was considered and concluded then namely that "(...) with the structure created the taxation was avoided, in the legal sphere of B… and under IRS, of the total amount of €426,870.54 corresponding respectively to 2010 and 2012 in the amounts of €326,908.56 and €99,961.98, in the total of €426,870.54, corresponding to taxable income, with the nature of dividends relating to 2010 and 2012 of €1,520,504.93 and €399,847.90, respectively (...)" and "(...) due to the disregard of the tax treatment of C… SGPS by virtue of the tax ineffectiveness, the income distributed by A… SA should assume the nature of dividends and be considered as the effective beneficiary thereof is Ana Paula Silva (...) being subject to taxation under IRS in category E (...)".

And it was on the basis of pure argumentative speculation inserted in the justification of the decision that it was then stated that "(...) the Claimant (C…SGPS) is right when it states that, even if by mere academic hypothesis, one were to consider there to be legitimacy for application of the general anti-abuse clause, this would not result that the economically equivalent transaction should be considered a distribution of dividends by C… SGPS to B…, but rather, distribution of dividends of A… to B…(…)" and from there the conclusion that emerges from the whole economy of the aforesaid decision, that should there be cause for taxation by withholding at source (underlined) for purposes of IRS it would be A…SA and not C… SGPS, as substitute taxpayer, which should be subject to that possible tax obligation.

That is: what, according to still the said decision, the Tax and Customs Authority (AT) "(...) did not fully and correctly implement the provision of paragraph 2 of Article 38 of the General Tax Law embodied in its sanctioning element because for the reasons above described, the assessments under IRS relating to withholdings at source should have been effected against A… SA and not against C…, SGPS (...)".

The decision rendered was not, however, in the sense of recognizing any right of the AT with respect to the now Claimant, namely as to the legal obligation of withholding at source arising from the tax ineffectiveness that was recognized nor the right to assess IRS to the entity which is the effective holder of the income, the aforesaid B…, but only to "(...) judge as well-founded the request for declaration of illegality of the IRS assessments that are the subject of the present request for arbitral pronouncement [assessment of withholdings at source on IRS 2010 Nos. 2013… of 22-7-2013 and No. 2013… – in the amount of €326,908.56 and compensatory interest in the amount of €32,063.90 respectively and assessment of withholdings at source on IRS 2012 Nos. 2013… of 2013-07-22 and Nos. 2013… and 2013…, which fixed the IRS payable in 2012 in the amount of €99,961.98 and compensatory interest in the amount of €3,307.28, respectively] in the total amount of €462,241.72 (four hundred and sixty-two thousand two hundred and forty-one euros and seventy-two cents) (...)."

This was the decision, the rest being justification thereof and which does not constitute res judicata.

Concluding on this point:

The exception of res judicata is utterly without foundation.

II.2. On abuse of rights on the part of the Claimant

The Respondent argues the peremptory exception of abuse of rights (in the dimension of venire contra factum proprium) and bad faith on the part of the Claimant, with the following grounds:

• in a first moment, the AT understood that the taxation to be undertaken should be carried out by the mechanism of withholding at source and in the sphere of C…, SGPS, S.A.;

• confronted with that assessment, that company – represented in court by the illustrious counsel who is the subscriber to the present request for arbitral pronouncement – in the scope of that other cited arbitral process, came to argue that the AT had erred and advocating that the impugned assessments should have been issued against the here Claimant and not against C… SGPS;

• in the present request for arbitral pronouncement - submitted by A…, S.A. following notification of acts of assessment in all respects consistent with the position previously argued by C…, SGPS - we note that the position argued - signed by the same illustrious counsel – points in a different direction, namely that responsibility for payment of the tax should not, now, after all, fall on A…, S.A. but, rather, on Ms. B…;

• there exists, therefore, - beyond manifest bad faith - conduct susceptible of being characterized as abuse of rights – in the dimension of venire contra factum proprium –, the AT understanding that the Tribunal should proceed with such characterization and extract the consequent legal effects therefrom.

Let us examine:

Abuse of rights is an institution that has general recognition in Article 334 of the Civil Code.

The abuse of rights in the modality of venire contra factum proprium requires: i) a first conduct (which may translate into a transaction statement), understood as a binding stance with respect to the future and, for that reason, generating an objective situation of confidence; ii) the good faith of the other party, which justifiably relied on that conduct; iii) a second conduct, contradictory with the former, which frustrates the confidence created (See, e.g., Decision of the Court of Appeal of Coimbra – Case No. 2725/08.3TBLRA.C1, of 24-4-2012).

The abuse of rights, in its various modalities, always requires that "the holder manifestly exceed the limits imposed by good faith, good customs or the social or economic purpose of that right" (Article 334 of the Civil Code).

The prohibition of contradictory conduct configures currently an autonomized legal institution which fits, precisely, within the prohibition of abuse of rights and, to that extent, is even of official knowledge. However, there does not exist in our law a general principle of prohibition of contradictory conduct, or, to put it another way, "a general rule of coherence of conduct of private law subjects, legally enforceable".

