Summary
Full Decision
ARBITRAL DECISION
The Arbitrators Councillor Jorge Lopes de Sousa (appointed by the other Arbitrators), Prof. Doctor Rui Duarte Morais and Dr. Maria Manuela Roseiro, appointed respectively by the Claimant and the Respondent, to constitute the Arbitral Tribunal, established on 15-06-2015, agree as follows:
1. Report
A…, S.A., legal entity no. …, with registered office at Rua …, no. …, Floor…, Dafundo, …-… Cruz Quebrada-Dafundo (hereinafter abbreviated as "Claimant" or "A…"), came to request, pursuant to the provisions of Article 2, no. 1, letter a), Article 3, no. 1, Article 6, no. 2, letter b), and Article 10, no. 1, letter a) of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter "LRAT") and Articles 1 and 2 of Ordinance no. 112-A/2011, of 22 March, the constitution of a Collective Arbitral Tribunal with a view to annulling the Corporate Income Tax (IRC) assessment no. 2015…, of 14-10-2014 and recognition of the right to deductibility, in the year 2010, of tax losses generated in Group B… up to the limit of the proportional share of the taxable profit of the total companies comprised in that group and which subsequently became part of the scope of Group A… and to recognize, by virtue of this annulment, as a subsidiary matter, the right to deductibility in the fiscal year 2010 of tax losses generated in the former Group B… up to the limits of the proportional shares of the individual taxable profits of each of the companies comprised in that group and which subsequently became part of the scope of Group A….
The Claimant further seeks that the Tax and Customs Authority be condemned to pay it compensatory interest.
The Respondent is the TAX AND CUSTOMS AUTHORITY (AT).
The Claimant appointed as Arbitrator Prof. Doctor Rui Morais, pursuant to the provisions of Article 6, no. 2, letter b) of the LRAT.
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 15-06-2015.
Pursuant to the provisions of letter b) of no. 2 of Article 6 and of no. 3 of the LRAT, and within the period provided for in no. 1 of Article 13 of the LRAT, the highest-ranking official of the Tax Administration service appointed as Arbitrator Dr. Maria Manuela Roseiro.
The Arbitrators appointed by the Parties agreed to appoint Cons. Jorge Lopes de Sousa as presiding arbitrator, who accepted the appointment.
Pursuant to and for the purposes of the provisions of no. 7 of Article 11 of the LRAT, the President of CAAD informed the Parties of this appointment on 04-08-2015.
Thus, in accordance with the provisions of no. 7 of Article 11 of the LRAT, the period provided for in no. 1 of Article 13 of the LRAT having elapsed without the Parties making any statement, the Collective Arbitral Tribunal was constituted on 19-08-2015.
The Tax and Customs Authority filed a Response in which it defended the inadmissibility of the claims.
By order of 16-10-2015, the meeting provided for in Article 18 of the LRAT was dispensed with and it was decided that the proceedings continue with successive written arguments.
The Parties presented arguments.
In its arguments, the Tax and Customs Authority raised the question of the material incompetence of this Arbitral Tribunal.
The Claimant addressed this question of incompetence, in exercise of the right to be heard.
The Arbitral Tribunal was regularly constituted and is competent.
The parties have legal personality and capacity and are legitimate (Articles 4 and 10, no. 2, of the same statute and Article 1 of Ordinance no. 112-A/2011, of 22 March) and are duly represented.
The proceedings contain no defects.
2. Facts
2.1. Established Facts
a) The Claimant A…, S.A assumes the legal form of a joint stock company, established on 28-10-2008, and whose purpose is technical consulting support for the creation, development, expansion and modernization of industrial, commercial and service enterprises, the provision of management and accounting and economic services and the development, evaluation and realization of studies and renewable energy projects;
b) A… holds and manages shareholdings in companies that operate wind farms, based in Portugal, these companies being held indirectly, through a company 100% owned by the Claimant, C… SGPS SA, NIPC …(hereinafter referred to as C…);
c) The Claimant initiated its activity on 14-11-2008 and is registered under CAE code 74900 – "Other consulting activities, scientific, technical and similar, not specific;
d) From 01-01-2009, A… (parent company) and C… (subsidiary company) opted for taxation according to the RETGS;
e) In the fiscal year 2010 the group was composed of the following companies:
f) The company B…UNIPESSOAL LDA, NIPC … (hereinafter referred to as B…), was the parent company of a group of companies taxed under the RETGS in the fiscal years 2006 to 2009;
g) Until August 2009, B… adopted the corporate name P…, SOCIEDADE UNIPESSOAL LDA;
h) B… was held, until fiscal year 2007 in 100% by the company T…SARL (Luxembourg);
i) From December 2008, B… came to be held 100% by company C…;
j) In fiscal year 2009, there are two groups taxed under the RETGS (Group A… and Group B…) given that company B… could not be included in Group A… because it was not held in 2009 for more than one year by company C…;
k) From 01-01-2010, B… with the companies in its group (with the exception of those incorporated by merger into B… and into A…) came to be part of Group A…;
l) An external inspection action was carried out, covered by service order no. OI 2013…, against entity A…SA, NIPC…, regarding the economic year of 2010, regarding the results of the group of companies in question;
m) At the end of the inspection action referred to, the Tax Inspection Report was drawn up, the content of which is given as reproduced, in which is mentioned, among other things, the following:
III.2.2 – On the question of transferability of tax losses
Given the acquisition of Group B… by Group A…, by means of the subsidiary company of the latter, company C…, the question arises of the transferability of the tax losses of the acquired group and generated between 2006 and 2009.
That is, could the new Group A… deduct, in fiscal year 2010, the tax losses determined between 2006 and 2009, during the existence of Group B…?
This is not here a matter of the limitation of number 8 of Article 52 of the IRC Code, since these are group losses and not from the company that generated them, as per the doctrinal note of AT, case no. …/2005 with order of 2006/03/31 from the Deputy Director-General, as legal substitute for the Director-General.
