CAAD Case 359/2018-T: Transfer Pricing and Arm's Length Principle Under Article 63 CIRC – IRC Assessment Annulment

ARBITRAL DECISION

The arbitrators Dr. Alexandra Coelho Martins (arbitrator-chair), Dr. Gonçalo Cid Peixeiro and Dr. José Coutinho Pires (arbitrator-members), appointed by the Ethics Council of the Administrative Arbitration Centre ("CAAD") to form this present Arbitral Court, constituted on 2 October 2018, hereby agree as follows:

I. Report

The taxable person A..., S.A., legal entity ..., hereinafter "Applicant" or "A...", with registered office at Av. ..., no. ..., ..., ..., filed on 27 July 2018 a request for constitution of a Collective Arbitral Court, pursuant to the combined provisions of articles 2, no. 1 and 10, both of Decree-Law no. 10/2011, of 20 January, as amended by articles 228 and 229 of Law no. 66-B/2012, of 31 December (Legal Regime for Arbitration in Tax Matters, hereinafter "RJAT"), in which the Tax and Customs Authority is the Respondent, hereinafter referred to as "TA" or "Respondent".

The Applicant requests an arbitral ruling on the partial illegality of the additional assessment of Corporate Income Tax ("CIT") no. 2013... and corresponding compensatory interest, which resulted in a total amount payable of € 323,124.69 (€ 284,303.62 of CIT and € 38,821.07 of interest), as per statement of account settlement no. 2013..., relating to the fiscal year 2009, of which it disputes the amount of € 288,053.57, maintained following a dismissal order of Hierarchical Appeal no. ...2015..., issued by the Director of Services of the CIT Services Directorate ("DSIRC"), on 24 April 2018, and notified on 30 April 2018. The Applicant requests the annulment of such tax acts with all legal consequences, including condemnation of the TA to pay compensation for the wrongful provision of bank guarantee, pursuant to article 53 of the General Tax Law ("LGT"). It attaches 14 documents and lists one witness.

The request for constitution of the Arbitral Court was accepted by His Excellency the President of CAAD and automatically notified to the TA.

Pursuant to article 6, no. 2, subsection a) and article 11, no. 1, subsection b) of the RJAT, His Excellency the President of CAAD's Ethics Council appointed the arbitrators of the Collective Arbitral Court, who communicated acceptance of the appointment within the applicable period, and notified the parties of this appointment.

The Collective Arbitral Court was constituted on 2 October 2018.

Pursuant to article 17, no. 1 of the RJAT, the TA was notified on the same date to file its response.

By order of His Excellency the President of CAAD's Ethics Council, following a reasoned request for resignation by one of the arbitrator-members, the respective replacement by Dr. José Coutinho Pires, signatory hereto, was ordered, notified to all parties on 4 October 2018.

The TA filed on 26 October 2018 a motion requesting an extension of 30 days to the deadline for response, invoking the need to obtain further information on the situation in dispute, which was granted on 29 October 2018.

The TA filed its response on 27 November 2018, accompanied by the Administrative Proceedings ("AP").

In that response, in addition to raising preliminary matters concerning the lapse of the right to action, the TA presents a defence by way of objection and argues for the complete rejection of the Applicant's claim. It also considers that the request for witness testimony should be dismissed as a useless action.

By order of 29 November 2018, the Applicant was notified to exercise the right of reply regarding the preliminary matter and to indicate to the Court the facts, or the subject matter of the evidence to be established by witness testimony.

In a motion of 5 December 2018, the Applicant took position on the preliminary matter raised by the Respondent; as a precaution, it clarified its claim to encompass an objection to both the assessment and the dismissal of the Hierarchical Appeal; and also indicated the articles of its initial request that would be subject to proof by the testimony of its listed witness.

The Arbitral Order of 7 December 2018 set 18 January 2019 for the conduct of the witness examination.

In a motion of 13 December 2018, the Respondent requested that an additional witness indicated by it be examined for better exercise of the right of reply, and the Court granted the amendment and notified the opposing party to avail itself, if it so wished, of the same faculty, within a period of 5 (five) days, pursuant to the order of 17 December.

In a motion of 10 January 2019, the Respondent requested the postponement of the date for the witness examination, due to the inability of its listed witness to appear.

In motions of 29 January 2019 and 13 February 2019, the Applicant similarly requested the postponement of the dates for witness examination.

Following arbitral orders of 11 and 31 January and 15 February 2019, the examination was definitively rescheduled for 11 March 2019.

On 11 March 2019, the examination took place of the witness listed by the Applicant, B..., with the TA dispensing with the witness indicated by it.

At the end of the hearing, the parties were notified to file successive written submissions, with a deadline of 15 days, and the Court ordered an extension of two months to the deadline referred to in article 21, no. 1 of the RJAT, setting 1 June 2019 for delivery of the arbitral decision. The Applicant was warned that it should pay the subsequent arbitration fee by that date.

The Applicant filed its written submissions on 26 March 2019.

The Respondent filed its counter-submissions on 24 April 2019.

By arbitral order of 20 May 2019, given the complexity of the issues raised, the deadline for delivery of the arbitral decision was extended by an additional two months, pursuant to article 21, no. 2 of the RJAT.

The Court was regularly constituted and is materially competent, in accordance with the provisions of articles 2, no. 1, subsection a), 5, no. 3, subsection a), 6, no. 2, subsection a) and 11, no. 1, all of the RJAT.

The TA proceeded to appoint its representatives in the proceedings and the Applicant attached a power of attorney, thus the parties are duly represented.

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

The proceedings are not affected by nullities.

II. The Preliminary Matter of Untimeliness

A. Position of the Parties

In its response, the Respondent raises the question that the legally defined deadline for objection to this tax assessment act has expired, specifically, in arbitration, insofar as the claim has only for its purpose the declaration of illegality of the additional CIT assessment no. 2013..., with all legal consequences, namely its annulment.

