Process: 336/2018-T

Date: June 26, 2019

Tax Type: IRC

Source: Original CAAD Decision

Summary

Process 336/2018-T addresses a transfer pricing dispute under Article 63 of the Portuguese Corporate Income Tax Code (CIRC), examining the arm's length principle application. The taxpayer A... LDA challenged an additional IRC assessment of €157,851.72 (including €143,551.62 in tax and €14,300.10 in compensatory interest) related to the 2010 tax year. The Tax Authority raised a procedural exception regarding timeliness, arguing the arbitration request was untimely since the original assessment was notified on December 20, 2013, while the CAAD petition was filed on July 13, 2018—well beyond the 90-day statutory deadline under Article 10 of LRATM and Article 102 of TCPT. The taxpayer countered that it had continuously contested the assessment through administrative channels: first via gracious complaint (May 19, 2014), then hierarchical appeal, which was dismissed on April 11, 2018 and notified on April 16, 2018. The taxpayer clarified its petition directly challenged the hierarchical appeal dismissal decision, not merely the original assessment, thereby making the arbitration request timely. This case illustrates critical procedural requirements for transfer pricing disputes in Portuguese tax arbitration, particularly the distinction between challenging original assessments versus subsequent administrative decisions, and the importance of exhausting administrative remedies before accessing CAAD arbitration.

Full Decision

ARBITRAL DECISION

I. REPORT

  1. The taxpayer A... LDA., with Tax Number ... (hereinafter "Claimant" or "A..."), with registered office at Av. ..., no. ..., ..., ..., submitted on 13 July 2018 a petition for establishment of a Collective Arbitral Court, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, as amended by articles 228 and 229 of Law no. 66-B/2012, of 31 December (Legal Regime for Arbitration in Tax Matters, hereinafter "LRATM"), in which the Tax and Customs Authority (hereinafter "TA" or "Respondent") is named as Respondent.

  2. The Claimant seeks an arbitral ruling on the illegality of the additional Corporate Income Tax (IRC) assessment no. 2013... and corresponding compensatory interest – in the total amount due of € 157,851.72 (€ 143,551.62 of IRC and € 14,300.10 of interest), as shown in the Statement of Account Reconciliation no. 2013... – with reference to the 2010 tax year, upheld following a dismissal order of the hierarchical appeal no. ...2015... issued by the Director of Services of the DSIRC, on 11 April 2018, and notified on 16 April 2018. The Claimant seeks the annulment of such tax acts with all legal consequences. It attaches 29 documents and lists one witness.

  3. The petition for establishment of the Arbitral Court was accepted by the Honorable President of CAAD and automatically notified to the TA.

  4. Pursuant to the provisions of article 6, paragraph 2, item a) and article 11, paragraph 1, item b) of the LRATM, the Deontological Council appointed the arbitrators of the Collective Arbitral Court, who communicated acceptance of the office within the applicable period, and notified the parties of such appointment.

  5. The Collective Arbitral Court was constituted on 25 September 2018; it was constituted regularly and is materially competent, in accordance with the provisions of articles 2, paragraph 1, item a), 5, 6, paragraph 1, and 11, paragraph 1, of the LRATM.

  6. Pursuant to article 17, paragraph 1 of the LRATM, the TA was notified on 25 September 2018 to submit its response.

  7. On 23 October 2018, the TA submitted a Request seeking an extension of 30 days to the deadline for response, citing the need to obtain more information on the situation in dispute.

  8. This Request was granted by Order of 24 October 2018.

  9. The TA submitted its response on 28 November 2018, accompanied by the Administrative File ("AF").

  10. In that response, the TA, in addition to raising matters of exception, alleges, in summary, the total lack of merit of the Claimant's petition. And it lists one witness.

  11. The Arbitral Order of 7 December 2018 notified the Claimant to exercise its right of reply regarding the matters of exception raised; and requested it to define the facts, or matter of proof, to which the witness examination requested by it pertains.

  12. In a Request of 12 December 2018, the Claimant took a position on the matters of exception raised by the Respondent; as a precaution, it clarified its petition so that it corresponds to a challenge of both the assessment and the dismissal of the Hierarchical Appeal; and further indicated the articles of its initial petition that would be subject to proof by the testimony of the witness it listed.

  13. The Arbitral Order of 17 December 2018 set 14 January 2019 for the conduct of the witness examination.

  14. In a Request of 10 January 2019, the Respondent requested the change of date for the witness examination, due to the impossibility of the witness it listed to attend.

  15. In a Request of 29 January 2019, the Claimant also requested the change of date for the witness examination.

  16. By Arbitral Orders of 11 and 14 January, and 1 February 2019, the examination was rescheduled for 28 February 2019.

  17. On 28 February 2019, the examination of the witness listed by the Claimant, B..., took place.

  18. At the end of the examination, the Court determined the extension by two months of the deadline referred to in article 21, paragraph 1 of the LRATM.

  19. By Request of the Respondent, submitted on 7 March 2019 and granted by Order of 11 March 2019, a new date was set for the examination, by videoconference, of the witness listed by the TA.

  20. On 13 March 2019, the examination of the witness listed by the Respondent, C..., took place.

  21. At the end of the hearing, the Claimant and the Respondent were notified to submit written arguments in successive periods of 15 days, with the final date for the arbitral decision set as 23 May 2019.

  22. The Claimant submitted its written arguments on 29 March 2019.

  23. The Respondent submitted its written counter-arguments on 26 April 2019.

  24. Finally, by Arbitral Order of 22 May 2019, taking into account the complexity of the case, the deadline for issuing the arbitral decision was extended by two months, pursuant to paragraph 2 of article 21 of the LRATM.

  1. The TA proceeded to appoint its representatives in the proceedings and the Claimant attached a power of attorney, with the Parties thus being properly represented.

  2. The Parties have legal personality and capacity and have standing, pursuant to articles 4 and 10, paragraph 2, of the LRATM and article 1 of Ordinance no. 112-A/2011, of 22 March.

  3. The proceedings are not affected by any nullities.

II. THE EXCEPTION OF TIMELINESS

II.A. Position of the Parties on the Exception

  1. In its response to the petition for arbitral ruling, the Respondent raises the issue that the legally defined deadline for challenging this tax act of assessment has been exceeded, specifically in arbitral proceedings, to the extent that the petition for arbitral ruling aims at the declaration of illegality of the additional IRC assessment no. 2013... with all legal consequences, namely its annulment.

  2. The additional assessment was notified to the taxpayer, now Claimant, on 20 December 2013, and the petition for arbitral ruling was submitted on 13 July 2018 – being, therefore, clearly untimely in light of the provisions of article 10 of the LRATM and article 102, paragraphs 1 and 2 of the TCPT, which establishes a 90-day deadline. The Respondent invokes in support of its understanding abundant arbitral case law (Cases nos. 62/2012-T, 188/2013-T, 244/2013-T, 38/2015-T, 195/2015-T, 196/2015-T, 211/2015-T, 261/2015-T, 346/2015-T, all of CAAD).

  3. Thus, according to the Respondent, the petition should be declared lacking merit as untimely, resulting in dismissal of the case, pursuant to article 278, paragraph 1, e) of the CPC, applicable by virtue of article 29, paragraph 1, e) of the LRATM.