In accordance with the legislation applicable at the time and until the entry into force of Law no. 2/2014 of 16 January, pursuant to Articles 69 and 71 of the IRC Code, when a group subject to RETGS is acquired by another group, also subject to that regime, the application of the RETGS in the acquired group ceases, with the consequent loss of the tax losses determined therein.
In the present case, the acquisition of Group B… by Group A…, both subject to RETGS, results, in the fiscal year under analysis, in the loss of the tax losses determined between 2006 and 2009 in the sphere of Group B…, in the amount of € 18,692,796.16, as per schedules in attached Annex I.
Thus, only the amount of € 18,591,000.63 may be deducted, resulting from the algebraic sum of the tax losses of fiscal year 2009 of companies A… and C…, in the amounts of € 16,216,121.59 and € 2,374,879.04.
From the foregoing, the value of tax losses deducted is corrected to € 18,591,000.63, with no group losses to be deducted or carried forward to subsequent fiscal years.
n) In the Tax Inspection Report the following corrections were made:
o) The Claimant was notified to exercise the right to be heard on the draft Tax Inspection Report, but did not exercise it;
p) Following the inspection, assessment no. 2015…, dated 12-03-2015, was drawn up, the content of which is given as reproduced, in which, among other things, the correction of € 346,182.19 was included, relating to the tax losses of Group B…;
q) On 02-06-2015, the Claimant submitted the request for arbitral decision that gave rise to the present proceedings.
2.2. Facts Not Established
There are no facts relevant to the decision of the case that have not been established.
2.3. Substantiation of the Decision on Facts
The facts established as proven based on the documents attached to the request for arbitral decision and in the administrative file, with no controversy over them.
3. Legal Matters
3.1. Question of Material Incompetence of the Arbitral Tribunal
The Tax and Customs Authority raises the question of the material incompetence of this Arbitral Tribunal, for the following reasons, in summary:
– "the Claimant seeks for the tribunal to examine the legality of the prerequisites of the right to deductibility of tax losses between two groups of companies subject to RETGS";
– the first question to be decided relates to whether or not the right to deduction of tax losses generated in the former Group B… is recognized;
– the additional IRC assessment, being in a relationship of substantial dependence on the recognition of that right;
– the Claimant, by requesting the annulment of the assessment in question, on grounds of illegality, is thus requesting the condemnation of the Tax Administration to recognize the right to deductibility of tax losses generated in the former Group B…, and the claim is expressed in that sense;
– the scope of competence of the arbitral tribunals constituted pursuant to the provisions of Decree-Law no. 10/2011, of 20 January (LRAT), does not contemplate the possibility of examining claims aimed at recognition of rights in tax matters.
The competence of the arbitral tribunals functioning at CAAD is defined, in the first place, by Article 2, no. 1, of the LRAT, which establishes the following:
1 – The competence of arbitral tribunals comprises the examination of the following claims:
a) The declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account;
b) The declaration of illegality of acts of determination of taxable matter when it does not give rise to the assessment of any tax, of acts of determination of taxable matter and of acts of determination of asset values;
In the second place, the competence of the arbitral tribunals functioning at CAAD is limited by the binding commitment of the Tax and Customs Authority, which, pursuant to Article 4, no. 1, of the LRAT, came to be defined by Ordinance no. 112-A/2011, of 12 March, which establishes the following, insofar as it is relevant:
The services and bodies referred to in the previous article commit themselves to the jurisdiction of the arbitral tribunals functioning at CAAD that have as their object the examination of claims relating to taxes whose administration is entrusted to them referred to in no. 1 of Article 2 of Decree-Law no. 10/2011, of 20 January, with the exception of the following:
a) Claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to administrative remedies in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process;
b) Claims relating to acts of determination of taxable matter and acts of determination of taxable basis, both by indirect methods, including the decision of the revision procedure;
c) Claims relating to customs duties on importation and other indirect taxes affecting goods subject to import duties; and
d) Claims relating to tariff classification, origin and customs value of goods and tariff contingents, or whose resolution depends on laboratory analysis or procedures to be carried out by another Member State within the framework of administrative cooperation in customs matters.
Ordinance no. 112-A/2011, regarding acts fitting those indicated in Article 2, only removed from the scope of the binding commitment of the Tax Administration, in non-customs matters, claims relating to acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to administrative remedies and claims relating to acts of determination of taxable matter and acts of determination of taxable basis, both by indirect methods, including the decision of the revision procedure.
It is manifest that we are not dealing with any of the situations in which Ordinance no. 112-A/2011 removes the competence of the arbitral tribunals functioning at CAAD, so competence must be assessed only in light of the LRAT.
As is evident from Article 2 of the LRAT, the competence of the arbitral tribunals functioning at CAAD was defined by the LRAT only having regard to the type of acts that are the subject of the claims of taxpayers and not as a function of the type of questions that need to be examined to determine whether acts are legal or illegal.
There is, in particular, no prohibition on examination of matters relating to the existence or non-existence of rights underlying assessments or any other questions of legality relating to acts of the types referred to in Article 2 of the LRAT. A tax assessment that departs from non-recognition of a right ceases to be a tax act of assessment. And the claim to examine the legality or illegality of that non-recognition underlying an act of assessment does not cease, therefore, to be the examination of a claim relating to the declaration of illegality of acts of assessment, in which that non-recognition is materialized.
Thus, in the arbitral proceedings, as occurs in the proceedings for judicial review, any illegality can, in general, be imputed to acts of assessment, as follows from Article 99 of the CPPT, applicable as a subsidiary matter.
This will only not be so in cases where the law provides for the autonomous contestability of administrative acts that are prerequisites of assessment acts, and only to that extent that the examination of the legality of assessment acts in all its aspects is excluded. But, for this autonomous contestability to exist, there must be some administrative act in tax matters, as contestability relates to acts and not to legal positions assumed expressly or implicitly as prerequisites of assessment acts, but not materialized in autonomous tax acts.