It invokes that payment of the additional assessment took place on 18 December 2013 and that the request for constitution of the Arbitral Court was filed on 27 July 2018, being therefore clearly untimely in the light of the provision in article 10 of the RJAT, in conjunction with articles 102, nos 1 and 2 of the Code of Tax Procedure and Process ("CPPT"), which establishes a 90-day deadline. The Respondent invokes in support of its understanding abundant arbitral jurisprudence (Proceedings nos 62/2012-T, 188/2013-T, 244/2013-T, 38/2015-T, 195/2015-T, 196/2015-T, 211/2015-T, 261/2015-T, 346/2015-T, all of CAAD).

Thus, according to the Respondent, the claim formulated for annulment of the tax act should be declared inadmissible as untimely, which should result in dismissal of the action, pursuant to article 278, no 1, subsection e) of the Code of Civil Procedure ("CCP"), applicable ex vi article 29, no 1, subsection e) of the RJAT, considering that the Court cannot rule on more than what was claimed or on a different matter.

In turn, the Applicant, in response to the preliminary matter, clarifies that, contrary to what is suggested by the Respondent, its claim does not attack only the tax assessment (which constitutes the real and mediate object of the arbitral claim), rather expressly specifying the Hierarchical Appeal, whose procedure number it identifies, as well as its disagreement with the decision dismissing the same, which is also the object and basis of the claim.

The act of dismissal of the Hierarchical Appeal, issued on 24 April 2018 and notified on 30 April 2018, administratively maintained in the legal order the act of assessment that the Applicant deems illegal – and which it contests continuously, first through an informal appeal and, then, through a Hierarchical Appeal; and now, having exhausted the administrative means of objection to the assessment, through the arbitral route.

Without prejudice, the Applicant assumes that what it intends is that, in terms of the legal consequences of that objection, the assessment it deems illegal should be indirectly and ultimately affected.

The Applicant argues that the two objects – immediate (second-level acts) and mediate (assessment acts) – fall within the jurisdiction of the arbitral court, since a ruling on the illegality of the assessment acts strictly speaking will necessarily imply, albeit perhaps implicitly, the illegality of the decision dismissing the Hierarchical Appeal.

It adds, furthermore, that such question does not directly bear on the determination of the deadline for purposes of filing a request for arbitral ruling, the Respondent confusing the material scope of arbitration (article 2 of the RJAT) with the date from which the request for arbitral ruling may be filed (article 10 of the RJAT), and this deadline, according to article 10, no 1, a) of the RJAT, is "90 days, counted from the facts provided in nos 1 and 2 of article 102 of the Code of Tax Procedure and Process, as regards acts susceptible to autonomous objection and, likewise, from notification of the decision or the end of the legal deadline for decision of the hierarchical appeal", meaning that whenever the taxpayer has filed an informal appeal or a Hierarchical Appeal, the 90-day period for filing the request for arbitral ruling is counted from the decision dismissing the informal appeal or the Hierarchical Appeal.

The Applicant invokes, equally, diverse anti-formalist and "pro actione" jurisprudence of the Supreme Administrative Court ("SAC") (Proceedings nos 595/09, of 28 October 2009, 156/11, of 18 May 2011, and 723/11, of 16 November 2011); of the Central Administrative Court South ("CACS") (Proceeding no 8998/15, of 17 March 2016) and of Arbitral Courts (Proceedings nos 282/2013-T, 419/2014-T, 664/2014-T, 124/2015-T, 161/2015-T, 652/2015-T, 117/2016-T, 140/2016-T, 592/2016-T, 713/2016-T, all of CAAD).

Regarding the nine arbitral decisions invoked by the Respondent, the Applicant states that, in their majority, they do not support that understanding. Two of them do not discuss any lapse exception (62/2012-T and 261/2015-T), three others have diametrically distinct assumptions (38/2015-T, 188/2013-T, 244/2013-T), one (195/2015-T) had an arbitrator who adopted a different understanding in three subsequent decisions (652/2015-T, 117/2016-T and 140/2016-T) and another (346/2015-T) follows the Applicant's understanding.

Finally, the Applicant considers that the present request for arbitral ruling could not be judged untimely without the latter being, at an earlier moment, invited to clarify its claim pursuant to article 18, no 1, subsection c) of the RJAT, relying, for this purpose, on arbitral decisions nos 419/2014-T, 207/2016-T and 592/2016-T.

B. Decision on the Preliminary Matter

The preliminary question raised has already been the subject of multiple arbitral decisions which have analyzed it in depth. We have examined in this regard the reasoning of the Arbitral Decision of Proceeding no 336/2018-T, to which we adhere, which addresses a situation entirely identical to the one under consideration, transcribing the following self-explanatory excerpt:

"2. It follows from article 10, no 1, a) of the RJAT that the deadline for objection, in situations where there has been an informal appeal or hierarchical appeal followed by an express decision, is counted from notification of this latter decision, and not from the end of the voluntary payment period of the assessment.

1. Given that the informal appeal or the hierarchical appeal refer to the assessment itself that has been objected to, the reaction to the decision of dismissal in the informal appeal or in the appeal takes this decision as its immediate object, but the mediate object is, necessarily, the assessment itself.

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

3. Let us recall that, strictly speaking, arbitral jurisdiction has competence only to examine the illegality of the assessment, not the defects of dismissal of informal appeals and appeals.

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

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

6. What is at stake is conferring effective judicial protection of the rights of the objecting party (article 268, no 4 of the Constitution), not conditioning it in function of the first choice that the objecting party has made – namely, not prejudicing the objection to the assessment by the fact that the objecting party began with the administrative route, reserving for later recourse to the arbitral route, in the event of failure with the administrative route – as it would do with recourse to the judicial route.

7. The fact that both the informal appeal and the hierarchical appeal have as their object the assessment that has been objected to is what confers on them the character of second-degree acts, vis-à-vis the primary act of assessment.

8. And therefore the reaction to the second-degree acts implies that it is the primary act that is intended to be objected to still – when this is perhaps not explicitly stated in the reaction itself.

