IRC Exemption for Fair Value Shareholdings Under Article 32(2) EBF – CAAD Ruling 351/2016-T

ARBITRAL DECISION

The arbitrators Councillor Maria Fernanda dos Santos Maçãs (President), Doctor Rui Duarte Morais (Member) and Doctor Manuel Pires (Member), agree as follows:

I. REPORT

A) Constitution of the Arbitral Tribunal

1. A…– SGPS SOCIEDADE UNIPESSOAL, LDA., taxpayer no.…, with registered office at …, no.…, …, …-… Lisbon (hereinafter referred to as "Claimant"), filed a request for arbitral pronouncement and constitution of a Collective Arbitral Tribunal, pursuant to the provisions of Article 4º and No. 2 of Article 10º of Decree-Law No. 10/2011, of 20 January [Legal Framework for Tax Arbitration (RJAT)], in which the Tax and Customs Authority is the respondent (hereinafter also referred to as "Respondent").

2. The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 18-07-2016.

2.1. In exercise of the option for appointment of arbitrator provided for in paragraph b) of No. 2 of Article 6º of the RJAT and in compliance with the provisions of paragraph g) of No. 2 of Article 10º and No. 2 of Article 11º of the same statute, the Claimant appointed as Arbitrator Prof. Doctor Rui Duarte Morais.

2.2. Under the terms of paragraph b) of No. 2 of Article 6º and No. 3 of Article 11º of the RJAT, and within the deadline provided for in No. 1 of Article 13º of the RJAT, the highest official of the Tax and Customs Authority ("TA") appointed as Arbitrator Prof. Doctor Manuel Pires.

2.3. According to the provisions of Nos. 5 and 6 of Article 11º of the RJAT, the President of CAAD notified the Claimant of the appointment of the Arbitrator by the highest official of the Tax Administration on 31-08-2016 and notified the arbitrators appointed by the parties to appoint the third arbitrator who shall hold the position of President Arbitrator, with the Honourable Arbitrators appointed by the parties agreeing, on 15-09-2016, on the appointment of Councillor Maria Fernanda dos Santos Maçãs as President Arbitrator.

2.4. On 15-09-2016, the President of CAAD informed the Parties of this appointment, under the terms and for the purposes of the provision in No. 7 of Article 11º of the RJAT.

2.5. In compliance with the requirement set out in paragraph c) of No. 11º of the RJAT, the Collective Arbitral Tribunal was constituted on 30-09-2016.

2.6. Accordingly, the Arbitral Tribunal is duly constituted to hear and decide the subject matter of the proceedings.

B) Request for Arbitral Pronouncement

1. The request for arbitral pronouncement is an assessment of the legality of Corporate Income Tax Assessment No. 2016…, for the fiscal year 2012, which resulted in a total Corporate Income Tax amount payable of € 8,942,701.12.

2. The Claimant further petitions that the TA be ordered to pay compensation for the expenses incurred by the Claimant with the establishment, provision and maintenance of a guarantee for the suspension of tax enforcement proceedings No. …2016….

3. The contested assessment was issued by the TA following an inspection procedure, within the scope of which corrections were made relating to the tax treatment to be given to changes in fair value of equity investments held by the Claimant in B…, S.A. ("B…") measured through results.

C) Position of the Parties

1. The Claimant alleges, in summary, that:

• being a Managing Company of Equity Investments ("SGPS"), such gains and losses would always fall within the scope of the special regime of Article 32º, No. 2, of the Tax Benefits Statute (EBF), and would not contribute to taxable income;

• if not understood in this manner, it must be concluded that the fair value of financial investments, i.e., financial instruments available for sale, corresponding to equity interests or assets held in a stable and lasting manner, is, in any case – regardless of the accounting option actually taken by the taxpayer between NCRF 27 or IAS 39 - irrelevant for tax purposes, by restrictive interpretation of paragraph a) of No. 9 of Article 18º of the Corporate Income Tax Code, which should be applied solely to fair value adjustments through results determined in relation to financial instruments held for trading;

• the non-conformity of the result of the literal interpretation of paragraph a) of No. 9 of Article 18º of the Corporate Income Tax Code with its ratio is induced by the accounting imprecision introduced by NCRF 27, which does not distinguish, for measurement purposes, financial instruments held for trading from financial investments, subjecting both indiscriminately to fair value with a charge to results, an imprecision that was not corrected by the tax norm;

• it proceeded to correct, for tax purposes, all positive and negative fair value adjustments determined, namely those recorded in the fiscal years 2011, 2012 and 2013, adding fair value losses and deducting fair value gains determined, on the understanding that fair value relating to financial investments is not relevant for tax purposes;

• the TA validated the tax treatment given by the Claimant to the loss of € 107,992,499.49 determined in fiscal year 2011;

• however, regarding fiscal year 2012, the TA maintains that the positive variations in fair value of equity investments held by the Claimant in B… were relevant for tax purposes (forming part of the Claimant's taxable profit), under Article 18º, No. 9, paragraph a), of the Corporate Income Tax Code, and Article 32º of the Tax Benefits Statute ("EBF") was not applicable to them, and therefore proceeded to issue the contested assessment;

• the equity investment held by the Claimant in B… lost its entire value as a result of the circumstances that occurred in 2014, whereby the Claimant determined, in relation to this equity investment, a loss amounting to € 228,679,068.09 (corresponding to the accumulated cost of acquisition of said equity investment);

• by considering some fair value adjustments irrelevant and others relevant for tax purposes, the TA introduces a disruption in the tax regime for fair value taxation and seeks to assess approximately € 19 M of tax for negative fair value of € 50,202,396.08 determined in fiscal years 2011, 2012 and 2013, relating to financial equity interests for which the Claimant recorded a total loss of € 228,679,068.09 that it will not recover as a result of the circumstances affecting B…;

• the reasoning of the contested assessment is based on a literal, limited and clearly contrary reading to its spirit and system, which leads to a patently absurd result from a tax perspective, of paragraphs a) of No. 9 of Article 18º and paragraph b) of No. 5 of Article 46º of the Corporate Income Tax Code (and also of the aforementioned No. 2 of Article 32º of the EBF), which results in disregarding negative value variation and considering positive variations for tax purposes;

• the contested assessment is unconstitutional, for violation of the principle of taxation of actual income and the principle of contributory capacity, in its aspect of taxation by actual profit, under No. 2 of Article 104º of the Constitution, by subjecting to taxation gains and losses without any adherence to the gains and losses actually determined by the taxpayer; and for violation of the principle of equality;

• the contested assessment also violates the principle of justice;

• the contested assessment further violates the principle of good faith, which must govern administrative activity;

• the TA classified the inspection procedure as internal in nature, under Article 13º of the Regulation of Tax Inspection Procedures (RCPIT), but in reality, there was an external inspection procedure, whereby the TA did not comply with any of the formalities governing this form of procedure, namely Nos. 1 and 2 of Article 46º, Article 49º of the RCPIT.