Thus, a person is free to change her opinion and conduct outside cases where she has assumed transaction commitments. Hence, in principle, the mechanism made available by the legal order to enable the formation of confidence and, consequently, the future conduct of the contracting parties is only the legal transaction. It is known, however, that one of the essential functions of law is the protection of the expectations of persons, and it is readily intuited that the legal transaction alone, at the cost of committing flagrant injustices in many concrete situations, cannot constitute the only mode of protection of the expectations of subjects in the non-contradiction of the conduct of the other party; there are cases in which, even before the threshold of contractual binding, the agent should be obliged to honor the expectations that she created, and one can then require of her that she act in a manner corresponding to the confidence she aroused, that is, in which she cannot venire contra factum proprium. The delimitation of such cases obliged the doctrine and jurisprudence to specify with the maximum possible rigor the premises of the prohibition of this modality of abuse, first and foremost because there was the awareness that this institute, constructed, in its entirety, from the general clause of good faith, should only function in limiting situations, as a true safety valve and escape mechanism of the system, and not as a panacea that one resorts to whenever the application of strict law rules seems to be insufficient to assure the just solution of the case. It is important to avoid at all costs, as someone has already written, the utilization of good faith as a "fog" that serves for everything".

And if things thus occur at the strict level of civil law, there is, by greater reason, no foundation for a different perspective in tax legal relations, that is, at the level of the effects of contradictory conduct of taxpayers and/or their representatives, especially when, as in this case, there exists no foundation whatever for the allegation of contradiction since this concerns different entities, each assuming, through a judicial representative [even if it be the same in both situations], the defense of the rights or interests of its principals [and even if the exercise of that indeclinable and legitimate duty may require possible contradiction of legal or procedural points of view in each of the cases].

In conclusion:

The premises required are not present in this case for a conclusion that the Claimant invokes the right of objection to the assessment that is the subject of the record in terms that manifestly exceed the limits imposed by good faith, good customs or the social or economic purpose of that right.

Which will be equivalent to saying that the exception of abuse of rights as invoked lacks merit.

There are no other exceptions or preliminary questions that impede consideration of the merits and of which it is necessary to consider.

III. SUBSTANTIVE GROUNDS

III.1. ON FACT

§1. FACTS ESTABLISHED

With respect to the factual matters, it is important, before all else, to underscore that the Tribunal does not have to pronounce on everything which was alleged by the parties, it falling to it instead the duty to select the facts that matter for the decision and to distinguish the established matter of fact from the unestablished (cf. Article 123, paragraph 2, of the Tax Procedure Code and Article 607, paragraphs 3 and 4, of the Civil Procedure Code, applicable ex vi Article 29, paragraph 1, subparagraphs a) and e), of the LRAT). In this way, the facts relevant for judgment of the cause are chosen and outlined in function of their legal relevance, which is established in attention to the various plausible solutions of the question(s) of Law.

Within this framework, the following facts are considered established:

a) The Claimant was established on 13/07/1977. (cf. AF attached to the record)

b) On 22/12/2003, a deed of conversion of that company, heretofore a limited liability company, into a joint-stock company was executed, as well as of increase of its capital. (cf. AF attached to the record)

c) The partners were then E… and F… (wife thereof), B… (hereinafter B…) and G… (children of the couple first referred to) and, also, H… (husband of B…). (cf. AF attached to the record)

d) The partner B… became holder of 34,916 shares, with a nominal value of €5.00 and a total value of €174,580.00, representing 9.9% of the capital. (cf. AF attached to the record)

e) The parents donated to her 139,644 shares, to which was assigned a value of €698,220.00 (unit value of €5.00), with B… at that date coming to hold 49.98% of the capital. (cf. AF attached to the record)

f) On 29/11/2006, B… acquired (by exchange) from her brother (the aforesaid G…) 46,278 shares, to which was assigned a value of €231,311.84 (unit value of €4.998), coming to hold 63.24% of the capital. (cf. AF attached to the record)

g) On 12/04/2007, B… purchased from her brother (the aforesaid G…) 105,200 shares, at a unit value of €24.08, in a total value of €2,533,216.00, at that date becoming holder of 326,038 shares, with a nominal value of €5.00, representing 93.36% of the capital of the Claimant. (cf. AF attached to the record)

h) On 12/04/2007, B… sold to I…, her son, 10 shares, at a unit value of €30.00, in a total of €300.00, becoming holder of 326,028 shares, representing 93.36% of the capital of the Claimant. (cf. AF attached to the record)

i) B… was administrator of the Claimant since 1986. (cf. AF attached to the record)

j) The Claimant, in 2008, proceeded to the distribution of dividends to its shareholders. (cf. AF attached to the record)

k) The Claimant then had to withhold at source the IRS due, in the amount of €200,000.00. (cf. AF attached to the record)

l) On 14/10/2009, B…, her husband, her children, I… (aforesaid) and J…, and her father, established C…, SGPS, S.A. (hereinafter designated C… SGPS), with capital stock of €50,000.00, represented by 2,500 shares, with the nominal value of €10.00 each. (cf. AF attached to the record)