  4. In a Request submitted on 12 December 2018, the Claimant responded to the exception.

  5. It begins by clarifying that, contrary to what is suggested, its petition is not limited to challenging the tax assessment; rather it immediately contests the act of dismissal of the Hierarchical Appeal (and, therefore, only mediately the assessment).

  6. The act of dismissal of the Hierarchical Appeal, issued on 11 April 2018 and notified on 16 April 2018, administratively maintained in the legal order the act of assessment which the Claimant considers illegal – and which it has continuously contested since 19 May 2014, first through a Gracious Complaint and then through a Hierarchical Appeal; and now, having exhausted the administrative means of challenging the assessment, through the arbitral route.

  7. This does not mean that the decisions dismissing the Gracious Complaint and subsequently the Hierarchical Appeal are not specifically contested, and that the latter is not directly targeted. But the Claimant accepts that what it intends is that, in terms of the legal consequences of that challenge, the assessment which it considers illegal is indirectly affected.

  8. In the Claimant's view, the exception would only be valid if the petition for arbitral ruling showed that the Claimant had accepted the dismissal of the Hierarchical Appeal, in order to focus on the illegality of the assessment: but, it insists, it is transparent in the petition for arbitral ruling that this is not the case.

  9. Therefore, it infers, any petition for arbitral ruling submitted following a decision dismissing a gracious complaint or hierarchical appeal, in the context of which the challenged act of assessment was discussed, has as its immediate object the decision of dismissal, although the real and mediate object is the assessment itself.

  10. Thus, the Claimant argues, even if it itself has not expressly petitioned for the annulment of the decision dismissing the Hierarchical Appeal, leaving that annulment to the other effects of the merit of the petition – but only, autonomously, the express declaration of illegality of the act of assessment – the truth is that both objects are within the knowledge of the arbitral court, since the ruling on the illegality of the acts of assessment strictly speaking will necessarily imply, even if perhaps implicitly, the illegality of the decision dismissing the Hierarchical Appeal, so that this question does not directly contend with the determination of the deadline for purposes of submitting the petition for arbitral ruling.

  11. Furthermore, the Claimant recalls that article 10, paragraph 1, a) of the LRATM provides that the petition for establishment of the arbitral court is submitted "Within 90 days, counted from the facts provided for in paragraphs 1 and 2 of article 102 of the Tax Procedure and Process Code, with respect to acts susceptible to autonomous challenge and, as well, from the notification of the decision or the end of the legal deadline for decision of the hierarchical appeal", meaning that, whenever the taxpayer has submitted an administrative complaint or hierarchical appeal, the 90-day deadline for submitting the petition for arbitral ruling is counted from the notification of the decision dismissing the gracious complaint or hierarchical appeal.

II.B. Decision on the Exception

  1. Having evaluated the position of the parties on the matter of the exception, we judge this exception as lacking merit.

  2. It follows from article 10, paragraph 1, a) of the LRATM that the deadline for challenging, in situations where there has been a gracious complaint or hierarchical appeal followed by an express decision, is counted from the notification of this latter decision, and not from the end of the voluntary payment deadline of the assessment.

  3. Given that the gracious complaint or the hierarchical appeal refer to the very assessment being challenged, the reaction to the decision dismissing the complaint or appeal takes this decision as its immediate object, but the mediate object is necessarily the assessment itself.

  4. It is not unreasonable that, as a precaution, both acts be expressly challenged simultaneously, the act of assessment (mediately) and the act of dismissal (immediately). But it does not appear that this is indispensable, or even necessary.

  5. Let us recall that, strictly speaking, arbitral jurisdiction only has material competence to assess the illegality of the assessment, not the defects of the dismissal of complaints and appeals.

  6. On the other hand, it is not required that the arbitral route should be the first form of reaction to the illegality of an assessment, excluding the administrative route; and, on the contrary, the arbitral route is configured as an appropriate means of reaction to the exhaustion of the administrative route, on a level parallel to the contentious judicial route of reaction, which itself is based on the exhaustion of the administrative route, presupposing it explicitly.

  7. Thus, when assessing the dismissal of a hierarchical appeal that upheld an assessment whose legality is contested, what is materially assessed are the defects of the assessment, in relation to which that dismissal presents itself as a second (or third) degree act.

  8. What is at issue is conferring effective judicial protection to the rights of the challenger (article 268, paragraph 4 of the Constitution), not conditioning it based on the first choice that the challenger has made – namely, not prejudicing the challenge of the assessment by the fact that the challenger began with the administrative route, reserving for later the recourse to the arbitral route, in the event of failure in the administrative route – as it would do with recourse to the judicial route.

  9. The fact that both the gracious complaint and the hierarchical appeal have as their object the assessment being challenged is what gives them the character of second degree acts, in relation to the primary act of assessment.

  10. And therefore the reaction to the second degree acts implies that it is the primary act that is still intended to be challenged – when that is perhaps not made explicit in the reaction itself.

  11. And, conversely, the reaction to the primary act, following the second (or third) degree acts, implies that these are equally targeted and must be removed from the legal order because the defects of the primary act, confirmed by them, "contaminate" them – even when that is perhaps not made explicit in that reaction.

  12. Hence, an interpretation favorable to access to law (article 7 of the ACPT) and to effective judicial protection (article 268, paragraph 4 of the Constitution) – favorable, therefore, to the assessment of the merit of the issues and not entangled in procedural and process formalism – must include the express dismissal of a gracious complaint or a hierarchical appeal in the object of the proceedings, as an expression of a timely reaction to the illegality of the primary act.

  13. To understand it otherwise would force the challenger to an exclusive option between the administrative route and the arbitral route, within the deadline for challenging the assessment; but this contends with the basic architecture that presided over the establishment of the arbitral route in tax matters – which nowhere places, as a condition of access, the non-existence of a prior administrative route, or more specifically the non-existence of confirmatory acts that maintained, in the legal order, the primary act.

  14. Moreover, to the extent that the arbitral courts that function at CAAD only have competence to assess the legality of assessment acts, and not decisions dismissing hierarchical appeals or gracious complaints, we could reach the conclusion that, given there has been administrative challenge of assessment acts, and thereby exceeding the deadline for direct challenge of the assessment, the arbitral route would be barred – were it not for the case that article 10, paragraph 1, a) of the LRATM explicitly provides, on the contrary, that the notification of the decision dismissing the administrative route serves as the starting point, thus rejecting such an understanding.

  15. Article 10 of the LRATM does not, therefore, confer on the arbitral courts that function at CAAD the competence for direct assessment of the second (or third) degree acts; it is a norm that, although referring to those acts, pertains exclusively to the determination of the starting point of the deadline for submitting the petition for arbitral ruling.

  16. Timeliness is therefore assessed in relation to those second (or third) degree acts, although the substantive nature of the dispute concerns an assessment that those acts merely upheld.

  17. Therefore, strictly speaking, the Claimant would not even have had to separately challenge the dismissals in the gracious complaint or hierarchical appeal, if it did not find in them defects of their own (since as mere confirmatory acts they are not subject to appeal) – it would perhaps suffice to make it more explicit that it was reacting to those acts merely for the purpose of the timeliness of the reaction to the primary act, the assessment.