1. The TA submitted its reply and attached the administrative file, alleging, in the sense of dismissal of the claim, in summary, that:

• the inspection procedure that led to the contested assessment was correctly classified as internal, since the corrections were based solely on documents provided by the Claimant following request by the TA, which does not alter the nature of the procedure, given the concept contained in the new version, given by Decree-Law No. 36/2016, of 1 July, of paragraph a) of Article 13º of the RCPIT;

• the classification of the procedure as internal or external has, in the specific case, no relevance;

• there was no violation of the principle of justice since the TA, acting in obedience to the principle of legality to which it is bound, merely sought to require the tax due in light of certain realities which the legislator, for reasons of political, economic and financial order, understood to be subject to taxation;

• as the request for arbitral pronouncement concerns the declaration of the illegality of the Corporate Income Tax assessment relating to fiscal year 2012, being therefore the tax situation of that fiscal year that is under scrutiny and not that of 2014, the element generating the alleged injustice is not properly linked to the application of measurement criteria based on fair value, both at the accounting and tax level, nor to the interpretation that the TA makes of the applicable provisions, but rather and solely to the resolution of B… that occurred in August 2014;

• it was the Claimant who chose to account for the shares according to NCRF 27, when it would have been sufficient to choose the IASB standard to exclude the applicability of paragraph a) of No. 9 of Article 18º of the Corporate Income Tax Code, in which case it would have been taxed according to the "realization" criterion;

• its (the TA's) conduct was not non-compliant with the principle of good faith and has no legal basis whatsoever, since, given that [regarding fiscal year 2011] the Claimant itself had made the correction in Box 07 of Model Form 22, it was only for the TA to conclude, as it did, that "no non-compliance in tax matters is verified";

• the regime of temporal allocation associated with the adoption of fair value as a measurement criterion did not appear, in the context of Corporate Income Tax, with the creation of Article 18º, No. 9, paragraph a) - whereby this norm cannot be considered as an innovation - since it has as precedents Article 57º, No. 2, paragraph a), of Law No. 53-A/2006, of 29 December, which established transitional rules for entities subject to supervision by the Bank of Portugal obliged to prepare their individual accounts in accordance with adjusted accounting standards (NCA); subsequently, a norm was created with identical wording - Article 2º, No. 2, paragraph a), of Decree-Law No. 237/2008, of 15 December, which established a transitional regime for adaptation of rules for determining taxable profit under Corporate Income Tax to the new accounting regulation applicable to the insurance sector resulting from the adoption of International Accounting Standards (IAS); since the introduction of Article 68º-B, added by Article 2º of Decree-Law No. 257-B/96, of 31 December, a similar periodization rule has been admitted for income and expenses resulting from the application of market value (which corresponds in this context to what is now referred to as fair value) to derivative financial instruments when these were operations carried out on stock exchanges, outstanding at the end of a fiscal year;

• the qualification of the provision of Article 18º, No. 9, paragraph a) as an exceptional norm would be inappropriate, since, for that type of quoted assets in a regulated market, the Corporate Income Tax Code does not contemplate a general rule and a special rule of temporal allocation for income and expenses. That is, Article 18º, No. 9, paragraph a) provides the only applicable rule for the realities provided for therein, therefore, at best it could be considered as a particular regime of temporal allocation of income/gains and expenses/losses resulting from measurement by the fair value criterion in certain precise situations;

• being certain that paragraph a) of No. 9 of Article 18º of the Corporate Income Tax Code is limited to regulating mere temporal allocation of income, i.e., periodization of adjustments resulting from the application of fair value and not the taxation or non-taxation of such income, it is also true that paragraph f) of No. 1 of Article 20º of the same Code considers as income contributing to the formation of taxable profit "those resulting from the application of fair value in financial instruments" and it was precisely this legal basis that the TA used to make the correction to taxable profit;

• it is not for the TA to make a judgment on the merits of legal norms but rather to apply them in accordance with the sense that emanates from them;

• the TA disclosed, through the Explanatory Note relating to case 39/2011 – Dispatch of 24/2/2011 by the Director-General (subject: Tax treatment of loss determined by SGPS as a result of the application of the fair value model), the interpretation and articulation of Articles 18º, No. 9, paragraph a) and 46º, No. 1, paragraph b), of the Corporate Income Tax Code and Article 32º, No. 2 of the EBF, the relevant part of which states the following: «1. Article 18º, No. 9, paragraph a) of the Corporate Income Tax Code (CIRC) provides that adjustments resulting from the application of fair value contribute to the formation of taxable profit when they concern financial instruments recognized at fair value through results, provided that, being equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, an equity interest exceeding 5% of the respective equity capital. 2. Accountingly and fiscally these adjustments resulting from the application of fair value are considered gains by increases in fair value or losses by reductions in fair value. 3. Article 46º, No. 1, paragraph b) of the Corporate Income Tax Code expressly states that capital gains or capital losses are not considered realized when they are gains or losses suffered through onerous transfer of financial instruments recognized at fair value in accordance with paragraph a) of No. 9 of Article 18º of the Corporate Income Tax Code. 4. As the regime of capital gains and losses is not applicable, the reinvestment regime for realization amounts provided for in Article 48º of the Corporate Income Tax Code will consequently also not be applicable, whereby in the case a gain by increase in fair value is determined, this contributes in full to the formation of taxable profit. (…) 7. In the case of an SGPS, the regime established in Article 32º, No. 2, of the EBF does not apply, since the same only applies to capital gains and losses realized by them. 8. Thus, adjustments resulting from the application of fair value are fiscally relevant under the terms indicated above when they concern financial instruments recognized at fair value through results, provided that, being equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, an equity interest exceeding 5% of the respective equity capital.», from which it results that the alternative thesis developed by the Claimant, which is based on the "extensive interpretation of No. 2 of Article 32º of the EBF, so as to encompass fair value adjustments determined by an SGPS." (cfr., Article 511º p.p.a), also has no legal basis whatsoever. All the more so as the tax legislator, following the introduction of paragraph a) of No. 9 of Article 18º did not adapt the wording of that provision of the EBF and, by maintaining the terms capital gains and losses, whose definition is given by Article 46º of the Corporate Income Tax Code, clearly assumed that adjustments resulting from the measurement of financial instruments at fair value were excluded from the scope of the tax benefit;

• Regarding the claim for compensation for undue provision of guarantee (in case of success of the opposition) the expenses incurred with said guarantee were not proven, and the Tribunal cannot order compensation for damage of which it is unaware.

1. By dispatch of 17 November 2016, the meeting provided for in Article 18º of the RJAT was waived, and 30 March 2017 was fixed as the deadline for issuance of the Arbitral Decision. By dispatch of 27 March, that date was extended to 30 May 2017.

2. By dispatch of 4 December 2016, the request was granted to attach to the proceedings documents that the Claimant had protested to attach with the request for Constitution of the Arbitral Tribunal, which resulted in the attachment of three opinions.

3. The parties submitted arguments contending, in essence, for what was maintained in their pleadings.

II. SANATION

1. The request for arbitral pronouncement is timely because it was filed within the deadline provided for in paragraph a) of No. 1 of Article 10º of the RJAT.

2. The parties enjoy legal personality and capacity, have legitimate standing with respect to the request for arbitral pronouncement and are duly represented, under the terms of the provisions of Articles 4º and 10º of the RJAT and Article 1º of Ordinance No. 112-A/2011, of 22 March.

3. The Tribunal is competent to hear the request for arbitral pronouncement filed by the Claimant.

4. No objections were raised that need to be decided.

5. There are no procedural defects that prevent the merit from being addressed.

III. MERITS

III.1. FACTUAL MATTERS

§ 1. Proven Facts

The following facts are deemed proven:

a) The Claimant is a commercial limited liability company established in the form of an SGPS that has as its corporate purpose the "management of equity interests in other companies, as an indirect form of conducting economic activities (cf. doc. no. 4, attached to the file) and is held exclusively (as the sole holder of an equity interest) by C…, S.A. ("C…"), a Brazilian company, taxpayer no.…, that carries on banking activity (cf. doc. no. 4 and page 10 of doc. no. 5, attached to the file);

b) On 31 December 2010, the Claimant held 70,583,333 shares, representing 6.05% of the equity capital of B…, with an accumulated cost of acquisition of € 282,761,656.02 (cf. doc. no. 6 attached to the file), an equity interest that remained unchanged from that date until mid-November 2011;

c) On 11 November 2011, an extraordinary general meeting of B… deliberated to increase the equity capital to € 786,946,959.99 (cf. page 21 of the report and accounts of B… for 2011, doc. no. 7, attached to the file), as a result of which 294,573,418 new shares were issued, such that the equity capital of B… became € 4,030,232,150.40, represented by a total of 1,461,240,084 shares (cf. doc. no. 7 attached to the file);

d) Following the subscription of 123,520,832 new shares of B…, the Claimant maintained its equity interest, now representing 4.83% of the equity capital of B…, with an accumulated cost of acquisition of € 331,552,384.66, as appears from the table below:

e) On 3 August 2014, the Bank of Portugal approved a resolution measure for B…, under which all the activity, assets, liabilities, off-balance-sheet items and assets under management of B… were transferred to a new entity, D…, S.A., further it was decided that "the Resolution Fund" would become the sole holder of the equity capital of the new institution, with the objective of allowing the subsequent entry of new capital and reconstituting a shareholder base for this bank" (cf. points 11 and 13 of doc. no. 12, attached to the file);

f) This resolution measure was accompanied by a statement from the Securities Market Commission (CMVM), to the same effect, on 5 August 2014 (cf. doc. no. 13, attached to the file);

g) The Claimant was left with an equity interest in the entity that retained all the toxic assets of B… that were not subject to transfer to D… (cf. doc. no. 14, attached to the file);

h) Following the introduction of the Accounting Standards System (SNC) in 2009 (by Decree-Law No. 158/2009, of 13 July), the Claimant proceeded to adopt NCRF 27 for the measurement of the equity investments in B… (cf. financial statements, management report, statutory audit report, ledgers, account extracts and simplified company information ("IES") of the Claimant for the fiscal years 2010, 2011, 2012 and 2013;

i) The Claimant proceeded to make transition adjustments from Prior Accounting Chart (POC) to SNC, after which it began, in 2010 (in the first fiscal year of application of SNC), measurement at fair value through results;

j) In 2011 a fair value variation (unrealized and contingent loss) was accounted for by the Claimant in the amount of € 107,992,499.49 relating to the 70,583,333 shares of B… that it held throughout that fiscal year (cf. doc. no. 19, attached to the file);

k) In 2012, with the subscription of shares in the capital increase, all the equity interests held by the Claimant (whose quotation on 31 December 2012 was € 0.89 (cf. doc. no. 25, attached to the file), experienced an appreciation of € 30,615,520.31 (cf. doc. no. 20, attached to the file);

l) The Claimant was subject to inspection procedures that had as their object fiscal year 2011, on one hand, and fiscal years 2012 and 2013, on the other;

m) In the inspection relating to fiscal year 2011, the TA concluded (Official Notice no.…, of 13 May 2014) that "no tax or tax-related acts result that would be unfavorable to it" (cf. doc. no. 31, attached to the file);

n) In the work program on "Corporate Income Tax – Control of other costs recognized in the fiscal year" it states that "The costs recorded by the A… in 2011 consist, in their vast majority, in the recognition of impairment in the value of its financial equity interest in the equity of B… . The impairment thus recognized amounts to 107,992,499.49 in 2011. The cost recognized in the fiscal year was entirely neutralized by an increase recorded in box 721 of the Corporate Income Tax return Model 22." (cf. doc. no. 32, attached to the file);

o) In the context of the inspection procedure relating to the Corporate Income Tax fiscal years 2012 and 2013, the Claimant was notified, through Official Notice no.…, of 2015.07.30 and subsequently, through its representative, to provide, under the collaboration principle, to the proceedings, among others, the following accounting and tax supporting elements relevant to the determination of taxable profit, in summary:

− Copy of analytical ledgers, reported to 31 December (before and after determining results);

− Extracts of accounts relating to impairments recorded, as well as losses and gains resulting from the treatment of the equity interest at fair value, for 2012;

− Summary map of the number of shares held and quotations used to make the accounting records during the years 2012 and 2013;

− Extract of account 569 – with transition adjustments, for 2012 and 2013, as well as demonstration of the breakdown of the amount accounted for and its respective tax treatment;

− Report and accounts for the fiscal years 2012 and 2013, including statutory audit reports" (Article 59º of the (cf. docs. nos. 33 and 35, attached to the file);

p) Moreover, "several telephone contacts and email exchanges were made with the Tax Advisor, based on the exchange of clarifications to some doubts and/or questions arising from the analysis of the accounting-financial documentation provided by the latter to the proceedings" (cf. page 11 of the Final Report attached below to the file, doc. no. 35);

q) The TA notified the Claimant of the draft report through Official Notice no.…, of 10 December 2015, in the context of which corrections to the taxable profit declared for the two fiscal years under inspection are proposed, in the amounts of € 30,615,520.31 and € 27,174,583.10, respectively, under Article 18º, No. 9 of the Corporate Income Tax Code (cf. doc. no. 33, attached to the file);

r) The corrections correspond to positive fair value variations recorded accountingly and not disclosed for tax purposes (cf. docs. nos. 20 and 21, attached to the file);

s) The TA accepted the value of the gains determined accountingly by the Claimant (cf. page 19 of doc. no. 33, attached to the file);

t) In the prior hearing, the Claimant invoked that, if the TA wished to maintain such proposed corrections with reference to fiscal years 2012 and 2013, it should always proceed to make a symmetrical correction for fiscal year 2011, in which a fair value loss of € 107,992,499.49 was determined that the Claimant disregarded for tax purposes and increased in the Corporate Income Tax return Model 22 (cf. docs. nos. 19 and 27, attached to the file);

u) The TA maintained the corrections proposed in full in the final inspection report, which gave rise to the contested assessment;

v) The Claimant did not proceed to pay the aforementioned assessments, having filed a request offering as guarantee to the TA the equity interests that it still holds in B…, requesting waiver of the remaining guarantee amount to be provided, if necessary (cf. doc. no. 46, attached to the file).

§ 2. Unproven Facts

There are no other facts, with relevance to the arbitral decision, to be deemed unproven.

§ 3. Reasoning on the Factual Matters

Regarding the assessment of the factual matters, the Tribunal's conviction was based on the free evaluation of the positions taken by the parties on factual grounds, the content of the documents attached to the proceedings (namely the administrative file).

III.2. LEGAL MATTERS

The questions to be decided are the following:

a) Whether, in 2012, the capital gains obtained by an SGPS, relating to financial investments accounted for at fair value through results, would be exempt from Corporate Income Tax by virtue of the provision in Article 32º, No. 2, of the EBF;

b) Whether a correct application was made of the provisions of Articles 18º, No. 9, paragraph a) and paragraph b) of No. 5 of Article 46º of the Corporate Income Tax Code;

c) Whether the contested assessment is unconstitutional for violation of the principles of contributory capacity, taxation of actual income and justice;

d) Whether the TA's conduct violated the principle of good faith.

e) Whether the inspection procedure that led to the contested assessment should have been classified as external.

In obedience to the provision in Article 124º of the Code of Tax Procedure (CPPT), the defects invoked by the Claimant will be assessed in the order indicated above.

III.2.1. Application of the Provision in Article 32º, No. 2, of the EBF

In 2011, Article 32º, No. 2, of the EBF provided as follows: capital gains and losses realized by SGPSs, SCRs and ICRs from equity interests of which they are holders, provided that they are held for a period not less than one year, and likewise, the financial expenses incurred with their acquisition do not contribute to the formation of the taxable profit of these companies.

This legal solution, abandoned with effect from the year 2014, was long-standing[1].

As is known, the Corporate Income Tax Code, in its original version, enshrined, without exceptions, the principle of realization, that is, as relevant here, income (capital gains) resulting from the transfer of an asset were only fiscally considered at the moment of its transfer.

With respect to capital gains (and also to capital losses), the assertion of the realization principle was made in a manner that could be considered not only express but repetitive[2].

This situation remained, in essence[3], unchanged until the entry into force of Decree-Law No. 159/2009, of 13/07, which "adapted the rules for determining taxable profit to international accounting standards as adopted by the European Union, as well as national accounting standards that aim to adapt accounting to those standards".

One of these adaptations was No. 9 of Article 18º of the Corporate Income Tax Code, which, as relevant here, provides: Adjustments resulting from the application of fair value do not contribute to the formation of taxable profit, being allocated as income or expenses in the tax period in which the elements or rights that gave rise to them are alienated, exercised, extinguished or liquidated, except when:

a) They concern financial instruments recognized at fair value through results, provided that, being equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, an equity interest in the capital exceeding 5% of the respective equity capital;

We have, therefore, that, considering only its literal element, Article 32º, No. 2, of the EBF only exempts realized capital gains obtained by SGPSs, whilst Article 18º enshrines the fiscal relevance of potential capital gains (gains accounted for at fair value in results) for certain situations, namely that provided for in its paragraph a), to which the factual situation of the Claimant is subsumed.

