CAAD 343/2017-T: IRC Supplementary Contributions and Shareholder Loans – Arbitral Decision Reform After TCA-Sul Annulment

ARBITRAL DECISION (consult full version in PDF)

I – REOPENING OF PROCEEDINGS

Following the learned judgment of the venerable Central-South Administrative Court, delivered in case no. 42/18.0BCLSB, the nullity of the previous decision of this arbitral tribunal was declared, on the following grounds:

a) lack of specification of facts not proven;

b) lack of motivation on matters of fact.

The proceedings were consequently reopened in the CAAD.

This tribunal notified the parties to make submissions before a new decision would be delivered.

The Applicant requested reformulation of the factual matters and resumed the legal arguments that would lead to annulment of the additional assessment and to full success of the initial claim.

The Tax Authority submitted its view in favour of substantive maintenance of the previously decided matter.

Having regard to all the proceedings, in particular the decision in the aforementioned learned judgment of the venerable TCA-South and the subsequent submissions of the parties, the Tribunal is of the view that it should amend the wording relating to the factual matters in the decision and conclude accordingly, as will be done below.

II – REPORT

1. A..., S.A., legal entity no. ..., with registered office at ... ..., ...-... ..., ... (hereinafter referred to as "Applicant"), from the jurisdiction of the tax office of ..., hereinafter the Applicant, or Claimant, filed by petition of 25 May 2017, a request for arbitral pronouncement with a view to annulment of the Corporate Income Tax (IRC) assessment no. 2016... in the amount of €31,071.42, relating to the tax year 2013;

2. The Applicant appointed as arbitrator Dr. Rodrigo Rabeca Domingues;

3. The Tax Authority, hereinafter also the Respondent, appointed as arbitrator Prof. Dr. Américo Brás Carlos;

4. The arbitrators appointed by the parties designated as President the Judge Manuel Luís Macaísta Malheiros;

5. The Arbitral Tribunal was constituted by order of the President of the CAAD of 8 August 2017;

6. The Respondent filed its response on 28 September 2017;

7. On 26 October 2017 the Tax Authority sent the Administrative File (PA) to the records;

8. The meeting referred to in art. 18 of the RJAT took place on 27 November 2017;

9. The Applicant requested an additional period of 10 days to present its submissions, which was granted by the Tribunal on 7 December 2017;

10. The Applicant submitted its submissions on 20 December 2017;

11. The Respondent submitted Counter-Submissions on 8 January 2018.

III - POSITION OF THE PARTIES

A - OF THE APPLICANT

12. The Applicant is a limited company with the following purpose: (i) provision of consulting services in management, economic, financial and accounting matters; (ii) provision of consulting services for the creation, development, expansion and modernization of companies; (iii) provision of administrative and human resources services, maintenance of quality systems, tools for operational and business support; and (iv) purchase, operation, promotion, encumbrance, and sale of real estate;

13. The entire assets of company B..., S.A., with tax identification number..., were transferred to the sphere of the Applicant company by virtue of a merger by absorption contract;

14. The Applicant alleges that the merger was carried out under the tax neutral regime provided for in articles 73 and following of the Corporate Income Tax Code (CIRC);

15. The integration of the assets of the merged company in the sphere of the acquiring company became effective as of the date of incorporation of the latter (05.04.2013), from which date all operations carried out by the merged company are considered, for accounting and tax purposes, as carried out for account of the acquiring company;

16. On that date the acquiring company was denominated C..., S.A.;

17. On 12 August 2013, C..., S.A. acquired from shareholder D... the credit rights for supplementary contributions and advances in the amount of €1,551,667.00 and €100,000.00, respectively, which this shareholder held over the merged company (B..., S.A.);

18. As consideration for the credits transferred, the now Applicant paid to the aforementioned shareholder the total sum of €1,029,999.00, an amount less than the nominal value of the credits transferred;

19. The Applicant was subject to a tax inspection procedure covering the years 2013 and 2014, and the Tax Authority made corrections of an arithmetic nature to the taxable income of the now Applicant in Corporate Income Tax matters, in the amount of €734,464.96;

20. Those corrections gave rise to the additional Corporate Income Tax assessment no. 2016... in the amount of €31,071.42 and were due to two situations:

a) Deductibility of financing costs not accepted for tax purposes, to which corresponds a correction to taxable income in the amount of €212,796.96;

b) Positive patrimonial variation not reflected in the net result of the fiscal year, to which corresponds a correction to taxable income in the amount of €521,668.00.

Deductibility of financing costs

21. In March 2010, B..., S.A., entered into a financing contract with E..., S.A., in the amount of €6,000,000.00 intended entirely for the restructuring of Group F..., in particular for the payment of the liabilities of company G... SGPS, S.A., owned 100% by B... S.A.;

22. This is an "earmarked loan" since the borrower undertook to apply the amount received to a specific purpose;

23. In December 2011, B... S.A. entered into an advances contract with its subsidiary G... SGPS, under which it loaned to the latter up to the amount of €5,600,000.00 according to the latter's financing needs;

24. The principal loaned had a period of interest grace of two years, after which it would be remunerated at an interest rate equivalent to the "Euribor" at 6 months, plus five percentage points;

25. With effect from 5 April 2013, the debt incurred by the borrower was transferred to the Applicant, as it incorporated that company following a merger dated 30 December 2013, but with retroactive effect to that date;

26. The Applicant considers that the contract entered into by its merged company with the subsidiary thereof is of an onerous nature, since after two years from the grace period, interest began to be owed;

27. In the inspection procedure, the Tax Authority verified that the interest was charged and recorded in accounting in accordance with legal provisions;

28. The Applicant further adds that the grace period on interest payments, during a certain period of time, had an impact on the interest rate contracted for subsequent periods, which was increased to reflect the interest not received by the lending entity during the said grace period;

29. The Applicant further adds that the provision for the grace period is entirely consistent with the fragility of the financial situation of the borrowing entity, which was determinative of the need for it to finance itself through its shareholder company;

30. The Applicant concludes that the costs recorded by it with the interest borne as a result of the bank loan cannot fail to be considered as deductible for tax purposes, as they are indispensable for the realization of taxable income;

31. The Applicant justifies its consideration in the version in force at the time of the facts of article 23 of the CIRC which clarified that: "Costs are considered those which are demonstrably indispensable for the realization of taxable income or for the maintenance of the income-producing source, namely c) Of a financial nature, such as interest on foreign capital applied in operations, discounts, premiums, transfers, exchange differences, costs with credit operations, debt collection and issuance of bonds and other securities, redemption premiums and those resulting from the application of the effective interest method to financial instruments valued at amortized cost (...)";

32. It alleges that the aforementioned requirement of indispensability of cost has come to be interpreted as an indeterminate concept requiring case-by-case application, as a result of a balance to be made between the assumption of a cost, on the one hand, and its realization in the interest of the company, on the other, always mindful of the corporate purpose of the entity; and, in this sense, only costs totally unrelated to the activity of the company or without economic interest thereto should be excluded from deductibility;

33. The activity of companies is not limited to their mere operational (normal and current) activity, being based also on financial investment, which may, in the future, result in taxable gains, namely through distribution of dividends. In this sense, the act of supplying the financing needs of a subsidiary company using foreign capital must be understood as a legitimate act of business management aimed at maintaining the income-producing source;

34. The Applicant emphasizes that commercial law itself expressly provides that the performance of supplementary or accessory contributions is an integral part of the pursuit of the lucrative purpose of companies (articles 209 and 210 of the Commercial Companies Code);

35. The Applicant disagrees with the understanding of the Tax Authority, in line with what has been the jurisprudence of the superior courts, according to which the deductibility of interest on financing obtained and subsequently applied in subsidiaries would only acquire tax relevance if the Applicant were a management company or had the management of shareholdings in its corporate purpose;

36. According to the Applicant, the position of the courts and the Tax Authority is merely formal and not compatible with the reality of the operations actually carried out by the companies;

37. In the case under examination, the Applicant considers that by supplying the treasury shortfalls of the company of which it owns 100%, it would naturally be pursuing its business activity and its lucrative purpose, indirectly, through its subsidiary;

Positive patrimonial variations

38. In the inspection procedure, it was concluded that the differential of €521,668.00 verified between the amount paid to the shareholder and the credit held by him in the company, in the form of supplementary contributions, although correctly recorded as a positive patrimonial variation, was not considered for purposes of determining the fiscal result of the fiscal year, as it should have been. From this situation results, therefore, an effective increase in the company's assets, in the amount of €521,668.00, with no applicable exception to taxation provided for in subparagraphs a) to c) of article 21 of the CIRC.