The consequential acts, of which the Tax and Customs Authority speaks, are consequential to other prior tax or administrative acts and, in the case in question, there is no record that any administrative act was carried out examining whether the Claimant has or does not have the right to deduct tax losses, so the considerations it makes on this matter are of no relevance to the examination of the question.
Therefore, since the assessment acts are prejudicial to the interests of the Claimant and being the only acts carried out by the tax administration on the situation examined in them, its contestability must be ensured on the basis of any illegality, as follows from the principle of effective judicial protection, enshrined in Articles 20, no. 1, and 268, no. 4, of the CRP.
On the other hand, when there is no autonomous prior act that may be contested preceding an assessment act dealing with its prerequisites, any previously committed illegality may be invoked in the contestation of the final decision (end of Article 54 of the CPPT), so all questions relating to the legality of assessment acts may be examined in tax tribunals in proceedings for judicial review, as follows from letter a) of no. 1 of Article 97 and Article 99 of the same Code.
In fact, in tax tribunals, even when, having carried out assessment acts, we are in a situation where it might be more useful for the taxpayer to use an action for recognition of a right or legitimate interest (by enabling, in addition to the examination of the legality of acts, the definition for the future of the taxpayer's rights), the use of an action instead of judicial review is a mere option, as follows from the text of Article 145, no. 3, of the CPPT itself, when it says that "actions may only be brought whenever this procedural means is the most appropriate to ensure full, effective and efficient protection of the right or legally protected interest". That is, what is provided in this rule is a limitation to the use of an action and not a limitation to the use of the judicial review process.
Indeed, it is manifest that the judicial review process includes the possibility of recognition of rights in tax matters, such as the right to annulment or declaration of nullity of assessments, the right to compensatory interest and the right to compensation for undue guarantee, so the fact that the recognition of rights is at issue is not an obstacle to the use of the judicial review process.
Thus, since the tax arbitral process was created as an alternative to the judicial review process, it is to be concluded that there is no obstacle to the legality of the assessment acts in question in this process being examined by this Arbitral Tribunal, as in tax tribunals that legality could be examined in judicial review proceedings.
Therefore, the Arbitral Tribunal is not materially incompetent to examine the legality of the challenged assessment act.
The same does not apply to the claims that the Claimant formulates for recognition of the right to deductibility in fiscal year 2010 of the losses of the fiscal group B… that the Claimant formulates.
In fact, in the model of contentious review that was adopted in the judicial review process and in the arbitral process, the object of the process is the act regarding which the declaration of illegality is requested, so the declaration of illegality and annulment exhaust the powers of cognition of the Arbitral Tribunal (in addition to those of defining the consequences of the annulment at the level of restitution of unduly paid amounts and compensatory interest and compensation for undue guarantee, which follow from Articles 43, 53 and 100 of the LGT, 24, no. 4, of the LRAT and 171 of the CPPT.
Therefore, the objection of material incompetence raised by the Tax and Customs Authority as to the claim for annulment of the assessment does not proceed, and it proceeds in relation to the claims for recognition of right.
3.3. Question of Merit
In 2009 the companies of Group B… could not be included in Group A… because the companies integrated in that group were not yet held for more than one year by the parent company of this group, now the Claimant, in light of the requirement provided for in letter b) of no. 3 of Article 69 of the IRC Code.
On 01-01-2010, the Claimant opted for the inclusion in its group of B… and the remaining companies dominated by it.
The Tax and Customs Authority understood that these losses determined in Group B… in the fiscal years 2006 to 2009 could not be deducted from the taxable matter of the Claimant's group in the year 2010, because "in accordance with the legislation applicable at the time and until the entry into force of Law no. 2/2014 of 16 January, pursuant to Articles 69 and 71 of the IRC Code, when a group subject to RETGS is acquired by another group, also subject to that regime, the application of RETGS ceases in the acquired group, with the consequent loss of tax losses determined therein" (Tax Inspection Report).
The question that is the subject of the present proceedings is whether, in light of the regime in force in 2010, with the Claimant, the parent company of a group of companies subject to the Special Tax Regime for Corporate Groups (RETGS), having indirectly acquired control of a company that is the parent company of another group of companies also subject to RETGS, the tax losses determined in this group of companies cease to be relevant, for the purposes of determining the taxable matter of the Claimant's group.
3.3.1. Substantiation of the Challenged Act
The tax arbitral process, as an alternative means to the judicial review process (no. 2 of Article 124 of Law no. 3-B/2010, of 28 April), is, like this, a procedural means of mere legality, aimed at eliminating the effects produced by illegal acts, annulling them or declaring their nullity or non-existence [Articles 2 of the LRAT and 99 and 124 of the CPPT, applicable by force of the provisions of Article 29, no. 1, letter a), of that Law].
Therefore, post hoc substantiation is irrelevant, and acts whose legality is questioned must be assessed as they were carried out, and the tribunal cannot, upon finding the invocation of an illegal ground as support for the administrative decision, examine whether its action could be based on other grounds. ([1])
In the case where only perfect substantiation of the challenged act would allow safe detection of whether the entity that issued that act incurred or not the defect of violation of law, the defect of form should be examined as a priority, as this offers more guarantees to the appellant than if the defect of violation of law were examined without complete knowledge of the factual and legal reasons that determined the issuance of the challenged act. ([2])
The substantiation of law invoked by the Tax and Customs Authority for its decision is that "in accordance with the legislation applicable at the time and until the entry into force of Law no. 2/2014 of 16 January, pursuant to Articles 69 and 71 of the IRC Code, when a group subject to RETGS is acquired by another group, also subject to that regime, the application of the RETGS ceases in the acquired group, with the consequent loss of tax losses determined therein".