  18. Having the Claimant expressly stated that it was submitting the petition for arbitral ruling for assessment of the tax act of IRC assessment, following the order dismissing the Hierarchical Appeal, and that it could not conform to the decision dismissing the Hierarchical Appeal (introduction and articles 177 to 179 of the petition for arbitral ruling), by direct application of article 10, paragraph 1, a) of the LRATM, it will be concluded that the deadline for that petition began on 17 April 2018, the day after the notification of the dismissal of the Hierarchical Appeal, and would end on 16 July 2018.

  19. Which makes it necessary to understand that the submission of the petition on 13 July 2018 was timely.

  20. It is not therefore deemed necessary to request the Claimant to clarify, correct or improve its petition for arbitral ruling, a hypothesis suggested by the Claimant in nos. 101 to 106 of its Request of 12 December 2018.

  21. Resolved as the matter of exception that was raised, one may proceed to the assessment of the merits of the case, in order to reach the final decision.

III. GROUNDS: FACTUAL MATTERS

III.A. Facts Considered Proven as Relevant to the Decision

  1. The claimant company, A..., LDA., was established on 5 July 2006 as a sole proprietor company, with share capital of € 5,000.00 held by its sole shareholder D... ("D..."), taxpayer no. ..., married to E..., taxpayer no. ... (RIT).

  2. A... is an entity whose corporate purpose is the development, production, installation and operation of renewable energy systems and is registered in the tax register for the activity of electricity production of hydraulic origin, with code 2704 corresponding to CAE 35111 (Partnership Agreement – considering A of Annex 8 of the RIT, and registration information).

  3. The Claimant submitted to the Regional Directorate of Commerce, Industry and Energy ("DRCIE") of the Autonomous Region of Madeira a Request for Prior Information ("RPI") on the possibility of connection, to the networks of the Public Electrical System Service, of electrical energy produced by it from a Photovoltaic Energy Production Center to be installed in ... (cf. annex 4 of the RIT and documents submitted with the petition for arbitral ruling ("ppa")).

  4. On 17 January 2007, a Prior Information favorable to the connection to the electrical network of a photovoltaic energy production center (1000 KW) to be installed in ..., Madeira, was issued in favor of the Claimant. (Annex 4 of the RIT; AF, 301ss. and documents submitted with the ppa)

  5. Having the RPI in question been favorable, a request for assignment of an electricity reception point was submitted, pursuant to the provisions of article 11 of Decree-Law no. 312/2001, of 10 December, and this reception point was granted to the Claimant on 20 April 2007 (cf. annex 6 of the RIT and documents submitted with the ppa).

  6. The assignment of the reception point conferred only the possibility for the Claimant to request the respective establishment license, in order to be able to begin the installation works (article 17 of Decree-Law no. 312/2001, of 10 December). (Annexes 6 and 7 of the RIT; AF, 312ss., 316ss., documents submitted with the ppa and testimony of the Claimant's witness)

  7. Given that the Claimant was in a situation of technical bankruptcy at the end of 2007 (with negative equity of € 13,880.08) and did not have the structure or technical means, it needed to gather such financial and technical means necessary for the development of the photovoltaic solar park construction project, without which it could not request the respective establishment license and carry out the installation works (the license was subject to a deadline for expiration by virtue of article 17 of Decree-Law no. 312/2001, of 10 December). (document no. 6 submitted with the petition for arbitral ruling and testimony of the Claimant's witness)

  8. On 28 March 2008, the Claimant, F..., S.A., G..., SGPS, S.A., H..., SGPS, S.A., I..., SGPS, S.A., E... and D..., executed a Partnership Agreement, for the development of a set of projects. In accordance with this Agreement, the costs of development relating to the projects and, as well, those relating to the maintenance and management of A... were borne, in their entirety and exclusively, by F..., S.A.. (Annex 8 of the RIT; AF, 319ss. and testimony of the Claimant's witness)

  9. It was also agreed to the transformation of the Claimant into a limited liability company, with the name A... LDA.. (Annex 8 of the RIT; AF, 319ss.)

  10. Moreover, F..., S.A. assumed the burden of fully bearing the financing of the realization of the share capital, and increases, by D... and E...– this until the moment of initiating the sale of electrical energy to the public network. (Annex 8 of the RIT; AF, 319ss.)

  11. Pursuant to the Partnership, the Claimant obligated itself to establish independent joint-stock companies for each project that obtained construction authorization and that was decided by Management to carry forward, and specifically in each photovoltaic project those independent joint-stock companies, vehicle companies, would have a capital distribution with 51% for A..., 26% for F..., S.A., 10% for D..., 10% for E... and 1% for each of the other 3 shareholders: G... SGPS, S.A., H... SGPS, S.A. and I... SGPS, S.A.. (Annex 8 of the RIT; AF, 319ss.)

  12. This corresponded to the requirements of the regime established by Decree-Law no. 312/2001, of 10 December, which establishes the general principle of non-transferability of rights acquired with the assignment of reception points, not preventing, however, the transmission of the reception point integrated in the set of installations constructed after its respective administrative licensing. (article 16 of Decree-Law no. 312/2001 and testimony of the Claimant's witness)

  13. Thus, once the sale of electrical energy to the public network began, the Claimant obligated itself to sell to F..., S.A. the totality of its shareholdings in the joint-stock company(ies) established, at a price equal to the total amount of its shareholdings in each project. (Annex 8 of the RIT; AF, 319ss. and testimony of the Claimant's witness)

  14. On 4 April 2008, a public deed of share assignment, capital increase and alteration of the articles of association of the Claimant A... was executed, with the company F..., S.A. being admitted as a shareholder. (Annex 1 of the RIT, AF, 282ss.).

  15. The share held by the sole shareholder D..., with a nominal value of € 5,000.00, was divided into two new shares: one with a nominal value of € 4,900.00 which she reserved for herself, and another, with a nominal value of € 100.00, which together with her husband E... she assigned to F..., S.A. at the price of € 50,000.00 (in the Partnership Agreement an "membership premium" of € 65,000.00 had been established, to be paid by F..., S.A. to D...). (Annex 1 of the RIT, AF, 282ss., chapter II, clause three, no. 2).

  16. In the same deed, the share capital of the Claimant was increased through a cash contribution of € 5,000.00, subscribed and realized by shareholder F..., S.A., which came to hold a share with a nominal value of € 5,100.00. (Annex 1 of the RIT, AF, 282ss.)

  17. That is, F..., S.A. came to hold 51% of the capital of the Claimant, with shareholder D... left holding 49% of the share capital. (Annex 1 of the RIT, AF, 282ss.)

  18. F..., S.A. subsequently became known as J..., S.A., with Tax Number ... (G..., SGPS, S.A., I..., SGPS, S.A. and H... SGPS, S.A. initially participated in the capital of J..., S.A.). (RIT)

  19. On 14 October 2008, an establishment license for the installation of the Photovoltaic Solar Park of ... was granted to the Claimant (documents nos. 12 and 13 submitted with the petition for arbitral ruling. (Annex 7 of the RIT, AF, 129ss.)

  20. On 14 April 2009, a Shareholder Agreement (amended on 31 October 2009) was executed between the Claimant, F..., S.A., K..., E... and D..., pursuant to which they obligated themselves to establish a commercial company called L..., S.A. (Tax Number...). (Annex 13 of the RIT; AF, 376ss.)