The TA bases the assessment on a strictly literal interpretation of these provisions.

The Claimant argues for an actualist interpretation of Article 32º, No. 2, of the EBF, which would lead to the exemption from taxation of capital gains subsumable under Article 18º, No. 9, paragraph a), of the Corporate Income Tax Code.

Assessing:

It is beyond doubt that Article 32º, No. 2, of the EBF enshrines an exemption - a tax benefit - i.e., an exceptional measure instituted for the protection of relevant extrafiscal public interests that are superior to the taxation that it prevents (cfr. Article 2º, No. 1, of the EBF).

That is, the legislator considered that the public interest linked to the development of SGPSs justified the non-taxation of capital gains obtained by these companies with the transfer of equity interests, provided that certain requirements were met. Requirements that are verified in the concrete case.

The question that we believe should be asked is simple: is the superior public interest that led to the exemption of these capital gains different depending on whether we are dealing with realized capital gains or capital gains accounted for at fair value through results?

It seems clear to us that the relevant criterion will always be the nature of the gain and not the moment of its taxation.

Thus, when the taxpayer[4] chooses accounting according to the realization principle or according to the fair value principle, the nature of the income (it is always a capital gain) is not altered, nor is its amount.

In reality, from the perspective of the continuity of business activity, the capital gain that is taxed always corresponds to the realized capital gain, because, in the fiscal year in which the transfer of the equity interest occurs, a gain or a loss will be recorded depending on whether the realization value is lower or higher than that at which such equity interest was accounted for in light of fair value criteria. The "referential" for taxation is, therefore, always the "realization value".

In these terms, the choice of one or the other accounting criterion merely alters the moment in which taxation occurs, which, in the fair value system, instead of occurring only upon alienation of the equity interests in question (as occurs in the realization system), will occur over the various fiscal years during which the holding of the equity interests is prolonged, by the consideration of potential increases or decreases (assessed according to fair value - market value) in the value of such equity interests at the end of each fiscal year.

Moreover, an exemption is an essential element of a tax: it is the result of a choice (which is the legislator's) of the fiscal and extrafiscal interests contemplated in a given situation, whereby its existence and applicability cannot be the result of an accounting option. In these terms, it seems to us unsustainable the understanding that an exemption "ceases to exist" when a particular accounting technique is chosen (accounting at fair value), all the more so as this would mean placing the realization of the extrafiscal interests underlying the exemption in the "hands" of each taxpayer.

It is, moreover, clear to the tribunal that there is a manifest and incomprehensible lack of harmony between the provision in Article 32º, No. 2 of the EBF and that provided for in Article 18º, No. 9, paragraph a), of the Corporate Income Tax Code, and that the coherence and rationality of the system of taxation of SGPSs seem to require that all capital gains obtained by them with the transfer of equity interests be exempt (provided that the other legal requirements are met), since it was the extrafiscal interest that the legislator wished to give primacy to when providing for the exemption contained in the first of the aforementioned norms.

Having reached this point, it is necessary to ascertain whether the Claimant is correct when it argues for the need for an actualist interpretation of the content of Article 32º, No. 2, of the EBF, considering what is now provided for in Article 18º, No. 9, paragraph a), of the Corporate Income Tax Code, mediated by the principle of interpretation in conformity with the Constitution of the Portuguese Republic (CRP).

Let us see.

According to No. 1 of Article 9º of the Civil Code, "Interpretation must not be confined to the letter of the law, but shall reconstruct the legislative intent from the texts, having especially in regard the unity of the legal system, the circumstances in which the law was made and the conditions specific to the time in which it is applied".

To grasp the meaning of the law, the interpreter, as FRANCESCO FERRARA notes (Interpretation and Application of Laws, translation by Manuel de Andrade, 3rd ed., Coimbra, 1978, pp. 127 ss. and 138 ss.), makes use of various means: "First it seeks to reconstruct the legislative intent through the words of the law, in their linguistic and stylistic connection, seeking the literal sense. But this is the lowest degree, the initial form of interpretive activity. Words may be vague, equivocal or deficient and offer no guarantee of faithfully and completely reflecting the intent: the literal sense is only the possible content of the law: in order to say that it corresponds to the legislative intent, it must be subjected to criticism and control."

And it continues: "Now, in this task of interrelation and evaluation that accompanies the grasping of literal sense, logical elements intervene, the doctrine pointing to elements of a systematic, historical and rational or teleological nature".

The author further clarifies the significance of each of these elements:

"The systematic element comprises the consideration of other provisions that form the complex of norms of the institute in which the interpreted norm is integrated, that is, that governs the same matter (context of the law), as well as the consideration of legal provisions that govern parallel normative problems or related institutes (parallel places). It also comprises the systematic place that pertains to the interpreted norm in the overall legal order, as well as its consonance with the spirit or intrinsic unity of the entire legal order"; "The historical element comprises all matters related to the history of the substantive provision of the same or identical question, the sources of the law and its preparatory works"; "For its part, the rational or teleological element consists in the reason for being of the norm (ratio legis), the purpose pursued by the legislator when enacting the norm, the solutions that it has in view and seeks to realize."

Regarding this criterion, the same author emphasizes that «The norm must be understood in the sense that best meets the achievement of the result it seeks to obtain. For the law behaves toward the ratio iuris as the means behaves toward the end: whoever wants the end also wants the means. To determine this practical purpose of the norm, it is necessary to pay attention to the relations of life, for whose regulation the norm was created. We must start from the concept that the law seeks to satisfy the economic requirements that flow from the relations (nature of things). And, therefore, an attentive and profound study is necessary, not only of the technical mechanism of the relations, but also of the requirements that derive from those situations, proceeding to the evaluation of the interests at stake» (Idem, p. 141).

We assume an objectivist orientation in the interpretation of legal norms, since «it favors more the correctness and justice of law, as it allows extracting from the texts the most reasonable sense that they contain and at the same time (in the actualist aspect) confers upon the law greater flexibility, for, besides facilitating its direct application to situations that the legislator did not foresee, it takes advantage of the potentiality, contained in the text, of constant adaptation to the criteria of justice and opportunity specific to each time in which the law is applied» (BAPTISTA MACHADO, Introduction to Law and to Legitimating Discourse, 1982, reprint, 2016, p. 179 ss).

In the sense of an "objectivist actualism", JOSÉ DE OLIVEIRA ASCENSÃO (Law Introduction and General Theory, 10th ed., Revised, Almedina, Coimbra, 1997, p. 397) ponders: "Given the orientation we defend, actualism appears to us to be necessary. If we affirm the primacy of the social order, if we indicate that the law only has meaning when integrated into that order, we make an actualist assertion". Interpretation which, according to the Author, finds in the text of Article 9º, No. 1, of the Portuguese Civil Code its consecration.

Indeed, he notes that "Among the elements to which attention must be paid in the interpretation of the law are the conditions specific to the time in which it is applied. This reference is entirely incomprehensible outside of an actualist understanding. An actualist can explain that among the auxiliary elements of interpretation are historical elements (…). But for a historicist it is entirely absurd that the meaning of a source can vary as a result of subsequent circumstances: it would be immutably fixed from the beginning".

"The justification we give is permanent, and not valid only at the moment of the formation of the law. The law, once created, is situated in a social order, which is necessarily alive, open to all the stimuli that in it provoke historical alterations. The formula in which the law is embodied is fixed: but the meaning of that formula can vary, depending on the incidences of the circumstantialism from which their meanings stem."

Also FRANCESCO FERRARA (ob. cit., p. 137) considers: "Given the objective character of the meaning of the law, it is concluded that this may have a different value from what was thought by its authors, that it can produce unforeseen or at least unexpected consequences at the moment it was made, and finally that with the passage of time the principle gains a broader horizon of application, extending to relations different from those originally contemplated, but which, being of equal structure, fall under its domain (projection phenomenon)".

