CAAD 353/2016-T: IRC Exemption for Fair Value Share Holdings Under Art. 32(2) EBF

ARBITRAL DECISION

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

I. REPORT

A) Constitution of the Arbitral Tribunal

1. A… – SGPS SOCIEDADE UNIPESSOAL, LDA., taxpayer number n.º…, with registered office at …, n.º…, ..., …-… Lisbon (hereinafter referred to as "Claimant"), filed an application for an arbitral pronouncement and constitution of a Collective Arbitral Tribunal, pursuant to the provisions of Article 4.º and n.º 2 of Article 10.º of Decree-Law n.º 10/2011, of January 20 [Legal Regime of Tax Arbitration (RJAT)], with the Tax and Customs Authority (hereinafter also referred to as "Respondent") as the respondent.

2. The application 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 to designate an arbitrator provided for in subparagraph b) of n.º 2 of Article 6.º of the RJAT and in compliance with the provisions of subparagraph g) of n.º 2 of Article 10.º and n.º 2 of Article 11.º of the same instrument, the Claimant designated as Arbitrator Professor Doctor Rui Duarte Morais.

2.2. Pursuant to the provisions of subparagraph b) of n.º 2 of Article 6.º and n.º 3 of Article 11.º of the RJAT, and within the period provided for in n.º 1 of Article 13.º of the RJAT, the highest-ranking official of the Tax and Customs Authority ("AT") designated as Arbitrator Professor Doctor Manuel Pires.

2.3. In accordance with the provisions of n.ºs 5 and 6 of Article 11.º of the RJAT, the President of CAAD notified the Claimant of the designation of the Arbitrator by the highest-ranking official of the Tax Administration on 31-08-2016 and notified the arbitrators designated by the parties to designate the third arbitrator who assumes the status of Arbitrator President, and the Honourable Arbitrators designated by the parties agreed, on 15-09-2016, on the designation of Councillor Maria Fernanda dos Santos Maçãs as Arbitrator President.

2.4. On 15-09-2016, the President of CAAD informed the Parties of this designation, in accordance with and for the purposes of the provisions of n.º 7 of Article 11.º of the RJAT.

2.5. In compliance with the provision of subparagraph c) of n.º 11.º of the RJAT, the Collective Arbitral Tribunal was constituted on 30-09-2016.

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

B) Application for Arbitral Pronouncement

1. The application for arbitral pronouncement concerns the appraisal of the legality of the Corporate Income Tax (IRC) assessment n.º 2016…, relating to the fiscal year 2013, which resulted in a total amount of IRC payable of € 7,945,855.00.

2. The Claimant further petitions that the AT be condemned to pay indemnification for expenses incurred by the Claimant with the constitution, provision and maintenance of a guarantee for the suspension of the tax enforcement proceedings n.º …2016….

3. The challenged assessment was issued by the AT following an inspection procedure, in the course of which corrections were made relating to the tax treatment to be given to variations in the fair value of the shareholdings 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 Shareholder Management Company ("SGPS"), such gains and losses would always fall within the scope of the special regime of Article 32.º, n.º 2, of the EBF, and would not contribute to the taxable profit;

• if this is not understood to be the case, it must be concluded that the fair value of financial investments, i.e., financial instruments available for sale, corresponding to shareholdings 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 subparagraph a) of n.º 9 of Article 18.º of the IRC Code, which should be applied only to adjustments of fair value through results determined in respect of financial instruments held for trading;

• the inconsistency of the result of the literal interpretation of subparagraph a) of n.º 9 of Article 18.º of the IRC Code with its rationale 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 as a counterpart to results, an imprecision that was not corrected by the tax rule;

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

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

• however, with respect to the fiscal year 2013, the AT understands that the positive variations in fair value of the shareholdings held by the Claimant in B… were relevant for tax purposes (forming part of the Claimant's taxable profit), pursuant to Article 18.º, n.º 9, subparagraph a), of the IRC Code, and that Article 32.º of the Fiscal Benefits Statute ("EBF") was not applicable thereto, and therefore proceeded with the assessment now challenged;

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

• by considering some fair value adjustments as irrelevant and others as relevant for tax purposes, the AT introduces a disruption in the tax regime for the taxation of fair value and seeks to assess approximately € 19 M in tax for negative fair value of € 50,202,396.08 determined in the fiscal years 2011, 2012 and 2013, relating to financial holdings in respect of which the Claimant recorded a total loss of € 228,679,068.09 that will not be recovered due to the vicissitudes of B…;

• the basis for the assessment challenged rests on a literal, limited reading, and clearly contrary to its spirit and the system, which leads to a manifestly absurd result from a tax perspective, of subparagraphs a) of n.º 9 of Article 18.º and b) of n.º 5 of Article 46.º of the IRC Code (and also of the aforementioned n.º 2 of Article 32.º of the EBF), which results in the disregard of negative value variation and the consideration of positive variations for tax purposes;

• the assessment challenged is unconstitutional, as it violates the principle of taxation of real income and the principle of taxpaying capacity, in its aspect of taxation on real profit, pursuant to n.º 2 of Article 104.º of the Constitution, by subjecting to taxation gains and losses with no adherence whatsoever to the gains and losses actually determined by the taxpayer; and by violation of the principle of equality;

• the assessment challenged also violates the principle of justice;

• the assessment challenged further violates the principle of good faith, which should govern administrative activity;

• the AT classified the inspection procedure as being of an internal nature, pursuant to Article 13.º of the RCPIT, but, in reality, an external inspection procedure took place, whereby the AT did not comply with any of the formalities governing this form of procedure, namely n.ºs 1 and 2 of Article 46.º, Article 49.º of the RCPIT.

1. The AT presented a reply and attached procedural file, alleging, in support of the lack of merit of the application, in summary, that:

• the inspection procedure that led to the assessment challenged was correctly classified as internal, inasmuch as the corrections were based solely on documents provided by the Claimant following a request by the AT, which does not alter the nature of the procedure, given the concept contained in the new wording given by Decree-Law n.º 36/2016, of July 1, of subparagraph a) of Article 13.º of the RCPIT;

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

• there was no violation whatsoever of the principle of justice as the AT, acting in obedience to the principle of legality to which it is bound, merely sought to exact the tax due in view of certain realities which the legislator, for reasons of a political, economic and financial nature, understood to be subject to taxation;

• given that the application for arbitral pronouncement concerns the declaration of illegality of the IRC assessment relating to the fiscal year 2013, being therefore the tax situation of that fiscal year that is under scrutiny and not that of 2014, the generating element of the alleged injustice is not properly related to the application of measurement criteria based on fair value, both on the accounting and tax levels, nor to the interpretation that the AT makes of the applicable provisions, but rather rests on, and only on, the resolution of B… that occurred in August 2014;

• it was the Claimant who opted for the accounting of the shares according to NCRF 27, when it would have been sufficient to have opted for IASB regulations, to preclude the applicability of subparagraph a) of n.º 9 of Article 18.º of the CIRC, in which case it would be taxed according to the "realization" criterion;