  21. L..., S.A. was established on the same date of 14 April 2009, and its corporate purpose is the development, production, installation and operation of renewable energy systems, construction and operation of a photovoltaic park and commercialization of energy. Its share capital, in the amount of € 50,000.00, was subscribed and realized as follows: - E...- € 4,000.00; - D...- € 4,000.00; - K...- € 1,000.00; - A...- € 25,500.00; - F..., S.A. - € 15,500.00. (Annex 11 of the RIT; AF, 341ss.)

  22. Pursuant to that Shareholder Agreement, the shareholders obligated themselves to, at a moment following the establishment of L..., S.A., resolve an increase in its share capital to € 500,000.00 and the entry of a new shareholder, an Investment Fund managed by M..., S.A., to which F..., S.A. would cede part of its shareholding in L..., S.A. (Annex 11 of the RIT; AF, 341ss.)

  23. And, at a later moment, to ensure the equity capital required by the investment effort, all shareholders obligated themselves to proceed with a new capital increase of € 1,600,000.00 or another amount adequate to the projected investment, but never to a value lower than 20% of the total investment of the project, in the proportion of their shareholding (Annex 11 of the RIT; AF, 341ss.)

  24. In this context, F..., S.A., obligated itself to place at the disposal of E... and D... the financial means so that they could realize the share capital of L..., S.A., and also the future financial means indispensable to provide future capital increases – until the moment of initiating the sale of electrical energy to the public network (start-up of the Photovoltaic Park), at which time:

a) D... was obligated to cede to J..., S.A. shares corresponding to 1% of the share capital of L..., S.A., in compensation for the financial means obtained from J..., S.A. to realize the capital and increases of capital thereof, without any additional consideration;

b) The Claimant remained obligated to transfer its shares in L..., S.A. to J..., S.A. without any additional amount being due. (Annex 8 of the RIT; AF, 319ss.)

  1. Pursuant to the amendment of 31 October 2009 to the Shareholder Agreement, after learning the effective financial dimension of the project, estimated at around 8 million euros, of which 2 million contributed with own funds, it was specifically provided that at the moment when the photovoltaic park of ... began operation:

a) D... would cede 0.5% and E... the remaining 0.5% of shares of L..., S.A. to J..., S.A., in compensation for the financial means obtained from J..., S.A., without any additional consideration;

b) J..., S.A. made available to the Claimant the financial means to realize the share capital and the increases of capital of L..., S.A.;

c) The Claimant would transfer its shares in L..., S.A. to F..., S.A. in the manner set forth in the previous point. (Annex 11 of the RIT; AF, 341ss.)

  1. In compliance with the Shareholder Agreement, J..., S.A. subscribed 31% of the share capital of L..., S.A. and realized 51% of the Claimant and 16% (8% + 8%) of D... and E... . (RIT)

  2. As derived from the Shareholder Agreement, J..., S.A., to strengthen the financial capacity of the vehicle company – L..., S.A. – could cede its shareholding in this to a new partner. This partner was N..., SGPS, S.A. (RIT)

  3. On 31 October 2009, J..., S.A. alienated to N..., SGPS, S.A., 20% of the shareholding it held in L..., S.A., at the total price of € 350,000.00. (RIT)

  4. On 4 November 2009, J..., S.A. alienated to N..., SGPS, S.A., 10% of the shareholding it held in L..., S.A., at the total price of € 1.00. (RIT)

  5. With these two transactions, J..., S.A. came to hold only a direct shareholding of 1% in the share capital of L..., S.A., and an indirect shareholding of 26%, via holding 51% of the share capital of the Claimant. (RIT)

  6. For their part, without any expenditure of their own, shareholders E... and D... came to hold a total shareholding in L..., S.A. of 41%, (direct shareholding of 16% and an indirect shareholding, via the Claimant, of 25%). (RIT)

  7. On 18 November 2009, an Agreement for Realization of Equity Capital was executed, and again J..., S.A., despite its direct shareholding of only 1% in the share capital of L..., S.A., assumed the obligation to realize ancillary services and supplementary capital, in its own name and in the name of the Claimant and of E... and D... . (Annex 15 of the RIT; AF, 410ss.)

  8. The investment project of the Photovoltaic Park of ... came to have an approximate cost of 9.5 million euros. Financing of € 7,000,000.00 was obtained in the "Project Finance" modality with mortgage guarantee over the rural lands acquired by L..., S.A. at € 293,000.00, personal guarantees and pledge of shares; and, to ensure the realization of equity capital, an autonomous bank guarantee was presented in the amount of € 2,000,000.00, subscribed exclusively by J..., S.A., not by the other shareholders, and in particular not by E... and D... . Beyond it, various guarantees were provided in the context of financing (such as Financial pledge of shares, Registration of financial pledge, Inherent rights, Judicial or extra-judicial sale of shares, Promise of pledge on new shares, Pledge of shareholder rights, Pledge of bank accounts, Pledge of assets, Assignment of credit with aim of guarantee, and Irrevocable Power of Attorney). (RIT and document no. 8 submitted with the petition for arbitral ruling)

  9. On 7 October 2009, the construction license permit was issued. (document no. 10 submitted with the petition for arbitral ruling; AF, 121ss.)

  10. In compliance with what was agreed in the Partnership Agreement, and in the Shareholder Agreement and its amendment, J..., S.A. developed all the tasks envisaged and necessary for the installation of the Photovoltaic Park of ...: it obtained the subsidized guaranteed rate for the Madeira Region on 13 October 2008; it obtained the Establishment License, issued by DRCIE on 14 October 2008, after the project prepared by O... was validated, negotiated the Assignment Contract on precarious and onerous terms executed with P... S.A. on 3 August 2009, for installation of the Photovoltaic Park of ...; it obtained the construction permit, issued on 7 October 2009 by the City Council of ...; executed, after delivery of the execution project, the Agreement with Q..., S.A., on 12 November 2009; negotiated the financing of 18 November 2009 with various banking entities. (document no. 11 submitted with the petition for arbitral ruling; AF, 123ss.)

  11. The subsidized rate for the Madeira Region, obtained on 13 October 2008 and guaranteed for a period of 15 years, was considered essential for the financial viability of the Photovoltaic Park of ..., to the extent that, without this rate, the electricity would have to be sold on the market at a considerably lower price, pursuant to Decree-Law no. 189/88, of 27 May and Annex II of Decree-Law no. 33-A/2005, of 16 February, to which clause 14 of the Agreement of 12 November 2009 refers. (document no. 15 submitted with the petition for arbitral ruling and testimony of the Claimant's witness)

  12. Indeed, Q..., S.A. was obligated to acquire the electricity produced at that rate (by the agreement executed with J..., S.A. on 12 November 2009), which guaranteed the return on the project, providing for the possibility of recovering, within a reasonable timeframe, the costs of the work and equipment. (document no. 14 submitted with the petition for arbitral ruling; AF, 133ss. and testimony of the Claimant's witness)

  13. On 27 April 2010, the Operating License for the Independent Electricity Production Installation of the Photovoltaic Solar Park installed at the location of ..., ..., in ... was sent to L..., S.A.. (Annex 9 of the RIT, document no. 7 submitted with the petition for arbitral ruling; AF, 119ss., 335ss.)