m) B… came to hold 2,460 shares of C… SGPS, representing 98.40% of its capital. (cf. AF attached to the record)

n) Her father, husband and two children of B… ended up with 10 shares each. (cf. AF attached to the record)

o) In the years to which the assessments relate, no entity (natural or legal) outside her family held shares in that company (as well as in the Claimant). (cf. AF attached to the record)

p) In the act of establishment of C… SGPS, administrators were elected, for the three-year term 2009/2011, the husband and children of B…. (cf. AF attached to the record)

q) In the same act, the father of B… (E…) was elected president of the general assembly of C… SGPS. (cf. AF attached to the record)

r) On 22/12/2009, B… transferred 325,954 of the shares of the Claimant to the newly-established C… SGPS. (cf. AF attached to the record)

s) The shares were sold at the unit price agreed between the parties to the contract of €100.00 per share, to which corresponds the total price of €32,595,400.00, it being agreed that such price would be paid on a deferred basis. (cf. AF attached to the record)

t) The Sole Fiscal Officer of C… SGPS (K…, CPA) issued the following opinion "at the request of the Board of Directors of the company (…) and in accordance with the stipulated in paragraph 2 of Article 397 of the Commercial Code" with respect to the aforesaid operation of buying and selling shares: "the preparation of the draft contract above referred to, as well as the conditions and price established, are the sole responsibility of the Board of Directors of the Company, our responsibility being its analysis so as to issue the present opinion" (point 2) and "in this manner I give favorable opinion on the draft contract (…) which was submitted for my consideration, by the nominal amount of 100.00 euros, which totals 32,595,400.00 euros, being the payment plan of 16 annual installments, with the first due on June 10, 2011" (point 4). (cf. AF attached to the record)

u) C… SGPS became debtor to B… of the amount corresponding to the price of acquisition of the shares, that is, €32,595,400.00, having therefore recorded a credit in its favor in that amount. (cf. AF attached to the record)

v) In the contract for purchase and sale of shares no payment of any interest by C… SGPS was stipulated. (cf. AF attached to the record)

w) C… SGPS then came to hold one – and sole – asset, constituted by that participation in the Claimant. (cf. AF attached to the record)

x) Still on the aforesaid date of 22/12/2009, B… transferred to her daughter 10 shares of the Claimant. (cf. AF attached to the record)

y) B… consequently came to hold, only, 64 shares of the Claimant, which represent a (direct) participation of 0.018% of its capital. (cf. AF attached to the record)

y') B… maintained the status of administrator of the Claimant. (cf. AF attached to the record)

z) In her IRS declaration for 2009, due to the aforesaid transfer of shares of the Claimant, B… declared a capital gain of €29,888,363.20, which she considered to be excluded from taxation. (cf. AF attached to the record)

aa) In 2010, the Claimant paid to C… SGPS, as an advance on 2010 dividends, €1,495,504.93. (cf. AF attached to the record)

ab) Still as dividends for 2010, and as a true-up, the Claimant paid to C… SGPS, already in 2011, €3,924.68. (cf. AF attached to the record)

ac) In 2012, the Claimant paid to C… SGPS dividends for 2011 in the amount of €399,847.90. (cf. AF attached to the record)

ad) The Claimant did not proceed to any withholding of tax on any of the aforesaid distributions of dividends. (cf. AF attached to the record)

ae) On the same dates in which it receives the dividends, C… SGPS reforwards them to B…; specifically (cf. AF attached to the record):

af) Since the beginning of its existence, in 2009, C… SGPS has not incurred expenses, namely relating to personnel costs, consultancy, specialized services or payment of any rents relating to its registered office. (cf. AF attached to the record)

ag) The registered office of C… SGPS is located in a room of the registered office of the Claimant. (cf. AF attached to the record)

ah) The administrators of C… SGPS were not compensated. (cf. AF attached to the record)

ai) The aforesaid operation of purchase and sale of shares carried out between B… and C… SGPS began to be analyzed in the inspection process opened to C… SGPS by the OI2012… and initiated on 26/10/2012, in the scope of which the general anti-abuse clause provided in Article 38 of the General Tax Law was applied. (cf. AF attached to the record)

aj) As a consequence, the assessments of withholding at source on IRS for 2010 (No. 2013…, in the value of €326,908.56) and for 2012 (No. 2013…, in the value of €99,961.98) were issued to C… SGPS, as well as the assessments of compensatory interest connected therewith. (cf. AF attached to the record)

al) C… SGPS then filed an arbitration challenge, requesting the annulment of those assessments, which was considered in the scope of arbitral process No. 258/2013-T which proceeded at the CAAD. (cf. Doc. 1 with the Response)

am) In the decision rendered on 14-6-2014 in that arbitral process and which became res judicata, it was decided "(...)judge as well-founded the request for declaration of illegality of the IRS assessments that are the subject of the present request for arbitral pronouncement [assessment of withholdings at source on IRS 2010 Nos. 2013… of 22-7-2013 and No. 2013… – in the amount of €326,908.56 and compensatory interest in the amount of €32,063.90 respectively and assessment of withholdings at source on IRS 2012 Nos. 2013… of 2013-07-22 and Nos. 2013… and 2013…, which fixed the IRS payable in 2012 in the amount of €99,961.98 and compensatory interest in the amount of €3,307.28, respectively] in the total amount of €462,241.72 (four hundred and sixty-two thousand two hundred and forty-one euros and seventy-two cents) (...)".

an) In the arbitral decision rendered in process No. 258/2013-T the following facts were considered established:

"(...)