39. The Applicant disagrees, considering itself to be dealing with supplementary contributions which, as equity instruments, are excluded from taxation in accordance with the terms provided in subparagraph a) of article 21 of the CIRC;

40. According to Accounting and Financial Reporting Standard (NCRF) 27, any contracts evidencing a residual interest of the holder in the assets of an entity, after deduction of all its liabilities, are considered equity instruments;

41. Thus, included in equity are shares (and quotas) issued by the company itself, supplementary contributions and, due to the residual nature of this category, any other financial instruments (or their components) that do not fall within the definition of "financial liability";

42. Equity instruments may give rise to patrimonial variations in various situations (in particular realization and reimbursement of supplementary contributions, gains or losses on the acquisition and disposal of own shares), and, as a general rule, these will always be excluded from taxable profit under the aforementioned article;

43. The Applicant emphasizes that even if this were not understood, it would still have to be concluded that the amount of €521,668.00 would correspond to a fair value variation without relevance for purposes of determining taxable profit, since in light of NCRF 27 (paragraph 10), financial assets should, at initial recognition, be measured at their fair value;

44. The Applicant further adds that, under article 18, no. 9, as a rule, fair value variations have no relevance for purposes of determining taxable profit under the CIRC, except in the case of financial instruments recognized at fair value through results, or, in the case of equity instruments, if they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a participation exceeding 5%;

45. Since none of the exceptions indicated occur in the present case, also by this route we would always have to conclude that the amount recorded in the amount of €521,668.00, corresponding to the difference between the nominal value of the credit and the price paid, is not relevant for purposes of determining the taxable profit of the Applicant.

In the Submissions:

46. The Applicant invokes that, according to various judgments of superior courts, the requirement for deductibility of costs is the onerous or non-onerous character of the financing contract. Therefore, and since the one assumed with the merger of B... S.A. is onerous, the respective costs arising therefrom should be considered for purposes of deduction from taxable income for Corporate Income Tax purposes;

47. It thus argues that the costs recorded by the Applicant with the interest borne as a result of the bank loan cannot fail to be considered as deductible for tax purposes as they are indispensable for the realization of taxable income, that is, the interest charged by the Applicant to the borrowing company;

48. The Applicant alleges that this is the approach followed by arbitral decisions delivered within the scope of the CAAD, identifying several;

49. It concludes that, based on art. 23 of the IRC (version in force at the time of the facts), all costs that are necessary for the realization of corporate interest should be considered indispensable, that is, all costs essential for the realization of income or for the maintenance of the income-producing source of the entity;

50. Indeed, the aforementioned requirement of indispensability of cost has come to be interpreted as an indeterminate concept requiring case-by-case application, as a result of a balance to be made between the assumption of a cost, on the one hand, and its realization in the interest of the company, on the other, always mindful of the corporate purpose of the entity;

51. With regard to the acquisition of credits from D..., by purchase and sale contract of 12 August 2013, the Applicant alleges that as of the date of its occurrence, B... S.A. was already incorporated in the applicant, so everything transpired as if the Applicant were acquiring its own credits for supplementary contributions and advances, which determined the extinction thereof;

52. Thus, the operation resulted in a gain of €100,000.00 and in a positive patrimonial variation of €561,668.00, the latter excluded from taxation under the provisions of article 21 of the CIRC, as they constitute operations in equity instruments;

53. But even if this were not understood, the Applicant argues, it would always have to be concluded that the amount of €521,668.00 would never be subject to taxation by reason of the merger operation having been carried out under the tax neutral regime provided for in articles 73 and following of the Corporate Income Tax Code;

B - OF THE RESPONDENT

54. The Applicant is at the top of Group F..., holding the entirety of the share capital of company G..., SGPS, SA;

55. In turn, G... SGPS, SA is the company that holds direct participation in the remaining companies of the group;

56. With effect from 5 April 2013, B... SA was incorporated in C..., SA, which subsequently adopted the same name as the merged company with tax identification number ... .

57. The merger operation was carried out under the tax neutral regime provided for in art. 73 and following of the CIRC;

58. The company filed a request for authorization for the transferability of tax losses determined by the extinct merged company, under the terms provided for in art. 75 of the CIRC, which was granted by the Corporate Income Tax Directorate;

59. The shareholders of B..., SA, with the exception of shareholder H..., SGPS, S.A., delivered the shares they held therein for the realization of shares subscribed by them in the capital of the new company (C..., S.A.) – contribution in kind;

60. Those shares were delivered at their nominal value, which totalled the amount of €430,000.00, as shown in statement form 4 delivered on 07/05/2013;

61. Subsequently, 50,000 shares of the new company were subscribed, at the nominal value of €1 each, with the result that the share capital subscribed in the new company (€50,000.00) was less than the valuation of the shares of the original company (€430,000.00), which is why there was a share premium, which was recorded in accounting in account 54.1 of the then denominated C..., S.A.;

62. In the years 2012 and 2013, the merged company recorded errors in the accounting of taxable profits, which gave rise to corrections totalling €323,792.33;

63. The irregularities found resulted from the merged company having contracted a bank loan from I... in March 2010 in the amount of €6,000,000.00, which was intended, not for operation of the company, but for financing, free of charge, of the subsidiary G..., SGPS, S.A. in the form of accessory contributions and advances;

64. In view of the merger effected, as from 05/04/2013, the operations in question were recorded in accounting in the acquiring company;

65. As from 01/01/2014, the company began to charge financing interest on the advances granted to its subsidiary;

66. From the provisions of art. 23 of the CIRC (version as of 31.12.2013), it follows that only interest on foreign capital applied in the operation of the company, and indispensable for the realization of taxable income, could be accepted for tax purposes;

67. Until 31/12/2013, no benefit was evident for the merged company or for the acquiring company, by reason of the former having incurred debt with the banking system;

68. In the period between 05/04/2013 and 31/12/2013, the recording of the following financial costs, related to the bank loan, was €212,796.96, which was proposed by the Tax Authority services to be added to that declared in the fiscal year 2013;

69. On 12 August 2013, company H..., SGPS, Individual Limited Liability, sold to C..., SA, its shareholding of approximately 28.33% in B..., SA;

70. On the same date, D... sold the credits he held in B..., SA, in the amount of €1,651,667.00, corresponding to €1,551,667.00 in supplementary contributions and €100,000.00 in advances, as well as his 16.63% participation in the share capital of J... USA;

71. As consideration, C..., SA paid: €170,000.00 to company H... for the shares held by this company in B...; €1,029,999.00 to D... for the credits (supplementary contributions and advances) held by him in B...; €1 to D... in consideration of the shares held by him in J...;

72. Only the operation relating to advances had a positive effect on the fiscal result determined in the fiscal year, since the differential of €521,668.00 verified between the amount paid to the shareholder and the credit held by him in the company, in the form of supplementary contributions, although correctly recorded as a positive patrimonial variation, was not considered for purposes of determining the fiscal result of the fiscal year, as it should have been;

73. In accordance with the provisions of art. 21 of the CIRC, positive patrimonial variations not reflected in the net result of the fiscal year contribute to the formation of taxable profit, since the concept of taxable profit is defined in no. 2 of art. 3 of the CIRC as being the difference between the values of net assets at the end and at the beginning of the taxation period, with the corrections established in the CIRC;

74. In the case under analysis, the operation in question does not constitute a capital contribution to the company, but rather a cash outflow to one of the holders;

75. This cash outflow constitutes a negative patrimonial variation, which does not contribute to the formation of taxable profit of the fiscal year – c) of art. 24 of the CIRC – just as did not contribute the capital contribution by the aforementioned shareholder, which occurred in the sphere of the merged company – exclusion from taxation under the terms of a) of no. 1 of art. 21 of the CIRC;

76. However, the amount returned to the shareholder for the accessory contributions held by him in the company was less than the amount thereof, and such operation, being a return to a shareholder leaving the company, constitutes an effective and definitive patrimonial increase for the company, as such subject to Corporate Income Tax;

77. The Respondent argues that the fact that the positive patrimonial variation results from a merger operation has no relevance as to the taxation thereof under Corporate Income Tax, since the tax implications of merger operations are dealt with specifically in arts. 73 to 78 of the CIRC, with no provisions being found in such rules regarding positive patrimonial variations;

78. Consequently, the patrimonial variation in question has an exact fit under the provisions of art. 21 of the CIRC;

79. The positive patrimonial variation would only not be taxable under Corporate Income Tax if it fell within one of the exceptions provided in subparagraphs a) to c) in no. 1 of art. 21 of the CIRC;

80. Now, in accordance with the provisions of art. 21 of the CIRC, positive patrimonial variations not reflected in the net result of the fiscal year contribute to the formation of taxable profit, since the concept of taxable profit is defined in no. 2 of art. 3 of the CIRC as being the difference between the values of net assets at the end and at the beginning of the taxation period, with the corrections established in the CIRC;

81. What is at issue here is not any increase in equity – which is what art. 21 of the CIRC deals with – but rather the return of supplementary contributions, which constitutes a negative patrimonial variation, also excluded from taxation, under the terms provided for in art. 24 of the CIRC;

82. Such return was not made at the value at which the aforementioned shareholder had entered the company, since the company returned to the shareholder €521,668.00 less than the amount at which he had entered the company;

83. This increase in assets is subject to taxation under the terms of the provisions of arts. 3, no. 2 and 17, no. 1 of the CIRC, and is not excluded therefrom, under the terms of art. 21, no. 1 a) of the CIRC, so it must necessarily be added to taxable profit;

84. With regard to the application of the provisions in no. 9 of art. 18 of the CIRC, the Tax Authority rejects the argument of the Applicant, defending its conviction that the same cannot be accepted, since the Applicant has not been measuring this equity instrument (financial liability, as it is reimbursable) by the fair value method but rather by the historical cost method, to which is added the lack of proof of fair value at the date of reimbursement. Thus, and because it is not a fair value variation (as defined in the SNC/NCRF 27), it could never have an exact fit under the provisions in no. 9 of art. 18 of the CIRC;

85. In the Counter-Submissions, the Tax Authority limited itself to reproducing the content of its Response, since the Submissions of the Applicant did not introduce any factual or legal element that would determine a change in the position assumed by the respondent entity in the Response.