• its (the AT's) conduct was not non-compliant with the principle of good faith and has no support whatsoever on the legal plane, inasmuch as, given that [with respect to the fiscal year 2011] the Claimant itself had made the correction in Box 07 of the Model 22 Declaration, the AT could only conclude, as it did, that "there is no violation whatsoever in tax matters";

• the regime for temporal allocation associated with the adoption of fair value as a measurement criterion did not arise, in the context of IRC, with the creation of Article 18.º, n.º 9, subparagraph a), – and therefore this rule cannot be considered as an innovation – as it has antecedents in Article 57.º, n.º 2, subparagraph a), of Law n.º 53.-A/2006, of December 29, 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 rule with identical wording was created – Article 2.º, n.º 2, subparagraph a), of Decree-Law n.º 237/2008, of December 15, which established a transitional regime for adapting the rules for determining taxable profit in IRC following the new accounting regulations applicable to the insurance sector resulting from the adoption of International Accounting Standards (IAS); since the introduction of Article 68.º-B, added by Article 2.º of Decree-Law n.º 257-B/96, of December 31, 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 designated as fair value) to derivative financial instruments when these were operations carried out on stock exchanges, in progress at the close of a fiscal year;

• the classification of the regulation in Article 18.º, n.º 9, subparagraph a) as an exceptional rule would be inappropriate, as, for that type of assets with a quotation on a regulated market, the IRC Code does not contemplate a general rule and a special rule for temporal allocation of income and expenses. That is, Article 18.º, n.º 9, subparagraph a) provides the only rule applicable to the realities envisaged therein, and therefore, at most, it could be considered as a particular regime for temporal allocation of income/gains and expenses/losses resulting from measurement by the fair value criterion in certain specific situations;

• being true that subparagraph a) of n.º 9 of Article 18.º of the CIRC is limited to regulating the mere temporal allocation of income, i.e., the periodization of adjustments resulting from the application of fair value and not the taxation or non-taxation of such income, it is equally true that subparagraph f) of n.º 1 of Article 20.º of the same Code considers as income that contributes to the formation of taxable profit those "resulting from the application of fair value in financial instruments" and it was precisely that legal basis which the AT used to promote the correction to taxable profit;

• it does not fall to the AT to make a judgment on the merits of the legal rules but rather to apply them in accordance with the meaning that emanates from them;

• the AT disclosed, through the Doctrinal Sheet relating to proceedings n.º 39/2011 – Order of 24/2/2011 by the Director-General (subject: Tax treatment of the loss determined by SGPS as a result of the application of the fair value model), the interpretation and articulation of Articles 18.º, n.º 9, subparagraph a) and subparagraph b) of n.º 5 of Article 46.º of the IRC Code and Article 32.º, n.º 2 of the EBF, the relevant part of which states as follows: "1. Article 18, n.º 9, subparagraph a) of the IRC Code (CIRC) provides that adjustments resulting from the application of fair value contribute to the formation of taxable profit when they relate to financial instruments recognized at fair value through results, provided that, being equity instruments, they have a price formed on a regulated market and the taxpayer does not hold, directly or indirectly, a participation in capital exceeding 5% of the respective capital stock. 2. From an accounting and tax perspective, these adjustments resulting from the application of fair value are considered gains by increases in fair value or losses by reduction in fair value. 3. Article 46, n.º 1, subparagraph b) of the CIRC expressly provides that gains or losses suffered through the onerous transfer of financial instruments recognized at fair value in accordance with subparagraph a) of n.º 9 of Article 18.º of the IRC Code are no longer to be considered as realized capital gains or capital losses. 4. Given that the regime for capital gains or capital losses is not applicable, the regime for reinvestment of realization values provided for in Article 48.º of the CIRC shall consequently also not be applicable, whereby in the case of a gain being determined by an increase in fair value, such gain contributes in full to the formation of taxable profit. (…) 7. In the case of an SGPS, the regime established in Article 32.º, n.º 2, of the EBF is not applicable, since the same applies only to capital gains or capital losses realized by them. 8. Accordingly, adjustments resulting from the application of fair value are tax-relevant in accordance with the terms indicated above when they relate to financial instruments recognized at fair value through results, provided that, being equity instruments, they have a price formed on a regulated market and the taxpayer does not hold, directly or indirectly, a participation in capital exceeding 5% of the respective capital stock.", from which it follows that the alternative thesis that the Claimant develops, which rests on a broad interpretation of n.º 2 of Article 32.º of the EBF, in order to encompass fair value adjustments determined by an SGPS (cfr., Article 511.º p.p.a), also has no foundation in law. All the more so since the tax legislator, following the introduction of subparagraph a) of n.º 9 of Article 18.º, did not adapt the wording of that provision of the EBF and, by maintaining the terms capital gains or capital losses, whose definition is given by Article 46.º of the IRC Code, clearly assumed that adjustments resulting from the measurement of financial instruments at fair value were excluded from the scope of the fiscal benefit;

• With respect to the application for indemnification for undue provision of guarantee (in the event the challenge is upheld), the expenses incurred with said guarantee were not proven, and the Tribunal cannot order indemnification for damage of which it has no knowledge.

1. By order of November 17, 2016 the meeting provided for in Article 18.º of the RJAT was dispensed with, and March 30, 2017 was set as the deadline for delivery of the Arbitral Decision. By order of March 27, that date was extended to May 30, 2017.

2. By order of December 4, 2016, the application for joinder to the case file of documents that the Claimant had sought to attach with the application for Constitution of the Arbitral Tribunal was granted, which resulted in the joinder of three expert opinions.

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

II. PRELIMINARY ASSESSMENT

1. The application for arbitral pronouncement is timely as it was presented within the period provided for in subparagraph a) of n.º 1 of Article 10.º of the RJAT.

2. The parties have standing and capacity to sue, have legitimacy with respect to the application for arbitral pronouncement and are properly represented, pursuant to the provisions of Articles 4.º and 10.º of the RJAT and Article 1.º of Ordinance n.º 112-A/2011, of March 22.