  14. Following a resolution to that effect adopted on 30 June 2010, on 2 July 2010, the Claimant alienated, in favor of J..., S.A., the totality of the shareholding (51% of capital, 5100 shares) which it held in L..., S.A., at the price of € 5.00 per share (total price of € 25,500.00), with the Claimant guaranteeing to J..., S.A. the right of eviction. (Annex 2 of the RIT; AF, 290ss.)

  15. The Share Purchase and Sale Agreement executed between the Claimant and J..., S.A., of 2 July 2010, mentions that it is executed, "Considering the commitments assumed between "A..." , its shareholders, and "F..." in the context of the Partnership Agreement of 28 March 2008" and "Considering the Shareholder Agreement executed between the first and second grantor herein on 14 April 2009 and the Amendment/Modification of that Shareholder Agreement of 31 October 2009". (Annex 2 of the RIT; AF, 290ss.)

  16. Still in accordance with the Share Purchase and Sale Agreement of 2 July 2010, its "FOURTH" title provides that the "global price agreed [for the sale of shares] is the corresponding to the nominal value of the shares (€ 25,500.00), which "A..." declares duly compensated with the amounts made available by "F..." to "A..." at the time of the realization of its shareholding in the capital of "L..."". (Annex 2 of the RIT; AF, 290ss.)

  17. The shareholdings existing in L..., S.A. at the date of the alienation of the shareholding held by the Claimant were as follows (cf. RIT):

a) The Claimant held a direct shareholding in the capital of L..., S.A. of 51%;

b) J..., S.A. held a total shareholding of 27% [1% + 26%] (51% quota in the Claimant, therefore indirect shareholding of 26% [0.51 * 0.51] + direct shareholding of 1%);

c) D... held a total shareholding of 33% (direct shareholding of 8% and an indirect shareholding, via A..., of 25% [0.49 * 0.51]);

d) E... held a direct shareholding of 8% (thus, D... and E... held a total shareholding of 41% [33% + 8%]);

e) K... held a direct shareholding of 2%.

  1. In the annual statement of accounting and tax information for the 2010 tax year of the Claimant, there is no reference to the existence of operations between J..., S.A. and the Claimant [A...], despite J..., S.A. holding a 51% shareholding in the capital of the Claimant and the latter having sold to the former a shareholding (the 51% it held in L..., S.A.). (RIT)

  2. The alienation of the shareholdings held by the Claimant in L..., S.A. in favor of J..., S.A. corresponded to the fulfillment of what was agreed in the Partnership Agreement (of 28 March 2008) and in the amendment to the Shareholder Agreement (of 31 October 2009), which imposed that alienation when the deadline set forth in article 16 of Decree-Law no. 312/2001 occurred, at the moment when the photovoltaic park of ... began operations (Annex 8 of the RIT; AF, 319ss. and Annex 11 of the RIT; AF, 341ss.)

  3. In clause 4, 5 of the Partnership Agreement, it was established that "Whether in photovoltaic projects, or in biomass projects and/or integrated project, A... LDA obliges itself to sell to F... [now J..., S.A.] the totality of its shareholdings referred to in 3 and 4, at a price equal to the total amount of its shareholdings in each project, from the moment the deadline set forth in Article 16 of Decree-Law no. 312/2001 occurs". (Annex 8 of the RIT; AF, 319ss.)

  4. In the Shareholder Agreement/Amendment, it was established that "9. (…) "A..., LDA." will mandatorily transfer to "F...", at the moment when the photovoltaic park of ... begins operation, its shares in L..., S.A., without any additional amount being due, as a consequence and because of that transfer, directly or indirectly, to the grantors, E... and/or D..., as shareholders of "A...", LDA" or to "A..., LDA., as such, once the consideration referred to in the previous number already encompasses and exhausts the compensation of all amounts associated. [§] 10. This clause of this Shareholder Agreement adapts and replaces, as far as L..., SA is concerned, what is provided in points 4., 4.1., 4.2., 4.3 and 5 of the Partnership Agreement (…)". (Annex 11 of the RIT; AF, 341ss.)

  5. The alienation of the shareholdings held by the Claimant in L..., S.A. in favor of J..., S.A. was contested by shareholder D... . (RIT)

  6. From the statement of vote of shareholder D..., in the General Assembly of the Claimant held on 28 March 2011 (minutes no. 17), there is, among others, the following passage: "Furthermore, as evidence of the great profitable business that F..., S,A. intends to undertake almost exclusively for itself, with the connivance of the administration of L..., S.A, disregarding the content of the existing Shareholder Agreement and thus "harming" other shareholders, in particular with the Shareholder Agreement/Amendment of the Agreement of the Company L..., S.A, it is verified that, together, the shareholders E... and D... will legally cede to F..., SA, 1% of the shares they hold in L..., S.A. and approximately 25% [49% x 51%] of the shares that, indirectly, they hold in the same L... S.A., via A..., Lda. According to the shareholder, shareholders E... and D... are offering F..., S.A., 26% [1% + 25%] of the shares they hold in L..., S.A., in exchange for payment of the funds that F..., S.A. supposedly made on their behalf, in the amount of approximately € 360,000.00, plus € 7,500.00 for the realization of the initial share capital [15% of € 50,000.00). Knowing that 26% of shares, by the amount of the investment alone [total investment of approximately € 9,200,000.00), has a market value in the order of € 2,400,000.00, it is concluded that what F..., S.A. "offers" to shareholders E... and D... is completely insignificant, compared to the value that the same shareholders give to F... S.A.. F..., S.A. intends to retain exclusive management of the photovoltaic park and the entirety of the value relating to the Development Agreement, which, according to the shareholder's allegations, is completely unacceptable, illegal and devoid of propriety and moral sense, knowing that these two contracts have a value exceeding € 224,000.00, in the part due to shareholders E..., together, and an amount exceeding € 714,000.00 with regard to A..., Lda." (pp. 72-73 / 145 of the Judgment of 15 March 2018 of the TAF of …, Case .../18...B… - document no. 23 submitted with the petition for arbitral ruling).

  7. The alienation of the shareholdings held by the Claimant in L..., S.A. in favor of J..., S.A. was the subject of a Specified Precautionary Procedure for Suspension of Corporate Resolution against the Claimant, brought by E... and D... (Case no. .../10...T…). The Application was dismissed. (documents nos. 16, 17 and 18 submitted with the petition for arbitral ruling)

  8. In that Precautionary Procedure, it was alleged that "such resolution affects the special management rights of the applicant D... and that such resolution harms the respondent from a financial point of view".

  9. The same E... and D... then brought a common declarative action, in which they petitioned for the nullity of the resolution of 30 June 2010 (case no. .../12...T…), an action which was judged as lacking merit. (documents nos. 20, 21 and 22 submitted with the ppa)

  10. In the actions, the value at which the Claimant alienated to J..., S.A. the shareholding it held in L..., S.A. was questioned: "Having tirelessly repeated that the resolution taken, having as its foundation the intention to comply with part of the shareholder agreement and partnership contract, and not the others, has abusive content, pursuing the objectives of resource extraction from L... SA by F... SA, of R..., K..., B..., G..., SGPS SA, and I... SGPS SA, clearly harming the shareholders defendant A... and the plaintiffs" (Court of Appeal Decision of Coimbra of 28 April 2016, p. 5, document no. 22 submitted with the petition for arbitral ruling)

  11. Later, on 31 January 2011, the Claimant alienated, in favor of J..., S.A., the totality of the shareholding (51% of capital) which it held in S..., S.A., the other "vehicle company", which resulted from the Partnership Agreement (an operation that gave rise to a separate IRC assessment, because relating to the 2011 tax year, concerning the Photovoltaic Park of ...).