IV - PROCEDURAL REVIEW

i. The parties have legal personality and capacity, are legitimate and are duly represented (arts. 4 and 10, no. 2 of the RJAT and 1 of Order no. 112-A/2011, of 22 March).

ii. The Arbitral Tribunal is regularly constituted and materially competent to adjudicate the claim (art. 2, no. 1, a) of the RJAT).

iii. The proceedings do not suffer from any defect.

iv. No exceptions or preliminary questions have been raised requiring adjudication before the decision.

V – MATTERS OF FACT

The conviction of this tribunal was based on critical analysis of the positions assumed by each of the parties, as well as on the documents contained in the Administrative File, in the Inspection Report, in the Advances Contract, in the Financing Contract and in the Purchase and Sale Contract, attached to the records, whose veracity was not disputed.

FACTS PROVEN

1. The APPLICANT – previously designated C..., S.A. – was incorporated on 5 April 2013, with the following purpose: (i) provision of consulting services in management, economic, financial and accounting matters; (ii) provision of consulting services for the creation, development, expansion and modernization of companies; (iii) provision of administrative and human resources services, maintenance of quality systems, tools for operational and business support; and (iv) purchase, operation, promotion, encumbrance, and sale of real estate;

2. On 30 December 2013, with effect from 5 April 2013, the APPLICANT incorporated the company B..., S.A., tax identification number ... (hereinafter "MERGED COMPANY") through a merger operation carried out by means of universal transfer of assets [cf. article 97, no. 4, subparagraph a), of the Commercial Companies Code];

3. As a result of this merger, the APPLICANT: (i) succeeded to the MERGED COMPANY in all its rights and obligations (cf. article 112, no. 1, of the Commercial Companies Code); and (ii) adopted the firm name of the latter, becoming designated as B..., S.A.;

4. On 12 March 2010, the MERGED COMPANY had entered into, in the capacity of borrower, a financing contract with BANK I..., S.A., under the terms of which the latter loaned to it, for a period of 102 months, the amount of €6,000,000.00 for the development of its activity and the activity of its subsidiaries. This contract records as the destination of the principal borrowed – restructuring of Group F..., in particular the payment of the liabilities of Company G..., Lda., owned 100% by B... SA.

5. Under the terms of the sixth clause of the financing contract, the principal loaned "accrues interest, in favor of I..., on a daily basis, at a rate corresponding to EURIBOR at 6 (six) months, plus 2.5% (two point five per cent) per annum".

6. Subsequently, on 27 December 2011, the MERGED COMPANY entered into an advances contract with its subsidiary G... SGPS LDA., under the terms of which it loaned to the latter the amount of €5,600,000 until 31 December 2016 (cf. DOC. 5 of the request for arbitral pronouncement);

7. The principal loaned in this advances contract had a period of interest grace of two years, after which it would be remunerated at an interest rate equivalent to the "Euribor" at 6 months, plus five percentage points;

8. As from 01/01/2014, the Applicant began to charge the financing interest to its subsidiary, which was recorded in accounting in accordance with legal provisions;

9. The merger operation was carried out under the tax neutral regime provided for in art. 73 and following of the CIRC;

10. The merged company ceased its activity, for Value Added Tax purposes on 5 April 2013 and for Corporate Income Tax purposes on 30 December 2013;

11. On 12 August 2013, a purchase and sale contract was entered into, under the terms of which the APPLICANT acquired from D... the following credits held by the latter against the MERGED COMPANY: (i) €100,000.00 (one hundred thousand euros) of advances; and (ii) €1,551,667.00 of accessory contributions (cf. DOC. 1 of the request for arbitral pronouncement);

12. As consideration for the credits transferred, the APPLICANT paid to the transferor the total sum of €1,029,999.00 (one million, twenty-nine thousand, nine hundred and ninety-nine euros) – less €621,668.00 (six hundred twenty-one thousand, six hundred and sixty-eight euros) than its nominal value (cf. cit. DOC. 1 of the request for arbitral pronouncement);

13. The APPLICANT recorded in its accounts a positive patrimonial variation in the amount of €521,668.00 (five hundred twenty-one thousand, six hundred and sixty-eight euros), corresponding to the difference between the nominal value of the aforementioned accessory contributions in the sphere of the Merged Company and the value effectively paid upon their acquisition.

14. The Applicant was subject to an external inspection procedure covering the years 2013 and 2014.

15. In December 2016, the APPLICANT was notified of the Tax Inspection Report issued in the course of that inspection action, to which the service orders OI2016... and OI2016... refer.

16. In this Report, the Tax Administration made two corrections to the taxable income of the APPLICANT, totalling €734,464.96 (seven hundred thirty-four thousand, four hundred sixty-four euros and ninety-six cents).

17. The first of the aforementioned corrections consisted of the disallowance of the interest borne under the aforementioned financing contract entered into by the MERGED COMPANY with BANK I..., in the total amount of €212,796.96 (two hundred twelve thousand, seven hundred ninety-six euros and ninety-six cents).

18. According to the reasoning that the Tax Administration provided for this correction:

"In the present case, it is found that the acquiring company, B..., S.A., tax identification number..., bore financial costs relating to the loan that it assumed (this loan having been contracted by the merged company, B..., S.A., tax identification number...), which was not intended for operation of the merged company, but rather for the provision of free financing to its subsidiary, G... SGPS, S.A.

In view of the above, until 31/12/2013, no benefit was found, neither for the merged company nor for the acquiring company (…).

It is thus concluded that such costs were not applied in operations (neither in the merged company nor in the acquiring company), and as such are not indispensable for the realization of any taxable income.

As from 01/01/2014, the company began to charge financing interest for the advances granted to its subsidiary, which are recorded in accounting in account 7914 – Financing gains granted to subsidiaries (…) For that reason, no corrections will be proposed to the fiscal year 2014."

19. In accordance with the Tax Administration's understanding on this matter:

"By contrast, given the differential found between the amount effectively paid by the company, €1,029,999.00 and the total amount of credits, €1,651,667.00, the following accounts were credited, in addition to account 12 – Demand Deposits:

account 7858 – Other income and gains, which constitutes a gain for the company by reason of the fact that the company did not pay to the shareholder the credit held by him in the company, in the form of advances;

account 599 – Other patrimonial variations, which constitutes a positive patrimonial variation, in the amount of €521,668.00, by reason of the fact that the company paid to the shareholder the amount of €1,029,999.00 for credits held by him, in the form of supplementary contributions (as such recorded in an account of class 5 – Capital), totalling €1,551,667.00.

In view of the above, it is clearly evident that both operations constitute an effective gain for the company;

Nevertheless, only the operation relating to advances positively affected the fiscal result determined in the fiscal year, given its recording in account 7858 – other income and gains;

In fact, the differential of €521,668.00 found between the amount paid to the shareholder and the credit held by him in the company, in the form of supplementary contributions, although correctly recorded as a positive patrimonial variation, was not considered for purposes of determining the fiscal result of the fiscal year, as it should have been.

From the situation under analysis results, therefore, an effective increase in the company's assets, in the amount of €521,668.00, with no applicable exception to taxation provided for in subparagraphs a) to c) of article 21 of the CIRC." (cf. cit. DOC. 2 of the request for arbitral pronouncement);

20. The corrections made by the Tax Administration gave rise to the additional Corporate Income Tax assessment no. 2016... in the amount of €31,071.42 (thirty-one thousand, seventy-one euros and forty-two cents), whose deadline for payment ended on 24 February 2017 and which constitutes the subject of the request for arbitral pronouncement that gave rise to the present proceedings (cf. DOC. 3 of the request for arbitral pronouncement).

21. In the period between 05/04/2013 and 31/12/2013, the recording of financial costs related to the bank loan was €212,796.96.

FACTS NOT PROVEN

With relevance to the decision, there are no facts that should be considered as not proven.

In the petition in which the aforementioned Judgment of the venerable Central Administrative Court – South was addressed, the Applicant petitioned that the following be given as facts not proven:

1. The advances contract entered into on 27 March 2011 between the MERGED COMPANY and its subsidiary G... SGPS LDA. is a free financing contract;

2. The accessory contributions acquired by the APPLICANT on 12 August 2013 correspond to ordinary credits, classifiable as liabilities in the sphere of the MERGED COMPANY and, after the merger, in the sphere of the APPLICANT.