The Claimant acquired, on 22-12-2009, from its shareholder B… 325,954 shares representing approximately 93% of the capital of A…, SA, legal entity No. …[See contract attached with the administrative file].

The purchase of the shares was made at the unit price of 100 € per share, which corresponds to the total price of 32,595,400 € [See contract attached with the administrative file].

The Claimant became debtor to B… of the amount corresponding to the price of acquisition.

To the draft contract promise of sale, at the nominal value of €100.00 and with a payment plan of the price in 16 successive annual installments, commencing on June 10, 2011, favorable opinion was given by the auditor and Certified Public Accountant, K… [Article 397-2, of the Commercial Code], with a statement that the shares were intended to "(…)integrate the account of financial participations in accordance with the object of the company (…)" and that that draft "(…) as well as the conditions and price established are the sole responsibility of the company's board of directors (…)" [See administrative file – annex 6, pp. 148].

A… Inc. commenced operations in 1977.

On 22-12-2003, a deed of conversion of that company, heretofore a limited liability company, into a joint-stock company was executed, as well as an increase in its capital, [See copy of deed attached with the administrative file].

The partners were then E… and F… (wife thereof), B… (hereinafter B…) and G… (children of the couple first referred to) and, also, H… (husband of B…).

The partner B… became holder of 34,916 shares, with a nominal value of €5.00 and a total value of €174,580.00, representing 9.9% of the capital.

The parents of B… donated to her 139,644 shares, to which was assigned a value of €698,220.00 (unit value of € 5.00), with her at that date coming to hold 49.98 % of the capital.

On 2006-11-29, B… acquired (by exchange) from her brother (the aforesaid G…) 46,278 shares, to which was assigned a value of € 231,311.84 (unit value of € 4.998), coming to hold 63.24 % of the capital.

On 2007-04-12, B… purchased from her brother 105,200 shares, at a unit value of €24.08, in a total value of €2,533,216.00, at that date becoming holder of 326,038 shares, with a nominal value of €5.00, representing 93.36% of the capital of A…SA [See contract attached with the administrative file].

On 2007-04-12, B… sold to I… a, her son, 10 shares, at a unit value of €30.00, in a total of €300.00, becoming holder of 326,028 shares, representing 93.36% of the capital of A… SA [See contract attached with the administrative file].

B… was administrator of the A…SA since 1986.

The Respondent, in 2008, proceeded to the distribution of dividends to its shareholders.

And withheld at source IRS in the value of €200,000.00.

On 2009-10-14, B…, her husband (hereinafter designated H…), her children, I… (aforesaid) and J…, and her father (the already mentioned E…), established the company now Claimant, C…, SGPS, S.A. (hereinafter designated C…SGPS), with capital stock of €50,000.00, represented by 2,500 shares, with a nominal value of € 10.00 each [See company contract attached with the administrative file].

Ana Paula Silva came to hold 2,460 shares of C…SGPS, representing 98.40% of its capital, [See company contract attached with the administrative file].

Her father, husband and two children of B… ended up with 10 shares each.

In the years to which the assessments relate, no entity (natural or legal) outside her family holds shares in the Claimant as well as in A… SA.

In the act of establishment of the claimant [see supra, 16.], administrators were elected, for the three-year term 2009/2011, the husband and children of the aforesaid shareholder B… [See annex 8, pp. 151, of the administrative file].

And in that same act the father of B… (E…) was also elected president of the general assembly of C… SGPS for the three-year term 2009/2011.

On 2009-12-22, B… transferred 325,954 of the shares of A… SA to the newly-established C… SGPS, in accordance with the contract attached with the administrative file.

C…SGPS did not pay the purchase price of the shares to B….

C… SGPS recorded a credit in favor of B… in the amount of €32,595,400.00.

Not stipulating the contract the payment of any interest by the company.

C… SGPS then came to hold one - and sole - asset, constituted by that participation in A… SA.

Still on the aforesaid date of 2009-12-22, B… transferred to her daughter 10 shares of A… SA, in accordance with the contract attached with the administrative file.

coming consequently to hold, only, 64 shares of that company, which represent a (direct) participation of 0.018 % of its respective capital.

And maintained the status of administrator of A… SA.

In her IRS declaration for 2009, B… declared a capital gain of €29,888,363.20, which she considered to be excluded from taxation.

In 2010 A… SA paid to C… SGPS, as an advance on 2010 dividends, €1,495,504.93.