3. The Tribunal is competent to consider the application for arbitral pronouncement filed by the Claimant.

4. No objections requiring consideration were raised.

5. No nullities exist that would prevent consideration of the merits.

III. MERITS

III.1. MATTER OF FACT

§1. Established Facts

The following facts are found to be established:

a) The Claimant is a commercial partnership by quotas established in the form of an SGPS whose corporate purpose is the "management of shareholdings in other companies, as an indirect form of economic activity (cf. doc. n.º 4, attached to p.i.) and is held exclusively (as sole holder of a shareholding) by C…, S.A. ("C…"), a Brazilian corporation, taxpayer number …, which carries on banking activity (cf. doc. n.º 4 and page 10 of doc. n.º 5, attached to p.i.);

b) As of December 31, 2010, the Claimant held 70,583,333 shares, representing 6.05% of the capital stock of B…, with an accumulated cost of acquisition of € 282,761,656.02 (cf. doc. n.º 6 attached to p.i.), a shareholding that remained unchanged from that date until mid-November 2011;

c) On November 11, 2011, a capital increase was resolved at an extraordinary general meeting of B…'s shareholders, up to € 786,946,959.99 (cf. page 21 of B…'s annual report for 2011, doc. n.º 7, attached to p.i.), as a result of which 294,573,418 new shares were issued, bringing B…'s capital stock to € 4,030,232,150.40, represented by a total of 1,461,240,084 shares (cf. doc. n.º 7 attached to p.i.);

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

e) On August 3, 2014, the Bank of Portugal approved a resolution measure in respect of B…, pursuant to which all of B…'s activity, assets, liabilities, intangible elements and assets under management were transferred to a new entity, D…, S.A., and it was further resolved that "the Resolution Fund" would become the sole holder of the capital stock of the new institution, with the objective of enabling the subsequent entry of new capital and the reconstitution of a shareholder base for this bank" (cf. points 11 and 13 of doc. n.º 12, attached to p.i.);

f) This resolution measure was accompanied by a statement from the CMVM, in the same sense, on August 5, 2014 (cf. doc. n.º 13, attached to p.i.);

g) The Claimant ended up with a shareholding in the entity that retained all the toxic assets of B… that were not transferred to D… (cf. doc. n.º 14, attached to p.i.);

h) Following the introduction of SNC in 2009 (by Decree-Law n.º 158/2009, of July 13), the Claimant began to adopt NCRF 27 for the measurement of the B… shareholdings (cf. financial statements, management report, statutory audit certificate, trial balances, account statements and simplified business information ("IES") of the Claimant for the fiscal years 2010, 2011, 2012 and 2013);

i) The Claimant made transition adjustments from 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, the Claimant recorded, a fair value variation (unrealized and contingent loss) in the amount of € 107,992,499.49 relating to the 70,583,333 B… shares it held throughout that year (cf. doc. n.º 19, attached to p.i.);

k) In 2012, with the subscription of shares in the capital increase, all of the shareholdings held by the Claimant (which had a quotation of € 0.89 as of December 31, 2012 (cf. doc. n.º 25, attached to p.i.)), experienced an appreciation of € 30,615,520.31 (cf. doc. n.º 20, attached to p.i.);

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

m) In the inspection relating to the fiscal year 2011, the AT concluded (Order n.º…, of May 13, 2014) that "no tax acts or tax matters result that would be unfavorable to it" (cf. doc. n.º 31, attached to p.i.);

n) In the work program on "IRC – Control of Other Costs Recognized in the Fiscal Year" it is stated that "The costs recorded by A… in 2011 consist almost entirely of the recognition of impairment in the value of its financial holding in the capital of B…. The impairment thus recognized amounts in 2011 to 107,992,499.49. The cost recognized in the fiscal year was entirely offset by an increase recorded in field 721 of the Model 22 declaration." (cf. doc. n.º 32, attached to p.i.);

o) In the course of the inspection action relating to the IRC fiscal years 2012 and 2013, the Claimant was notified, through Order n.º…, of 2015.07.30 and subsequently, through its representative, to provide, under the principle of cooperation, to the proceeding, among others, the following accounting and tax supporting elements with relevance to the determination of taxable profit, in summary:

− Copy of analytical trial balances, as of December 31 (before and after determination of results);

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

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

− Extract of account 569 – with transition adjustments, for 2012 and 2013, as well as demonstration of the decomposition of the value recorded and its respective tax treatment;

− Annual report and accounts for fiscal years 2012 and 2013, including statutory audit certificates" (Article 59.º of (cf. docs. n.ºs 33 and 35, attached to p.i.);

p) Furthermore, "various telephone contacts and email exchanges were conducted with the Chartered Accountant, based on the exchange of clarifications to certain questions and issues arising from the analysis of accounting-financial documentation provided by him to the proceeding" (cf. page 11 of Final Report attached below to p.i. doc. n.º 35);

q) The AT notified the Claimant of the draft report through Order n.º…, of December 10, 2015, in the course of which corrections to the taxable profit declared for the two fiscal years under inspection were proposed, in the amounts of € 30,615,520.31 and € 27,174,583.10, respectively, pursuant to Article 18.º, n.º 9 of the IRC Code (cf. doc. n.º 33, attached to p.i.);

r) The corrections correspond to positive fair value variations recorded in accounting and not reflected for tax purposes (cf. docs. n.ºs 20 and 21, attached to p.i.);

s) The AT accepted the amount of the gains determined in accounting by the Claimant (cf. page 19 of doc. n.º 33, attached to p.i.);

t) At the preliminary hearing, the Claimant argued that, if the AT were to maintain such proposed corrections with reference to fiscal years 2012 and 2013, it should always make a symmetric correction for fiscal year 2011, in which a fair value loss of € 107,992,499.49 was determined which the Claimant disregarded for tax purposes and increased in respect to the IRC Model 22 (cf. docs. n.ºs 19 and 27, attached to p.i.);

u) The AT maintained entirely the corrections proposed in the final inspection report, which gave rise to the assessment now challenged;

v) The Claimant did not proceed to pay the aforementioned assessments, having filed an application offering as guarantee to the AT the shareholdings it still holds in B…, requesting a waiver of the remainder of the guarantee to be provided, if necessary (cf. doc. n.º 46, attached to p.i.).

§2. Unestablished Facts

There are no other facts with relevance to the arbitral decision to be judged as unestablished.

§3. Motivation as to the Matter of Fact

With respect to the judgment of the matter of fact, the Tribunal's conviction was based on the free appraisal of the positions assumed by the parties regarding factual matters, the contents of the documents attached to the case file (in particular the administrative proceeding file).

III.2. MATTER OF LAW

The issues to be decided are the following:

a) Whether, in 2013, the capital gains obtained by an SGPS, relating to financial investments accounted at fair value through results, would be exempt from IRC by virtue of the provisions of Article 32.º, n.º 2, of the EBF;

b) Whether there was correct application of the provisions of Articles 18.º, n.º 9, subparagraph a) and subparagraph b) of n.º 5 of Article 46.º of the IRC Code;

c) Whether the assessment challenged is unconstitutional due to violation of the principles of taxpaying capacity, taxation of real income and justice;

d) Whether the conduct of the AT violated the principle of good faith.

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

In compliance with the provisions of Article 124.º of the CPPT, the defects invoked by the Claimant will be appreciated in the order indicated above.

Given that the issues to be decided are identical to those analyzed and decided in proceeding n.º 351/2016-T and there being no reason to alter the judgment then made, we proceed to reproduce the reasoning contained in that proceeding.

III.2.1. Application of the Provisions of Article 32.º, n.º 2, of the EBF

In 2011, Article 32.º, n.º 2, of the EBF provided as follows: the capital gains and capital losses realized by SGPSs, by SCRs and by ICRs from shareholdings of which they are holders, provided such are held for a period of no 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.

As is well known, the CIRC, in its original version, enshrined, without exception, the principle of realization, that is, insofar as it is relevant here, revenues (capital gains) resulting from the transfer of an asset were only fiscally considered at the moment of its transfer.

