CAAD 363/2016-T: IRS Anti-Abuse Clause Deadline and Withholding Tax on SGPS Distributions

ARBITRAL DECISION

The arbitrators Counselor Jorge Manuel Lopes de Sousa (arbitrator-chairman), Dr. José Nunes Barata and Professor Doctor Suzana Fernandes da Costa (arbitrators-members), designated by the Deontological Council of the Center for Administrative Arbitration to form the Arbitral Court, constituted on 21-09-2016, agree on the following:

1. Report

A…, SGPS, S.A., NIF…, with headquarters at …, n.º …, …-… … (hereinafter referred to merely as Claimant or A… SGPS), submitted a request for arbitral decision in accordance with the Legal Regime for Arbitration in Tax Matters, approved by Decree-Law no. 10/2011, of 20 January (hereinafter referred to merely as RJAT).

The Respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY.

The Claimant requests the declaration of illegality and annulment of the following acts:

– Demonstration of assessment of income tax withholdings no. 2016…, in the amount of € 612,750.00 and respective demonstration of assessment of compensatory interest of € 109,516.87, relating to the year 2011;

– Demonstration of assessment of income tax withholdings no. 2016…, in the amount of € 312,579.41, and respective demonstration of assessment of compensatory interest of € 40,559.26, relating to the year 2012;

– Demonstration of assessment of income tax withholdings no. 2016…, in the amount of € 193,080.05, and respective demonstration of assessment of compensatory interest of € 14,569.50, relating to the year 2013;

– Demonstration of assessment of income tax withholdings no. 2016…, in the amount of € 151,308.05, and respective demonstration of assessment of compensatory interest of € 5,857.20, relating to the year 2014.

The Claimant further requests that the reimbursement of the amounts paid by the Claimant as tax (income tax withholding), compensatory interest, default interest and procedural costs, paid in tax enforcement proceedings, in the total amount of €1,465,819.36, plus indemnifying interest, from the date of payment of the tax until the enforcement of the judgment, calculated at the legal rate, in accordance with article 24, no. 5, of RJAT, article 43 of LGT and article 61, nos. 4 and 5, of CPPT, be determined.

The request for constitution of the arbitral court was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Authority on 22-07-2016.

In accordance with the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral court the undersigned, who communicated acceptance of the assignment within the applicable period.

On 06-09-2016 the parties were duly notified of this designation, having manifested no intention to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b) of RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provision of paragraph c) of no. 1 of article 11 of RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral court was constituted on 21-09-2016.

The Tax Authority and Customs Authority responded, raising the exception of material incompetence of the Arbitral Court regarding the request for reimbursement of the amount of default interest and costs paid in tax enforcement proceedings and defending that the request should be judged unfounded.

By order of 27-10-2016 it was decided to waive a hearing and that the proceedings proceed with written pleadings.

The parties submitted pleadings.

The arbitral court was duly constituted, in accordance with the provisions of articles 2, no. 1, paragraph a), and 10, no. 1, of Decree-Law no. 10/2011, of 20 January.

The parties are duly represented, have legal personality and capacity, are legitimate and are represented (articles 4 and 10, no. 2, of the same diploma and article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities and exceptions were invoked.

2. Factual Matters

2.1. Proven Facts

Based on the elements contained in the proceedings and the administrative process attached to the file, the following facts are considered proven:

a) The Claimant develops its activity within the scope of CAE…, with its corporate purpose consisting of the management of shareholdings in other companies, as an indirect form of exercise of activity, and is framed, for corporate income tax purposes, under the general taxation regime;

b) The Tax Authority and Customs Authority conducted inspections of the Claimant, in compliance with the Service Orders nos. OI2015…, initiated on 07-08-2015 and concluded on 05-10-2015, OI2015…, OI2015… and OI2015…, initiated on 09-09-2015 and concluded on 05-10-2015;

c) On 29-12-2015, an order was issued by the General Director of the Tax Authority and Customs Authority (which appears on page 45 of the "Group I" section and page 5 of the "Group III" section of the administrative process), authorizing the application of the general anti-abuse clause, manifesting agreement with the proposal presented by the tax inspection that appears in the administrative process, the substance of which is given as reproduced, in which it is stated, among other things, the following:

(...)

(...)

E…, SA, NIPC – …

From the analysis of the elements provided, as well as from information contained in the databases of the Tax and Customs Administration and Ministry of Justice, the following facts of interest were found for the present inspection action:

a) Concerning E…, S.A., NIPC - …

The company's registered office is coincident with the registered office of A… SGPS.