The Claimant laments the insufficiency of this substantiation, saying that "it is not clear in what terms the said Articles 69 and 71 of the IRC Code impose such conclusion" and asking "immediately, what are, properly viewed, the numbers and letters of the provisions in question from which it derives such legal effects?", but does not refer to intending to impute to the challenged act the defect of lack of substantiation, proceeding to set out its position, to the effect that those articles impose a different conclusion.
In Article 171 of the request for arbitral decision the Claimant reaffirms that the position of the Tax and Customs Authority "is not justified nor properly substantiated", but does not draw from this statement any conclusion regarding the annulment of the challenged assessment.
As the Claimant does not impute to the challenged act the defect of lack of substantiation, the possibility of its examination is excluded, since it is a defect giving rise to mere voidability, which is not subject to ex officio examination.
In any case, being in a situation where the Claimant, not raising the defect of lack of substantiation, seeks to have the assessment declared illegal for the defect of violation of law, it should be examined whether the assessment is justified in light of the grounds of illegality that the Claimant imputes to it.
Furthermore, despite the references that the Claimant makes to the deficiency of substantiation, examining the request for arbitral decision and its arguments, it must be concluded that the alleged deficiency has not prejudiced its defense, since the Claimant's argument covers, exhaustively, the interpretations of the law capable of substantiating its claim, which leads to the conclusion that the alleged deficiency is irrelevant.
3.3.2. Position of the Claimant
The Claimant argues that the position assumed by the Tax and Customs Authority in the Tax Inspection Report underlying the challenged assessment has no legal support in Article 71 of the IRC Code, in the version in force in 2010.
The Claimant says, in summary:
– in letters a) to d) of no. 1 of Article 71 the following situations of deduction of tax losses are covered, in addition to the case of merger of companies:
(i) tax losses generated by a company in a group verified in periods of taxation prior to the beginning of application of RETGS;
(ii) tax losses generated by a company in the group in periods of taxation in which RETGS applies; and
(iii) losses generated by a company in the group relative to which the application of RETGS ceases.
– there is no situation fitting into letter c) in which the application of the regime has terminated relative to a company in the group, since, on 31-12-2009, the special tax regime for corporate groups applied to the companies comprising Group B… and at the beginning of 2010 the regime continued to apply to the same companies, now comprising Group B…;
– letter c) refers to the cessation of application of the regime "relative to a company in the group", which is also not to be confused with the cessation of application of RETGS to the totality of the group as such, which continues to be subject to RETGS;
– it is aimed in that rule to regulate the situation of the company that leaves a group that is maintained, preventing that the losses it generated within it may be used when the link under which those losses had been produced was broken;
– letter b) of no. [1] of Article 71 sought here to safeguard the hypothesis that RETGS ceases its effects for the totality of the companies of the group, in which case the tax losses determined in the course of the application of RETGS are lost;
– the tax losses of letter b) correspond to the tax losses determined by the companies already in the context of the application of RETGS (the so-called group losses) while the losses of letter c) refer to group losses which, as such, cannot be deductible to the taxable profit of companies that have abandoned the group of companies subject to RETGS and the losses of letter a) correspond to the losses of the companies in the group verified in periods of taxation prior to the beginning of application of the regime" (the so-called individual losses);
– in the case in question, it is a matter of group tax losses, so the tax deductibility of the tax losses in question is assured – literally – pursuant to letter b), of no. 1, of Article 71 of the IRC Code, as the companies within Group B… were always – continuously – subject to RETGS, without any interruption, there being only a change in the parent company;
– the group tax losses would continue to be deductible at the level of the group, meanwhile expanded, as letter b) is exclusively directed at cases of cessation of the RETGS relative to a taxation group;
– within the application of letter a), individual tax losses are not lost, being only limited to the taxable profit of each individual company to be obtained already in the context of Group A…;
– to reject the interpretation that the Claimant formulates regarding letter b), of no. 1, of Article 71 of the IRC Code would mean, without more, to assume the negative discrimination that would then be conferred on a group of companies that were integrated in the scope of a taxation group subject to RETGS as opposed to companies that were taxed individually;
– not applying in the present case letter b) of no. 1 of Article 71 of the IRC Code would make it imperative to recognize, as a "minimum threshold of reasonableness", the deductibility of losses under letter a), as refusing the application of letter a) in those situations would lead to the application of letter c), a conclusion that entirely lacks foundation, since what is at issue is not an abandonment of the scope of a group and the consequent frustration of the extrafiscal objectives of RETGS.