Regarding capital gains (and also capital losses), the assertion of the principle of realization was made in a manner that we could consider not only express but repetitive.

This situation remained, in essence, unchanged until the entry into force of Decree-Law n.º 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 to national accounting regulations aimed at adapting accounting to those standards".

One of these adaptations was n.º 9 of Article 18.º of the CIRC, which, as far as is 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 disposed of, exercised, extinguished or liquidated, except when:

a) They relate to financial instruments recognized at fair value through results, provided that, where they are equity instruments, they have a price formed on a regulated market and the taxpayer does not hold, directly or indirectly, a participation in capital exceeding 5% of the respective capital stock;

We have, therefore, considering only its literal element, that Article 32.º, n.º 2, of the EBF only exempts capital gains realized obtained by SGPSs, whereas Article 18.º enshrines the tax relevance of potential capital gains (gains accounted at fair value in results) for some situations, in particular that provided for in its subparagraph a), to which the Claimant's factual situation is subsumable.

The AT bases the assessment on an appraisal in a strictly literal interpretation of these provisions.

The Claimant advocates for an updating interpretation of Article 32.º, n.º 2, of the EBF, which would lead to the exemption from taxation of capital gains falling within Article 18.º, n.º 9, subparagraph a), of the CIRC.

Considering:

It is undisputed that Article 32.º, n.º 2, of the EBF establishes an exemption – a tax benefit – i.e., an exceptional measure instituted for the protection of relevant extra-fiscal public interests that are superior to those of the taxation they prevent (cfr. Article 2, n.º 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 through the transfer of shareholdings, 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 at fair value through results?

It appears 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 opts for accounting according to the realization principle or according to the fair value principle, the nature of the income is not altered (it is always a matter of a capital gain), 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 shareholding occurs, a gain or loss will be recorded depending on whether the realization value is lower or higher than that at which such shareholding was accounted for in light of the fair value criteria. The "referential" for taxation is, therefore, always the "realization value".

In these terms, the option for one or another accounting criterion only alters the moment in which taxation occurs, which, under the fair value system, instead of occurring only upon the disposal of the shareholdings in question (as occurs under the realization system), will occur over the various fiscal years throughout which the holding of the shareholdings extends, through the consideration of potential increases or decreases (assessed according to fair value – market value) in the value of such shareholdings at the end of each fiscal year.

Furthermore, an exemption is an essential element of a tax: it is the result of a choice (which falls to the legislator) assessing the fiscal and extra-fiscal interests contemplated in a given situation, whereby its existence and applicability cannot be the result of an accounting choice. In these terms, it appears to us unsustainable the understanding according to which an exemption "ceases to exist" when one opts for a given accounting technique (accounting at fair value), and, moreover, such would mean placing the realization of the extra-fiscal interests underlying the exemption in the "hands" of each taxpayer.

It is, on the other hand, clear to the tribunal that there exists a manifest and incomprehensible disharmony between the provisions of Articles 32.º, n.º 2 of the EBF and that provided for in Article 18.º, n.º 9, subparagraph a), of the CIRC, and that the coherence and rationality of the SGPS taxation system seem to impose that all capital gains obtained by them through the transfer of shareholdings be exempt (provided that other legal requirements are met), since it was to the extra-fiscal interest that the legislator wished to give primacy in providing for the exemption contained in the first of said rules.

Arrived at this point, we must ascertain whether the Claimant is correct in arguing for the necessity of an updating interpretation of the content of Article 32.º, n.º 2, of the EBF, considering what has now come to be provided for in Article 18.º, n.º 9, subparagraph a), of the CIRC, mediated by the principle of interpretation in accordance with the Constitution.

Let us see.

According to n.º 1 of Article 9.º of the Civil Code, "Interpretation should not confine itself to the letter of the law, but should reconstruct from the texts the legislative thought, having above all in mind the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied".

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

And he continues: "Now, in this task of interconnection and valuation that accompanies the apprehension of literal meaning, logical elements intervene, with doctrine pointing to elements of a systematic, historical and rational or teleological order".

He further explains the meaning of each of these elements:

"The systematic element comprises the consideration of other provisions that form the normative complex of the institute in which the interpreted rule is integrated, that is, which regulate the same matter (context of law), as well as the consideration of legal provisions that regulate parallel normative problems or related institutes (parallel places). It further comprises the systematic place that belongs to the interpreted rule 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 material provision or the same or identical question, the sources of the law and preparatory works"; "For its part, the rational or teleological element consists in the reason for being of the rule (ratio legis), the purpose sought by the legislator in enacting the rule, the solutions it has in view and which it intends to achieve."

On this criterion the same Author emphasizes that "It is necessary that the rule be understood in the sense that best responds to the achievement of the result it aims to obtain. For law behaves towards ratio iuris as the means toward the end: whoever wills the end also wills the means. To determine this practical purpose of the rule, one must attend to the relationships of life for whose regulation the rule was created. We must start from the concept that law seeks to satisfy the economic requirements that spring from relationships (nature of things). And therefore, first comes a careful and profound study, not only of the technical mechanism of relationships, but also of the requirements that derive from those situations, proceeding to the appraisal of the interests at stake" (Idem, p. 141).

We adopt an objectivist orientation in the interpretation of legal norms, since "it favors more the rectitude and fairness of the law, as it allows extracting from the texts the most reasonable meaning they contain and at the same time (in the updating aspect) confers greater flexibility on the law, since, beyond facilitating its direct application to situations not foreseen by the legislator, it takes advantage of the virtuality, contained in the text, of constant adaptation to the criteria of justice and opportuneness proper to each era in which the law is applied" (BAPTISTA MACHADO, Introduction to Law and Legitimating Discourse, 1982, reimp., 2016, p. 179 et seq).

In the sense of an "updating objectivism", JOSÉ DE OLIVEIRA ASCENSÃO (The Law Introduction and General Theory, 10th ed., Revised, Almedina, Coimbra, 1997, p. 397) ponders: "Given the orientation we defend, updating emerges as necessary. If we affirm the primacy of the social order, if we indicate that the law only has meaning when integrated in that order, we are making an updating assertion". Interpretation which, according to the Author, finds its consecration in the text of Article 9.º, n.º 1, of the Portuguese Civil Code.

Indeed, he states that "Among the elements to which attention should be paid in the interpretation of law are the specific conditions of the time in which it is applied. This reference is totally incomprehensible outside of an updating understanding. An updating proponent can explain why among the auxiliary elements of interpretation historical elements appear (…). But for a historicist it is entirely aberrant that the meaning of a source can vary due to 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 law's formation. The law, once created, is situated in a social order, which is necessarily alive, open to all the stimuli that provoke historical alterations within it. The formula in which the law is embodied is fixed: but the meaning of that formula can vary, depending on the incidences of circumstantialism from which their meanings originate."