Now we are dealing with affirmations, qualifications and legal conclusions that cannot be considered facts, and thus cannot be included here.

MOTIVATION OF THE DECISION ON MATTERS OF FACT

The pertinent facts for the judgment of the case were chosen and selected according to their legal relevance, in light of the plausible legal solutions, under the terms of article 123 of the Code of Administrative Tax Procedure (CPPT) and article 607 of the Code of Civil Procedure (CPC), applicable by virtue of article 29, no. 1, subparagraphs a) and e) of the RJAT.

VI - QUESTIONS TO BE DECIDED

There are two questions on which the Tribunal must pronounce itself:

A) The first concerns the tax deductibility of costs resulting from a financing contract entered into by a merged company before the merger;

B) The second concerns the taxation of a positive patrimonial variation arising from the payment of accessory contributions in an amount less than the value at which they were recorded.

VII – GROUNDS AND DECISION

Tax deductibility of costs resulting from the financing contract

In accordance with the provision in art. 3, no. [2] of the CIRC, "the profit (of the entities referred to in no. 1) consists of the difference between the values of net assets at the end and at the beginning of the taxation period, with the corrections established in this Code". In these terms, as Joaquim Fernando Ricardo states in an annotation to this article (Tax Law, Collection of Legislation, 15th ed.). The notion of profit accepted under Corporate Income Tax encompasses any gains that represent a patrimonial increase and not the regular flow of income related to the functional area of companies. It is the so-called income-increment, which encompasses any patrimonial increase whatsoever.

Different is the concept of taxable profit, which is found in no. 1 of art. 17 of the CIRC, which consists of the algebraic sum of the net result for the period and positive and negative patrimonial variations verified in the same period and not reflected in that result, determined on the basis of accounting and possibly corrected under the terms of this Code.

Following the application of corrections to taxable profit is the taxable matter on which the liability of the taxpayer in the year under consideration will fall. Art. 23 of the CIRC contains the enumeration of costs capable of determining corrections to taxable profit, which are those demonstrably indispensable for the realization of taxable income or for the maintenance of the income-producing source, namely: (…). For the case at issue in the proceedings, the costs indicated in subparagraph c) of this article are relevant, that is, of a financial nature, such as interest on foreign capital applied in operations…and the results of the application of the effective interest method to financial instruments valued at amortized cost.

At issue in the proceedings is the deductibility of costs resulting from a loan contract entered into by company B... SA (which was subsequently incorporated by the Applicant) with a company held by the latter (G... SGPS, Lda.) for the financing of the latter.

The Applicant states in its Submissions that "following a merger by absorption operation, all assets and liabilities, rights and obligations of the borrowing company were transferred to the sphere of the Applicant with retroactive effect as of 05.04.2013", adding that, as a result "the debt initially incurred by the merged company came to be recorded in the sphere of the acquiring company, now Applicant." Now, we are once again faced with the formal versus the substantive. Formally, following the absorption of liabilities and assets of the merged company by the acquiring company, this would have to proceed with the respective recording. However, what the law requires (art. 23, no. 1 of the CIRC) in substantive terms to recognize the deductible nature of costs of a financial nature is the verification of the indispensability of such costs to achieve one of the following two objectives: for the realization of taxable income or for the maintenance of the income-producing source of the contributing entity.

The Tribunal also understands that the civil-commercial effects of universal transfers of patrimonial assets do not automatically carry with them the previous tax characterizations of costs, unless a norm with tax relevance imposes it. With a merger, civil and commercial rights and obligations are transferred, but the assessment of the tax deductibility of costs moves in the field of tax norms. There is no such internal norm establishing continuity of the tax regime for costs in general, nor does EU law impose it, as results from the decision of the Court of Justice of the European Union of 19 July 2019 (case C-438/18) which is transcribed "Directive 90/434/EEC of the Council (…) must be interpreted to the effect that it does not preclude a national regulation such as that at issue in the main proceedings, which leads to costs not being considered as tax deductible, for the acquiring company, which were so for the merged company before the merger between those companies, and which would have been so if that merger had not taken place."

The loan contract entered into by company B... SA with I... records, with interest for the question under consideration in the present proceedings, the following characteristics:

• the date of entry into – March 2010;

• the amount – €6,000,000.00 (six million euros);

• the destination of the principal borrowed – restructuring of Group F..., in particular the payment of the liabilities of company G... SGPS, Lda., owned 100% by B... S.A.

To satisfy this destination, in December 2011, that borrower (B... SA) entered into an advances contract with its subsidiary G... SGPS, by which it loaned to the latter €5,600,000.00.

The incorporation of the borrowing company in the Applicant took effect as of 5 April 2013, which means that the acquiring company and now Applicant received the burdens of the loan contract by virtue of the incorporation of company B... S.A. and came to appear in its own accounting. In other words, the Applicant was extraneous to the entry into the aforementioned contracts, that is, took no decision regarding the interest of those contracts for the pursuit of its activity, but merely assumed the costs resulting therefrom by virtue of having incorporated the initial borrower.

In this context, the Tribunal considers that the requirements whose verification art. 23, no. 1, c) of the CIRC requires for the deductibility of costs are not satisfied.

The Tribunal recognizes the onerous nature of the contract entered into by its merged company with G... SGPS and which gave rise to the costs borne by the Applicant. This nature was proven in the proceedings and for the relevance thereof the Applicant proceeded with extensive jurisprudential citation.

The Tribunal does not recognize, however, the character of proven indispensability of the contract for the realization of taxable income or for the maintenance of the income-producing source, a requirement equally necessary for the assessment of deductibility, as provided for in the already identified art. 23, no. 1, c) of the CIRC.

Contrary to what the Applicant claims, it is not demonstrated that the costs it bears have a direct and immediate relationship with concrete income, or that they have contributed to the maintenance of the productive source.

Now, until 31/12/2013, the existence of any benefit for the acquiring company was not demonstrated, nor even for the merged company, by reason of the latter having incurred debt with the banking system.

Although it must be admitted – as the jurisprudence of the Superior Administrative Courts has unanimously done – that the attribution of indispensability does not have a univocal nature, but rather must be verified case by case, the fact is that in the case under consideration in the proceedings, the Tribunal considers that it is not satisfied in view of the corporate purpose of the Applicant (provision of consulting services in management, economic, financial and accounting matters; provision of consulting services for the creation, development, expansion and modernization of companies; provision of administrative and human resources services, maintenance of quality systems, tools for operational and business support, and purchase, operation, promotion, encumbrance, and sale of real estate), as we are not dealing with an indispensable cost, either for the realization of taxable income or for the maintenance of the income-producing source.

The Applicant, upon bearing the costs resulting from the loan contract that it assumed at the date it incorporated company B... S.A., satisfied an onerous commitment to which it was bound by virtue of the aforementioned incorporation, is not developing an action that relates directly to its activity or to the activity of the company it incorporated, and did not even choose that activity for the maintenance of the income-producing source.

Moreover, in dealing with the payment of costs with loans, the Tribunal understands that the characterization and regime that applies – indispensability and tax deductibility, or not – to the accompanying interest results from a judgment of indispensability for the entity that bears it (Court of Justice judgment, case 171/11), reported to the moment they were incurred.

Also noteworthy regarding the tax regime of interest that remunerate foreign capital with multi-year relevance is the Judgment of the Constitutional Court no. 42/2014 (case 564/12), which decided that "such costs do not depart from the general principles governing the allocation of deductible costs, in particular the principle of specialization of periods (article 18 of the CIRC) and the principle of homogeneity between deductible costs and the income or profits subject to taxation to which they are linked".

There does not, therefore, exist any causal nexus between the costs borne by the Applicant with the loan and its profits or gains, explained in terms of normality, necessity, congruence and economic rationality (Court of Justice judgment, case no. 6754/13);

There is lacking also the proven "necessity" of the payment of such interest "having regard to the corporate purpose of the business entity in question" (Judgments Court of Justice-South, case 8137/14 and case 5327/12)

This is, as has been said, the understanding that the doctrine of the Central Administrative Courts and of the Supreme Administrative Court have come to follow and which this Tribunal understands to be its duty to also follow (art. 8, no. 3 of the Civil Code).

See in this regard, among several, the following judgments:

From the Supreme Administrative Court of 24-09-2014, delivered in Appeal no. 0779/12, according to which I- In the understanding that doctrine and jurisprudence have come to adopt for the purpose of determining the indispensability of a cost (cfr. art. 23 of the CIRC in the version in force in 2001), the Tax Authority cannot scrutinize the soundness and convenience of the decisions made by company management, under penalty of interfering with the freedom and autonomy of management of the company.