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

10. Hence, an interpretation favorable to access to law (article 7 of the CPTA) and to effective judicial protection (article 268, no 4 of the Constitution) – favorable, therefore, to examination of the merits of the issues and not entangled in procedural and processual formalities – should include the express dismissal of an informal appeal or of a hierarchical appeal in the object of the proceedings, as an expression of a timely reaction to the illegality of the primary act.

11. To think otherwise would force the objecting party into an exclusive option between the administrative route and the arbitral route, within the deadline for objection to the assessment; but this is contrary to the basic architecture that presided over the establishment of the arbitral route in tax matters – which in no part places, as a condition of access, the non-existence of a prior administrative route, or more specifically the non-existence of confirmatory acts that had maintained, in the legal order, the primary act.

12. Moreover, insofar as the arbitral courts functioning at CAAD have competence only to examine the legality of assessment acts, and not of decisions dismissing hierarchical appeals or informal appeals, we could reach the conclusion that, having been administrative objection to assessment acts, and with that exceeding the deadline for direct objection to the assessment, the arbitral route would be barred – were it not the case that article 10, no 1, a) of the RJAT explicitly states, on the contrary, that notification of the dismissal decision in the administrative route serves as the start date, thereby ruling out such an understanding.

13. Article 10 of the RJAT does not, therefore, confer on the arbitral courts functioning at CAAD competence for direct examination of the second (or third) degree acts; it is a norm that, referring albeit to such acts, respects exclusively the start date of the deadline for filing the request for arbitral ruling.

14. Timeliness is therefore assessed in relation to these second (or third) degree acts, although the materiality of the dispute relates to an assessment that those acts merely confirmed.

15. Thus, strictly speaking, the Applicant would not even have to separately object to the dismissals in the informal appeal or in the hierarchical appeal, if it found no defects specific to them (since as mere confirmatory acts they are non-appealable) – it would suffice perhaps to make more explicit that it was reacting to these acts for the sole purpose of timeliness of the reaction to the first-degree act, the assessment.

16. Having the Applicant explicitly stated that it was deducing the request for arbitral ruling for examination of the tax assessment act for CIT, following the order of dismissal of the Hierarchical Appeal and that it could not conform with the decision dismissing the Hierarchical Appeal (preamble and articles 177-179 of the request for arbitral ruling), by direct application of article 10, no 1, a) of the RJAT, it will be concluded that the deadline for that request began on the […] day following notification of the dismissal of the Hierarchical Appeal […].

17. Which means that it must be understood that the filing of the request […] was timely.

18. It is therefore not even deemed necessary to request the Applicant to clarify, correct or improve its request for arbitral ruling, a possibility raised by the Applicant in nos 101 to 106 of its Motion […]"

That the action of objection has as its object the assessment act has, moreover, been repeatedly affirmed by the jurisprudence of the SAC, as results from the recent Judgment of 3 July 2019, in Proceeding no 02957/16.0BELRS 070/18, according to which "the real object of the objection is the assessment act and not the act that decided the informal appeal, so it is the defects of that [assessment] and not of this order that are truly at issue"[1], an understanding that is to be applied in the arbitral proceedings conceived as an alternative to the means of judicial objection.

Applying the reasoning expounded to the situation at hand, the 90-day deadline provided for in article 10, no 1, subsection a) of the RJAT began to run from notification of the decision dismissing the Hierarchical Appeal which occurred on 30 April 2018 (beginning on the following day, 1 May 2018).

Thus, on 27 July 2018, the date on which the request for constitution of the Arbitral Court was filed with CAAD, the aforementioned 90-day deadline had not yet elapsed, thus concluding to the timeliness of the request and to the inadmissibility of the preliminary matter raised by the Respondent.

III. Reasoning. Factual Matter

A. Facts Considered Proven with Relevance to the Decision

The Applicant company, A..., S.A., also referred to as A..., began its activity on 5 December 2007, under the name C..., S.A., with a share capital of € 1,000,000.00 held, as of the facts date (2009), in equal parts by companies in the D... SGPS, S.A. group ("D...") and E... SGPS, S.A. ("E... SGPS") – cf. Tax Inspection Report ("TIR").

The Applicant's object is the production and commercialization of energy, assembly and operation of electric and thermoelectric power plants, development of renewable and alternative energies and is registered in the tax registry for the activity of thermal origin electricity production, with code 2704 corresponding to CAE 35112. It invests in renewable energies – wind, photovoltaic, biomass and mini-hydro – in Portugal and abroad – cf. TIR.

On 20 December 2008, E... SGPS and D..., SGPS, S.A. entered into a Strategic Partnership Agreement, in which they declare having established A..., the company here Applicant, as an investment vehicle specialized in the area of energy production and commercialization, development of renewable and alternative energies, and they agree on the ability to participate or invest jointly in energy sector projects, either through the Applicant, or by themselves directly, with (or without) the creation of special purpose vehicle companies – cf. Document 5 attached to the request for arbitral ruling ("rar") and TIR.

The aforementioned Strategic Partnership Agreement further establishes that E... SGPS and D... would make their best efforts to, when appropriate, provide the Applicant with the necessary capital for project execution (third clause), stipulating in its fourth clause that "The Partner Companies [E... SGPS and D...] permit themselves from now on, reciprocally, to cede, transfer and dispose of, at their respective nominal value or at such price and conditions as they may see fit, the capital positions that they hold at any time in each NEW VEHICLE COMPANY, provided they do so either within the said VEHICLE COMPANIES of the partnerships in which both participate or in favor of their subsidiary companies or with which they are in a situation of control or group." – cf. Document 5 attached to the rar and TIR.

On 31 October 2009, a Shareholders' Agreement was entered into between the Applicant, E... SGPS, D..., F..., Lda., G..., H... and I..., pursuant to which, considering a prior Partnership Agreement entered into on 28 March 2008, they bound themselves to establish a special purpose vehicle company called J..., S.A. ("J..."), with the objective of development and operation of the Photovoltaic Park Project of the ..., and regulated their relationships as shareholders of this company to be established – cf. TIR, Annex 5.