A… SA did not proceed to withholding when that distribution of dividends was made.

Still as dividends for 2010, and as a true-up, it paid to it, already in 2011, €3,924.68.

In 2012, A… SA paid to C… SGPS dividends for 2011 in the amount of €399,847.90.

On the same dates in which it receives the dividends, C… SGPS reforwards them to B….

As of the date of the facts C…SGPS had no property, human resources or structural means of its own.

Since the beginning of its existence, in 2009, C… SGPS has not incurred expenses, namely relating to personnel costs, consultancy, specialized services or payment of any rents relating to its registered office.

Said registered office being located in a room of the registered office of A…, SA.

The administrators of the Claimant were not compensated.

The Claimant was notified of the demonstration of assessment of withholdings at source on IR 2010 No. 2013… and the demonstration of assessment of compensatory interest No. 2013…, in the total value of 358,972.46 €, in accordance with the assessment attached to the record with the arbitral claim by the Claimant.

The Claimant was also notified demonstration of assessment of withholdings at source on IR 2012 No. 2013… and demonstration of assessment of compensatory interest No. 2013…, in the total value of 103,269.26 €, in accordance with the assessment attached to the record with the arbitral claim by the Claimant (...)"

ao) The Arbitral Tribunal in that process having considered as unestablished facts:

"(...)- It is not considered established that C… SGPS, S.A., was established with the purpose of managing the social participations of the companies of the D… Group (among which A…, S.A.), nor with the intention of, at the appropriate time, acquiring a broad set of social participations, namely in the following companies:

i. L…, Inc, with registered office in Angola and with tax identification number…,

ii. M…, Inc, with registered office in Mozambique and with tax identification number…, held by shareholders B…, which holds 50% of the capital and shareholder H…, which holds 50%;

iii. N…, Inc, a company of Portuguese law, with tax identification number…,

iv. O…, S.A., a company of Portuguese law,

v. P…, S.A., a company of Portuguese law, with tax identification number…,

• It was not established that the claimant was established to be the parent company and to direct the concentration of a business group with various companies, held by various shareholders, and with registered office and activity in various countries.

• It was not established that dividends were utilized by the Claimant in the scope of its economic activity.

• It is not considered established that the Claimant was notified of the decision dispatch authorizing the application of the anti-abuse clause (...)".

ap) As a consequence and following the arbitral decision rendered in process No. 258/2013-T, the AT determined the opening of the Service Orders Nos. OI2014… and OI2014… to the Claimant, the inspection procedure having been initiated on 29/08/2014. (cf. Docs. 1 and 2 attached with the Initial Petition and AF attached to the record).

aq) As a consequence of that inspection action, the Tax Inspection Services of the Finance Directorate of the… prepared the Tax Inspection Report, the tenor of which is here given as entirely reproduced, from which it is important here to extract the following (cf. AF attached to the record):

"III.1.5.2 – Application of paragraph 2 of Article 38 of the General Tax Law and Article 63 of the Tax Procedure Code

In summary of what has been exposed in this document:

A. As to the description of the legal transaction executed or the legal act performed and the transactions or acts of identical economic purpose, as well as the indication of the rules of application applicable thereto:

It is embodied in the receipt, in 2010 and 2012, by B…, following the distribution of dividends by A… SA, preceded by the transfer of the participation of 93.34% that she held in the capital of that company A… SA on 2009-12-22, for the total value of € 32,595,400.00, to the company C… SGPS, which had been established on 2009-10-14 and in which she holds a participation of 98.40%, which had as its fundamental objective the distribution of dividends, placed at disposal in the exercises of 2010 to 2012. It is evident that, without the use of these means, the liable beneficiary taxpayer (B…) would not avoid taxation, resulting from the transformation of dividends into receipt of debt, remaining thus subject to tax, in accordance with the general terms, as income of category E of IRS.

To remunerate the capital of the shareholder the normal form would be the distribution of dividends paying the respective tax and not the creation of a structure that allowed the withdrawal of dividends without any taxation, through its transformation into receipt of debt generated by a transaction executed between entities legally distinct, but economically controlled by the same shareholder. By using this structure, it is clear that the shareholder decided artificially to avoid taxation in IRS, through the use of a set of anomalous transactions, thus achieving the identical economic purpose, avoiding tax of € 421,495.54, due in accordance with the provisions of subparagraph a) of paragraph 2 of Article 5, subparagraph c) of paragraph 1 of Article 71, subparagraph 2) of subparagraph a) of paragraph 3 of Article 7 and paragraph 1 of Article 98, all articles of the IRS Code.

B. As to the demonstration that the execution of the legal transaction or performance of the act was essential or mainly directed to the reduction, elimination or temporal deferment of taxes that would be due in case of transaction or act with identical economic purpose, or to the obtaining of tax benefits:

The payment of the debt by the company C… SGPS to its shareholder, with the financial means derived from the distribution of dividends of the company A… SA, following the acquisition of the participation that it held in the company A… SA, aimed at the withdrawal of dividends from that company without any taxation.