In jurisprudence, the ruling of the Supreme Court of Justice, of 4 October 2007, in case no. 07B1710, is highlighted as relevant to the case at hand, in that it is a decision that, breaking with a strictly literal interpretation of Article 505º of the Civil Code (which established as a circumstance exonerating from liability the exclusive fault of the injured party, defended by traditional doctrine), gave prevalence to a "progressive or actualist interpretation" of the mentioned provision, so as to accommodate the rule of concurrence of the fault of the injured party with the risk inherent to the vehicle.

In the summary of that ruling, it can be read, among other things, that:

"2. According to traditional jurisprudence and doctrine, inspired by the teaching of Antunes Varela, in matters of traffic accidents, if any of the circumstances referred to in Article 505º of the Civil Code is verified - notably, if the accident is attributable to a fact, culpable or not, of the injured party - this excludes the objective liability of the vehicle holder, not admitting the concurrence of the special danger of the vehicle with the fact of the victim, so as to lead to a distribution of liability: liability for risk is excluded by the act of the injured party.

1. This doctrinal and jurisprudential current, encompassing in the exonerating dimension of Article 505º and treating in the same manner situations that are most disparate - encompassing mechanical behaviors of injured parties, dictated by fear or instinctive reaction, acts of children and persons unable to form intent, behaviors of precipitous or momentary distraction, etc. - and standardizing the absences of conduct, the non-culpable conducts, the slightly culpable and the very culpable conducts of injured parties, leads, often, to shocking results.

2. (…)

3. The text of Article 505º of the Civil Code should be interpreted in the sense that it accommodates the rule of concurrence of the fault of the injured party with the risk inherent to the vehicle, that is, that the objective liability of the vehicle holder is only excluded when the accident is due solely to the injured party or to a third party, or when it results exclusively from a cause of force majeure foreign to the operation of the vehicle.

4. (…)

5. To this result a progressive or actualist interpretation of Article 505º leads, which takes into account the unity of the legal system and the conditions of the time in which such norm is applied, in which liability for risk is focused in a new light, illuminated by new conceptions of solidarity and justice."

Applying the interpretive vision set out to the case at hand, it is important to consider that the balance found by the legislator in the taxation of SGPSs, under Article 32º, No. 2 of the EBF, was translated into not giving fiscal relevance to capital gains and losses, not taxing, in return, financial expenses. The teleological rationality underlying this regime was based on the principle of realization, in accordance and consonance with the principles of contributory capacity, equality and justice.

It should be noted, however, that, in the meantime, with the evolution of accounting technique the theory of fair value was instituted, such that relevance came to be given also to latent capital gains, as results from the provision in Article 18º, No. 9, paragraph c), of the Corporate Income Tax Code.

There was, thus, a paradigm shift that requires that these alterations should merit consideration within the scope of the interpretation to be undertaken in view of the unity of the legal-fiscal system and the direction in which it has evolved.

In these terms, the interpreter should, in the concrete case, find a solution so as to apply the same benefit both to realized capital gains and to latent capital gains, under penalty of identical realities being taxed differently.

In truth, the strictly literal interpretation of No. 2 of Article 32º of the EBF, sustained by the TA, would result in an unjustified differentiated treatment of companies that find themselves in materially identical situations, by demonstrating equal contributory capacity. Contributory capacity that is not altered by the different moment in which taxation deriving from it should occur. It would be a frontal violation of the principle of equality, whose greater dimension is, precisely, that of "taxation according to contributory capacity" (in this sense, CASALTA NABAIS, Tax Law, 2016, p. 151 and ss), to treat identically equal realities differently merely because the moment in which their taxation should occur is different.

In truth, as we have already emphasized, the contributory capacity (the taxable income) resulting from the obtaining of a capital gain is the same, whether its accounting is done according to the principle of realization or to fair value. What is different – as we have also already noted - is only the periodization, for tax purposes, of such income (the fiscal years in which gains or losses are to be fiscally disclosed).

We have, therefore, on the one hand, a strictly literal interpretation centered on the historical element that restricts the application of Article 32º, No. 2, of the EBF, to realized capital gains, leading to a result of manifest systemic incoherence and to the violation of constitutional principles of taxation of actual income and equality.

However, an interpretation that takes into account, beyond the literal sense (current) of the provision, also the systematic and teleological elements and the requirements of the constitutional principles mentioned, admits application of Article 32º, No. 2, of the EBF, to latent (potential) capital gains and losses.

Thus it proves necessary to extend the field of application of the norm, defined by the text, based also on its inherent teleology, to cases that would not be formally encompassed by that text, which "implies the abandonment of a purely hermeneutic sense (hermeneutic-exegetical) and the assumption of a truly normative sense (practical-normative) in legal interpretation, so as to avoid antinomies or incongruities in the system, with the consequent legal insecurity." (CASTANHEIRA NEVES, Legal Methodology, Stydia Iyridica, Bulletin of the Faculty of Law of Coimbra, Coimbra Publisher p. 108).

The paths of actualist interpretation and teleological extension, which are invoked here, make it possible, as appears from the foregoing, to ensure that identical realities are treated equally, thus harmonizing the legal solutions.

It is, in truth, this methodological criterion that appears to be due in the context at hand.

In these terms, as the system has evolved in the direction of giving fiscal relevance also to potential or latent capital gains and losses, the interpretation of Article 32º, No. 2, of the EBF, in accordance with the stated parameters, leads to the conclusion that in the corresponding regime this evolution should be reflected, considering this type of capital gains and losses also included in the provision in question.

If, as KARL ENGISCH notes, "the boundary line between interpretation (especially extensive interpretation) on the one hand, and analogy, on the other, is fluid" (ob. cit., p. 239), the case at hand is still within the scope of interpretation, being covered by the "logical and teleological capacity for expansion of the law" (ob. cit., p. 243).

Indeed, gaps only appear "when neither the law nor customary law provide an immediate answer to a legal question", being that "the law provides an answer when this is extracted from it by interpretation, even when it is an extensive interpretation". To the extent that interpretation is sufficient to answer legal questions, the Law will not, therefore, be lacunose. On the contrary, "analogy" already possesses an integrative function" (KARL ENGISCH, Introduction to Legal Thought, Translation and preface by J. BAPTISTA MACHADO, 5th ed., Calouste Gulbenkian Foundation, Lisbon, p. 226).

It is therefore necessary, in the present case, to consider the innovative elements, of an accounting nature, that have, in the meantime, been absorbed by the legal-fiscal system, not yielding to the temptation of immobility and crystallization of the literal meaning of the provisions.

As noted by JOÃO DE CASTRO MENDES (Introduction to the Study of Law, Lisbon, 1994, p. 221) historical interpretation is opposed to actualist interpretation. "The first has as its objective to reconstruct the meaning that the law had at the moment of its elaboration and entry into force; the second, to determine the meaning that the law has at the moment of its interpretation. By alteration of circumstances and even of the meanings of words, the two meanings may be different". The importance of actualist interpretation resides, therefore, essentially in the fact that the law assumes "value as a social instrument, not as a piece of tradition".

The interpretation that admits the application of Article 32º, No. 2, to latent (potential) capital gains or losses is, moreover, the one that is more consistent with constitutional principles of taxation of actual income (provided for in Article 104º, No. 2, of the Constitution of the Portuguese Republic) and equality.

Now, one of the general principles of interpretation of legal norms and a "criterion of interpretation" is that of interpretation in conformity with the Constitution (cfr. KARL LARENZ, Methodology of Legal Science, 3rd ed., Calouste Gulbenkian Foundation, Lisbon, p. 480). According to this criterion, if the interpreter, through the application of the interpretive elements, arrives at more than one possible meaning to be assigned to a normative provision, the one that best fits the Constitution should be preferred.

In the concrete case, such hermeneutic rule, mediated by an actualist interpretation, points decisively to the interpretation of No. 2 of Article 32º of the EBF that we have endorsed above.

Thus, in an actualist perspective, in light of the evolution of accounting technical concepts effected, only an interpretation based on a teleological-objective criterion, and in conformity with the Constitution, avoids an insurmountable contradiction of valuation, which finds no reasonable basis and is contrary to the unity of the legal system.