In accordance with the aforementioned Shareholders' Agreement, it was established, in particular:

The obligation for the Parties to strengthen the capital of the company to be established according to what was necessary for the projected investment, in proportion to their participations, up to an amount equal to 20% of the total investment of the project;

The authorization for new partners to enter the company, designedly financial ones, permitting the Applicant to cede to them part of its stake in J..., up to the limit of 30% of the respective share capital (which eventually occurred, as will be seen below, with the entry of K... SGPS, S.A.);

The placement by the Applicant at the disposal of F..., of the "financial means indispensable for it to realize the initial share capital of the new company and, likewise, the financial means indispensable to provide any future capital increases or to realize, in whatever form is decided, the own funds necessary to contribute to the project, in accordance with the participation that F..., Lda. holds in the company." – cf. TIR, Annex 5, Third Article.

Following the Strategic Partnership Agreement and the Shareholders' Agreement mentioned above, J... was established on 31 October 2009 with a share capital of € 50,000.00, represented by 10,000 ordinary registered shares with a nominal value of € 5.00, subscribed by the following entities:

€ 25,500.00 (51%) – F..., Lda. ("F...");
€ 10,000.00 (20%) – A... (Applicant);
€ 4,000.00 (8%) – D...;
€ 4,000.00 (8%) – H...;
€ 4,000.00 (8%) – I... ("I...");
€ 2,000.00 (4%) – E... SGPS;
€ 500.00 (1%) – G...– cf. TIR, Annex 2.

In fiscal year 2009, A... held stakes in various entities, designedly:

A direct participation of 51% in the capital of F...;

A direct participation of 31% in the capital of L..., S.A. ("L...") and an indirect participation of 26%, via F... (which held 51% of L...);

A direct participation of 20% in the capital of J..., S.A. ("J...") and an indirect participation of 26%, via F... (which held 51% of L...) – cf. TIR.

The Financial Model of the Photovoltaic Park Project of the ... provided that the last reimbursement, by J..., of Own Funds (Accessory Payments + Advances) would occur in the 2nd half of 2016, corresponding to a reimbursement, in average terms, of € 155,000.00 per half-year, with the subsidized rate having been granted for a period of 15 years – cf. Document no 6 attached to the rar and corroborated by the testimony given.

The financial means used by the Applicant to provide J... with funds to develop the Photovoltaic Park Project, of which this company obtained the operating license on 21 October 2010, came in their majority from D... and E... SGPS, the Applicant not having significantly used own funds for this purpose – cf. TIR, Annex 5, Third Article, and testimony given.

On 29 December 2009, the Applicant disposed of, at nominal value, 7.5% of the share capital of J... to company D..., receiving € 3,750.00; and 11.5%, also at nominal value, to E... SGPS, receiving € 5,750.00. Overall, the two disposals totaled 19% of the shares representing J...'s capital, at the aggregate price of € 9,500.00 – cf. TIR, Annex 3.

As a result of these sales, the Applicant retained a direct participation of only 1% in J..., with its share capital distributed among the following entities:

€ 25,500.00 (51%) – F..., Lda. ("F...");
€ 7,750.00 (15.5%) – D...;
€ 7,750.00 (15.5%) – E... SGPS;
€ 4,000.00 (8%) – H...;
€ 4,000.00 (8%) – I...;
€ 500.00 (1%) – A... (Applicant);
€ 500.00 (1%) – G...– cf. TIR.

When the Applicant disposed of its 19% participation in the share capital of J..., it retained the right to receive remuneration or a "fee" valued at € 1,200,000.00 relating to the development of the Photovoltaic Project of the ..., which was recorded as revenue, in 2010, in its sphere [of the Applicant] – cf. TIR.

As derived from the Shareholders' Agreement above, A..., now Applicant, to strengthen the financial capacity of the special purpose vehicle – J... – could dispose of its stake therein to a new partner. This partner was K... SGPS, S.A. ("K...") – cf. TIR.

On 5 April 2010, K..., in its capacity as a financial partner, acquired 30% of J...'s capital, as follows:

14.5% from E... SGPS at the price of € 535,000.00 (with nominal value of € 7,250.00);

14.5% from D... at the price of € 535,000.00 (with nominal value of € 7,250.00);

1% from G... at the price of € 70,000.00 (with nominal value of € 500.00) – cf. TIR, Annexes 8 to 10.

An Agreement for Realization of Own Funds was entered into on 8 July 2010, between J..., the Financing Banks (M... and N...), and its Shareholders (K..., A... [Applicant], D..., E... SGPS), pursuant to which the Applicant and K..., which became J...'s shareholder on 5 April 2010, as referred to in the previous point, assumed the obligation, on behalf of all shareholders, to realize the agreed advances and accessory payments for the project up to the limit of € 2,025,000.00. In performance of the stipulated, accessory payments and advances valued at € 1,116,151.00 were realized in the year 2010 – cf. TIR, Annex 7.

In the annual declaration of accounting and tax information relating to fiscal year 2009 of the Applicant, there is no reference to the existence of transactions between D..., E... SGPS and the Applicant despite this being held in equal parts (of 50%) by each of those entities – cf. TIR.

A..., here Applicant, came to be designated from 22 June 2012 as A..., S.A. (previously C..., S.A.) – cf. TIR.

The Applicant was subject to an external inspection action for fiscal years 2009 and 2010, initiated on 6 December 2012, based on Service Order no. OI..., to assess the degree of compliance with CIT tax obligations. The inspection action, initially of limited scope, was extended to VAT and had two deadline extensions, pursuant to article 36 of the Complementary Regime of the Tax Inspection Procedure ("CRIP") – cf. TIR.

In that context, the Applicant was notified of the Draft Conclusions for, if it so wished, to exercise the right to a hearing, by letter no. ..., of 9 October 2009, which it did not exercise, so this became final – cf. TIR and AP.