To obtain the intended results, several legal acts were artificially executed, more complex and more costly, that prove to be manifestly unnecessary and clearly denote the artificial intent of its use, that is, to avoid the taxation that would be due.(…)

III.1.5.3 – Conclusion

In conclusion, notwithstanding the qualification given by the liable taxpayers party to the legal transactions effected, the same does not bind the Tax Administration, as determined by paragraph 4 of Article 36 of the General Tax Law, and the conditions are met for application of the provision of paragraph 2 of Article 38 of the General Tax Law and Article 63 of the Tax Procedure Code, for the disregard of the form given to the payment of dividends by A… SA to C… SGPS, immediately followed by the payment of debt by C… SGPS to shareholder B…, giving it the framing of payment of profits (dividends) of A… SA to B…, in accordance with subparagraph h) of paragraph 2 of Article 5 of the IRS Code, taxing them by withholding at source on IRS, in accordance with subparagraph c) of paragraph 1 of Article 71, subparagraph 2) of subparagraph a) of paragraph 3 of Article 7 and paragraph 1 of Article 98 of the same legal act, at the moment they are made available to B….

For being so, in light of the articles indicated, it falls to the Tax Administration to consider ineffective within the tax scope the transformation of dividends, since such acts/transactions were performed with abuse of legal forms and had as essential objective the elimination of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or the obtaining of tax benefits that would not be achieved totally or partially without the use of these means.

In light of the above, the taxation should occur in accordance with the applicable norms in the absence of such structure, not producing the tax benefits referred to, as provided by paragraph 2 of Article 38 of the General Tax Law, that is, through the taxation of the amounts paid by company A… SA at the moment they were made available to B…, which corresponds to the following tax in arrears (withholding at source on IRS), due by A… SA:

Table 6

"

ar) On 12/12/2014, the Director-General of the AT issued a Dispatch of Authorization for Assessment Based on the Application of Anti-Abuse Provisions. (cf. AF attached to the record)

as) The Claimant, in the person of Mr. Dr. Q…, in his capacity as constituted representative, was notified of the Tax Inspection Report, as well as of the aforesaid Dispatch of Authorization for Assessment, through the office …/…, of 29/12/2014, from the Finance Directorate of…, which was received on 02/01/2015. (cf. AF attached to the record and Doc. 2 attached to the Response)

at) The Claimant received notification relating to the assessments (of tax and compensatory interest) relating to the year 2010 (assessments No. 2014… and No. 2015…), on 05/05/2015, by way of access to its electronic mailbox of ViaCTT. (cf. Doc. 3 with the Response)

au) On 02/03/2015, the Claimant effected voluntary payment of the assessments (of tax and compensatory interest) relating to the year 2012, in the total amount of €109,119.08. (cf. Doc. 5 attached to the Initial Petition)

av) On 03/06/2015, the Claimant filed the request for constitution of the arbitral tribunal that gave rise to the present process. (cf. Information system for management of CAAD proceedings)

§2. FACTS UNESTABLISHED

With relevance for the consideration and decision of the cause, the following facts did not result as established:

a) That C…, SGPS, S.A. was established with the purpose of managing the social participations of the companies of the D… Group (among which the Claimant), nor with the intention of, at the appropriate time, acquiring a broad set of social participations, which would involve the concentration in the holding by C…, SGPS, S.A. of the following companies:

-L…, Inc, with registered office in Angola and with tax identification number…, held by shareholders B…, which holds 95% of the capital and shareholder I…, which holds 5%;

-M…, Inc, with registered office in Mozambique and with tax identification number…, held by shareholders B…, which holds 50% of the capital and shareholder H…, which holds 50%;

-N… , Inc, a company of Portuguese law, with tax identification number…, held by the following shareholders: B…, with a quota of 40% of the capital; A…, S.A., with a quota of 49% of the capital; H…, with a quota of 11% of the capital.

-O…, S.A., a company of Portuguese law, with tax identification number…, held by the following shareholders: B…, with 50.120% of the capital; H…, with 49.48% of the capital; E…, with 0.133 % of the capital; I…, with – 0.133% of the capital; J…, with 0.133% of the capital.

-P…, S.A., a company of Portuguese law, with tax identification number…, held by the following shareholders: B…, with 88.784% of the capital; H…, with 6.537% of the capital; E…, with 1.559 % of the capital; I…, with 1.559% of the capital; J…, with 1.559% of the capital.

b) That C…, SGPS, S.A. was established to be the parent company and to direct the concentration of a business group with various companies, held by various shareholders, and with registered office and activity in various countries.

c) That the dividends which the Claimant paid to C… SGPS were by it utilized in the scope of its economic activity.

§3. REASONING ON THE FACTUAL MATTERS

With respect to the established factual matters, the conviction of the Tribunal was based on the facts articulated by the parties, the adherence of which to reality was not put in question, on the documents attached to the record and on the administrative file.

Regarding the unestablished factuality, this was thus considered as a result of the absence of any probative elements susceptible of, unequivocally, proving it.