II - Thus, a cost will be accepted for tax purposes if, in a judgment made at the moment it was incurred, it is adequate to the productive structure of the company and to the obtaining of profits, even if it comes to prove to be an economically fruitless or economically ruinous operation, and the Tax Authority can only disregard as tax costs those that do not fall within the scope of the activities of the taxpayer and were incurred, not in the interest thereof, but for the pursuit of outside objectives (when it is to be concluded, in the face of the rules of common experience, that it had no potential to generate profits).

From the Central Administrative Court South, of 16-11-2004, Case no. 00182/04 CT-2nd Court which decided: I- Under the terms of art. 23 of the CIRC, only costs that were demonstrably indispensable for the realization of profits or gains or for the maintenance of the income-producing source are considered costs of the fiscal year. II- Art. 17, no. 1 of the CIRC establishes that one of the components of taxable profit is the net result of the fiscal year expressed in accounting, this result being a synthesis of positive elements (profits or gains) and negative elements (costs or losses). III- It is to define the group of negative elements that art. 23 of the CIRC enumerates, by way of example, the situations that may be included therein, establishing a general defining criterion in light of which shall be considered as costs or losses those that are duly proven to be indispensable for the realization of profits or gains subject to taxation and for the maintenance of the respective income-producing source. IV- The tax relevance of a cost depends on proof of its necessity, adequacy, normality or the production of a result (connection to a profitable business), and the lack of these characteristics may generate doubt about whether or not the causation is business-related. V- It resulting from the records that the present appellant granted loans to shareholders, this circumstance reveals that the loans it contracted from third parties in each of the said fiscal years exceeded that amount to the extent of the needs of the company or at least its ability to apply them in operations, that is, the present appellant would certainly not have resorted to credit if it had not granted loans to shareholders or if it had not done so in the amounts in which it did. VI- Since the corporate purpose of the appellant is the commerce of automobiles and not the granting of credit, the financial costs with loans obtained from third parties can only legally be had as costs covered by c), 1st part, of no. 1 of that art. 23 and as such accepted for tax purposes, to the extent and measure in which they correspond to resources effectively engaged in the statutory activity of the company, in accordance with the principle of specialization. VII – The understanding contrary to that advocated in VI would imply that all companies would be tempted to contract loans with the purpose of financing their shareholders, in the certainty that the costs inherent in those loans would be deducted under Corporate Income Tax as costs, which would subvert the principle of tax justice, in its aspect of the principle of equality in the distribution of tax burdens. VIII- Wherefore, the operations between the appellant and the shareholders and the costs arising therefrom cannot, in any way whatsoever, be viewed as elements realizing the profits indispensable to the maintenance of the income-producing source.

From the Central Administrative Court South, of 25-11-2009, delivered in Case no. 03501/09 CT-2nd Court, where it is stated that I- Under the terms of art. 23 of the CIRC, only costs that were demonstrably indispensable for the realization of profits or gains or for the maintenance of the income-producing source are considered costs of the fiscal year.

II. - Art. 17, no. 1 of the CIRC establishes that one of the components of taxable profit is the net result of the fiscal year expressed in accounting, this result being a synthesis of positive elements (profits or gains) and negative elements (costs or losses). III. - It is to define the group of negative elements that art. 23 of the CIRC enumerates, by way of example, the situations that may be included therein, establishing a general defining criterion in light of which shall be considered as costs or losses those that are duly proven to be indispensable for the realization of profits or gains subject to taxation and for the maintenance of the respective income-producing source. IV. - The tax relevance of a cost depends on proof of its necessity, adequacy, normality or the production of a result (connection to a profitable business), and the lack of these characteristics may generate doubt about whether or not the causation is business-related.

As Dr. José Campos Amorim wrote ("The deductibility of costs under Corporate Income Tax - General Considerations" in Opinion and Analysis – text that was drawn up based on the Corporate Income Tax Code in force until 31/12/2013) "There must be a direct relationship between the costs and the profits, that is, the costs must generate directly or indirectly income, even if future. The tax relevance of a cost depends not only on its necessity, adequacy and normality, but also on the "production of a result" or "connection to a profitable business, and the lack of these characteristics may generate doubt about whether or not the causation is business-related".

This is also the understanding consistent with the principle of taxation of real income, established in no. 2 of art. 104 of the Constitution of the Republic. Indeed, the income of entities with lucrative purpose should be applied to the realization of that same purpose within the scope of its activity.

Moreover, with regard to interest on foreign capital, these are only tax deductible if such capital is applied in the operation of the company that bears them (art. 23, no. 1 and c) of the CIRC). Which was not the case. On the requirement that "Costs cannot fail to respect the contributing company itself. That is, in order for a given amount to be considered a cost thereof, it is necessary that the respective activity be carried out by it itself, not by other companies (…) even if in a relation of domination" see, among all, the Judgments of the Supreme Administrative Court of 30.05.2012 (case no. 171/11) and of 10.07.2002 (case no. 0246/02), as well as the Judgment of the Court of First Instance – North of 14.03.2013 (case no. 01393/06.1).

The Applicant also does not have as its corporate purpose the management of shareholdings that would allow for the consideration of the deductibility of interest on financing obtained and subsequently applied in subsidiaries (e.g., Judgments of the Supreme Administrative Court of 07.02.2007, case no. 01046/05; of 30.01.2011, case no. 107/11; of 21.09.2016, case no. 0571/13; of 21.02.2018, case no. 0473/13; of 28.02.2018, case no. 01206/17).

To support its position, the Applicant points to several decisions delivered within the scope of the CAAD, with which this Tribunal understands to be its duty to disagree. Indeed, it must be invoked at the outset the objective that presided over the creation of this Arbitration Center, which was essentially the fulfillment of the principle of procedural speed, reflected in the creation of an entity capable of alleviating courts and reducing pending cases.

Notwithstanding the natural guarantees of independence enshrined for the functioning of arbitral tribunals constituted within the scope of the CAAD, the fact is that these cannot constitute themselves as creators of their own jurisprudence that opposes that followed by the Central Administrative Courts and by the Supreme Administrative Court. This circumstance was immediately safeguarded by the legislator in no. 2 of art. 25 of Decree-Law no. 10/2011, of 10 January (RJAT), by providing as a ground for appeal of an arbitral decision to the Supreme Administrative Court, the opposition thereof, on the same fundamental question of law, with a judgment delivered by the Central Administrative Court or by the Supreme Administrative Court.

Therefore, the Applicant's claim for tax deductibility of the aforementioned costs is rejected, for failure to meet the requirement of article 23, no. 1 and subparagraph c) of the CIRC.

On positive patrimonial variations

The Tax Authority made a correction to taxable profit because the Applicant benefited from a positive patrimonial variation resulting from the payment of accessory contributions held by shareholder D... With effect, the latter was creditor of the amount of €1,551,667.00, but the Applicant paid only €1,029,999.00.

Although in the pleadings of the Applicant and the Respondent these are sometimes referred to as accessory contributions (e.g., arts. 5 and 46 of the initial petition) and other times as supplementary contributions, it is found that they are expressly accessory contributions, as shown in the copy of this purchase and sale contract attached to the Tax Inspection Report (TIR), submitted by the Applicant to the request for arbitral pronouncement as document no. 1, and cited by the Respondent by reference to pp. 1 to 17 of annex 2 of the TIR. The Applicant, however, recorded them in a capital account.

With the difference between the amount of the credit and the amount paid, the fact is that the Applicant had an increase in its real economic strength, that is, improved its net situation, and, in accordance with the theory of patrimonial increment established in article 3, no. 2 of the CIRC, increased its profit.

It is clear that the amount paid to the shareholder for the accessory contributions held by him in the company was less than the amount thereof. This is an operation of return to a shareholder leaving the company, with the difference between the amount of the obligation that the shareholder had and the amount by which the company divested itself constituting an effective and definitive patrimonial increase of the company, not resulting from the legal relationships specifically arising from the merger. This operation does not result from the merger.

As results from the purchase and sale contract that the Applicant filed with its request for arbitral pronouncement, we are precisely dealing with accessory contributions, and doctrine is unanimous in clarifying that accessory contributions, so classified by the contractors and by the Applicant, and being reimbursable, with no constraint of a corporate nature evident in the records capable of altering their express nature (for example those applicable to supplementary contributions under article 213 of the Commercial Companies Code) as is the case, should be recorded as liabilities and not as equity. Therefore, the recording of these contributions, as well as of the aforementioned difference of €521,668.00, as variations of equity, is not correct and nor are we even dealing with a positive patrimonial variation not reflected in net result and even less excluded from taxation.

The obligation to return reimbursable accessory contributions should be recorded in a liability account. The obligation to return is present (not future) and its settlement will require an outflow of resources from the patrimony of the company. It is an act similar to what occurs in a loan. It has no effects on equity and cannot be applied the exclusion for purposes of forming taxable profit provided for in subparagraph a) of no. 1 of article 21 of the CIRC, on which the Applicant bases its claim.