3.3.3. Position of the Tax and Customs Authority
The Tax and Customs Authority defends, in summary, the following:
– in principle, adopted in Article 52 of the IRC Code, the tax losses of a given taxpayer can only be deducted from the taxable profit of the same taxpayer;
– RETGS constitutes an exception to that principle;
– the possibilities for deduction of tax losses within RETGS are indicated exhaustively in Article 71 of the IRC Code;
– even with the provision of a broader range of possibilities for deduction of tax losses, in cases of changes in the scope of the groups, introduced by Law no. 2/2014, of 16/01, the legislator subordinated, in nos. 3, 4 and 5 of Article 71 of the IRC Code, the deduction of tax losses accumulated by pre-existing groups, to the approval of an authorization dependent on the recognition of the economic interest of the operation or operations that induced the changes to the composition of the group;
– the law in force, as of the date of the facts, only admitted the continuity of the application of RETGS, in case of changes in its composition, translated notably in expansions of its scope, but in which the parent company remained;
– in case the parent company of a group covered by RETGS directly or indirectly acquires control of the parent company of another group of companies also covered by RETGS, the application of the regime to the group whose company came to have the status of subsidiary company ceased, and although the companies that formed it had to be included in the scope of the acquiring group, in case they met the legally required requirements, the right to deduction of the losses of the "acquired" group was extinguished by force of the provisions of letters b) and c) of no. 1 of Article 71 of the IRC Code;
– treating RETGS the group as a taxation unit, whose taxable profit, pursuant to Article 70 of the IRC Code, is calculated by the parent company, through the algebraic sum of taxable profits and tax losses determined in the individual periodic declarations of each of the companies belonging to the group, the taxation unit constituted by Group B… ceased to exist when the parent company became a subsidiary company of another company resident in Portuguese territory, a requirement required by letter b) of no. 3 of Article 69 of the same Code, so, for that Group in particular, the application of the regime ceased;
– as "the tax losses of the group determined in each period of taxation in which the regime applies can only be deducted from the taxable profits of the group", the right to deduction of tax losses determined by a group of companies cannot be transferred to another group of companies nor can their proportional shares be assigned to the companies belonging to the group, in case the RETGS ceases;
– it does not appear what support in the law can be invoked to establish the distinction between losses of the group and losses of a group, since, both in letter b) and in letter c), of no. 1, of Article 71 of the IRC Code, the expression losses of the group is always used, precisely to mean that these are not losses of a group in the abstract but rather losses determined by a concrete group of companies, identified by its respective parent company;
– the deduction of losses under letter a) of the same number, runs up against the rules of letters b) and c) of no. 1 of Article 71, which state that losses determined during the validity of RETGS cease to "belong" to the companies that generated them and, therefore, even though the companies that formed Group B… came to be part of Group A…, also covered by RETGS, the right to deduction of tax losses accumulated in the sphere of the first Group was not safeguarded by the legislator;
– this possibility was only admitted by Law no. 2/2014 and, even so, subordinated to the provisions of Article 52 of the same Code, that is, subjecting it to the recognition of the economic interest of the operation;
– nor could the AT, against the specific rules established in no. 1 of Article 71 of the IRC Code, in the matter of treatment of tax losses in the context of the application of RETGS, go beyond the limits that the legislator set, adopting, notably, a solution such as the one presented in the claim as the main request, as is developed in Articles 261 et seq., which would consist, if its scope is correctly understood, in circumscribing the deduction of accumulated tax losses of Group B… to taxable profits determined by Group A…but with the limit of the proportional share of the taxable profit of the companies comprised in that Group and which came to be part of Group A…;
– the possibility of admitting the deduction of tax losses only up to the limit of the taxable profit of the company to which the losses relate, taking as legal basis letter a) of no. 1 of Article 71 of the IRC Code, was only permitted by Law no. 2/2014.
Analyzing this substantiation invoked by the Tax and Customs Authority, it is found that the essential premise on which it rests is that the application of RETGS to B… ceased, by force of the provision in the article requirement required by letter c) of no. 3 of Article 69 of the IRC Code. ([3])
3.3.4. Special Tax Regime for Corporate Groups
Articles 69 to 71 of the IRC Code, in the versions in force in 2010, establish the following:
Article 69
Scope and conditions of application
1 – Where there exists a group of companies, the parent company may opt for the application of the special regime for determination of taxable matter in relation to all companies in the group.
2 – There exists a group of companies when one company, called parent, holds, directly or indirectly, at least 90% of the capital of one or more companies called subsidiaries, provided that such participation confers on it more than 50% of voting rights.
3 – The option for application of the special tax regime for corporate groups can only be formulated when the following requirements are cumulatively met:
a) The companies belonging to the group all have their registered office and effective management in Portuguese territory and all their income is subject to the general tax regime in IRC, at the higher normal rate;
b) The parent company holds the participation in the subsidiary company for more than one year, with reference to the date on which application of the regime begins;
c) The parent company is not considered subordinate to any other company resident in Portuguese territory that meets the requirements to be qualified as parent.
d) The parent company has not renounced the application of the regime in the three years prior, with reference to the date on which application of the regime begins.
4 – Companies in the following situations cannot be part of the group, at the beginning or during application of the regime:
a) Are inactive for more than one year or have been dissolved;
b) A special recovery or bankruptcy proceeding has been instituted against them in which a ruling has been issued to proceed with the action;
c) Have tax losses in the three fiscal years prior to that of the beginning of application of the regime, except, in the case of subsidiary companies, if the participation has already been held by the parent company for more than two years;
d) Are subject to an IRC rate lower than the higher normal rate and do not renounce its application;
e) Adopt a period of taxation not coinciding with that of the parent company;
f) The required level of participation of at least 90% is obtained indirectly through an entity that does not meet the legally required requirements to be part of the group;
g) Do not assume the legal form of limited liability company, joint stock company or partnership limited by shares, except as provided in no. 12.
5 – The temporal requirement referred to in letter b) of no. 3 is not applicable when companies are established by the parent company less than one year, it being relevant for the counting of that period, as well as that provided in letter c) of no. 4, in cases where the participation was acquired in the context of a merger, demerger or asset contribution process, the period during which the participation remained in the ownership of the merged, demerged companies or the contributing company, respectively.
6 – When the participation is held indirectly, the effective percentage of participation is obtained by the process of successive multiplication of the percentages of participation at each level and, where participations in a company are held directly and indirectly, the effective percentage of participation results from the sum of the percentages of participations.
7 – The option mentioned in no. 1 and the changes referred to in letters d) and e) of no. 8, as well as the renunciation or cessation of application of this regime must be communicated to the Directorate-General of Taxes by the parent company through the sending, by electronic data transmission, of the competent declaration provided for in Article 118, within the following periods:
a) In the case of option for application of this regime, by the end of the 3rd month of the period of taxation in which it is intended to begin application;
b) In the case of changes in the composition of the group:
i) By the end of the 3rd month of the period of taxation in which the inclusion of new companies should be effected pursuant to letter d) of no. 8;
ii) By the end of the 3rd month of the period of taxation following that in which the exit of companies from the group or other changes occur pursuant to letter e) of no. 8;
c) In the case of renunciation, by the end of the 3rd month of the period of taxation in which it is intended to renounce the application of the regime;
d) In the case of cessation, by the end of the 3rd month of the period of taxation following that in which the conditions for application of the regime referred to in letters a) and b) of no. 8 cease to be met.