III.2. ON LAW

The tax acts and the defects attributed to them

In addition to the exceptions raised by the AT and previously decided, it is necessary in the present process to consider the legality of the assessment of withholding at source on IRS No. 2014…, in the amount of €321,533.56, relating to the year 2010, and of the corresponding assessment of compensatory interest No. 2015…, in the amount of €50,353.03, as well as of the assessment of withholding at source on IRS No. 2015…, in the amount of €99,961.98, relating to the year 2012, and of the corresponding assessments of compensatory interest Nos. 2015… and 2015…, in the total amount of €9,157.10.

The Claimant attributed to the aforesaid IRS assessments the following defects:

a) Procedural lack of standing: non-opposability to the Claimant, as substitute taxpayer, of the disregard of tax effects resulting from the application of the general anti-abuse clause to the acts and legal transactions in issue, with the sequent argument of the violation of Article 38, paragraph 2, of the General Tax Law and, further, of the unconstitutionality of that norm, if interpreted as admitting the opposability of the effects of the application of the general anti-abuse clause to the substitute taxpayer, in the face of the constitutional principles of proportionality and the right to property (Articles 18, paragraph 2 and 62, paragraph 1, of the Constitution);

b) Expiration of the assessment relating to the year 2010;

c) Failure of fulfillment of the premises for application of the general anti-abuse clause, thus resulting violated the provision of Article 38, paragraph 2, of the General Tax Law, namely by:

i. The operations performed not constituting resort to fraudulent or artificial means and abuse of legal forms;

ii. The operations not having been performed with sole, principal or determinant objective of a fiscal nature, but rather aiming at the creation of a leveraged and coordinated business group by an SGPS.

Consideration of the merits of the claim

The fulcral question here is to determine whether the application of the general anti-abuse clause (GAAC) can or cannot produce tax effects on third parties other than the taxpayer who obtained the tax benefit (for example, by imposing the obligation of withholding at source), since the Tax Authority has been issuing, insofar as we understand, the additional assessments against substitute taxpayers and not against liable taxpayers.

Now, in light of the developments on this matter, it would be important to clarify by legislation or, at least, in a way to assure uniformity in the jurisprudence, some aspects associated with the application of the anti-abuse norm (namely with respect to the consequences of ineffectiveness and on whom those consequences fall).

Having made these preliminary considerations, let us proceed to the analysis of the present case.

The matter is, in essence and preliminarily, to determine the (un)legality of the assessment to the substitute taxpayer (the Claimant, A…, SA) of the IRS and compensatory interest due by shareholder Ana Paula Silva as a result of IRS assessments made by the AT derived from the failure of withholding at source on IRS by that entity following and as a consequence of the application of the general anti-abuse clause (Article 38 of the General Tax Law).

More specifically: in a prior arbitral decision in which C…, SGPS, S.A was Claimant, the Tribunal recognized the well-foundedness of the application of the GAAC (general anti-abuse clause provided in Article 38 of the General Tax Law) but considered illegal the IRS assessments to the Claimant, as substitute taxpayer, considering it not to hold that status (of substitute taxpayer).

Subsequently, as a consequence and following the aforesaid arbitral decision, the AT understood to undertake the assessments now at issue which, in relation to those previously challenged in the cited arbitral process, now had as substitute taxpayer the Claimant, A…, SA.

The question of execution of a judgment (Article 24 of the LRAT)

The AT invokes, on this question and in essence, that it was bound to "perform the tax acts due in substitution of the acts that were the subject of the arbitral decision" rendered in process No. 258/2013-T and to "assess the tax obligations in conformity with the arbitral decision" that became res judicata being, to that extent, that the acts of assessment now impugned were performed – cf. Article 24, paragraph 1, subparagraphs a) and d), of the LRAT (cf. Articles 13 to 28 of the Response).

That is and if we understand correctly (in summary and without prejudice to later fuller development), by the fact that in the arbitral decision rendered in process No. 258/2013-T it was decided that the tax acts there challenged were illegal because they aimed at an entity that was not obliged to pay in that it was not, in the case, a substitute taxpayer, the AT decided to perform new acts of assessment, now against the entity which it considered to be the real substitute taxpayer and debtor of the taxes assessed.

The AT invokes, if we understand correctly, the fulfillment of the duty to give effect to the arbitral decision of annulment in accordance with the provisions of Article 24 of the LRAT, that is and more specifically, the performance of the tax acts legally due and/or assessments of the tax obligations in substitution of the acts or assessments that were the subject of the cited arbitral decision, all in conformity with that same decision (cf. subparagraphs a) and d) of the cited Article 24).

In other words, the question having been decided by the tribunal, in the manner in which it was, it fell to the AT to proceed, as it did, to the (new) assessment of the taxes in arrears, adopting the position endorsed by the tribunal.

It does not appear, however, that there is cause for invocation of the provision in question inasmuch as and first and foremost, the position endorsed by the Tribunal was only and solely to consider the illegality of the acts of assessment performed against the impugner in process No. 258/2013-T – the commercial company C…, SGPS, SA.