FRANCESCO FERRARA (op. cit., p. 137) also considers: "Given the objective character of the meaning of law, it follows that it can have a value different from what was thought by its authors, that it can produce consequences and results unforeseeable or, at least, unexpected at the moment it was made, and finally that as time goes by the principle gains a broader horizon of application, extending to relationships different from those originally contemplated, but which, being of equal structure, fall within its domain (phenomenon of projection)".

In jurisprudence, particularly relevant to the case at hand is the Decision of the Supreme Court of Justice of October 4, 2007, in proceeding n.º 07B1710, as it is a decision that, breaking with a strictly literal interpretation of Article 505.º of the Civil Code (which established exclusive fault of the injured party as an exonerating circumstance from liability, defended by traditional doctrine), gave prevalence to a "progressive or updating interpretation" of the aforementioned provision, in order to accept the rule of concurrent fault of the injured party with the risk inherent to the vehicle.

In the summary of that decision one can read, among other matters, that:

"2. According to traditional jurisprudence and doctrine, inspired by the teaching of Antunes Varela, in matters of traffic accidents, the verification of any of the circumstances referred to in Article 505.º of the CC – namely, the accident being attributable to a fact, culpable or not, of the injured party – excludes the objective liability of the holder of the vehicle, not allowing the concurrent fault of the risk special to the vehicle with the fact of the victim, in order to lead to a distribution of liability: liability for risk is precluded by the fact of the injured party.

1. This doctrinal and jurisprudential current, grouping into the exonerating dimension of Article 505.º and treating in the same manner the most disparate situations – in which are grouped mechanical behaviors of the injured parties, dictated by fear or instinctive reaction, facts of children and those lacking capacity, behaviors of precipitousness or momentary distraction, etc., – and uniformizing the absences of conduct, non-culpable conduct, slightly culpable and very culpable conduct of the injured parties, leads, very often, to shocking results.

2. (…)

3. The text of Article 505.º of the CC should be interpreted to mean that it embraces the rule of concurrent fault of the injured party with the risk inherent to the vehicle, that is, that the objective liability of the holder of the vehicle is only excluded when the accident was due solely to the injured party itself or to a third party, or when it results exclusively from a force majeure cause unrelated to the functioning of the vehicle.

4. (…)

5. This result is achieved through a progressive or updating interpretation of Article 505.º, which takes into account the unity of the legal system and the conditions of the time in which such rule is applied, in which liability for risk is viewed in a new light, illuminated by new conceptions of solidarity and justice."

Applying the interpretive vision expounded to the case under analysis, it is important to consider that the balance found by the legislator in the taxation of SGPSs, in Article 32.º, n.º 2 EBF, was translated into not giving tax relevance to capital gains and losses, not taxing, in turn, financial expenses. The teleological rationality underlying this regime was based on the realization principle, in accordance and in consonance with the principles of taxpaying capacity, equality and justice.

It should be noted, however, that, meanwhile, with the evolution of accounting technique, the fair value theory was instituted, and relevance began also to be given to latent capital gains, as results from what is provided for in Article 18.º, n.º 9, subparagraph c), of the CIRC.

There was, thus, a paradigm shift that imposes that these alterations should merit consideration within the scope of the interpretation to be carried out attending to the unity of the fiscal-legal system and the sense in which it has evolved.

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

In truth, the strictly literal interpretation of n. 2 of Article 32.º of the EFB, sustained by the AT, would result in an unjustified differentiated treatment of companies that are in materially identical situations, by exhibiting equal taxpaying capacity. Taxpaying capacity that is not altered by the different moment in which the taxation stemming 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 taxpaying capacity" (in this sense, CASALTA NABAIS, Tax Law, 2016, p. 151 et seq), to treat equal realities differently merely because the moment of their taxation is different.

In truth, as we have already noted, the taxpaying capacity (the taxable income) resulting from obtaining a capital gain is the same, whether its accounting is done according to the realization principle 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 the gains or losses should be tax-relevant).

We have, thus, on the one hand, a strictly literal interpretation centered on the historical element that restricts the application of Article 32.º, n.º 2, of the EBF, to realized capital gains, leading to a result of manifest systemic incoherence and to the violation of the constitutional principles of taxation of real income and equality.

However, an interpretation that attends, beyond the literal (current) meaning of the provision, also to the systematic and teleological elements and the requirements of the aforementioned constitutional principles, admits the application of Article 32.º, n.º 2, of the EBF, to latent (potential) capital gains and losses.

It thus becomes indispensable to broaden the field of application of the rule, defined by the text, based also on its immanent teleology, to cases that would not be formally encompassed by that text, which "requires the abandonment of a purely hermeneutic meaning (hermeneutic-exegetical) and the assumption of a truly normative meaning (practical-normative) in legal interpretation, in order to avoid antinomies or incongruities in the system, with the consequent legal insecurity." (CASTANHEIRA NEVES, Legal Methodology, Studia Iuridica, Bulletin of the Faculty of Law of Coimbra, Coimbra Publisher p. 108).

The paths of updating interpretation and teleological extension, which are invoked here, allow, as emerges from what has been expounded, ensuring that identical realities are treated in an equal manner, thus harmonizing the legal solutions.

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

In these terms, having the system evolved in the sense of also giving tax relevance to potential or latent capital gains and losses, the interpretation of Article 32.º, n.º 2, of the EBF, in accordance with the stated parameters, leads to the conclusion that the corresponding regime should reflect that evolution, considering this type of capital gains and losses also included in the provision in question.

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

Indeed, lacunae appear only "when neither the law nor customary law give an immediate answer to a legal question", being that "the law provides an answer when this is drawn from it by interpretation, even when it be an extensive interpretation". Insofar as interpretation suffices to answer legal questions, the Law will not, therefore, be lacunous. On the contrary, "analogy" already has an integrating function" (KARL ENGISCH, Introduction to Legal Thought, Translation and preface by J. BAPTISTA MACHADO, 5th ed., Calouste Gulbenkian Foundation, Lisbon, p. 226).

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

As JOÃO DE CASTRO MENDES refers (Introduction to the Study of Law, Lisbon, 1994, p. 221) historical interpretation is opposed to updating interpretation. "The first has as its purpose the reconstruction of the meaning the law had at the moment of its elaboration and entry into force; the second, to determine the meaning the law has at the moment of its interpretation. By alteration of circumstances and even of the meanings of words, the two meanings can be different". The importance of updating 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 32.º, n.º 2, to latent (potential) capital gains or losses is, on the other hand, that which presents itself most in accordance with the constitutional principles of taxation of real income (provided for in Article 104.º, n.º 2, of the CRP) and of equality.

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

In the concrete case, such hermeneutical rule, mediated by an updating interpretation, points decisively to the interpretation of n.º 2 of Article 32.º of the EBF which we have supported.

Thus, in a current perspective, in light of the evolution of technical accounting concepts that have been carried out, only an interpretation based on a teleological-objective criterion, and in accordance with the Constitution avoids an irremediable contradiction of valuation, that finds no reasonable foundation and is contrary to the unity of the legal system.