The corporate purpose of the company consists of the manufacture and trade of electrical panels, assembly and marketing of electrical materials, with CAE codes … and … .

The company was established by deed of incorporation of 1986-03-01, in the form of a private company. In July 2003 the company was transformed into a public limited company. The initial share capital fully paid in cash was 1,000,000 escudos (4,987.98 euros). Currently (following capital increases) the share capital of the company is 750,000.00 €.

It can be verified that the shareholder structure of E… S.A. is practically the same as that of A… SGPS both as regards shareholders and in the percentage of capital attributable to each one.

The share/participation of shareholders F… and G… in the companies is merely residual, possibly stemming from the legal requirement that a public limited company be obliged to have a minimum of five (5) individual shareholders (article 273 of CSC).

To this end, as we shall see below, the fact alludes that, until 2014/12/31, they were the only shareholders who did not receive any amount relating to the credit created in A… SGPS with the acquisition of E… S.A..

Regarding Corporate Bodies

The Board of Directors for the quadriennium 2013/2016 consists of three members, all shareholders of the company:

Supervisory Body for the quadriennium 2013/2016:

Sole Auditor: H…, SROC, LDA, NIPC -…, represented by I…;

Alternate Sole Auditor: J…, NIF - … .

Regarding the Profit Distribution Policy of E… S.A.

Below we present a summary table of profits distributed to A… SGPS.

Concerning the distribution of profits of E… S.A., the following should be noted:

• Until 2008, prior to the establishment of A… SGPS, the company did not distribute any dividend.

• The justification for the transfers to A… SGPS were as follows:

In 2011 - according to the minutes of the Extraordinary General Meeting of 23 March 2011:

"...the SGPS needs money to pay its creditors and E… S.A. retains very significant values that are direct property of A… SGPS presently there is some availability that will allow us to reduce somewhat the existing liability."

The shareholders decide to pay themselves, as "creditors" because A… SGPS needs [funds], not specifying the reasons invoked by the "creditors" to require payment from SGPS.

In 2013 and 2014 - according to the minutes of the General Meeting of 2 May 2013 and 10 December 2014, the justification was similar but the "creditors" were then referred to as "third parties".

"... (Mr. B… (...) summarized the need to carry out the proposed distribution given the existence of liabilities of the sole shareholder to third parties."

• The amounts paid to shareholders in 2011 - 2,850.00,00 €, correspond almost entirely to the sum of profits distributed by E… S.A. to A… SGPS between 2008 and 2011 - 2,880,795.22 €.

• Between 2012 and 2014 of the 2,936,827.00 € distributed to SGPS, 2,542,409.69 € were paid to shareholders.

There is clear evidence of the intention of the shareholders of the companies to use A… SGPS to receive without any taxation in the form of payment of the debt created with the acquisition of E… S.A., what were in fact dividends distributed by A… SGPS.

b) Regarding the acquisition of E…, S.A.

It was requested in point 6 of the notification for presentation of elements - "Copy of the minutes relating to the decision and conditions for acquisition of the company E…, S.A., W/PC -… .

In response to the said notification, a copy of Minutes no. 1 (Annex 3) of A… SGPS, dated 2 April 2007, ten (10) days after the start of its activities (2007/03/22), was attached.

The sole point under discussion in the General Meeting was the following:

• "To resolve on the acquisition of the entire share capital of company E…, S.A.

We can verify that in the "analysis and discussion" of the sole point of the agenda (expressions/taken from the minutes) no economic or financial interest was mentioned for acquiring E… S.A.. It is revealing - of the economic-financial irrationality of the form chosen to acquire E… S.A. - to note that the shareholders manifested themselves in the capacity of shareholders of E… S.A. and not in the capacity of shareholders of A… SGPS, that is, they manifested the intention to dispose of their participation in E… S.A. when, in a general meeting of A… SGPS what should be under discussion would be the economic and/or financial interest in acquiring the participations of E… S.A. explaining the reasons for this intention.

• Shareholder B… stated: "in accordance with article 397 of CSC, the disposition of the share interest that it holds in company E…, S.A., requires the favorable opinion of the Sole Auditor of the company (of E…, S.A., underlining ours) and in his view of a plural supervisory body, the correction of the General Meeting itself."

• C… "also manifested its intention to dispose of the shares it holds in E…, S.A., on the same conditions as shareholder B… would carry out."

• "All other shareholders manifested identical intention..."