But even if we were dealing with a supplementary contribution, whose return would translate into an operation on equity, the definitive reimbursement of a supplementary contribution in an amount less than its value would be equivalent to a remission or forgiveness in favor of the company. And these positive patrimonial variations are not excluded for purposes of taxable profit under the terms of art. 21 of the CIRC.

The Applicant also alleges that as of the date of purchase and sale of the accessory contributions of D... (12.08.2013), B... S.A. was already incorporated in the Applicant, so everything transpired as if the Applicant were acquiring its own credits, which determined the extinction thereof. It does not, however, have reason. Before the aforementioned purchase and sale, the holder of such credits was solely D... and not the Applicant, and nor would it be understood how the latter would pay €1,029,999.00 as consideration for rights that already belonged to it.

The Applicant also invokes that the amount paid to the shareholder was less because that was the fair value of its supplementary contributions, so that the provision established in no. 9 of art. 18 of the CIRC would apply to the case, according to which Adjustments arising from the application of fair value do not contribute to the formation of taxable profit, being allocated as income or costs in the taxation period in which the elements or rights that gave rise to them are sold, exercised, extinguished or liquidated.

But on this aspect too the Applicant does not have reason. Indeed, it is not sufficient to assert that a positive patrimonial variation has its origin in adjustments that result from the application of fair value for that variation to cease to contribute to the formation of taxable profit. This value, which the Applicant qualifies as "the fair," was determined only by it and by the shareholder to whom the supplementary contributions were paid. Thus, this is a consensual value and not fair value, for whose measurement much more than a mere agreement is necessary. As already cited Dr. José Campos Amorim writes (now in "Fair value and its tax implications http://recipp.ipp.pt/bitstream/10400.22/850/1/COM_JoseAmorim_2012.pdf) it is only possible to measure fair value in situations of high reliability of measurement, such as is the case of financial assets quoted on organized markets and of assets evaluated by independent third parties, for example, offices and buildings. These are cases in which it is possible to determine objectively and reasonably the value of the item. If it is not possible to measure with reliability, the historical cost valuation should be maintained.

Therefore, it should be understood that the aforementioned positive difference should contribute to the taxable profit of the Applicant, by reason of the fact that no provisions for exclusion are applicable thereto (e.g., art. 21, no. 1, subparagraph a) and art. 18, no. 9, both of the CIRC).

Therefore, the tribunal decides to consider the challenge presented by the Applicant entirely without merit.

Costs in accordance with law.

Amount: €31,071.42 (thirty-one thousand, seventy-one euros and forty-two cents)

Lisbon, 22 October 2019

Arbitrator President - Manuel Luís Macaísta Malheiros

Arbitrator - Rodrigo Domingues

(Dissenting Opinion)

Arbitrator - Américo Brás Carlos

DECLARATION OF DISSENTING OPINION

Dissatisfied with the decision of the Arbitral Tribunal, which judged without merit the request for arbitral pronouncement filed against the Tax Authority, the Applicant filed jurisdictional challenge, on 19 April 2018, in the Central-South Administrative Court (TCA South).

The issues to be resolved were the following:

a) To assess, as a preliminary matter, the conformity of the conclusions of the respective legal regime;

b) To determine whether there is excess of pronouncement in the challenged judgment;

c) If there was a violation of the principle of adversarial procedure;

d) If there is nullity of the judgment due to lack of specification of the grounds of fact and law.

On 11 July 2019, the judges of the 1st Subsection of the Contentious Section of the TCA South (Case no. 42/18.0BCLSB) agree to judge the challenge as meritorious and, in consequence, declare the nullity of the arbitral decision.

The Venerable Judges of the TCA South understand that the nullity of the decision results from the non-specification of the factual and legal grounds of the decision.

With the proceedings reopened and a new arbitral decision having been delivered, I proceed to set out the formal and substantive grounds that distance me from the same, without prejudice to the decision delivered by the TCA South in the course of the present proceedings.

I. BRIEF SUMMARY OF THE FACTS

Deductibility of financing costs

1. The facts underlying the first issue are summarized in points 21 to 25 of the position that makes law, which I reproduce below in their essential parts.

2. In March 2010, B..., entered into a contract with E... for financing in the amount of €6,000,000.00, intended entirely for the restructuring of Group F..., in particular for the payment of the liabilities of company G... SGPS, owned 100% by B... .

3. This is an "earmarked loan," since the borrower undertook to apply the amount received to a specific purpose.

4. In December 2011, B... entered into an advances contract with its subsidiary, G... SGPS, under which it loaned to the latter up to the amount of €5,600,000.00, according to the latter's financing needs.

5. The principal loaned had a period of interest grace of two years, after which it would be remunerated at an interest rate equivalent to the "Euribor" at 6 months, plus five percentage points.

6. With effect from 5/4/2013, the debt incurred by B... was transferred to the Applicant, as a result of a merger by absorption dated 30 December 2013, but with retroactive effect to that date.

7. In 2013, the year to which the Corporate Income Tax assessment in dispute relates, the period of interest grace still ran. In 2014, upon termination of the grace period, interest began to be charged to company G... SGPS.

Positive patrimonial variations

8. On 12/08/2013, a purchase and sale contract was entered into between D... and the Applicant, which had as its object, among others, the sale of credit rights (for supplementary contributions and advances) held by D... in company B..., S.A., in the total amount of €1,651,667.00, corresponding to €1,551,667.00 in supplementary contributions and €100,000.00 in advances.

9. In accordance with point 3 of the aforementioned contract, and as consideration for the transmission of the supplementary contributions and advances, the Applicant paid to D... the sum of €1,029,999.00.

10. With date of 30/12/2013, all assets of company B..., S.A., were transferred to the sphere of the Applicant, by virtue of a merger contract (under the tax neutral regime provided for in articles 73 and following of the Corporate Income Tax Code - (IRC)) by absorption of that company in the Applicant.

11. The integration of the assets of company B..., S.A., (merged company) in the sphere of the Applicant (acquiring company) became effective as of the date of incorporation of the latter (05/04/2013).

12. As shown on page 15 of the Tax Inspection Report (TIR) and point 43 of the Response of the Tax Authority and Customs Authority (Tax Authority) to the Submissions of the Applicant "from the operations carried out, noteworthy, for its tax implications, is the acquisition of credits, which was recorded by the company as follows:" (all underlining throughout this Declaration is mine).

II. ON THE FIRST ISSUE

13. The first issue concerns the tax deductibility, in 2013, of costs resulting from the loan contract (essentially interest) entered into with E..., the year in which the period of interest grace on the advances granted to company G... SGPS occurred. Such costs were assumed by the Applicant as the acquiring company in the merger.

14. Given that the matter subject to discussion between the parties concerns the interpretation of the tax provision contained in article 23 of the Corporate Income Tax Code (Costs), I begin by transcribing, in the relevant part, its version as of the date of the facts: "Costs are considered those that are demonstrably indispensable for the realization of taxable income or for the maintenance of the income-producing source, namely: (…) Of a financial nature, such as interest on foreign capital applied in operations (…)".

15. Article 23 of the Corporate Income Tax Code establishes the general principle relating to the tax deductibility of costs borne by entities subject to Corporate Income Tax. As is known, this is a principle whose interpretative breadth has led to considerable litigation between taxpayers and the Tax Authority, and is therefore extensively examined by the courts, both judicial and arbitral. Thus, there is extensive jurisprudence on this principle.

16. Indeed, the characterization of costs accepted for tax purposes as being those "demonstrably indispensable for the realization of taxable income or for the maintenance of the income-producing source" contains a requirement of indispensability with, I recognize, considerable interpretative margin. Additionally, with regard to the deductibility of "interest on foreign capital," the interpretative margin on the concept of application "in operations" is equally considerable.

17. The Tax Authority, in the TIR and in the Response to the Request for Arbitral Tribunal Constitution, bases its position alleging that the loan from E... was intended for the granting of financing (advances) free of charge.

18. The Applicant, in the Request for Arbitral Tribunal Constitution, bases its understanding on extensive jurisprudence, both from the Supreme Administrative Court (SAC) and from the CAAD – based on this jurisprudence, the Applicant contests, in essence, the fact that the Tax Authority disregarded the tax acceptance of financial costs given that the loan was intended, in its understanding, for the realization of free financing to its subsidiary.

19. The position that makes law recognizes that we are not dealing with free financing, but does not draw any consequence from this recognition. In essence, the position that makes law denies merit to the claims of the Applicant based: (i) on the fact that the Applicant had received "the burdens of the loan contract by virtue of the incorporation of company B... (…) was extraneous to the entry into the aforementioned contracts, that is, took no decision regarding the interest of those contracts for the pursuit of its activity, but merely assumed the costs resulting therefrom by virtue of having incorporated the initial borrower" (ii) "(…) the attribution of indispensability is not satisfied in view of the corporate purpose of the Applicant (…)"

20. The position that makes law also cites, in a generic manner, without it being evident its applicability to the present case, that "(…) the tax deductibility, or not – of the accompanying interest results from a judgment of indispensability for the entity that bears it (Court of Justice judgment, case 171/11), reported to the moment they were incurred (…) There does not, therefore, exist any causal nexus between the costs borne by the Applicant with the loan and its profits or gains, explained in terms of normality, necessity, congruence and economic rationality (Court of Justice judgment, case no. 6754/13); There is lacking also the proven "necessity" of the payment of such interest "having regard to the corporate purpose of the business entity in question" (Judgments Court of Justice-South, case 8137/14 and case 5327/12).