All of which having direct application in the concrete case, leads, necessarily, to an updating interpretation of Article 32.º, n.º 2, of the EBF, from which emerges that the provision should be understood in the interpretive sense that the same encompasses the exemption of capital gains obtained by SGPSs, in the conditions provided therein, regardless of whether its tax relevance occurs only at the moment of its transfer (realization principle) or over the various fiscal years throughout which its holding extends (fair value).

We make our own the understanding of GOMES CANOTILHO in an expert opinion attached to the present case, according to which when in the text of Article 32.º/2 of the EBF the legislator refers to realized capital gains and losses, this derives from the fact that only those contribute to the formation of a taxable profit in IRC.

"From the moment the CIRC undergoes an alteration that translates into the possibility of taxation of potential capital gains and losses, then, the rule of Article 32.º/2 should be subject to an updating interpretation.

"The reasons that led the legislator to create the special taxation regime for SGPSs, reflected in Article 32.º/2 of the EBF, and which are invoked in the decision of the STA cited supra" [Proceeding n.º 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 for the national economy and recognizing their specificity, would provide for a special regime determining that realized capital gains and losses do not contribute to the formation of taxable profit and, simultaneously, subject them to a general regime that admits, in certain cases (those of Article 18.º, n.º 9, subparagraph a) of the CIRC) the taxation of potential capital gains by means of fair value adjustments".

In the same sense, which the Tribunal equally endorses, conclude PAULO DA MOTA PINTO and ANTÓNIO MARTINS, in an expert opinion attached to the case (page 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 rule in Article 32.º, n.º 2, of the EBF, the context in which it was enacted and its alteration, all of which imposes an updating interpretation: it would make no sense that the legislator wished to grant a tax benefit to SGPSs as a means to foster their activity for the benefit of the economy, when these realize capital gains by converting them into monetary means, and that, differently, it seeks the taxation of merely potential capital gains obtained by the same SGPSs, in a context in which these have become tax-relevant. It will be said, therefore, that it appears clear that, by its reason for being, the tax benefit provided for in Article 32.º, n.º 2, of the EBF should, by equality or even a fortiori, likewise include fair value adjustments (potential capital gains) that have become relevant, as of 2010, to the formation of taxable profit".

We also share what, on this matter, GUSTAVO COURINHA emphasizes, likewise in an expert opinion attached to the case: (i) "the tax benefit contained in Article 32.º, n.º 2, of the EBF is unquestionably a tax regime of a subjective basis [emphasis ours], structured by reference to the corporate form (SGPS)" (page 60); (ii) "Article 32/n.2 of the EBF cannot be interpreted as a rule that decides in favor or against a given periodization method – realization or Fair Value. Instead, this article must be interpreted in neutral terms. This neutral interpretation proves most appropriate to its own nature, as merely a rule for the determination of tax events (in this case, by exemption). Article 32º/n.º2 cannot have sought to promote the use of one periodization method (realization) to the detriment of another (Fair Value). That is not its function, nor is it clear what extra-fiscal interest would justify such treatment. Indeed, it is impossible to imagine what interest could explain a tax benefit that translates to the preference for the realization of capital gains, when it is precisely the opposite function pursued by SGPSs in corporate groups (…)" (pages 65 and 66).

It is thus concluded that the income (capital gain) obtained by the Claimant enjoys the exemption provided for in Article 32.º, n.º 2, of the EBF, and the Claimant's application should be upheld.

By deciding to the contrary, the AT incurred in illegality and, in this sequence, the assessment must be annulled, with the legal consequences.

III.2.2. Causes of Action Rendered Moot

Thus, the consideration of the remaining causes of action (defects in the assessment challenged) invoked by the Claimant is necessarily rendered moot, with the exception of the application for condemnation of the AT in payment of indemnification for undue provision of guarantee to obtain suspension of the coercive collection of the tax assessed.

III.2.3. On Indemnification for Undue Provision of Guarantee

The Claimant petitions that the AT be condemned to pay indemnification for expenses incurred by the Claimant with the constitution, provision and maintenance of a guarantee for the suspension of tax enforcement proceedings n.º …2016….

Article 53.º, n.ºs 1 to 3, of the LGT provides:

"1 - The debtor who, to suspend enforcement, offers a bank guarantee or equivalent shall be indemnified wholly or partly for the damage resulting from its provision, should he have maintained it for a period exceeding three years in proportion of the outcome in administrative appeal, judicial challenge or opposition to enforcement that have as their object the debt guaranteed.

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

3 - The indemnification referred to in n.º 1 has as its maximum limit the amount resulting from the application to the value guaranteed of the rate of indemnificatory interest provided for in this law and may be requested in the very proceeding for administrative reconsideration or judicial challenge, or autonomously."

In the case of an additional assessment (therefore, of the exclusive initiative of the services), now entirely annulled, it is verified that there was "an error attributable to the services", which confers on the Claimants the right to be fully indemnified, within the legal limit, for the costs incurred with the guarantees offered to suspend the tax enforcement.

However, since the Claimant does not allege to have actually provided a guarantee and therefore that it has suffered damage, the arbitral tribunal lacks elements to consider this application, which, as the law provides, may be filed autonomously, in particular in execution of judgment.

IV. DECISION

a) The IRC assessment n.º 2016…, relating to fiscal year 2013, processed in the name of A… – SGPS SOCIEDADE UNIPESSOAL, LDA., NIF n.º …, is annulled in its entirety as illegal, from which resulted a total amount of IRC payable of € 7,945,855.00;

b) No decision is made on the application for indemnification for undue provision of guarantee, which should be filed autonomously.

V. Value of the Proceedings

Having into consideration the provisions of Articles 306.º, n.º 2, of the CPC, Article 97.º-A, n.º 1, of the CPPT and Article 3.º, n.º 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is set at € 7,945,855.00.

Notify.

Lisbon, May 30, 2017.

DISSENTING OPINION

Limiting myself to the Law, I cannot agree with what is written and decided in the Award to which this Declaration is attached, the following being the grounds for my disagreement, grounds set out in a manner and dimension not usual, which, however, I deem justified in view of the case.

1. THE GENERAL FRAMEWORK

1.1. According to Article 11.º n.º 1 of the General Tax Law (LGT), "the rules and general principles of interpretation and application of laws" apply "in determining the meaning of tax rules", adding in the corresponding n.º 4: "Lacunae resulting from tax rules covered by the reservation of law of the Assembly of the Republic [cfr. Articles 103.º n.º 2 and Article 165.º n.º 1, subparagraph i) of the Constitution of the Portuguese Republic (CRP)] are not susceptible of analogical integration". Also, in the Fiscal Benefits Statute (EBF), its Article 10.º provides that "rules establishing tax benefits" are not susceptible of analogical integration, but do admit extensive interpretation. For its part, Article 10.º n.º 1 of the Civil Code (CC) – general disciplinary of the matter – enshrines the objective of interpretation, not confining itself to the letter of the law, "to reconstruct from the texts the legislative thought, having above all in mind the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied", but enshrining in its respective n.º 2 the theory of allusion ("However, the interpreter cannot consider the legislative thought that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed"). Moving on to the regulation of lacunae in the law, the C.C. establishes in its Article 10.º n.º 1, that cases not provided for in the law are "governed according to the rule applicable to analogous cases", analogy existing, by force of n.º 2 of the same article, "whenever in the omitted case the reasons justifying the regulation of the case provided for in the law obtain".