All of which having direct application in the concrete case, necessarily leads to an actualist interpretation of Article 32º, No. 2, of the EBF, from which results the sense that the provision encompasses the exemption of capital gains obtained by SGPSs, in the conditions provided therein, regardless of whether their fiscal relevance occurs only at the moment of their transfer (principle of realization) or over the different fiscal years during which their holding is prolonged (fair value).

We adopt the understanding of GOMES CANOTILHO in an opinion attached to the present proceedings, according to which when the legislator in the text of Article 32º/2 of the EBF refers to realized capital gains and losses, this derives from the fact that only these contributed to the formation of a taxable profit under Corporate Income Tax.

"From the moment when the Corporate Income Tax Code undergoes an alteration that translates into the possibility of taxation of potential capital gains and losses, then the norm of Article 32º/2 should be subject to an actualist interpretation.

"The reasons that led the legislator to create the special taxation regime for SGPSs, reflected in Article 32º/2 of the EBF, and which are invoked in the ruling of the Administrative Tax Court cited above" [Case no. 0314/12, of 05/09/2012], "are valid for both realized capital gains and losses and for potential capital gains and losses".

"It would not be understood that the legislator, concerned with the importance of SGPSs to the national economy and recognizing their specificity, foresaw a special regime determining that realized capital gains and losses do not contribute to the formation of taxable profit and, simultaneously, subjected them to a general regime that admits, in certain cases (those of Article 18º, No. 9, paragraph a) of the Corporate Income Tax Code) the taxation of potential capital gains through fair value adjustments».

In the same sense, which the Tribunal likewise endorses, conclude PAULO DA MOTA PINTO and ANTÓNIO MARTINS, in an opinion attached to the proceedings (p. 35), when they state: «It will be said that the answer is evident, taking into account the reason for being and the purpose of the provision of Article 32º, No. 2, of the EBF, the context in which it was enacted and its alteration, all imposing an actualist interpretation: it would make no sense for the legislator to have wished to confer a tax benefit on SGPSs as a means to promote their activity to the benefit of the economy, when such entities realize capital gains by converting them into monetary means, and that, differently, it intends taxation of merely potential capital gains obtained by the same SGPSs, in a context where these came to be fiscally relevant. It will be said, therefore, that it seems clear that, by its reason for being, the tax benefit provided for in Article 32º, No. 2, of the EBF, must, by equality or even a fortiori, also include fair value adjustments (potential capital gains) that came to contribute, from 2010 onward, to the formation of taxable profit».

We also share what, to this effect, emphasizes GUSTAVO COURINHA, likewise in an opinion attached to the proceedings: (i) «the tax benefit contained in Article 32º, No. 2, of the EBF is an undisputedly subject-based tax regime [emphasis ours], structured by reference to the corporate form (SGPS)» (p. 60); (ii) "Article 32º/No. 2 of the EBF cannot be interpreted as a norm that decides in favor or against a particular method of periodization – realization or Fair Value. Instead, this article must be interpreted in neutral terms. This neutral interpretation proves more suited to its own nature, as a simple norm of determination of tax events (in this case, by exemption). Article 32º/No. 2 could not have intended to promote the use of one periodization method (realization) to the detriment of another (Fair Value). That is not its function, nor is any extrafiscal interest understood that would justify such treatment. Indeed, it is impossible to imagine what interest could explain a tax benefit that translates into the preference for the realization of capital gains, when it is precisely the opposite function pursued by SGPSs in corporate groups (…)» (pp. 65 and 66).

We therefore conclude that the income (capital gain) obtained by the Claimant enjoys the exemption provided for in Article 32º, No. 2, of the EBF, such that the Claimant's petition should succeed.

In deciding to the contrary, the TA incurred in illegality, and as a result, the assessment should be annulled, with the legal consequences ensuing.

III.2.2. Causes of Action Made Moot

The assessment of the other causes of action (defects of the contested assessment) invoked by the Claimant is thus necessarily made moot, with the exception of the petition for ordering the TA to pay compensation for undue provision of guarantee to achieve suspension of the coercive collection of the assessed tax.

III.2.3. On Compensation for Undue Provision of Guarantee

The Claimant petitions that the TA be ordered to pay compensation for the expenses incurred by the Claimant with the establishment, provision and maintenance of a guarantee for the suspension of tax enforcement proceedings No. …2016….

Article 53º, Nos. 1 to 3, of the General Tax Law (LGT) provides:

"1 - The debtor who, to suspend enforcement, offers a bank guarantee or equivalent shall be compensated in full or in part for the damages resulting from its provision, should it have been maintained for a period exceeding three years in proportion to the succeeding in administrative appeal, judicial opposition to enforcement or opposition to enforcement that concern the debt guaranteed.

2 - The period referred to in the preceding number does not apply when it is verified, in administrative complaint or judicial opposition, that there was an error attributable to the services in the assessment of the tax.

3 - The compensation referred to in No. 1 has as its maximum limit the amount resulting from the application to the guaranteed amount of the rate of indemnifying interest provided for in the present law and may be requested in the administrative complaint proceedings itself or judicial opposition proceedings, or autonomously."

Being a matter of an additional assessment (therefore, exclusively from the initiative of the services), now entirely annulled, it is verified that there was "an error attributable to the services", which confers to the Claimants the right to be fully compensated, within the legal limit, for the costs incurred with the guarantees that they may have offered to suspend the tax enforcement.

However, since the Claimant does not allege that it actually provided a guarantee and, therefore, that it suffered damages, the arbitral tribunal does not have elements to assess this petition, which, as the law provides, may be formulated autonomously, namely in execution of judgment.

IV - DECISION

a) The Corporate Income Tax Assessment No. 2016…, relating to the fiscal year 2012, assessed in the name of A…– SGPS SOCIEDADE UNIPESSOAL, LDA., NIF no.… by which a total Corporate Income Tax amount payable of € 8,942,701.12 resulted, is annulled in its entirety as being illegal;

b) The petition for compensation for undue provision of guarantee is not heard, which should be formulated autonomously.

V. Value of the Proceedings

Taking into account the provisions of Article 306º, No. 2, of the Civil Procedure Code, Article 97º-A, No. 1, of the Code of Tax Procedure and Article 3º, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 8,942,701.12.

Notify.

Lisbon, 30 May 2017.

DISSENTING OPINION

Limiting myself to the Law, I cannot agree with what is written and decided in the Ruling to which this Declaration is attached, the following being the grounds for disagreement, grounds set out in a manner and dimension unusual, which, however, I deem justified given the case.

1. THE GENERAL FRAMEWORK

1.1. According to Article 11º, No. 1 of the General Tax Law (LGT), "the rules and general principles of interpretation and application of laws" are applicable "in determining the sense of tax norms", adding in the corresponding No. 4: "Gaps resulting from tax norms covered in the reservation of law of the Assembly of the Republic [cfr. Articles 103º, No. 2 and Article 165º, No. 1, paragraph i) of the Constitution of the Portuguese Republic (Constitution)] are not susceptible to analogical integration". Also, in the Tax Benefits Statute (EBF), its Article 10º provides that norms "establishing tax benefits" are not susceptible to analogical integration, but do admit extensive interpretation. For its part, Article 10º, No. 1 of the Civil Code – governing, in general, the matter – enshrines the objective of interpretation, not being confined to the letter of the law, to "reconstruct from the texts the legislative intent, having especially in regard the unity of the legal system, the circumstances in which the law was made and the conditions specific to the time in which it is applied", but enshrining in its corresponding No. 2 the theory of allusion ("However, cannot be considered by the interpreter the legislative intent that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed"). Proceeding to the regulation of gaps in the law, the Civil Code establishes in its Article 10º, No. 1, that cases not provided for in law "are regulated according to the norm applicable to analogous cases", with analogy existing, by force of No. 2 of the same article, "whenever in the omitted case the reasons justifying the regulation of the case provided for in the law proceed".