21. Indeed, and as I referred, the characterization of costs accepted for tax purposes as being those "demonstrably indispensable for the realization of taxable income or for the maintenance of the income-producing source" contains a requirement of indispensability that may be interpreted and examined from different perspectives – a more formal perspective (connection to corporate purpose)?; a more substantial/teleological perspective, in the sense that article 23 only intends to disregard costs unrelated to the activity? what is the scope of the expression "maintenance of the income-producing source"? What is the breadth of the causal nexus that should be established between costs and income? Should other factors such as normality, necessity, congruence and economic rationality be considered? Should article 23 scrutinize management decisions?

22. I repeat, all these views merit careful reflection, and it is not, as stated by the position that makes law, that jurisprudence is unanimous.

23. However, there is a conclusion that seems to me legitimate to qualify as unequivocal and unanimous, sanctioned by the Supreme Administrative Court, and which I transcribe from Judgment no. 0570/2013, although I could draw it from many other judgments, "The concept of indispensability of costs is an indeterminate concept and jurisprudence has been tasked with its interpretation, but in a case-by-case manner, and from such labor has not emerged a concrete definition thereof. But that indeterminacy does not allow the Tax Authority to determine its relevance under the criterion of its reasonableness or even necessity or convenience".

24. It is thus important to delimit the concept of indispensability of costs invoked by the Tax Authority, contained in the TIR and which gave rise to the Request for Arbitral Tribunal Constitution, because the Applicant disagreed therewith.

The position of the Tax Authority

25. Faced with a controversial issue, subject to extensive doctrine and jurisprudence of the courts, the legal-tax reasoning of the disallowance of the cost by the Tax Authority is unprecedented.

26. The Tax Authority begins by stating in the TIR that:

"Thus, in light of the provisions of article 23 of the Corporate Income Tax Code, it is concluded that only interest on foreign capital applied in the operation of the company, and which are naturally indispensable for the realization of taxable income, could be accepted for tax purposes".

"In the present case, it is found that the acquiring company, B..., S.A., tax identification number..., bore financial costs relating to the loan that it assumed (this loan having been contracted by the merged company, B..., S.A., tax identification number...), which was not intended for operation of the merged company, but rather for the provision of free financing to its subsidiary, G... SGPS, S.A."

"In view of the above, until 31/12/2013, no benefit was found, neither for the merged company nor for the acquiring company (…)"

"It is thus concluded that such costs were not applied in operations (neither in the merged company nor in the acquiring company), and as such are not indispensable for the realization of any taxable income."

"As from 01/01/2014, the company began to charge financing interest for the advances granted to its subsidiary, which are recorded in accounting in account 7914 – Financing gains granted to subsidiaries (…) For that reason, no corrections will be proposed to the fiscal year 2014."

27. Thus, the Tax Authority begins by stating that the financing was not intended for operation of the merged company, but rather for the provision of free financing to its subsidiary (…) "In view of the above, until 31/12/2013, no benefit was found, neither for the merged company nor for the acquiring company (…)"

28. Thus, it is unequivocal to conclude that, for the Tax Authority, the bank costs with E... cannot be considered as tax deductible because they were used for the granting of financing (in its understanding) free of charge.

29. The remaining paragraphs of the TIR confirm this conclusion: "(…) until 31/12/2013, no benefit was found, neither for the merged company nor for the acquiring company (…)" and "(…) and as such are not indispensable for the realization of any taxable income". The Tax Authority concludes that "As from 01/01/2014, the company began to charge financing interest for the advances granted to its subsidiary" (…) For that reason, no corrections will be proposed to the fiscal year 2014.

30. That is, for the Tax Authority, the requirement of indispensability established in article 23, in all its dimensions, is only violated for one reason – the free character of the financing. It is unequivocal that this is so, since the Tax Authority itself states that from 2014 onwards it does not raise any issues of article 23 to the extent that "the company began to charge interest".

31. If there were any doubt about the reasoning of the Tax Authority, the analysis of the Response to the Submissions of the Tax Authority removes any doubts:

"Both the merged company and the acquiring company did not declare, in the fiscal years of 2012 and 2013, any gain related in any way to the loan made to its subsidiary, in the form of accessory contributions and advances"

"Now, in the case of the fiscal years of 2012 and 2013, the financial costs recorded did not contribute to the realization of any profits;

"In the case of the acquiring company specifically, and taking into account that in 2014, the company began to debit interest to its subsidiary, no corrections were thus proposed"

"Nevertheless, in the fiscal year 2013, financial costs were recorded that had no counterpart in terms of profits in that same fiscal year".

From all the above, it results:

32. The costs were not considered by the Tax Authority as demonstrably indispensable for the realization of taxable income or for the maintenance of the income-producing source, based, solely and exclusively, on the fact that they were applied, in 2013, to the granting of financing which, in its view, was free of charge.

33. It is this alleged free nature, with which the Applicant disagreed, that presided over the Constitution of the Arbitral Tribunal, questioning it.

34. Now, it is the very position that makes law that admits as proven that the financing was not free of charge, thus formally agreeing with the essence of the reasoning deduced by the Applicant regarding the matter brought to the Tribunal.

35. With a view to remedying the nullity affirmed by the TCA South, resulting from the lack of motivation through the indication of facts not proven in the present decision, it is stated as not proven that the advances contract entered into on 27 March 2011 between the merged company and its subsidiary is a free financing contract.

36. However, the position that makes law decides against the acceptance of the costs, basing its position on general considerations around the concept of indispensability which, analyzing the TIR and the Response to the Request for Arbitral Tribunal Constitution, were, at no time, put to question by the Tax Authority. I repeat, it is unequivocal that this is so, since the Tax Authority itself states that from 2014 onwards it does not raise issues of article 23 to the extent that "the company began to charge interest".

Finally, I do not fail to note that:

37. Although the non-free nature of the financing was proven, which, being the issue put to the Tribunal, should have, from the outset, closed the matter in favor of the Applicant, even so, the Arbitral Tribunal should have understood that the fundamental issue placed before it, around the free nature or not of the financing, is embodied in the fact that, citing the Tax Authority, "in the fiscal year 2013, financial costs were recorded that had no counterpart in terms of profits in that same fiscal year", i.e., for the Tax Authority, the financing costs were not accepted because, in that year, they did not generate profits, using, to express itself, improperly the qualification "free of charge".

38. Thus, it is evident the lack of connection and, even, the contradiction between the facts considered not proven and the decision, and it is not understood, throughout, what facts with interest for the just decision of the case were taken into consideration by the position that makes law.

39. Therefore, in addition to not agreeing with the position that makes law, I also maintain that we are dealing with a situation capable of generating grounds for challenge of the decision under the terms of article 28, no. 1 of the RJAT.

Terms of the dissenting opinion (First Issue)

1. Given all the above, I concur with the decision that makes law insofar as it recognizes the onerous nature of the financing, highlighting that it was given as a fact not proven the free nature thereof.

2. I disagree with the decision that makes law, as I consider that the same is susceptible to suffering from formal defects, namely the opposition of the grounds with the decision, which may result in the nullity of the decision.

3. As to the substantive analysis contained in the position that makes law, I do not pronounce upon it, because it does not address the issue that was put to the Tribunal, noting, however, that the position that makes law contradicts other arbitral decisions on the same fundamental question of law.

III. ON THE SECOND ISSUE

40. The second issue subject of the request for arbitral pronouncement concerns the taxation, under Corporate Income Tax, of the positive patrimonial variation arising from the payment of accessory contributions in an amount less than the value at which they were recorded, with the Tribunal tasked to examine whether the legal fact relating to the acquisition of supplementary contributions below their nominal value is capable of generating, per se, a taxable fact under Corporate Income Tax in the sphere of the acquirer (the Applicant).

41. At no time was the recording of the acquisition of supplementary contributions effected by the Applicant subject of dispute and discussion between the parties, it having been given as a proven fact its correct recording through the aforementioned equity, that is, that the supplementary contributions were correctly recorded in capital accounts. However, the two arbitrators did state that "the Applicant recorded in its accounts a positive patrimonial variation in the amount of €521,668.00 (five hundred twenty-one thousand, six hundred and sixty-eight euros), corresponding to the difference between the nominal value of the aforementioned accessory contributions in the sphere of the Merged Company and the value effectively paid upon their acquisition."

42. The position that makes law qualifies the accessory contributions as "reimbursable" liabilities for the sole reason that, in the words of the decision, "being reimbursable, without there appearing in the records any constraint of a corporate nature capable of altering their express nature". This characterization as liabilities seems to me debatable. Accessory contributions, according to the law, may be contributions of a capital nature, provided the contract of association so provide. In the present case, the contract of association clearly states that they are supplementary contributions (not "accessory contributions").