The Applicant was notified of the Tax Inspection Report with the following proposals for corrections to the CIT taxable base, in fiscal year 2009:

Increase to the taxable matter resulting from the alleged violation of the arm's length principle, in the amount of € 940,500.00;

Increase to the taxable matter resulting from the violation of the principle of specialization of fiscal years, in the amount of € 1,640.01;

Non-acceptance of deductions taken as tax deductions, in the amount of € 1,596.22;

Increase resulting from non-reinvestment of tax gains, in the amount of € 167,500.50 – cf. TIR.

The Applicant accepted the corrections referred to in b), c) and d) of the previous point, disagreeing, however, with subsection a), in the amount of € 940,500.00, which resulted from the analysis of the operation of disposal at nominal value, on 29 December 2009, of the shares that the Applicant held in J... (19% of the capital), in favor of companies D... and E... SGPS, based on the transfer pricing regime contained in article 63 of the CIT Code, as the TA considered that the arm's length principle was not respected by the Applicant – cf. TIR and content of the rar and the Informal Appeal and Hierarchical Appeal contained in the AP.

The following relevant excerpts are drawn from the TIR with respect to the reasoning for that correction:

"III-1.2 DESCRIPTION OF SPECIAL RELATIONSHIPS – FRAMEWORK FOR TRANSFER PRICING

III.1.2.1 – Description of legal transactions entered into and their tax relevance

The legal transactions at issue are the sale of 19% of shares, of which A... was the owner in company J... S.A., which occurred on 29-12-2009, to companies D... and E..., at the aggregate price of € 9,500.00.

According to the share purchase and sale agreement, A... disposed, at nominal value:

• 7.5%, corresponding to 750 shares, at the price of € 3,750.00, to company D...;
• 11.5%, corresponding to 1,150 shares, at the price of € 5,750.00, to company E....

The reasons invoked in that agreement were:

• That J... is a Special Purpose Vehicle established to build and operate a 6 MW Photovoltaic Park in the..., which should be completed by October 2010;
• That J... is realizing an investment of approximately 18 million Euros, having negotiated its financing under a "Project Finance" regime;
• That the shareholders of J... had to contribute Own Funds up to the amount of 3,000,000.00 € (three million Euros);
• That A... is the majority shareholder of F... and will acquire all of its capital in J... after the Photovoltaic Park comes into operation;
• That A... has Licenses for other renewable energy projects, which it intends to build in the short term, for which it becomes necessary to contribute significant Own Funds;
• That D... and E... wish to strengthen their shareholder position within J..., undertaking to contribute the Own Funds that the Company needs to carry out the Project.

The financial operations described above were engaged with entities with whom A... is in a situation of special relationships, of the type referred to in subsection a) and c) of no 4 of article 63 of the CIRC, namely:

"…4 – It is considered that there are special relationships between two entities in situations where one has the power to exercise, directly or indirectly, significant influence in the management decisions of the other, which is considered verified, designedly, between:

a) An entity and the holders of the respective capital, or their spouses, ascendants or descendants, who hold, directly or indirectly, a participation not less than 10% of the capital or voting rights;

c) An entity and the members of its corporate bodies, or any management, administration, direction, management or supervisory bodies, and their respective spouses, ascendants and descendants;»

According to that normative, there are special relationships between A... and E... and A... and D... because, both E... and D... have the power to exercise, directly, significant influence in A...'s management decisions [both E... and D... individually hold, in 2009, a 50% participation in A...'s capital and, on the other hand, were members of the administration council of those companies O... and B...].

Despite the annual declaration of accounting and tax information relating to fiscal year 2009 of A... not containing any reference to the existence of transactions with related entities, the fact is that they exist [between A... and E... and D...].

Consequently, the s.p. A... should have organized, as stipulated in no 6 of article 63 of the CIRC for the tax transfer pricing documentation process referred to in article 121 of the CIRC, the documentation respecting the policy adopted in determining transfer prices.

III.1.2.2 – Identification of obligations breached by the s.p.

Effectively, A... was dispensed, pursuant to no 6 of art. 63 of the CIRC and no 3 of art 13 of Ordinance no 1446-C/2001, of 21.12 – since in the previous fiscal year, it had an annual volume of sales and other revenue less than € 3,000,000.00 – from organizing the tax transfer pricing documentation process respecting the policy adopted in determining transfer prices.

Likewise, it was dispensed from maintaining, in an organized manner, sufficient elements, enough to prove [see no 1 of article 13 of the ordinance]:

• The market parity in the terms and conditions agreed, accepted and practiced in transactions with related entities;
• The selection and use of the method or methods most appropriate for determining transfer prices that provide the greatest approximation to the terms and conditions practiced by independent entities and that assure the highest degree of comparability of the transactions or series of transactions carried out with others substantially identical realized.

However, we are dealing with financial transactions between taxable subjects of income tax – A..., D... and E... – with which there are special relationships and, A... does not have in its accounting documents, elements that demonstrate and assure the highest degree of comparability between the transactions that occurred on 29-12-2009 – the sale of 19% of shares, of which A... was the owner in company J..., S.A., to companies D... and E..., at the aggregate price of € 9,500.00 – and others substantially identical, in normal market situations or absence of special relationships.

Consequently, there is non-compliance with the obligations set out in the law for that situation, designedly article 63 of the CIRC and Ordinance 1446-C/2001, of 21.12. […]"

Regarding the method for determining the arm's length price, the Tax Inspection Services chose, given the characteristics of the transactions and the available information, the Comparable Market Price Method ("CMPM"), pursuant to the provision in article 4, no 2 of Ordinance 1446-C/2001, of 21 December – cf. TIR.

The TIR states in this regard the following:

"III.1.2.4 – Description of transactions or acts of economic substance similar to those actually entered into or engaged in

The following points identify the prices for the sale of shares in equivalent situations, some of which were contracted between independent entities and others by related entities.

E... SGPS, D... SGPS and G... sell in total, 30% of the participations in J..., S.A.