1.2. With reference to the cited norms of the Civil Code, doctrine has been developed, in which, for what now interests, stand out actualist interpretation and extensive interpretation vs. analogy, the first having merited less attention than these.

1.2.1. In the sense of legally disciplining evolutionary reality a historico-evolutionary school is generated and there is talk of actualist interpretation, seeking what could be described as filling old skins with new wine. The interpretations could, thus, be variable so as to accompany new times. From the static vision one moves to the dynamic or ambulatory vision, attributing to the norms a potential for expansion that becomes act when new circumstances arise.

Inocêncio Galvão Telles wrote: "We do not wish to omit the following note: it would be inaccurate to suppose that actualist interpretation is something inevitable, that it always operates, in relation to all norms, and even in a continued or constant manner. The truth is that the vast majority of norms retain, at the moment their force ceases, the same meaning they had when they came into being. One can peruse the Civil Code, which has already passed thirty years, and will hardly find a provision still in force whose meaning has changed merely because times changed. This does not exclude, of course, the legitimacy of the application of the actualist principle when the narrow requirements mentioned above occur" (Introduction to the Study of Law, volume I, 11th edition (reprint), p. 268). Very important is what Manuel de Andrade wrote, according to a transcription made there: "in case of uncertainty it is to be presumed that the law retains the meaning it had when it entered into force". José Oliveira Ascensão gives examples of actualist orientation: the discipline of the contract of carriage to encompass automobile transport or civil liability under the Brazilian Code relating to that resulting from nuclear energy. (Law – Introduction and General Theory, 10th edition, p. 396). Also, Miguel Teixeira de Sousa wrote: "The need to integrate the law in its social environment is particularly important. Faced with a modification in the meaning of a word - which, naturally, could not have been foreseen by the legislator - one cannot but pay attention to its current meaning. This modification is especially frequent in some indeterminate concepts, such as those of alteration of circumstances, of good faith, of good customs, of culpability or of gravity of the violation, but it can equally occur in relation to determinate concepts. It is sufficient to consider the following examples: (i) Article 34º, No. 4, Constitution prohibits any interference in telecommunications and other means of communication, whatever means of communication existed at the moment the provision was elaborated, it is clear that this prohibition encompasses means of communication that have since become possible, such as the mobile telephone or electronic mail; (ii) Article 362º, 2nd part Civil Code defines a document as any object elaborated with the purpose of reproducing or representing a person, thing or fact; it is evident that this notion encompasses realities unknown at the moment of its drafting, such as, among others, computer documents and digital photographs" (Introduction to Law, 2nd reprint, pp. 341/342).

Actualist understanding cannot, therefore, mean that this interpretation does not entail dangers and, moreover, that it can be done without subordination to rules in which verticality and not horizontality has place, as results from what has been written, namely from the examples given, because to conclude something, even in the sense of the norm, must be characterized by discipline and care and not be the fruit of desire to achieve at all costs an intended objective. It is therefore a creator of pronounced risks, being one of these the possibility of the boomerang effect, namely the reactive modification of legal provisions.

1.2.2. Creating other difficulties is the distinction in practice between extensive interpretation and analogy, although there is unanimity as to their abstract or conceptual distinction.

1.2.2.1. Beginning with the literal element, revealing a possible sense of the law, one proceeds to so-called logical interpretation. However, as Galvão Telles notes, "This does not exclude that the linguistic element may by itself, though not very frequently, reveal the spiritual content of the law. This happens in those cases in which the words of the law are so explicit and categorical that they only bear a particular meaning. The interpreter must then accept that meaning, it not being incumbent upon the interpreter to examine other hermeneutic elements. It might be possible to admit that recourse to these other elements would lead to a more just or reasonable result; but the interpreter must accept the literal meaning, for the stated reason". And continues: "It is even a commonplace to state that one cannot escape literal interpretation when the law is drafted in terms that only allow one meaning, however much this proves unjust or inadequate to the demands of life. Hence the feeling of the imperious necessity of observance of the law, despite that injustice or inadequacy, in accordance with the old Roman maxim 'dura lex sed lex'." (ob. cit., pp. 245/246).

1.2.2.2. One of the first questions that arises in the thematics of interpretation is whether subjectivism or objectivism was enshrined in the law. A. Pires de Lima and Antunes Varela wrote: "To summarize, though without great rigor, the general thinking of this provision [Article 9º Civil Code], it can be said that the decisive sense of the law will coincide with the real will of the legislator, whenever this is clearly and unequivocally demonstrated through the legal text, the report of the statute or the preparatory works of the law itself. When, however, this is not the case, the Code makes an open appeal, as could not but be the case, to criteria of an objective character, such as those contained in No. 3" (Civil Code Annotated I, p. 16). And the same orientation is followed by Galvão Telles (ob. cit., p. 266). Others embrace objectivism which today prevails, which did not prevent Manuel de Andrade, a defender of this latter current, from writing: "It must be recognized, however, that, though as a somewhat confused tendency, objectivism seems to predominate in the School, and even seeks to overflow into practice, to the point that it has happened to me, I who at times took a position for objectivism-actualism - though diluting the wine considerably and having nowadays a certain inclination to sing a paean... - to see defended interpretations in which it seems to me to notice too much objectivism" (On Recent Evolution of Portuguese Private Law in Bulletin of the Faculty of Law, volume XXII (1946), pp. 289/290).

1.2.2.3. The difficulties, in practice, in distinguishing between extensive interpretation, which Marcelo Rebelo de Sousa considered "perhaps the most problematic of the forms of interpretation" (Introduction to the Study of Law, 3rd edition, pg. 64), and analogy are confirmed by João Castro Mendes: "It is often difficult to draw the line between analogy and extensive interpretation (...). The difference is easy to establish in theory, very difficult to apply in practice" (Introduction to the Study of Law, Lisbon, p. 263).

Also Galvão Telles acknowledges: "Sometimes, it is difficult to know where one [extensive interpretation] ends and the other [analogy] begins" (ob. cit., p. 262), which accords with the care revealed when he writes "The judge must, however, be particularly careful in this field [criminal] avoiding making analogy under the guise of extensive interpretation, because in homage to the freedom and security of citizens, it is categorically forbidden to consider a certain fact criminal by mere analogy with another that the law qualifies as such" (ob. cit., p. 255), which, we add, is important to apply in Tax Law, not only as to subjection to tax but also as to exclusion from taxation-rule. Still Ascensão: "The criterion [for distinguishing extensive interpretation from analogy] can be delineated with precision, which does not mean that in practice problems of the greatest complexity do not arise" (ob. cit., p. 436).

On extensive interpretation Teixeira de Sousa writes that "extensive interpretation should also not be confused with the situation in which the provision of the law is a typology or a non-exhaustive enumeration in which the law is applied to a subtype or a situation that is not provided for. In this case, what falls under the legal provision is not only the cases typified or enumerated, but also cases analogous to these cases" (ob. cit., p. 377).

It is read in Galvão Telles that analogy is "the application of a legal provision established for a certain fact to another legally relevant fact but without direct or implicit regulation (omitted case) and similar to the first", constituting its "immanent principle" "ubi eadem legis ratio ubi eadem legis dispositio", "If the reason is the same in both cases, the same should also be the disposition" (ob. cit. pp. 261 and 262).

More has been written by Baptista Machado on analogous cases: "when there is verified therein a conflict of parallel, isomorphic or similar interests – so that the evaluative criterion adopted by the legislator to compose that conflict of interests in one of the cases is equally or a fortiori applicable to the other (cfr. No. 2 of Article 10º) " (Introduction to Law and to Legitimating Discourse, 18th Reprint, p. 202).