8 – The special tax regime for corporate groups ceases its application when:
a) One of the requirements referred to in nos. 2 and 3 ceases to be met, without prejudice to the provisions of letters d) and e);
b) One of the situations provided for in no. 4 occurs and the respective company is not excluded from the group to which the regime is being or is intended to be applied;
c) The taxable profit of any of the companies in the group is determined using the application of indirect methods;
d) Changes occur in the composition of the group, notably with the entry of new companies that meet the legally required requirements without their inclusion being made under the regime and the respective communication to the Directorate-General of Taxes being made pursuant to no. 7;
e) The exit of companies from the group occurs by disposal of the participation or by non-compliance with the other conditions, or other changes in the composition of the group motivated notably by mergers or demergers, whenever the parent company does not opt for continuity of the regime in relation to the other companies in the group, by sending the respective communication within the terms and period provided for in no. 7.
9 – The effects of renunciation or cessation of this regime are dated:
a) To the end of the period of taxation prior to that in which the renunciation to the application of this regime was communicated pursuant to the terms and period provided for in no. 7;
b) To the end of the period of taxation prior to that in which the inclusion of new companies should have been communicated pursuant to letter d) of no. 8 or to the end of the period of taxation prior to that in which the continuity of the regime should have been communicated pursuant to letter e) of that number;
c) To the end of the period of taxation prior to that of the occurrence of the facts provided for in letters a), b) and c) of no. 8.
10 – Public enterprises, which meet the requirements regarding the status of parent company required by this article, may opt for the application of this regime to their respective group.
11 – It is incumbent upon the parent company to prove the fulfillment of the conditions for application of the special tax regime for corporate groups. (as amended by Law no. 64-B/2011, of 30-12)
Article 70
Determination of taxable profit of the group
1 – For each of the periods of taxation covered by the application of the special regime, the taxable profit of the group is calculated by the parent company, through the algebraic sum of taxable profits and tax losses determined in the individual periodic declarations of each of the companies belonging to the group.
2 – The amount obtained pursuant to the previous number is corrected for the portion of profits distributed among the companies in the group that is included in the individual taxable bases.
Article 71
Specific regime for deduction of tax losses
1 – Where the regime established in Article 69 is applicable, in the deduction of tax losses provided for in Article 52, the following is also observed:
a) The losses of the companies in the group verified in periods of taxation prior to the beginning of application of the regime can only be deducted from the taxable profit of the group up to the limit of the taxable profit of the company to which they relate;
b) The tax losses of the group determined in each period of taxation in which the regime applies can only be deducted from the taxable profits of the group;
c) Once application of the regime terminates relative to a company in the group, the tax losses verified during the periods of taxation in which the regime applied are not deductible from its respective taxable profits, being able, however, still to be deducted, pursuant to the terms and conditions of no. 1 of Article 52, the losses referred to in letter a) that have not been fully deducted from the taxable profit of the group;
d) Where there is continuity of application of the regime after the exit of one or more companies from the group, the right to deduction of the proportional share of tax losses relating to those companies is extinguished.
2 – Where, during the application of the regime, mergers occur between companies in the group or a company incorporates one or more companies not belonging to the group, the losses of the merged companies verified in periods of taxation prior to the beginning of the regime can be deducted from the taxable profit of the group up to the limit of the taxable profit of the new company or of the incorporating company, provided that the authorization provided for in Article 75 is obtained.
3 – In the deduction of tax losses, those determined longest ago must be deducted first.
The regime for deduction of tax losses of the group is found in this Article 71, which has a special nature, so the possibility of deduction of tax losses of Group B… in the taxable profit of Group A… depends on fitting the situation into one of the hypotheses provided for in this article.
3.3.4. Question of Fitting the Situation into Letter a) of No. 1 of Article 71 of the IRC Code
Letter a) of no. 1 of Article 71 of the IRC Code establishes that "the losses of the companies in the group verified in periods of taxation prior to the beginning of application of the regime can only be deducted from the taxable profit of the group up to the limit of the taxable profit of the company to which they relate".
This rule is intended to ensure the possibility of deduction from the taxable profit of the group of the losses of each of the companies that form it occurring before the application of the regime.
It is a rule that aims to regulate the regime of individual losses of each one of the companies that come to comprise the group, so it does not apply to the situation in question, in which what is at issue is the deduction of losses of a group that is integrated into another.
Therefore, legal support is not found in it to conclude for the possibility of the losses of that group being deducted from those of this one.
3.3.5. Question of Fitting into the Situation Provided for in Letter c) of No. 1 of Article 71 of the IRC Code
Letter c) of no. 1 of Article 71 of the IRC Code, which establishes that "once application of the regime terminates relative to a company in the group, the tax losses verified during the periods of taxation in which the regime applied are not deductible from its respective taxable profits, being able, however, still to be deducted, pursuant to the terms and conditions of no. 1 of Article 52, the losses referred to in letter a) that have not been fully deducted from the taxable profit of the group".
This rule applies to cases of cessation of application of RETGS relative to a company in the group and not to the cessation of application of the regime to the totality of the group.
In the first part of this rule, a prohibition on deduction of losses is established, the second part only providing for a situation of possibility of deduction.
The possibility of deduction of losses provided for in the second part is reduced to that provided for in letter a), aiming only, therefore, at individual losses verified in periods of taxation prior to the beginning of application of the regime that have not been deducted from the taxable profit of the group, while the companies comprised it.
3.3.6. Question of Fitting into the Situation Provided for in Letter b) of No. 1 of Article 71 of the IRC Code
Letter b) of no. 1 of Article 71 of the IRC Code establishes that "the tax losses of the group determined in each period of taxation in which the regime applies can only be deducted from the taxable profits of the group".
Of the three rules of no. 1 of Article 71 of the IRC Code, that of letter c) is the only one that relates to tax losses of groups of companies.