These manifestations of intention indicate a contradiction of interests that are one - the interest in making use of A… SGPS - creating a credit (to each of the shareholders of E… S.A.) in A… SGPS with the acquisition of capital parts, which would allow the receipt of dividends paid, first to SGPS by the subsidiary E… S.A., without the respective and just taxation, when another way of effecting the passage of the capital parts of E… S.A. from direct to indirect possession would be more normal and usual - taking into account the characteristics of A… SGPS - namely the fact that the share capital is only 60,000 €.

Note 1 - Regarding the transactions mentioned above and prior to their execution, binding information was not requested in accordance with no. 8 of article 63 of CPPT.

Note 2 - The shares disposed of were held by the shareholders for more than one year, so the gains obtained with their disposition were excluded from taxation for personal income tax purposes in accordance with paragraph a) of no. 2 of article 10 of CIRS.

With respect to the contract concluded for the acquisition of the shareholdings representing the entire share capital of E… S.A. (Annex 4), the following particularities should be noted, once again indicating that the transactions in question had as their objective the non-taxation of a taxable reality - the distribution of dividends.

Clause 1 - The unit price was not defined in the contract, it is merely stated that the "price to be spent on the acquisition of all assets will be 11,277,000.00 euros".

Receipt "the form of receipt will be addressed in a private document, to be signed between the 1st and 2nd party, the debt being initially recorded in current account."

The price of the shares was justified by the result of the valuation ("Value Study") carried out by the consultant (designation at the date of valuation) K…, S.A., NIPC - … (currently designated as L... S.A.) with reference to 2007/03/31 and dated 2007/04/10 (Annex 5).

Note - The valuation was requested and paid by E… S.A.

The result of the valuation from the perspective of discounted cash flows was 11,276,788.00 € - the service provided was invoiced in two installments, only on 2007/11/15 and 2007/12/03.

It is found, once again, that there was no economic-financial motive for the transaction under analysis - for the parties involved the rounding up of the price was and is irrelevant, they did not expect to receive from A… SGPS any monetary value generated by it, what actually was the basis of the transaction was to create the credit that made it possible to receive dividends (with taxation) in the form of payment of debt (without taxation).

What happened, in the end, was E… S.A. financing its own acquisition, paradoxical in economic-financial terms but perfectly logical in light of the scheme mounted by the shareholders of E… .

Regarding the payment conditions (receipt) agreed, the following should be noted:

1. As we shall see below, the accounts of company A… SGPS reveal that it did not have the financial capacity to proceed with payment of 11,277,000.00 €, did not have liquidity, own capital or borrowed capital for this purpose.

2. In accordance with nos. 1, 2 and 6 of article 243 of the Commercial Companies Code (CSC), a "shareholder loan" contract is considered "...the contract by which the shareholder lends to the company money or other fungible thing, the company being obliged to return the same amount of the same kind and quality provided that a repayment period superior to one year is stipulated, and the validity of the contract does not depend on any special form, so it does not necessarily have to be put in writing." However, the sellers and shareholders of A… SGPS are creditors in relation to it for the price of the shares disposed in the capacity of shareholders of E… S.A., the value owed cannot have the nature of a shareholder loan made by the shareholder but rather a debt to third parties - other creditors (who incidentally are also shareholders of A… SGPS).

3. The payment conditions were not defined by any private document, as the profits of E… S.A. were transferred to A… SGPS, the same were transferred to the shareholders.

4. When requested with the elements that served as the basis for determining the amount to be paid, a table was provided (Annex 6) with the percentage (%) of each shareholder's participation in company E… S.A., as justification for the amount to be credited to each of the sellers (nothing having been contracted) according to the table below:

c) Regarding A… SGPS, S.A.

Characterization of activity and legal framework

In the context of European integration, it was through Decree-Law no. 495/88 of 30 December (legal regime of SGPS) created the legal regime of Management Companies for Shareholdings, in order to create conditions that would facilitate and encourage the creation of economic groups more capable of facing the competition that resulted from entry into the Single Market (current European Union). In this context, SGPS (Holding companies) have as their contractual purpose "...the management of shareholdings in other companies, as an indirect form of exercise of economic activities."

They are also permitted to provide technical services of administration and management to their subsidiaries, as well as to grant financing within certain conditions.

Within the scope of the benefits that a SGPS can bring to the management of a group of companies, we can point out, in particular, the following:

• Exemption of withholding tax on income resulting from advances granted by the SGPS to its respective subsidiaries, as well as stamp duty;

• Financial operations, including the respective interest, for a period not exceeding one year, provided that exclusively intended to cover treasury shortfalls, in favor of its subsidiaries (downstream operations), as well as operations of the same nature carried out for the benefit of SGPS by companies with which it is in a relationship of control or group (upstream operations), are also exempt from Stamp Duty.