  12. Chronological summary of some of the facts, as appears from the RIT:

  13. The Claimant was subjected to an external tax inspection of its 2010 tax year, initiated on 6 December 2012, on the basis of Service Order no. OI2012... (RIT).

  14. Having noticed that the annual statement of accounting and tax information of the Claimant contained no reference to the existence of operations with related entities, relating to the 2010 tax year, the Claimant was notified on 25 February 2013 to demonstrate that in the operations subsumable under article 63, paragraph 4, a) and b) of the IRC Code, substantially identical terms and conditions to those normally would be contracted, accepted and practiced between independent entities in comparable operations had been contracted, accepted and practiced; presenting, for that purpose, all the elements referred to in article 63, 6 of the IRC Code, specifically "… the documentation concerning the policy adopted with respect to transfer pricing, including guidelines or instructions relating to its application, the contracts and other legal acts executed with entities with which it is in a situation of special relationships, with the modifications that occur and with information on their compliance, the documentation and information relating to those entities and as well as to the companies and the goods or services used as a comparison term, the functional and financial analyses and sector data, and other information and elements that it took into consideration for the determination of the terms and conditions normally agreed, accepted or practiced between independent entities and for the selection of the method or methods used.". (Annexes 17 and 18 of the RIT; AF, 449ss.)

  15. Having the Claimant's arguments been to the effect that its participation in the investments was due to legal imperatives, and that the entity promoting the same was J..., S.A., a company which concentrated, in accordance with the terms of the shareholder agreements, all the financial and economic effort of developing the projects, it was understood by the Tax Inspection that the adherence to the Arm's Length Principle of the conditions established in the sale of the shareholdings held in L..., S.A. to J..., S.A. had not been justified nor demonstrated. (RIT)

  16. In the draft Report of the Tax Inspection (AF, 1ss.), an increase to the Claimant's taxable base, in terms of IRC and for the 2010 tax year, of the amount of € 569,517.00, resulting from an adjustment in terms of transfer pricing, was proposed. (document 3 submitted with the ppa and AF).

  17. The TA understood that the arm's length principle had been disrespected in the alienation of the shareholdings held by the Claimant in L..., S.A. in favor of J..., S.A., and sought to remedy the situation by resorting, itself, to the "Comparable Market Price method", to sustain that the market value of the shares of L..., S.A. corresponded to the average of the prices practiced in the sales of 31 October and 4 November 2009, that is, € 116.67 per share, and not the € 5.00 declared and corresponding to the nominal value. (document 3 submitted with the ppa and AF).

  18. The Claimant in previous tax years to those verified had registered an annual volume of net sales and other income below € 3,000,000.00, falling within the waiver of maintaining organized documentation respecting the transfer pricing policy. (RIT and article 63, paragraph 6 of the IRC Code and article 13, paragraph 3 of Ordinance no. 1446-C/2001, of 21 December)

  19. According to the RIT "Similarly, it was waived from maintaining, in an organized manner, sufficient elements to prove [see no. 1 of article 13 of the ordinance]:

a) Market parity in the terms and conditions agreed, accepted and practiced in operations carried out with related entities;

b) The selection and use of the method or methods most appropriate for the determination of transfer prices that provide a greater approximation to the terms and conditions practiced by independent entities and that ensure the highest degree of comparability of the operations or series of operations carried out with others substantially identical undertaken.

However, such waiver does not prevent the presentation, either of the information or of the proof, when requested, since what is at issue are financial operations undertaken between two persons subject to income tax – J..., S.A. and A..., Lda –, with which the latter is in a situation of special relationships. Consequently, there is non-compliance with the obligations established in law for this situation, namely article 63 of the IRC Code and Ordinance 1446-C/2001, of 21.12.

  1. As to the method for determining the arm's length price, the Tax Inspection Services chose, given the characteristics of the operations and the available information, the "Comparable Market Price Method" (CMPM), pursuant to the provisions of article 4, paragraph 2 of Ordinance 1446-C/2001, of 21 December. (RIT)

  2. The Tax Inspection Services subsequently proceeded with the identification of transactions which they considered to have similar economic substance to those actually undertaken, considering those concerning the same investment – photovoltaic park of ... with a capacity of 2 MW and photovoltaic park of ... with a capacity of 6 MW. It was considered that the characteristics of the assets underlying the operations undertaken were the same, as were the risks assumed and the economic context – and therefore they made the comparison with the transactions of 31 October and 4 November 2009, in which J..., S.A. sold shareholdings in L..., S.A. to N..., SGPS, S.A. – shares with a nominal value of € 5.00 which were then transacted at the average price of € 116.67. (RIT)

  3. According to the RIT, comparability was based on the fact that it was a transaction executed between independent entities, although they concerned the same investment, the same underlying asset, the same risks assumed and the same economic context of the transaction of 2 July 2010.

  4. The RIT concludes that the price practiced by the Claimant in the linked operations of sale of the shareholdings held in L..., S.A. did not respect the arm's length principle, considering there to be evidence of operations undertaken between independent entities with characteristics identical to the linked operations being analyzed that can constitute comparables for assessing the appropriate market price to them, in a context of application of the Comparable Market Price Method.

  5. The RIT also concludes that the elements obtained allowed demonstrating that conditions different from those which would be practiced between independent entities were practiced, and therefore a positive correction to the taxable profit of the 2010 tax year is due, pursuant to article 63, paragraph 8 of the IRC Code and article 3, paragraph 1 of Ordinance 1446-C/2001, of 21 December, so that the resulting values are not different from what would be determined in the absence of special relationships.

  6. Adding in the RIT that, with respect to J..., S.A., no adjustment would be made since it was a financial investment that had no immediate impact on the company's accounting, in terms of results.

  7. In conclusion, the RIT proposes a correction quantified in the following terms:

  8. In compliance with article 60 of the LGT and article 60 of the RCPIT, notification of the Claimant was made, through official communications nos. ... and ..., both of 6 November 2013, to exercise, if it so wished, the right of hearing on the draft decision (document no. 3 submitted with the petition for arbitral ruling). It was granted a 15-day period and remitted the draft report and its respective annexes.

  9. In the exercise of the right of hearing, on 25 November 2013, the Claimant expressed its disagreement with this calculation methodology, arguing that there was no comparability between the operations of October/November 2009 and that of July 2010, which would not constitute a credible reference to "market" values (document no. 4 submitted with the petition for arbitral ruling; AF, 70ss.).