In truth, that arbitral decision did not recognize (nor could it have done) the right of the AT with respect to the now Claimant, A…, S.A., namely as to the legal obligation of withholding at source arising from the tax ineffectiveness that was recognized nor the right to assess IRS to the entity which had not even been called to the process.

Certainly, following the annulment of a tax act, the AT has the power/duty to perform a new act, in respect of the limits dictated by the authority of the res judicata (cf. Article 173, paragraph 1, of the Code of Tax Procedure), having for that purpose no other limits than those derived from the authority of the decision of annulment and provided for in the procedure for execution of judgments (cf., on this point, Jorge Lopes de Sousa, Guide to Tax Arbitration, Ed. Almedina/2013, pp. 217 et seq.).

And it will therefore be the legality of those new and now impugned tax acts which it befalls us to consider and decide, in the assurance that, contrary to what the AT alleges, they were not performed in execution of the prior decision of annulment although they were performed as a consequence thereof.

It is not, therefore, a matter of giving effect to the judgment in the terms invoked by the AT.

The question of "procedural lack of standing"

At the heart of this question is, as has been stated already, to determine how the disregard by the AT, for tax purposes, operates or what are, in reality, the consequences of disregarding the chain of operations and acts which would serve as a "facade" to conceal or hide the real substance of the same and which would be, in the case, the distribution of dividends to the shareholder, it being indisputable and having already been established that there was, behind another appearance of non-taxable acts, a reality subject to taxation in IRS and of which the shareholder B… was the direct beneficiary.

The tax benefits improperly obtained in the situation in issue, namely in that the amounts received should be taxed as dividends, as defended by the Tax and Customs Authority and was already the subject of consideration and decision in the arbitral process No. 258/2013-T of the CAAD, is manifest that those which obtained them was the shareholder herself, B…, who received the amounts without any deduction or payment of tax (IRS), and not the Claimant, which paid in full the amounts in question.

In truth, the creation of the SGPS and its interposition between the A… SA now Claimant and the shareholder, B…, allowed the conversion of dividends into payment of debt and thus the avoidance of taxation in the legal sphere of B… during a significant period of time (16 years).

Thus, as results from the arbitral decision rendered in the aforesaid process No. 258/2013-T, the debt of €32,595,400.00 contracted by C… SGPS corresponding to the transfer to C… SGPS of the participation of 93.3% which B… held in A… SA, would be paid by C… SGPS to that (B…) "… in 16 installments of €2,037,212.50, with the first due on June 10, 2011 and the following on the same day of the subsequent years…", which would allow B… to receive indirectly through C… SGPS dividends from A… SA without any taxation. Following the interposition of C… SGPS, B… held indirectly (underlined) 91.85% of the capital of A… SA having remained administrator of A… SA while her husband H… was administrator of C…SGPS, together with the children. Thus, we are faced with entities in a situation of special relationships as defined in Article 63 of the Corporate Income Tax Code and in Decree No. 1446-C/2001 of December 21, both at the level of the inter-corporate relationship (C… SGPS/A… SA) and at the level of the shareholders. However B… both as shareholder of C… SGPS and as administrator of A… SA had significant preponderance within this economic family group (D… Group).

And it was that preponderance and the position of shareholder and administrator of the Claimant that would have allowed the organization of a chain of operations and acts which gave the appearance of debt of C…, SGPS to B… than what truly constituted payment (distribution) of dividends by the now Claimant with the consequent obligation of withholding at source at the final tax rate due (Article 71, paragraph 1, subparagraph c), of the IRS Code).

That is and as had already been demonstrated in the decision rendered in process No. 258/2013-T, the creation of the SGPS served as an instrument or vehicle to convert dividends, which previously were taxed under IRS when made available and paid by A… SA to shareholder B…, into payment of a debt of the SGPS to its majority shareholder B…, considering namely the proof that in 2010, A… SA paid to C… SGPS, as an advance on dividends, the amount of €1,495,504.93, having not proceeded to withholding at source for purposes of IRS, when that distribution of dividends was made. Still as dividends for 2010, and as a true-up, A… paid, already in 2011, to C… SGPS, the amount of €3,924.68. It was equally established that in 2012, A… SA paid to C… SGPS dividends for 2011 in the amount of €399,847.90, having not proceeded to withholding at source for purposes of IRC, with C… SGPS on the same dates in which it receives the dividends, reforwarding the same to B… in the form of payment of debt resulting from the transfer of the participation which she held in A… SA to C… SGPS, without any taxation in the sphere of B….

From the above it results from now unequivocal, it is reaffirmed, that the shareholder B… is the direct exclusive beneficiary of the aforesaid structure created, being she who solely benefited from the tax treatment and, concretely, from the payment of dividends without there having been place to the inherent taxation.

Now being the shareholders the real beneficiaries of the aforementioned benefits, the application of the general anti-abuse clause, in the manner in which it was effected, does not allow the setting aside of those benefits

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