As can be verified, SGPS enhance efficient management of the surpluses/deficits of treasury of the entities of the Group.

Share Capital held by A… SGPS

1. E… S.A., shareholding of 100%.

2. M…, Lda (hereinafter referred to merely as M…) - Two shares of 1,250.00 € were acquired on 2009/03/06 - in the total value of 2,500.00 €, corresponding to 50% of the company's share capital, acquired at nominal value.

On the same date (2009/03/06) according to minutes no. 4 (Annex 7) of M…, it was resolved that the shareholders make shareholder loans to the company, in the amount of six hundred thousand euros each. Thus a company without liquidity committed itself/was obliged to make shareholder loans in the amount of 600,000.00 €.

The way found to do this was as follows: A… SGPS received 600,000.00 € as dividend from E… S.A.. Although this is the accounting record and what appears in tax declarations, namely Form 22 and IES, on 2009/03/04 - two days before minutes no. 4 in which A… SGPS came to participate in the share capital of M…, A… SGPS issued a check to the order of M… in the amount of 588,014.20 € (Annex 8).

A… SGPS presented the following balance sheet values for the years 2011 to 2014:

From the analysis of the above table, the following should be noted:

• The company did not change its share capital since its establishment - 60,000.00 €.

• Regarding the debt relating to the acquisition of E… S.A., this was reduced to 5,948,084.36 €* as a result of transfers made to shareholders in the amount of 5,392,409.69 €.

*includes shareholder loans made during the period under analysis in the amount of 63,494.50 € - would be 5,884,590.31 € without these shareholder loans.

A… SGPS presented the following values in the profit and loss statements for the years 2011 to 2014:

From the analysis of the above table, the following should be noted:

• The net result of the years under analysis is practically the same as that of E… S.A..

• In this context it is demonstrated that A… SGPS presents results that are practically a mirror of the results obtained by E… SA, as a management company of shareholdings, it fulfills its objective as it generates dividends for the shareholder — which it does not distribute as such.

Regarding the application of results of A… SGPS

During the years 2011 and 2014, the amounts transferred from A… SGPS to its shareholders in the form of payment of the amount owed in accordance with the accounting records made and supporting documents of the transfers (e.g. bank statements, bank transfers, checks - Annex 9) were those shown in the table below:

Note - Some simultaneous entries (on the same date) to the three shareholders have as supporting document only one transfer, or several transfers to only one account, the division then being made by the three shareholders, as can be verified by the entry notes (Annex 10).

Taking into account the values shown in the above table, between 2011 and 2014 the shareholders of A… SGPS received as payment of the amount owed concerning the acquisition of the shares of E… S.A., 5,392,409.69 €.

These amounts were not subject to any taxation and originated from the profits distributed to SGPS by E… S.A., which in turn correspond almost exclusively to the source of income of A… SGPS.

IV - Regarding the Law

No. 2 of article 38 of the General Tax Law provides that:

"Acts or legal transactions that are essentially or primarily directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions with an identical economic purpose, or to the obtaining of tax advantages that would not be achieved, in whole or in part, without the use of such means, shall be ineffective within the scope of taxation, and taxation shall then be effected in accordance with the applicable rules in their absence and the tax advantages referred to shall not be produced."

The transcribed rule establishes, in the national tax legal order, a true general anti-abuse clause and provides for the ineffectiveness, before the Tax Administration, of acts and legal transactions performed with evident abuse of legal forms which lead, to the detriment of the National Treasury, to the elimination, in whole or in part, or temporal deferment of the payment of taxes that would otherwise be due.

V - Appreciation of the Concrete Case

Analyzing the rule and following closely the doctrine, it can be said that its hypothesis contains four requirements for the interpreter, in concreto, to be able to rely on it, these being:

• The form used - instrumental element;

• The tax advantage and the economic equivalence obtained - resultant element;

• The motivation of the T.P. - intellectual element;

• The normative rejection - systematic of the advantage obtained - normative element;

Now, from the evaluation of all the elements that were made known to the proceeding it is possible, in coupling with the elements or conditions referred to, to identify;

1. Instrumental Element

In accordance with no. 2 of article 38 of the LGT, there were used "...acts or legal transactions that are essentially or primarily directed ... to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions with an identical economic purpose..."