  10. After analysis of the right of hearing, the Tax Inspection Services concluded, in conclusion, that: "From the analysis made of the hearing submitted, it is concluded that the facts and grounds presented by the t.p. throughout points 1 to 206 do not change in any way the course of the corrections proposed and contained in the draft report. [§] It was incumbent upon the t.p., the burden of proving that the conditions or terms practiced concerning the operations with J..., S.A. respected the arm's length principle. As it did not do so, it was incumbent upon the T.A., as provided in no. 3 of article 77 of the LGT, to ground the corrections to the taxable base. Throughout the draft report, compliance with the grounding requirements provided for in no. 3 of article 77 of the LGT was demonstrated. [§] Thus, the determination of the corrected taxable base adjusted for the effects of special relationships took into account the following requirements: "a] Description of special relationships; b] Indication of the obligations not fulfilled by the taxpayer; c] Application of the methods provided for in law, and the T.A. may use any elements at its disposal and the duty to ground the elements of comparison adequately observed is considered satisfied even if from such elements are purged data capable of identifying the entities to whom they pertain; d] Quantification of their respective effects." [§] For that reason, it is proposed that the corrections initially proposed be maintained as they are contained in the initial inspection report and which are reproduced in the previous chapters, with the grounds contained therein." (document no. 5 submitted with the ppa; AF, 196ss.)

  11. The Claimant was notified on 20 December 2013 of IRC assessment no. 2013..., which originated from the aforementioned external tax inspection for the 2010 tax year (document no. 1 submitted with the ppa; proved by agreement).

  12. From the respective Statement of Account Reconciliation no. 2013..., the total amount due was € 157,851.72, of which € 14,300.10 concerning compensatory interest and € 143,551.62 to IRC (documents nos. 1 and 2 submitted with the ppa).

  13. The Claimant submitted, on 19 May 2014, a Gracious Complaint filed under no. ...2014... against the assessment in question. The Draft Decision, notified on 1 September 2014, proposed dismissal of that Gracious Complaint. The Claimant exercised on 19 September 2014 the Right of Hearing, with the Gracious Complaint being dismissed in its entirety, by order issued on 5 November 2014 and notified to the Claimant on 7 November 2014. (documents nos. 24, 25, 26 and 27 submitted with the ppa; AF, 465ss., 667ss., 698ss., 812ss.)

  14. Not conforming, the Claimant submitted, on 5 December 2014, a Hierarchical Appeal from the decision dismissing the Gracious Complaint, which was dismissed by order issued on 11 April 2018, and notified to the Claimant on 16 April 2018. (documents nos. 28 and 29 submitted with the ppa; AF, 852ss., 1316ss.)

  15. Thus, on 13 July 2018, in compliance with the provisions of articles 2, paragraph 1, a) and 10 of the LRATM, the Claimant submitted the petition for establishment of the Arbitral Court.

III.B. Facts Not Proven

Facts alleged by the parties and presented as facts, consisting of affirmations that are strictly conclusive, not susceptible to proof, and whose truthfulness must be assessed in relation to the concrete factual matter consolidated, were not deemed proven nor unproven. With relevance to the decision, there are no alleged facts that should be considered unproven.

III.C. Reasoning of the Factual Matters

  1. With respect to the proven facts, the arbitrators' conviction was based on the positions taken by the parties, on critical analysis of the documentary evidence submitted in the proceedings and, whenever applicable, on the testimony of the witnesses examined, who testified objectively and consistently and demonstrated direct and personal knowledge of the facts reported. The first witness, B..., was indicated by the Claimant and participated in the partnership negotiation process and in the installation of the Photovoltaic Park of ... . The witness indicated by the Respondent, C..., is a tax inspection technician and followed the tax procedure which is at the origin of the IRC assessment in question.

  2. The facts relevant to the judgment of the case were chosen and defined based on their legal relevance, in light of the plausible solutions to the legal issues, pursuant to the combined application of articles 123, paragraph 2 of the TCPT, 596, paragraph 1 and 607, paragraph 3 of the Civil Procedure Code ("CPC"), by reference of article 29, paragraph 1, a) and e), of the LRATM.

IV. POSITIONS AND ARGUMENTS OF THE PARTIES

IV.A. Position of the Claimant

a) The Claimant argues that the alienation of the shareholdings held by it in L..., S.A. in favor of J..., S.A. corresponded to a fair market value, because it results from a balance of prestations previously agreed (in the Partnership Agreement, of 28 March 2008, and in the amendment to the Shareholder Agreement, of 31 October 2009), and that it reflects the investment realized by J..., S.A. up to the moment of alienation for the benefit of the other shareholders, including the Claimant.

b) In its view, the balance reflected in that price is understood in a global and integrated perspective of the various steps that led from the Partnership Agreement, on 28 March 2008, to the alienation of the Claimant's shareholdings in L..., S.A., on 2 July 2010 – and which can be summarized in a simple formula: J..., S.A. did not need to pay much more for the acquisition of those shareholdings, because until that moment it had been practically paying for everything. To the extent that everything that was essential for the project to exist and be executed was not guaranteed, and it was J..., S.A. that guaranteed it, one could not demand that J..., S.A. should have to pay as the acquisition price the appreciation that only resulted from its own activity! In sum, there is, for the Claimant, no economic or financial foundation that would justify the obtaining of a capital gain by it itself upon transmission of the shareholdings in L..., S.A. to J..., S.A..

c) Nor could it even be said that there would be a need to compensate the Claimant for the value of the RPI, or for the assignment of a reception point, since without all the investment borne by J..., S.A., the entire project would represent no relevant economic value.

d) Having verified that the Claimant did not have the necessary financial means for the development of the Project, which were provided by J..., S.A., and proving that the Claimant acquired a percentage of 51% in the capital of L..., S.A. only because J..., S.A. assumed the realization of the share capital, and also because legally the Claimant could not hold a shareholding that was not considered majority, the price of the transfer of the shareholdings in favor of J..., S.A. had to be found in a careful weighing of all those factors.

e) The sale price would have been determined based on the exact value realized by J..., S.A., in the name and on behalf of the Claimant, in the share capital of L..., S.A., equivalent to 51% of that capital at the nominal value of the shareholding, that is, € 25,500.00.

f) The Claimant thus argues that the transfer of the shares was intended solely for the compensation of the initial share capital of the new company realized by J..., S.A., as well as the equity capital realized by J..., S.A. in the name and on behalf of the Claimant – and hence, contrary to approaching "comparable operations", the alienation operation was fixed, in its outlines and in its price, in earlier moments – those of the Partnership Agreement and of the amendment to the Shareholder Agreement.

g) If by any chance any appreciation of L..., S.A. had occurred from the moment of its establishment (on 14 March 2009) to that of its alienation by the Claimant to J..., S.A. (on 2 July 2010), not only would that appreciation have been posterior to the moment when the price was set, but also the Claimant would never have been obligated to develop any financial effort with a view to that possible appreciation of L..., S.A.; and even if it had been, it is understood that the appreciation borne by the shareholders themselves would not be a relevant factor to the price of a transaction between shareholders.

h) Moreover, in the Claimant's view, the price was not even paid to it, but directly to D... and E... – who, by virtue of successive payments borne, on their behalf, by J..., S.A., at the time of realizations of share capital, ancillary services and supplementary capital, acquired credits on those amounts, at zero cost.

i) It would thus be duly demonstrated, for the Claimant, the economic justification of the transfer, at nominal value, of the shareholdings that it held in L..., S.A.; and that, given the obligations assumed by J..., S.A., it could not be demanded of the latter the payment of a price higher than what a third party not related would be willing to bear under identical conditions.