As an example of analogy, an example repeated by Germano Marques da Silva (Introduction to the Study of Law, 3rd ed., p. 280), Castro Mendes presents the application of the regulation of maritime transport to air transport that subsequently arose, given the "many similarities" between them, with analogy occurring "when the reason for deciding in the omitted case and in the provided case is the same, ubi eadem est ratio legis eadem est legis dispositio" (ob. cit., p. 261, cfr. p. 262). And further: "There is analogy whenever the difference between the omitted case and the provided case resides in points irrelevant to the legal regulation" (ob. cit., pp. 261/262). Still Marcelo Rebelo de Sousa, defender of objectivist actualism, after writing "only if there is an identity of reasons is it legitimate to establish an analogical relationship" (ob. cit., pp. 69/70), added: "An example of analogy legis is resort to law, providing on wired television to govern matters of cable television, as to which a legal gap exists" (ob. cit., pp. 55 and 71), example of "analogy juris is what can concern the regulation of reception and transmission of satellite television if the inapplicability of rules on merely national television is patent" (ob. cit., pp 71 and 72).

For his part, Teixeira de Sousa presents as an example of facts originating gaps "social or technological evolution", "only the civilizational acquisition of equality between the sexes created gaps relating to the position of women in the family" (ob. cit., p. 386) and considers the type of case as a subsequent or secondary gap ("arise, for reasons of social, technical, economic or other evolution, at the beginning of the force of a legal regime") (ob. cit., p. 394). Also, faced with the importation of ostriches (bipedal animals) unknown until then in Rome and as per the thinking of the time, presented now as an example of a "self-integratable" gap, "what applies to "quadrupedal" animals equally applies to "bipedal" animals, since both are concretizations of the type "animal", whereby the integration of the gap is obtained through the analogical application of the regime established for "quadrupedal" animals to "bipedal" animals (ob. cit., p. 404). Finally writes: "The interpretation of the source presupposes the subsumption of cases (real or imaginary) to that source, which requires that these cases be analogous to the typical case provided for therein. It is important to clarify, however, that the analogy used in the integration of the gap, is not the analogy between a concrete case and the typical case (that is, the analogy that makes possible the subsumption), but the analogy between a typical case and the omitted case" (ob. cit., p. 406).

1.3. From all that has been written previously, the need results not to overlook the literal element, of actualist interpretation not being able to be applied solely by virtue of the change in context and analogy not being able to be obfuscated or even opacified by a purported interpretation, as preventively noted by Galvão Telles.

2. TAX LAW FRAMEWORK

2.1. Having surpassed the Montesquieuan conception, according to which "judges are solely the mouth that pronounces the word of the law, inanimate beings that cannot weaken either its force or its rigor" (transcribed by Bravo Arteaga, Juan Rafael, Fundamental Notions of Tax Law, 2nd ed, p. 167)[5], the teachings gathered in the General Framework have application in Tax Law, as results from the normative provisions cited at the outset. However, "the thesis of pure and simple assimilation by Tax Law of private law institutes in the form cast for them by their respective branches of origin, creates delicate problems in matters of interpretation of tax norms" (González, Eusebio and González, Teresa, citing various authors, Tax Law, I, p 130).

Interpretation in Tax Law is, therefore, an operation identical to the interpretation that occurs in the various branches of Law, but cannot fail to take into account specificities, namely the corresponding ordering principles. Calvo Ortega wrote; "The peculiarity of Tax Law as it refers to the interpretation of its norms consists in the use of the principles that presided over all of its normative production to know in case of doubt all that the norm being interpreted established. The tax legal order is not governed by the principle more or less abstract of the general interest (though it does not exclude it), but rather by other concrete ones (…): tax generality, economic capacity, progressivity, equality, justice, etc. Some, those that have a material content (e.g. economic capacity) will be more adequate than others whose essence is the attribution of power (reservation of law), but all can and should constitute methods of interpretation. This principalist methodology will be fruitful in the face of the doubts that frequently present the tax norms from the facts that give rise to the birth of the obligation to those that determine its extinction. Moreover, it will contribute to the application of taxes being made more in accordance with the principles that presided over their creation. In another order of ideas, principalist methodology ends the questions and solutions of other methods of interpretation that have been the object of debate in recent decades (functional interpretation, evolutionary and adaptation to social reality). Indeed, the principles of tax generality and equality are of such categorical formulation and formal character as to make them apt for interpretation at all times (whatever the social reality may be). From another angle, the principle of economic capacity has sufficient flexibility to allow the adaptation and automatic evolution of situations to the evolution of wealth (income, patrimony and consumption), the only matter of interest to taxation. In summary, principlism is sufficient a tool to solve a large part of the doubts that may present themselves in the application of tax norms. Principlist methodology does not use exclusively strictly tax principles already studied. It also resorts to those that have a particular incidence in subjective situations. I refer concretely to legal security. Several are the reasons that justify the use of this method: the complexity of tax norms and their constant modifications, the importance of the powers of organization and inspection attributed to Tax Administrations and the continued extension of possible subjective situations distinct from those of taxpayers in obligations to perform specific tasks" [Tax Law (General Part), 2nd ed., p. 120].

In the same orientation, Túlio Rosembuj wrote: "The supremacy of the Constitution over all norms and its central character in the construction and validity of the legal order as a whole obligates the interpretation of this, at any moment of its application, in the sense that results from constitutional principles and rules (Garcia, Enterría). The Constitution then is the text and the framework that, preserving the continuity of the legal order, guarantees the material values of creative interpretation and, at the same time, offers the guarantee of renewal of the legal order in its temporal dimension. Interpretive innovation in the performance of legal provisions, has a foundation and a limit in its reach, general and particular constitutional principles of tax law" (Elements of Tax Law, I, p. 122). Also Nicolò Polari: "Today, it seems to be admitted, in fact, peacefully that Tax Law, (…), characterized by its own general principles of constitutional level to which reference must always be made in tax law interpretation, is not something strange to the legal order considered in its entirety" (Tax Law, p. 140).

Similarly, national doctrine: "Interpretation in conformity with the Constitution did not arise within Tax Law, but proves to be especially suited to the specific problems of this branch of Law, particularly in the case of our legal order" and further: "The principle of interpretation of laws in conformity with the Constitution is nothing more than the consequence of the principle that affirms constitutionality to be the primary expression of legality" (J.L. Saldanha Sanches, Tax Law Manual, 3rd ed., p. 148).

In Tax Law, therefore, the respective requirements apparent in the principles that constitute a double guarantee must always be present: in subjection to tax, the sub-principles of legality, typicality and security (sub-principles of the principle of Rule of Law, alongside the sub-principle of proportionality), enshrining the rule of law and not rule by law, as well as, in deviations from the rule-regime, still the principle of equality, unfolding this principle in a legal aspect, sub-principle of generality or universality, according to which all must pay taxes, and in an economic aspect, by virtue of which tax must be paid in accordance with contributory capacity, preventing taxation from not occurring when it should, so as to avoid violation of fair sharing of public charges, of income and wealth (Article 106º, No. 1, Constitution). Once that sharing is established, once what in common terminology is called fair sharing is operated, any modification would create imbalance, completely to be avoided, either by capturing more realities than those provided for or by creating deviations, beyond clearly justified cases, to the rules of taxation, by virtue of, in the first case, legal certainty being injured, today the object of redoubled attention, deriving from its growing acuity, and hence the protection of confidence, and, in the second, the fair share that falls to each one, being unable to be injured equality. In both cases, what is established constitutes a limit. The exceptionality of what deviates from taxation-rule and not taking other concepts about the nature of tax benefits, is clearly established in Article 2º, No. 1 of the Tax Benefits Statute (EBF), given its non-egalitarian character, which, moreover, is clearly evident in community jurisprudence with strict or declarative interpretation in the framework of VAT exemptions. Hence these cares, also avoiding the corresponding loss of revenue, are well evident both in the Constitution [Article 106º, No. 3, paragraph g)] and in the Budget Framework Law (LEO), attached to Law No. 151/2015, of 11 September (Articles 12º, No. 3, paragraph b), 31º, No. 3, paragraph j), 42º, paragraph j) and 45º, No. 11). This care requires its non-forgetting when interpreting and applying provisions establishing deviations from the rule-regime of taxation. It is understood, therefore, the reason for the text of Alain Steichen: "It is logical, indeed, to limit strictly the scope of the derogations to the general rule and, therefore, namely, the exclusions from the field of application of a tax or the exemptions from a tax

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