The Claimant argues that this rule assures literally the deductibility of the tax losses of Group B…, as the companies that comprised it were always – continuously – subject to RETGS, without any interruption, there being only a change in the parent company, so the group tax losses would continue to be deductible at the level of the group, meanwhile expanded, as letter b) is exclusively directed at cases of cessation of the RETGS relative to a taxation group.
However, the text of this letter b) does not give to the Claimant's thesis the literal support it seeks, as it does not refer in it that the tax losses of a group may be deducted from the tax losses of any group, but rather that "the tax losses of the group ... can only be deducted from the taxable profits of the group". The use of this "the" in the latter part, with definite article, does not enable the Claimant's thesis that it is intended to refer to losses "of" group, whatever it might be.
Therefore, from the literal tenor of this rule it results that on the basis of this letter b) of no. 1 of Article 71 the tax losses of Group B… cannot be deducted from the taxable profit of Group A….
On the other hand, in light of the regime in force in 2010, prior to Law no. 2/2014, of 16 January, it was not even legislatively recognized the possibility of maintaining the special regime for taxation of corporate groups relative to a parent company of a group when it became a subsidiary of a company resident in Portuguese territory that met the requirements to be qualified as parent.
In fact, letter c) of no. 3 of Article 69 of the IRC Code established, among the cumulative requirements for option for application of the special tax regime for corporate groups, that "the parent company is not considered subordinate to any other company resident in Portuguese territory that meets the requirements to be qualified as parent" and letter a) of no. 8 of the same article determined the cessation of application of the regime when one of the requirements provided for in no. 3 ceased to be met. ([4])
Therefore, as the Tax and Customs Authority refers in the Tax Inspection Report, the acquisition of a group subject to RETGS by another subject to the same regime implied the cessation of application of this regime to the acquired group, by force of this no. 8, combined with letter c) of no. 3 of Article 69.
On the other hand, if it is true that this regime for deduction of tax losses involves negative discrimination of the tax losses of the companies that comprise a group when it is extinguished [since taxable profits of the group cease to exist and the tax losses verified during the periods of taxation in which the regime was applied are not deductible from the taxable profits of the companies in relation to which the application of the regime ceased, by force of the first part of letter c) of no. 1 of Article 71], it is also true that this is a discrimination that embodies a clear legislative choice, as both letter b) and letter c) of no. 1 of Article 71 have evident scope for restricting the deductibility of tax losses of the group and companies therein.
Thus, that discrimination constitutes an inconvenience of the special tax regime for corporate groups that does not amount to discrimination offensive to the constitutional principle of equality, as, on the one hand, the special tax regime for corporate groups has advantages (namely greater possibility of deduction of tax losses than is possible with individual taxation under the general IRC regime) whose consideration is inseparable from the inconveniences.
Furthermore, the restrictions on transmission of tax losses between groups of companies are also not incompatible with the principle of justice, as they are justified as measures suitable to prevent the abusive erosion of tax revenues, which can be effected through the purchase, with purposes of tax evasion, of companies with high accumulated tax losses. ([5]) It is just that companies that opt for this form of taxation, coming to enjoy advantages that companies taxed individually do not benefit from, also bear the inconveniences that result from that choice, namely those intended to prevent abusive practices that cause erosion of the tax base.
It is revealing of this legislative intent to mitigate the advantages that result from the adoption of RETGS, the fact that the "specific regime for deduction of tax losses" provided for in Article 71 of the IRC Code has as its primary objective the establishment of limitations on the deduction of tax benefits, implemented in all the letters of its no. 1.
On the other hand, the application of RETGS is optional, depending on an option of the parent company of the group (Article 69, no. 1, of the IRC Code), so it cannot be understood that we are facing the legal imposition of a discriminatory regime, as "since the regime is of voluntary accession, it is up to the companies, in the exercise of their freedom of organization, to evaluate whether they should group together and consolidate or not in accordance with the benefits and costs that such choice may entail". ([6])
Alternatively, the Claimant suggests that this letter b) is not applicable to the situation in question "if it is considered that the tax losses referred to therein are exclusively those of the group into which the scope of companies of Group B… was integrated (i.e. the aggregating group)".
However, as referred to, the literal tenor of this rule, in referring as the object of its provision "the tax losses of the group" imposes its application to all situations in which there is a group, and no support is seen for failing to apply it to losses of groups that come to be integrated into another group.
On the other hand, from another perspective, given that the law in force, prior to 2014, did not expressly provide for the hypothesis of the parent company of a group subject to RETGS becoming subsidiary to another company, it could be understood that we are facing a gap, which could be filled by recourse to analogy, since we are not in the domain of essential elements of the tax.
In this case, in the absence of express regulation, we would have to conclude that the cessation of application of RETGS to a given group of companies, because the premise provided for in Article 69, no. 3, letter c) of the IRC Code has ceased to be met (the parent company having become subsidiary to another company), is equivalent, for tax purposes, to the exit from the group of each and every one of the companies that comprised it. Accordingly, the gap should be filled, in relation to each of the companies that constituted the "extinct" group, by application of the provisions of letter c) of Article 71 of the IRC Code, as it is evident the identity of the reason for deciding in both situations. Now, such provision states that, with a company ceasing to be part of a group subject to RETGS, "the tax losses verified during the periods of taxation in which the regime applied are not deductible from its respective taxable profits". If a company that exits the group "loses" its proportional share of the tax losses generated during its permanence in the group it comprised, it becomes irrelevant the question of whether, thereafter, it came to be part of another group subject to RETGS or not.
Thus, it is to be concluded that the regime in force in 2010 did not permit the maintenance of RETGS in situations in which the parent company came to be considered subsidiary to another company resident in Portuguese territory that meets the requirements to be considered parent, a possibility that only came to be introduced by Law no. 2/2014, of 16 January, with the new wording it gave to no. 10 of Article 69 of the IRC Code: "10 - In cases where the parent company becomes considered subsidiary to another company resident in Portuguese territory that meets the requirements, with the exception of that provided for in letter c) of no. 4, to be qualified as parent, the latter may opt for the continuity of application of the special regime for taxation of corporate groups through communication to the Tax and Customs Authority, carried out within 30 days following the date on which that fact occurs, with that group coming to include the new parent company".