j) To accept the value of € 595,017.00 proposed by the TA would mean that J..., S.A., in addition to all the expenses it had incurred, would still pay to D..., shareholder of the Claimant, the sum of € 291,558.33 (49% of € 595,017.00).

k) That additional burden would negatively impact the financial model, preventing, in practice, J..., S.A. from recovering its investment – given the temporal limitation of the subsidized rate regime (to end in the first half of 2025). (see "Financial Model", document no. 15 submitted with the petition for arbitral ruling)

l) To refute the idea that the alienation of the shareholdings in L..., S.A. by the Claimant to J..., S.A. was made at a price lower than that which would be practiced by independent entities, the Claimant recalls that the application of the transfer pricing regime cannot be satisfied merely by the demonstration of a transaction between related entities and another, deemed comparable, between non-related entities; being equally necessary to demonstrate that in a given operation between related entities, terms and conditions different from those which were, or would be, used in a comparable operation undertaken between non-related entities were practiced – which implies a double judgment: on the one hand, on the terms and conditions actually practiced and, on the other, on the terms and conditions which are believed should be used as a reference.

m) That is, there is first required the demonstration that the price was not reasonable, so that only thereafter one seeks to discern, on the basis of robust elements and studies of comparability that are technically unassailable, an undervaluation resulting from the special relationships existing between the contracting parties.

n) In the Claimant's view, it was incumbent upon the TA to demonstrate that the arm's length principle had been violated by the simple fact that the transaction was undertaken at the nominal value of the shareholdings and not at the market value of the transacted companies (which, in the TA's view, could not but reflect the high amounts invested in the development of the photovoltaic parks, as well as the underlying expectations of future income). But, in the Claimant's view, it did not, not even reaching the point of determining the substantial accounting value of L..., S.A. at the date of alienation of the Claimant's shareholdings.

o) Beyond the TA's failure to demonstrate that the price was not reasonable, "not that of the market", the Claimant further argues that it also remains to be demonstrated that another price, besides the one actually practiced, could have been established in the specific and particular circumstances that led to its determination.

p) Consequently, the Claimant considers it to be unsustainable to obtain a capital gain on its part in the amount of € 569,517.00, when (i) its intervention and contribution to the development and appreciation of L..., S.A. was practically nil, (ii) the price for the acquisition of the shareholdings was paid to the shareholders D... and E..., (iii) the Claimant's connection to this latter company was only due to legal constraints, for which reason it was from the outset agreed that the shareholding would only be temporary, with no economic or financial foundation justifying the obtaining of a capital gain by the Claimant upon transmission of the shareholdings in question.

q) With respect to special relationships, the Claimant argues that the determination of the alienation price of the shareholdings in L..., S.A. was determined in a context in which there were no special relationships between the Claimant and J..., S.A. – specifically, in the Partnership Agreement, on 28 March 2008, before the entry of J..., S.A. into the capital of the Claimant, which would only take place on 4 April 2008. Drawing from this the inference that the transfer pricing rules provided for in article 63 of the IRC Code do not apply to the transaction.

r) Moreover, the Claimant argues that there is no basis for "comparability" that permits determining a "market value" different from that which was practiced, pursuant to the terms and for the purposes of article 63, paragraph 3 of the IRC Code and article 4 of Ordinance no. 1446-C/2001, of 21 December, by the application of the "traditional methods" (1. comparable market price method; 2. resale price method; 3. cost plus method), as well as the so-called "non-traditional methods" (4. profit split method; 5. transactional net margin method).

s) The Claimant recalls that, pursuant to Ordinance no. 1446-C/2001, the comparable market price method requires that the economic and financial characteristics of the operations considered be sufficiently comparable,

Frequently Asked Questions

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What is the arm's length principle under Article 63 of the Portuguese IRC Code for transfer pricing?
The arm's length principle under Article 63 of the Portuguese IRC Code requires that transactions between related parties be conducted at prices and conditions comparable to those that would be agreed between independent entities in similar circumstances. This principle ensures that transfer pricing arrangements do not artificially shift profits to reduce tax liability, requiring documentation and economic justification for intercompany transactions to demonstrate compliance with market conditions.
How did the CAAD rule on the additional IRC assessment of €157,851.72 in process 336/2018-T?
The CAAD ruling in Process 336/2018-T initially addressed a procedural exception of timeliness raised by the Tax Authority regarding the €157,851.72 additional IRC assessment. The Tax Authority argued the arbitration request was untimely as it was filed nearly five years after the original assessment notification. However, the taxpayer successfully argued that it was challenging the April 2018 hierarchical appeal dismissal decision rather than the 2013 assessment directly, having continuously contested through administrative channels. The court's analysis focused on whether the petition was timely filed within 90 days of the hierarchical appeal dismissal, a critical procedural determination before addressing the substantive transfer pricing issues.
What are the timeliness requirements for filing a tax arbitration request at CAAD regarding transfer pricing disputes?
Timeliness requirements for filing tax arbitration at CAAD require petitions to be submitted within 90 days of notification of the contested administrative decision, as established by Article 10 of LRATM and Article 102 of TCPT. Critically, taxpayers must first exhaust mandatory administrative remedies (gracious complaint and hierarchical appeal) before accessing arbitration. The 90-day deadline runs from notification of the final administrative decision—typically the hierarchical appeal dismissal—not from the original assessment. Process 336/2018-T demonstrates that properly distinguishing between challenging the original assessment versus the administrative decision dismissing appeals is essential for maintaining timely access to CAAD arbitration in transfer pricing and other tax disputes.
How does Portuguese tax law address transfer pricing adjustments between related parties under IRC?
Portuguese tax law addresses transfer pricing adjustments between related parties under IRC Article 63, which codifies the arm's length principle requiring intercompany transactions to reflect market conditions. The Tax Authority can make upward adjustments to taxable income when transactions between related entities deviate from arm's length conditions, potentially resulting in additional IRC assessments with compensatory interest. Taxpayers must maintain contemporaneous transfer pricing documentation demonstrating compliance. When disputes arise, taxpayers can contest adjustments through gracious complaints, hierarchical appeals, and ultimately CAAD arbitration. The burden typically falls on taxpayers to prove their transfer pricing methodology complies with the arm's length standard and applicable OECD guidelines incorporated into Portuguese law.
What is the role of hierarchical appeals (recurso hierárquico) before submitting a case to CAAD tax arbitration?
Hierarchical appeals (recurso hierárquico) serve as mandatory administrative remedies that must generally be exhausted before accessing CAAD tax arbitration in Portuguese tax law. Following an unfavorable decision on a gracious complaint, taxpayers can file a hierarchical appeal to superior Tax Authority officials. Only after receiving a dismissal decision on the hierarchical appeal—or after regulatory deadlines for decision have expired—can taxpayers proceed to arbitration. In Process 336/2018-T, the taxpayer filed a gracious complaint in May 2014, then a hierarchical appeal which was dismissed in April 2018, after which the CAAD petition was filed in July 2018. This procedural sequence ensures administrative resolution opportunities before judicial or arbitral review, with the final administrative decision establishing the starting point for calculating arbitration filing deadlines.