1.2. With reference to the cited C.C. rules doctrine was elaborated, in which, for what now interests, stand out updating interpretation and extensive interpretation vs. analogy, the first of which has merited less attention than the latter.

1.2.1. In the sense of legally governing evolutionary reality, the historic-evolutionary school is generated and one speaks of updating interpretation, aiming at what could be written as putting new wine in old skins. 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 norms the potentiality of expansion that becomes actuality when new circumstances arise.

Inocêncio Galvão Telles wrote: "We do not wish to fail to emphasize the following note: it would be inaccurate to suppose that updating interpretation is something inevitable, that it always operates, in relation to all norms, and even in a continuous or constant manner. The truth is that the great majority of norms retain, at the moment of the cessation of their force, the same significance they had when they were born. One could browse through the Civil Code, which has already surpassed thirty years, and hardly find a provision still in force whose significance has changed merely because times have changed. This does not exclude, of course, the legitimacy of the application of the updating principle when the strict requirements presented 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 transcription made there: "in the uncertainty it is to be presumed that the law retains the significance it had when it entered into force". José Oliveira Ascensão gives examples of updating orientation: the discipline of the transport contract to embrace automobile transport or civil liability under the Brazilian Code for that resulting from nuclear energy. (The Law – Introduction and General Theory, 10th edition, p. 396). Also, Miguel Teixeira de Sousa wrote: "The need to integrate law into the social environment is particularly important. Faced with a modification in the meaning of the word - which, naturally, could not have been foreseen by the legislator - one cannot fail to attend to its current meaning. This modification is especially frequent in some indeterminate concepts, like those of change of circumstances, of good faith, of good customs, of culpability or of gravity of the breach, but it can equally occur in respect to determinate concepts. It suffices to attend to the following examples: (i) Article 34, n.º 4, CRP forbids all interference in telecommunications and in other means of communication, whatever the means of communication that existed at the moment the provision was elaborated, it is clear that this prohibition encompasses the means of communication that have meanwhile become possible, like the mobile telephone or electronic mail; (ii) Article 362º 2nd part CC defines the 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, like, among others, informatic documents and digital photographs" (Introduction to Law, 2nd reprint, pp. 341/342).

The understanding of updating cannot, therefore, mean that this interpretation does not have dangers and, moreover, that it can be done without subordination to rules in which verticality and not horizontality has place, as results from what was written, notably from the examples given, because concluding something, even in the sense of the rule, has to be clothed in discipline and care and not be the fruit of the will to attain at any cost an objective sought. It is creator, therefore, of accentuated risks, one of which is the possibility of the boomerang effect, namely the reactive modification of legal provisions.

1.2.2. Generating other difficulties presents itself the distinction in practice between extensive interpretation and analogy, although there exists unanimity as to their respective distinction in the abstract or conceptual.

1.2.2.1. Initiating interpretation by the literal element, revealing a possible meaning of law, one moves on to the so-called logical interpretation. However, as Galvão Telles states, "This does not exclude that the linguistic element can by itself, although not very frequently, reveal the spiritual content of the law. This happens in those cases where the words of the law are so explicit and categorical that they only admit a given meaning. The interpreter must then accept that meaning, it not being his role to examine other hermeneutical elements. He could perhaps admit that the resort to these other elements would conduct to a more just or reasonable result; but he must accept the literal meaning, for the reason exposed". And he continues: "It is even a commonplace to affirm that one cannot escape literal interpretation when the law is drafted in terms that only allow a single significance, however much this shows itself unjust or inadequate to the demands of life. Whence the feeling of the imperativeness of observance of law, despite this injustice or inadequation, in accordance with the old Roman maxim 'dura lex sed lex'." (op. cit., pp. 245/246).

1.2.2.2. One of the first issues that arises in the interpretation matter is whether subjectivism or objectivism was enshrined in law. A. Pires de Lima and Antunes Varela wrote: "Summarizing, although without great rigor, the general thought of this provision [Article 9º CC], it can be said that the decisive meaning of the law will coincide with the real will of the legislator, whenever this is clear and unequivocally demonstrated through the legal text, the report of the instrument or the very preparatory works of the law. When, however, this is not the case, the Code makes frank appeal, as it could not fail to do, to criteria of an objective character, as are those contained in n.º 3" (Annotated Civil Code I, p. 16). And the same orientation is followed by Galvão Telles (op. cit., p. 266). Others espouse objectivism which today is prevalent, which did not prevent Manuel de Andrade, a defender of the latter current, from writing: "It must be recognized, however, that, although as a somewhat confused tendency, it seems to preponderate in the School, and even to overspill into practice, objectivism. To such a point that it has already happened to me, I who at times took position for objectivism-updating – although watering it down considerably and having nowadays some inclination to sing a palinode... – to see defended interpretations in which it seems to me to note objectivism too much" (On the 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 compounded by João Castro Mendes: "It is often difficult to draw the boundary 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 recognizes: "At times, there is difficulty in knowing where one [extensive interpretation] ends and another [analogy] begins" (op. cit., p. 262), which comports with the care revealed when he writes "The judge must, however, be particularly careful in this domain [criminal] avoiding making analogy under the appearance of extensive interpretation, because in homage to the freedom and security of citizens, it is categorically forbidden to consider a given fact criminal by simple analogy with another that the law qualifies as such" (op. cit., p. 255), which, we add, is important to apply in Tax Law, not only as to subjection to tax but also as to departure from taxation-rule. Also Ascensão: "The criterion [for distinguishing extensive interpretation from analogy] can be delineated with precision, which does not mean that in practice there do not arise problems of the greatest complexity" (op. cit., p. 436).

On extensive interpretation writes Teixeira de Sousa that "extensive interpretation also should not be confused with the situation in which the provision of law is a typology or non-exhaustive enumeration in which the law is applied to a sub-type or a situation not provided for. In this hypothesis there fall within the legal provision not only the cases typified or enumerated, but also cases analogous to those cases" (op. cit., p. 377).

It is read in Galvão Telles that analogy is "the application of a juridical provision established for a certain fact to another juridically 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 the two cases, the same should also be the provision" (op. cit. pp. 261 and 262).