43. The position that makes law, further, qualifies as wrong the recording by the Applicant of the supplementary contributions as equity. Yet the document (the purchase and sale contract) expressly states that they are "supplementary contributions." However, in the Applicant's accounting, these were recorded in accounts 54 – "other variations in the amount of the equity." This can only be interpreted as the Applicant recording the supplementary contributions in the capital, and not as a "variation of the patrimonial variable related to capital." This statement can be verified by analyzing the accounts of the Applicant where the supplementary contributions of D... appear in the accounts of 54 – (equity accounts), as presented in the documents that are in the administrative file.

44. In fact, the Applicant acquired, on 12/08/2013, the credits corresponding to supplementary contributions and advances by D..., and paid for them €1,029,999.00, which represents a reduction of €521,668.00 in relation to the nominal value of the supplementary contributions (€1,551,667.00). This difference gives rise to a gain in the sphere of the Applicant.

45. Now, the question is: is this gain subject to Corporate Income Tax? The position that makes law affirms it. However, this position presents some issues that merit reflection, which I will seek to elucidate below.

46. In the first place, it seems to me that the reasoning followed by the position that makes law is incomplete and does not allow, on a coherent basis, to support the taxation of the gain referred to. Secondly, the alternative argument raised by the position that makes law, concerning the applicability of the exception in article 21, no. 1, subparagraph a) of the CIRC and the application of the fair value regime, does not seem to me to be supported, from a factual and legal point of view, for the reasons that I will set out below.

47. With regard to the first issue, the position that makes law states that "the amount paid to the shareholder for the accessory contributions held by him in the company was less than the amount thereof. This is an operation of return to a shareholder leaving the company, with the difference between the amount of the obligation that the shareholder had and the amount by which the company divested itself constituting an effective and definitive patrimonial increase of the company, not resulting from the legal relationships specifically arising from the merger. This operation does not result from the merger."

48. However, nowhere in the administrative file is there any element capable of supporting the conclusion that "this operation does not result from the merger." In fact, the operation of the purchase and sale of the credits corresponding to the supplementary contributions and advances that D... held in the Merged Company was a direct consequence of the merger. Had the merger not occurred, D... would not have sold these credits to the Applicant, and the Applicant, consequently, would not have acquired them. On 12/08/2013, the Applicant, already holding 100% of the capital of the Merged Company (B..., S.A.) by virtue of the merger (with retroactive effect from 05/04/2013), proceeded to the acquisition of the credits held by the former minority shareholder, with the merger operation being the determining factor in the structure of the transaction.

49. I would add that the financial structure of the transaction is clear: the Applicant, holder of the 100% of the capital of the Merged Company and the merger being the determining factor in the structure of the transaction, proceeded to the acquisition of 28,33% of the shareholding of the Merged Company (through the acquisition of the Merged Company), and the acquisition of the credits held by D... in the Merged Company (supplementary contributions and advances) at a price below the nominal value. In light of all this, it would appear that the Applicant has acquired at a discount (€521,668.00) the residual rights and obligations of a former minority shareholder, which seems justified by the market conditions that determined the completion of the merger operation (which occurred at a discount as well, for the H... shareholding, with the payment of €170,000.00 in place of the nominal value of €430,000.00).

50. The context of the acquisition of these credits by the Applicant is not, in my view, adequately addressed by the position that makes law. The acquisition was made in a context where the Applicant sought to eliminate (at a discount) all residual rights and obligations of former minority shareholders related to the Merged Company (B..., S.A.). This seems to me to be a matter that should be examined in the context of the tax regime of the merger, under articles 73 and following of the CIRC, and not isolated as a positive patrimonial variation subject to taxation.

50bis. The position that makes law refers that the operation in question "does not result from the merger," a phrase that is somewhat obscure and perhaps requires further clarification. What I understand is that the position that makes law intends to state that, since the acquisition of the credits was done by way of purchase and sale (and not by force of the merger), it is not governed by the fiscal regime of mergers. However, this reasoning does not seem to me to be entirely correct, since the acquisition of the credits was made, economically and temporally, in the direct context of the merger and is, therefore, part of the general restructuring operation.

51. It is obvious that the credits could be acquired through the merger, and indeed, if the minority shareholder D... had given the credits as a contribution in kind in the merger, the acquisition would have been directly governed by the tax regime of mergers, without giving rise to any patrimonial variation. However, D... instead of contributing the credits in kind, sold them at a price lower than the nominal value. This decision of D... does not alter the fact that the operation is, economically, part of the general restructuring operation carried out by means of the merger.

52. With regard to the issue of the application of the exception provided for in article 21, no. 1, subparagraph a) of the CIRC, the position that makes law states that "the Applicant recorded in its accounts a positive patrimonial variation in the amount of €521,668.00 (five hundred twenty-one thousand, six hundred and sixty-eight euros), corresponding to the difference between the nominal value of the aforementioned accessory contributions in the sphere of the Merged Company and the value effectively paid upon their acquisition," and that "It is clear that the amount paid to the shareholder for the accessory contributions held by him in the company was less than the amount thereof."

53. However, the position that makes law does not provide a clear characterization of what constitutes the patrimonial variation in question. Is it (i) a patrimonial variation related to a decrease in a liability (the reimbursement obligation of the accessory contributions)? Or is it (ii) a patrimonial variation related to the acquisition at a discount of equity (supplementary contributions treated as capital in the accounts of the Applicant)? The position that makes law seems to oscillate between these two characterizations.

54. If we are talking about a patrimonial variation related to a decrease in a liability (option i), then it does not fall within the scope of the exception provided for in article 21, no. 1, subparagraph a) of the CIRC (which is specifically about capital contributions, not about decreases in liabilities).

55. If we are talking about a patrimonial variation related to the acquisition at a discount of equity (option ii), and if the supplementary contributions (which the Applicant recorded as equity) are considered to be equity (capital) in the sense of article 21, no. 1, subparagraph a) of the CIRC, then the exception may be applicable. However, the position that makes law appears to rule out the application of this exception by characterizing the accessory contributions as liabilities (reimbursable liabilities).

56. However, the position that makes law does not coherently establish which of the two characterizations is the correct one. The position that makes law states that "the contabilização destas prestações, bem como da referida diferença de 521.668,00, como variações de capital próprio, não está correta," but does not clearly explain which would be the correct characterization. If the supplementary contributions are liabilities, then the "patrimonial variation" in question is not a patrimonial variation as referred in article 21 of the CIRC, but rather a decrease in liabilities, which would fall under article 24 of the CIRC (negative patrimonial variations).

57. In any case, these considerations as to the lack of coherence or clarity in the reasoning followed by the position that makes law only serve to reinforce my conviction that we are dealing with a situation that would warrant a more thorough analysis of the issue, one that takes into account the context of the merger and the tax regime of mergers (articles 73 and following of the CIRC), rather than merely isolating the acquisition of the credits as a positive patrimonial variation.

58. With regard to the issue of fair value, the position that makes law states that "the Applicant qualifies as "the fair," was determined only by it and by the shareholder to whom the supplementary contributions were paid. Thus, this is a consensual value and not fair value, for whose measurement much more than a mere agreement is necessary."

59. I am in agreement with this reasoning. The value at which the credits were exchanged was a "agreed value" and not a "fair value" in the sense of article 18, no. 9 of the CIRC or the Accounting and Financial Reporting Standards. Therefore, the exception provided for in article 18, no. 9 of the CIRC cannot be applied.

60. However, the position that makes law does not address the issue of whether the gain in question could be characterized as a "fair value variation" in the context of the merger. I mean, even if the credits were revalued as a result of the merger (and the Applicant acquired them at a value less than the post-merger valuation), could the gain be characterized as resulting from a "fair value variation" and thus fall within the scope of the exception provided for in article 18, no. 9 of the CIRC? I do not pursue this line of reasoning further, as it would require a more detailed analysis of the financial and tax position of both the Merged Company and the Applicant at the time of the purchase and sale operation.

Termos da declaração de voto de vencido (Segunda Questão)

61. Atendendo ao exposto, embora não concorde integralmente com a conclusão de que o montante de €521.668,00 deva ser tributado em sede de IRC, reconheço que a posição que faz vencimento identifica uma questão fiscal relevante, ainda que, na minha convicção, a questão não tenha sido analisada de forma adequada e completa, especialmente no que respeita ao contexto em que a operação teve lugar (isto é, no contexto da operação de fusão) e ao regime fiscal aplicável às operações de fusão (artigos 73.º e seguintes do CIRC).

62. Assim, sobre a segunda questão do pedido de pronúncia arbitral, sem prejuízo de reconhecer que a posição que faz vencimento identifica um problema fiscal relevante, considero que a análise efetuada não foi suficientemente cuidada e completa, e que a questão seria mais adequadamente resolvida, considerando o contexto da operação de fusão e o regime fiscal específico das operações de fusão.