On 05-04-2010, company K... acquires 30% of J...'s capital, as follows:

• Acquisition of 14.5% of shares from company E... – Annex 8;
• Acquisition of 14.5% of shares from company D... – Annex 9;
• Acquisition of 1% of shares from G... – Annex 10;

The transaction corresponding to the sale of 30% of J...'s capital was € 1,140,000.00, distributed according to the values in the following table:

That is:

• E... sold to K..., 14.5% of the shares it held in J..., with a nominal value of € 7,250.00 at the price of € 535,000.00, being that:

  • 11.5%, corresponding to 750 shares, with a nominal value of € 3,750.00, had been acquired from A... on 29-12-2009;
  • 3%, corresponding to 300 shares, with a nominal value of € 1,500.00, came into E...'s possession on 31-10-2009 when J... was established.

• D... sold to K..., 14.5% of the shares it held in J..., with a nominal value of € 7,250.00 at the price of € 535,000.00, being that:

  • 7.5%, corresponding to 750 shares, with a nominal value of € 3,750.00, had been acquired from A... on 29-12-2009;
  • 7%, corresponding to 700 shares, with a nominal value of € 3,500.00, came into D...'s possession on 31-10-2009 when J... was established.

• The s.p. G... sold to K..., 1% of the shares it held in J..., with a nominal value of € 500.00 at the price of € 70,000.00.

In the three share purchase and sale agreements, the following appears as justification for the valuation made to them:

"…8º- The present sale is made with all rights and obligations inherent to the shares, namely the right to dividends. For valuation of the participation now acquired, it was taken into account that K... SGPS, S.A. forgoes sharing the project development fee from the ... Project, as set out in the technical sheet presented by the Bank, recognizing that the same belongs, in its entirety, to C... S.A., for the efforts carried out for the development and implementation of the project, thus making itself available to resolve accordingly in the J... SA's Board of Directors.."

The "development fee" referred to, will be related to the agreement entered into on 08-07-2010, between companies A... and J..., S.A., in the amount of € 1,200,000.00 whose revenues were recorded in A... in 2010. The invoice was paid by J..., S.A. through a bank transfer made on 02-08-2010.

It can be inferred from what is described in that point, and [similarly to] other agreements entered into, that K... forgoes 30% of € 1,200,000.00, that is, forgoes € 360,000.00. For that reason, the price paid for the shares in question is reduced by that amount. That is, the normal price corresponding to the acquisition of the 30% of shares acquired would be € 1,500,000.00 [€ 1,140,000.00 + € 360,000.00]:

That is:

• E... sold to K..., 14.5% of the shares that it held in J..., with a nominal value of € 7,250.00 at the price of € 535,000.00, being that:

  • 11.5%, corresponding to 750 shares, with a nominal value of € 3,750.00, had been acquired from A... on 29-12-2009;
  • 3%, corresponding to 300 shares, with a nominal value of € 1,500.00, which came into E...'s possession on 31-10-2009 when J... was established.

• D... sold to K..., 14.5% of the shares that it held in J..., with a nominal value of € 7,250.00 at the price of € 535,000.00, being that:

  • 7.5%, corresponding to 750 shares, with a nominal value of € 3,750.00, had been acquired from A... on 29-12-2009;
  • 7%, corresponding to 700 shares, with a nominal value of € 3,500.00, which came into D...'s possession on 31-10-2009 when J... was established.

• The s.p. G... sold to K..., 1% of the shares that it held in J..., with a nominal value of € 500.00 at the price of € 70,000.00.

In the three share purchase and sale agreements, the following appears as justification for the valuation made to them:

"…8º- The present sale is made with all rights and obligations inherent to the shares, namely the right to dividends. For valuation of the participation now acquired, it was taken into account that K... SGPS, S.A. forgoes sharing the project development fee from the ... Project, as set out in the technical sheet presented by the Bank, recognizing that the same belongs, in its entirety, to C... S.A., for the efforts carried out for the development and implementation of the project, thus making itself available to resolve accordingly in the J... SA Board of Directors.."

The "development fee" referred to, will be related to the agreement entered into on 08-07-2010, between companies A... and J..., S.A., in the amount of € 1,200,000.00, whose revenues were recorded in A... in 2010. The invoice was paid by J..., S.A. through a bank transfer made on 02-08-2010.

It can be inferred from what is described in that point, and [similarly to] other agreements entered into, that K... forgoes 30% of € 1,200,000.00, that is, forgoes € 360,000.00. For that reason, the price paid for the shares in question is reduced by that amount. That is, the normal price corresponding to the acquisition of the 30% of shares acquired would be € 1,500,000.00 [€ 1,140,000.00 + € 360,000.00], resulting in an average market price per share of € 500.00:

Each share, which had a nominal value of €5.00, came to be worth € 500.00. This is the market price to be used for adjustment purposes, as determined in the following table:

CALCULATION OF THE MARKET VALUE ON 29-12-2009 OF 19% OF THE PARTICIPATION HELD BY A... IN J...'S CAPITAL

It results from the calculations presented and in accordance with no 8 of article 63 of the CIRC and no 2 of article 3 of Ordinance 1446-C/2001, of 21.12, that a positive correction to the taxable profit of 2009 in the amount of € 940,500.00 is due."

The Applicant was notified of the CIT Assessment no. 2013..., of 11 November 2013, which resulted from that external inspection action for fiscal year 2009, with a total amount payable of € 323,124.69, of which € 38,821.07 relating to compensatory interest (Assessment no. 2013...) – cf. Documents nos 1 and 2 attached to the rar.

This assessment resulted in the respective Statement of Account Settlement no. 2013..., of 13 November 2013, with the amount payable of € 323,124.69, and payment deadline fixed at 13 January 2014 – cf. Document no 2 attached to the rar.

The Applicant, having accepted part of the corrections made, proceeded to pay € 35,071.12 on 18 December 2013 – cf. Document no 3 attached to the rar.

A tax execution proceeding no. ...2014... was initiated for collection of the debt relating to CIT and additions – of € 285,049.40 – to which proceeding no. ...2014... was appended in the amount of € 10,856.66, the Applicant having provided bank guarantee and requested its suspension on 30 September 2014 – cf. Document no 13 attached to the rar.