But, despite there being this possibility of continuity in light of the new regime, the deductibility of tax losses of the group verified during earlier periods of taxation in which RETGS was applied is not automatic, only existing "in cases of recognized economic interest and by means of a request to be submitted to the Tax and Customs Authority with that communication, being deductible from the taxable profit of the new group, provided that authorization is obtained from the member of the Government responsible for the area of finance", as provided for in no. 3 of Article 71 of the IRC Code in the new wording.
This special concern in limiting and controlling the situations in which there is a right to deduction of tax losses of a group, in cases where there is integration of one group into another, reveals well that, in the legislative perspective, the change in ownership of the capital of companies in this type of situation can be a symptom of abuse of the regime for deduction of losses.
Therefore, being evident the legislative intent underlying the reform of the IRC to increase the deductibility of tax losses ([7]), this new possibility of deduction of tax losses in cases of continuity of RETGS, dependent on a case-by-case assessment of economic interest, is confirmed as revealing that, in the legislative perspective, this possibility could not exist automatically in the prior regime, following mere communication to the Tax and Customs Authority.
It is concluded, thus, that the request for arbitral decision must be judged inadmissible.
4. Compensatory Interest
Concluding that the correction carried out by the Tax and Customs Authority is not illegal, there is no basis for payment of compensatory interest, as there was no unduly paid tax liability (Article 43, no. 1, of the LGT).
5. Decision
In accordance with the foregoing, this Arbitral Tribunal agrees to:
a) Judge inadmissible the objection of material incompetence raised by the Tax and Customs Authority regarding the claim for annulment of the assessment;
b) Judge admissible the objection of material incompetence regarding the claims for recognition of right, dismissing the Tax and Customs Authority from these;
c) Judge inadmissible the request for arbitral decision for annulment of the assessment, dismissing the Tax and Customs Authority from this claim;
d) Judge inadmissible the request for arbitral decision for compensatory interest, dismissing the Tax and Customs Authority from this claim.
6. Value of the Case
In accordance with the provisions of Article 306, no. 2, of the CPC of 2013, Article 97-A, no. 1, letter a), of the CPPT and Article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the case is assigned the value of € 346,182.19.
Lisbon, 10-12-2015
The Arbitrators
(Jorge Manuel Lopes de Sousa)
(Rui Duarte Morais)
(Maria Manuela Roseiro)
[1] Essentially in this sense, the following rulings of the Supreme Administrative Court may be seen, regarding a parallel situation that arises in contentious review proceedings:
– of 10-11-98, of the Plenary, rendered in appeal no. 32702, published in AP-DR of 12-4-2001, page 1207.
– of 19/06/2002, case no. 47787, published in AP-DR of 10-2-2004, page 4289.
– of 09/10/2002, case no. 600/02.
– of 12/03/2003, case no. 1661/02.
In the same sense, may be seen:
– MARCELLO CAETANO, Manual of Administrative Law, volume I, 10th edition, page 479, in which he refers that it is "irrelevant that the Administration subsequently, in the course of the contentious review, invokes as determining reasons other reasons, not expressed in the act", and volume II, 9th edition, page 1329, in which he writes that "the authority against which recourse is made cannot (...), in its response to the appeal, justify the practice of the challenged act by reasons different from those that are contained in its express motivation".
– MÁRIO ESTEVES DE OLIVEIRA, Administrative Law, Volume I, page 472, where it is written that "the reasons objectively existing but which are not expressly adduced as grounds of the act, cannot be taken into account in assessing its legality".
[2] Ruling of the Supreme Administrative Court of 28-4-1988, case no. 25474, published in Appendix to the Official Gazette of 20-01-94, page 2166.
[3] The Tax and Customs Authority, in Article 32 of the Response, indicates letter b), but this is a manifest lapsus, as letter b) relates to the requirement of the period of holding of the participation in the subsidiary company, it being letter c) that is potentially applicable, as it establishes the requirement that "the parent company is not considered subordinate to any other company resident in Portuguese territory that meets the requirements to be qualified as parent".
[4] The Claimant in Articles 56 and 57 of the request for arbitral decision refers to "the automatic extinction of Group B…", as "an inescapable consequence of the provisions of Article 69, no. 3, letter b) and no. 8, letter a) of the IRC Code in the version then in force"
The Tax and Customs Authority, in the request for arbitral decision and in the arguments refers to the requirement provided for in letter b) of no. 3 of Article 69, as implying that the taxation unit constituted by Group B… ceased to exist when the parent company became a subsidiary company of another company resident in Portuguese territory.
However, in that letter b) of no. 3 of Article 69 reference is made to the requirement that the parent company holds the participation in the subsidiary company for more than one year, with reference to the date on which application of the regime begins, providing a requirement necessary for beginning the application of RETGS and not for its maintenance or cessation, it being letter c) that requires as a requirement that "the parent company is not considered subordinate to any other company resident in Portuguese territory that meets the requirements to be qualified as parent", which, when the situation is supervening, implies the cessation of application of the regime, by force of letter a) of no. 8 of Article 69, referred to by the Claimant.
[5] As the Tax and Customs Authority refers, in the wake of Manuel H. Freitas Pereira.
An identical reference to the "abuses detected (acquisition of companies – often without any activity - with high tax losses that could be carried forward, which then came to exercise another activity, very profitable [or the same activity, but in a completely different corporate framework], taking advantage of the benefit resulting from the deduction of losses previously accumulated)" is made by RUI DUARTE MORAIS, Notes on the IRC, page 165, whose doctrine is cited in the ruling of the Supreme Administrative Court of 28-11-2012, case no. 0558/11.
[6] Ruling of the Supreme Administrative Court of 29-02-2012, case no. 021/12.
[7] Expressly stated on pages 145 and 146 of the Draft Reform.
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