More wrote Baptista Machado on analogous cases: "when in them there exists a conflict of parallel, isomorphous or similar interests – so that the evaluative criterion adopted by the legislator to compose that conflict of interests in one of the cases be equally or a fortiori applicable to the other (cfr. n.º 2 of Article 10.º)" (Introduction to Law and 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 maritime transport regulation to air transport which subsequently arose, given the "many similarities" between them, analogy occurring "when the reason for deciding in the omitted case and in the case provided for is the same, ubi eadem est ratio legis eadem est legis dispositio" (op. cit., p. 261, cfr. p. 262). And further on: "There is analogy whenever the difference between the omitted case and the case provided for resides in points irrelevant to the juridical regulation" (op. cit., pp. 261/262). Also Marcelo Rebelo de Sousa, a defender of updating objectivism, after writing "there is only analogy when there is an identity of reasons, so that it is legitimate to establish a relationship of analogy" (op. cit., pp. 69/70), added: "An example of analogy legis is recourse to law, disposing on television without cable to govern matters of television by cable, relatively to which there exists legal lacuna" (op. cit., pp. 55 and 71), example of "analogy iuris is that which may concern the regulation of the reception and transmission of television by satellite if it is manifest the inapplicability of the rules on merely national television" (op. cit., pp 71 and 72).

For its part, Teixeira de Sousa presents as an example of facts originating lacunae "social or technological evolution", "only the civilizational acquisition of equality between the sexes created the lacunae relating to the position of women in the family" (op. cit., p. 386) and considers the type of case as a subsequent or secondary lacuna ("arise, for reasons of social, technical economic or other evolution, to the beginning of the force of a juridical regime") (op. cit., p. 394). Also, faced with the importation of emus (two-legged animals) unknown until then in Rome and according to thought of that time, presented now as an example of a "self-integrating" lacuna, "that which applies to animals 'four-legged' applies equally to animals 'two-legged', since both are concretizations of the type 'animal', whereby the integration of the lacuna is obtained through the analogical application of the regime established for animals 'four-legged' to animals 'two-legged' (op. cit., p. 404). Finally he 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 in it. It is well to clarify, however, that the analogy that is used in the integration of the lacuna, 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" (op. cit., p. 406).

1.3. From all that was written previously results the necessity of not neglecting the literal element, of updating interpretation not being able to be applied merely by virtue of the change of context and analogy not being able to be obscured or even opacified by a purported interpretation, as referred preventively by Galvão Telles.

2. TAX LAW FRAMEWORK

2.1. Having overcome the Montesquieuian conception, according to which "judges are solely the mouth that pronounces the word of the law, inanimate beings that cannot weaken either its force nor its rigor" (transcribed by Bravo Arteaga, Juan Rafael, Fundamental Notions of Tax Law, 2nd ed, p. 167), the teachings gathered in the General Framework have application in Tax Law, as results from the normative provisions listed at the beginning. However, "the thesis of pure and simple assimilation by Tax Law of the institutes of private law in the form created for them by their respective branches of origin, places delicate problems in the matter of interpretation of tax rules" (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 consideration specificities, namely the corresponding ordering principles. Calvo Ortega wrote; "The peculiarity of tax law as far as the interpretation of its rules is concerned consists in the use of the principles that presided over all its normative production to know in case of doubt all that the rule being interpreted established. The tax legal order is not governed by the more or less abstract principle of general interest (although 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 (p. ex. economic capacity) will be more adequate than others whose essence is the attribution of power (reservation of law), but all can and should constitute interpretation methods. This principalist methodology will be fruitful faced with the doubts that frequently present the tax rules from the facts that give rise to the birth of the obligation to those that determine its extinction. Moreover, it will contribute so that the application of taxes is made more in accordance with the principles that presided over its creation. In another order of ideas, principalist methodology ends placing and solutions of other interpretation methods that were object of debate in the last decades (functional, evolutionary interpretation and adaptation to social reality). Indeed, the principles of tax generality and equality are of a categorical formulation and character that make them fit for interpretation at all times (whatever the social reality be). From another angle, the principle of economic capacity has sufficient flexibility to permit the adaptation and automatic evolution of situations to the evolution of wealth (income, assets and consumption), the only one that matters to taxation. In summary, principalism is a sufficient tool to resolve a great part of the doubts that can present themselves in the application of tax rules. The principalist methodology does not utilize only the strictly tax principles already studied. It also resorts to those that have special incidence in subjective situations. I refer concretely to legal security. Various are the reasons that justify the use of this method: the complexity of tax rules 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 specific performance obligations" [Tax Law (General Part), 2nd ed., p. 120].

In the same orientation, Túlio Rosembuj wrote: "The supremacy of the Constitution over all rules and its central character in the construction and validity of the legal order in its entirety oblige interpreting it, at any moment of its application, in the sense that results from the principles and constitutional rules (Garcia, Enterría). The Constitution then is the text and the frame 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. The interpretive innovation in the actuation of legal provisions has a foundation and a limit in its reach, the general constitutional principles and particular 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 own general principles of constitutional level to which one must always make reference in the seat of interpretation of law, is not something strange to the legal order considered in its totality" (Tax Law, p. 140).

In the same sense, national doctrine: "Interpretation in accordance with the Constitution did not arise within Tax Law, but shows itself above all adequate to the specific problems of this branch of Law, particularly in the case of our legal order" and further ahead: "The principle of interpretation of laws in accordance with the Constitution is nothing more than the consequence of the principle that asserts constitutionality to be the principal expression of legality" (J.L. Saldanha Sanches, Manual of Tax Law, 3rd ed., p. 148).

In Tax Law, therefore, the respective requirements evident in the principles that constitute a double guarantee must always be present: in subjection to tax, the sub-principles of legality, typicity and security (sub-principles of the principle of Rule of Law, alongside the sub-principle of proportionality), enshrining rule of law and not rule by law, as well as, in deviations from the general-rule regime, still the principle of equality, unfolding this principle in a juridical aspect, sub-principle of generality or universality, according to which all should pay taxes, and in an economic aspect, by force of which tax should be paid according to taxpaying capacity, preventing taxation from not occurring when it should occur, in order to avoid violation of the fair share of public burdens, of incomes and of wealth (Article 106.º n.º 1 CRP). Once that share is established, operated what in usual terminology is denominated as fair sharing, any modification would create imbalance, totally to be shunned, either by capturing more realities than those provided for or by creating deviations, beyond cases undoubtedly justified, to the rules of taxation, by virtue of, in the first case, wounding legal certainty, today object of redoubled attention, derived from its growing acuity, and thence the protection of confidence, and, in the second, the fair share that falls to each one, not being able equality to be wounded. In both cases, the established constitutes a limit. The exceptionality of what deviates from taxation-rule and not embracing other conceptions on the nature of tax benefits is clearly established in Article 2.º n.º 1 of the Fiscal Benefits Statute (EBF), seen its non-egalitarian character, which, moreover, is well evident in community jurisprudence with the strict or declarative interpretation within the framework of VAT exemptions. Whence these cares, avoiding also the corresponding loss of revenue, are well evident either in the C.R.P. [Article 106.º n.º 3, subparagraph g)] or in the Budget Framework Law (LEO), attached to Law n.º 151/2015, of September 11 (Articles 12.º n.º 3, subparagraph b), 31.º n.º 3, subparagraph j), 42.º, subparagraph j) and 45.º n.º 11). This care imposes the respective non-forgetfulness when interpreting and applying the provisions establishing deviations from the general taxation rule.

[The dissent continues with extensive further legal analysis regarding the specific interpretation of the tax provisions at issue, but reaches a different conclusion than the majority]