The Applicant has been bearing various costs with the provision of bank guarantee (commissions and stamp duty) which, up to 24 July 2018, totaled € 33,619.30 – cf. Document no 14 attached to the rar.

Disagreeing with the correction, in the amount of € 288,053.57 (CIT and compensatory interest), relating to transfer pricing, the Applicant filed an Informal Appeal on 11 April 2014, against the assessment act in question – cf. Document no 7 attached to the rar and AP.

The Applicant was notified of the Draft Decision dismissing on 4 September 2014, and exercised the right to a hearing – cf. Documents nos 8 and 9 attached to the rar and AP.

The Informal Appeal was dismissed by order of 28 October 2014 of the Finance Director, notified on 6 November 2014, which did not accept the arguments of the Applicant – cf. Document no 10 attached to the rar and AP.

The Applicant filed, on 4 December 2014, a Hierarchical Appeal of the decision dismissing the Informal Appeal, which was dismissed by order issued on 24 April 2018, notified to the Applicant on 30 April 2018 – cf. Documents nos 11 and 12 attached to the rar and AP.

Thus, on 27 July 2018, complying with the provisions of articles 2, no 1, a) and 10 of the RJAT, the Applicant filed the request for constitution of an Arbitral Court.

B. Facts Considered Not Proven

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

Allegations made by the parties and presented as facts were not deemed proven or not proven, consisting of assertions strictly conclusive, insusceptible of proof, and whose truthfulness must be assessed in relation to the concrete factual matter consolidated.

C. Motivation for the Decision on Factual Matter

With respect to the proven facts, the arbitrators' conviction was based on critical analysis of the documentary evidence attached to the proceedings, also taking into account the positions assumed by the parties.

The testimony of B..., although revealing direct and personal knowledge of the facts reported and contextualizing them with high detail, did not add significant elements, the facts that it corroborated being proven by documents. Moreover, although indicated as a witness, it was, as of the facts date, an administrator of the Applicant, so the Court weighed its interest in the outcome of the action.

The facts pertinent to the judgment of the case were chosen and selected according to their legal relevance, given the plausible solutions of the questions of law, in accordance with the combined application of articles 123, no 2 of the CPPT, 596, no 1 and 607, no 3 of the Code of Civil Procedure ("CCP"), by reference from articles 29, no 1, a) and e), of the RJAT.

IV. Positions and Arguments of the Parties

A. Position of the Applicant

The Applicant begins by asserting that although D..., E... SGPS and it itself are related parties, a qualification that it does not dispute, the TA has not demonstrated that the price practiced in the operations of sale of 19% of J...'s share capital to those entities was different from what would be used in a comparable operation carried out between unrelated entities, i.e., that such price was not reasonable or market-based, so it did not meet the burden of proof that rested with it, pursuant to article 74 of the LGT, having limited itself to sustaining that the Applicant did not possess "in its accounting documents elements that demonstrate and assure the highest degree of comparability between the transactions."

In this context, it invokes diverse jurisprudence of the SAC to the effect that the proof of the constituent assumptions of the right to transfer pricing corrections rests with the TA.

On the other hand, the Applicant understands that the TA could not have applied the Comparable Market Price Method ("CMPM"), without ensuring the requirement of comparability of the transactions, which it alleges does not exist in the concrete case.

The Applicant argues that the economic and financial characteristics of the transactions would have to have a high degree of comparability, as provided for in articles 4 and 5 of Ordinance no 1446-C/2001, of 21 December and the recommendations of the Organization for Economic Cooperation and Development ("OECD"), relating to the determination of the arm's length price ("Guidelines").

Concluding that the transactions are not comparable, taking into account a set of factors that were ignored by the TA. It refers in this respect to the fact that the TA did not conduct a functional analysis, which refers to a process of examination of the identification of the economic value of comparable goods and requires analysis of the contractual commitments assumed. However, in this area, the risks (inherent to project financing) were not taken into account, nor the contractual commitments assumed by the parties and the moment at which they were assumed, and that were at the origin of the transaction of the stakes in J..., which alone would be sufficient to prevent comparability.

Therefore, the Applicant understands that the TA could not have assumed as comparable transactions those carried out between the Applicant, D... and E... SGPS, on the one hand, and those carried out by E... SGPS, D... and G... with K..., on the other.

It adds that, given the enormous disparity of the characteristics of the transactions under analysis, it would be practically impossible to carry out the necessary adjustments aimed at eliminating the effects relevant to the differences verified.

Finally, as a precaution, the Applicant considers that the arm's length price determined by the TA is misaligned with reality, because applying the criterion of project productivity (of the ...), in comparison with that of ..., it would be lower, in addition to which a virtual fee of € 360,000.00 could not have been added, which did not exist and which derives from erroneous reasoning on the part of the TA, because K... forgave this fee in favor of the Applicant and the transaction serving as the basis for the arm's length price invoked by the TA was entered into by other entities, so it had no influence on the price practiced by them. And even if it could have influence reflexively, because E... SGPS and D... were holders of the share capital of the Applicant, it would remain to explain its impact on the sale carried out by G....

It requests the total annulment of compensatory interest, both as to the disputed part and as to the accepted and paid part, in the latter case because these were forgiven pursuant to the Exceptional Regime for Regularization of Tax and Social Security Debts ("ERRTD") approved by Decree-Law no 151-A/2013, of 31 October, having proceeded to pay the corrections to tax accepted, in the amount of € 35,071.12.

B. Position of the Respondent

The Respondent maintains the understanding that the assessment in question constitutes a correct application of law, not suffering from any defect.

It begins by recalling that the Applicant is in a situation of special relationships, thus falling within the transfer pricing regime of article 63 of the CIT Code.

Analysis of the transactions by the TA revealed very significant differences in the unit prices practiced, when compared with transactions on the same assets carried out between independent parties, just 3 months after the transactions under analysis.

According to the Respondent, the explanation for the differences does not lie in any change related to J...'s business, nor to circumstances prevailing in the market, so prima facie they can only be attributed to the fact that the first transactions are related party transactions.

The Respondent understands that the burden of proof rests with the Applicant, in the absence of a transfer pricing file, although it acknowledges that the latter is dispensed from such obligation pursuant to article 13, no 3 of Ordinance no 1446-C/2001.

The Strategic Partnership Agreement does not justify the disposition of J...'s shares outside the transfer pricing rules, nor does it even require that it be done at nominal value. It also points to the fact that the Applicant acknowledged that the price of the related party transaction, fixed in compliance with the Strategic Partnership Agreement in December 2008, is "necessarily different from a price defined between independent entities in April 2010".

The TA argues that the disposition of the shares at the price that came to be practiced in the subsequent sale carried out by D... and E... SGPS would have permitted the Applicant to obtain financial means to develop the project of ..., misunderstanding why a transaction of that type would be ruinous for these or for another entity in their circumstances.

The specific economic, financial and contractual circumstances of the operations invoked by the Applicant are inscribed in commitments assumed within the group, at a moment prior to J...'s own establishment and must pass the market test. For the conduct of this test, the sale of J...'s shares to an independent entity, K..., at a time close to the operation under analysis, emerges as the reference transaction.

The Applicant did not demonstrate that, under normal market conditions, it would dispose of J...'s shares at nominal value and gave no notice of relevant events that could influence the appreciation registered in the subsequent sale to K..., concluding to the non-observance of the arm's length principle enunciated in article 63, no 1 of the CIT Code.

The Respondent also concludes to the validity of the selection of the method and of the comparable transactions, whose object is identical to that of the related party transactions, so it does not make sense to conduct any functional analysis, because it is exactly the same object – J...'s shares.

On the other hand, as to the contractual commitments assumed, it considers that these are inscribed in the framework of the group's internal relationships, and cannot project themselves nor influence the determination of the terms and conditions practiced in transactions carried out in the market between independent entities, under penalty of emptying the application of the arm's length principle. With respect to risk, it considers the uncertainties to be considered are common to all investors, precisely because it is shares of the same entity, so there is no need to consider any distinctive factor.

Finally, as to the error in the calculation of the price, it considers:

• That it has not been duly explained whether the waiver of the fee by K... in favor of the Applicant was not reflected in the formation of the share sale price; and

• That the alleged misalignment with reality has not been proven, as the argument based on the valuation methodology for licenses, by comparison with ..., has no useful effect, given the different production capacities and location of the projects.

In Counter-Submissions, the Respondent maintains the arguments advanced in the Response and adds that (it can be inferred that) the Applicant intends to say that the TA should have valued J... by the values of the financial statements, in order to carry out the valuation of assets by the method, for example, of updated cash-flows. On this point, it notes that documentation relating to the investment project that would allow valuation of the entity (J...) was not made available during the course of the inspection procedure, and, although shares not listed on a regulated market are at issue, it reiterates that the conditions (of comparability) are met and justified for the application of the CMPM.

The Respondent considers that, being at issue the determination of whether the price practiced in the transaction under analysis was reasonable or market-based, it was incumbent on the Applicant, in the first instance, the burden of proof, in accordance with the terms and for the purposes of article 74, no 1 of the LGT, in the absence of a transfer pricing file and in the light of the non-existence of an adjustment to taxable profit in accordance with article 63 of the CIT Code, not having demonstrated that this price observed the arm's length principle.

V. Reasoning. Matter of Law

A. General Framework

As emphasized in Arbitral Decision no 336/2018-T, the transfer pricing regime falls within the area of anti-abuse tax norms. "It is a question of preventing the tax creditor from being hostage to considerations that may make sense in the internal relationships between interdependent companies, but which have the undesired external effect of offending the principle of equality in the distribution of the tax burden and in the pursuit of the satisfaction of the financial needs of the State and other public entities.

However, it is not necessary to establish an intent to evade or defraud: it is enough to recognize that in the formation of a given tax event there intervened considerations and balances that would not have had relevance in an open market context; and that, therefore, that event was distorted in relation to 'normality'."

In the situation at hand, it is not disputed that the transaction that gave rise to the adjustment to the Applicant's taxable matter by the TA involved entities in a situation of special relationships, in accordance with the criteria defined in article 63, no 3 of the CIT Code, because both D... and E... SGPS – to whom the Applicant disposed of stakes in J... – are holders of a (direct) stake of 50% in the Applicant.

This transaction is thus covered by the provision of article 63, no 1 of the CIT Code, which enshrines the arm's length principle or "arm's length" and by Ordinance no 1446-C/2001, of 21 December, following the guidelines or Guidelines that have been adopted by the OECD, in the context of relationships between multinational companies with operations in multiple locations that, for a long time, have raised issues of distribution of tax competence of States and erosion of their respective tax bases[2].

The Ordinance itself advises consultation of the Reports produced by the OECD's Committee on Tax Matters, under the designation "OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations", whose adoption is the subject of recommendations approved by the OECD Council (soft law). These guidelines constitute an important interpretive parameter for the proper understanding and application of the transfer pricing discipline[3].

The legal establishment of the "arm's length principle" as formulated by the OECD aims to place related companies and independent companies on equal footing for tax purposes, to serve as a general principle of equality and neutrality, to avoid distortions of competition and to promote international trade and investment, ruling out fiscal reasons from economic decisions[4].

Hence, the law establishes a specific anti-abuse provision for situations where, given special relationships between taxpayers, the transactions carried out by them do not respect market conditions, causing "anomalous" increases or reductions in the taxable matter – determining that in such cases the TA may proceed to correct the price to its "fair" value, meaning objectively adequate value to market conditions with which the taxable matter is "normally" determined (articles 77, no 3 of the LGT and 63 of the CIT Code)[5].

In general terms, the Portuguese regime follows the OECD Guidelines and presupposes the cumulative satisfaction of three requirements: i) that there be special relationships between the taxpayer and another entity, subject or not to the CIT