The instrumental element corresponds to the route chosen by the T.P. to obtain the desired fiscal gain or advantage, i.e., the acts and/or legal transactions celebrated whose structure is determined in function of a given fiscal result, which would not occur if these had not occurred with the contours they assumed.

In the case at issue, as will be described below, the shareholders of A… SGPS/E… S.A. resorted to a set of acts and legal transactions that had as their result the transformation of a financial flow subject to taxation, in accordance with paragraph h) of no. 2 of article 5 of CIRS (the payment of dividends to the shareholders of A… SGPS) into another financial flow not subject (the payment of the price determined in the transaction for the acquisition of E… S.A.).

We will therefore describe the acts and transactions through which the shareholders achieved the desired fiscal result:

1 - The management company for shareholdings A… SGPS was established on 2007/03/22, and commenced activity on 2007/03/22, with share capital of 60,000.00 €, fully subscribed by the 5 shareholders of E… S.A.,

2 - On 2 April 2007, 10 days after the establishment and commencement of activity of A… SGPS, the share purchase and sale contract was executed;

3 - The price of the shares was justified by the result of the valuation ("Value Study") carried out by the consultant (designation at the date of valuation) K…, S.A., with reference to 2007/03/31 and concluded on 2007/04/10. The result of the valuation from the perspective of discounted cash flows was 11,276,788.00 €;

4 - The overall price defined was 11,277,000.00 €, with the value and payment conditions to each of the sellers to be defined by private document;

5 - No contract was executed that would regulate and define price and payment conditions - the profits transferred from E… S.A. to A… SGPS, were then transferred to the shareholders without any apparent criteria;

6 - A… SGPS as a management company for shareholdings, intended for the exercise of management of shareholdings, did not have (nor does it have) the financial capacity to execute a transaction of this magnitude - as a consequence of the form chosen and designed to carry it out;

7 - E… S.A. is, almost exclusively, the financier of the transaction, that is, it finances its own acquisition;

8 - The results distributed by E… S.A. to SGPS, the income from the activity of SGPS, seven years after the transaction in question, served, almost exclusively, to pay the debt created by the shareholders.

It is manifest that the acts and legal transactions carried out by the taxpayers are not typical nor normal in the management of companies effected on the basis of simple economic-financial rationality.

It is only possible to understand this succession of acts and legal transactions in the context of the search for a determined fiscal result - the non-taxation of the distribution of dividends.

The conditions of the transaction, as well as all the acts practiced previously, are inserted in the logic of the scheme designed by the shareholders of the companies of the N… group and had as their objective the transformation of the payment of dividends by SGPS into payment of the agreed price and consequent reduction of the credit recorded accounting-wise.

These contractual conditions were only possible because the shareholders are common to both companies (indeed their percentage of participation in A… SGPS is practically the same in Single E… S.A.).

1. Resultant Element

As referred to in no. 2 of article 38 of the LGT, the "anomalous" acts or legal transactions should be "essentially or primarily directed ... to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions with an identical economic purpose, or to the obtaining of tax advantages that would not be achieved, in whole or in part, without the use of such means...".

In summary, the resultant element consists of the fiscal advantage achieved through the instrumental element used by the T.P., which in the case under consideration consisted of the transformation of a financial flow - the distribution of dividends, subject to IRS in accordance with paragraph h) of no. 2 of article 5 of CIRS, into another flow, the payment of the amount owed to each seller/shareholder relating to the price determined in the transaction for the acquisition of the capital shares of E… S.A., from which, once again it is stated, no taxation results, by application of the provision, at the time, in paragraph a) of no. 2 of article 10 of CIRS.

Equivalence of the result of the acts and transactions executed with the acts and transactions normal of equivalent economic effect

If the shareholders of the companies of the N… group intended to carry out the acts and transactions by their economic and financial purpose, resulting from the gains in competitiveness, efficiency and critical mass obtained, with the creation and transfer of the shareholdings to SGPS, they would have at their disposal normal acts and transactions of equivalent economic effect but provided with economic rationality. Thus, it would be normal, for example, for this purpose to establish a company with own capital of sufficient amount to proceed with the acquisition of shareholdings of this amount, or the obtaining of financing with borrowed capital for this purpose, or the subscription of the initial share capital through contributions in kind embodied in the shareholdings which instead were acquired.

On the contrary, in the case at issue the form (the set of acts and transactions) of acquisition of E… S.A. was the "facilitator" of the transformation of a financial flow - dividends, into another financial flow of distinct nature - payment of the price of the shares of E… S.A. disposed to A… SGPS.

Using an ingenious scheme to avoid the just and normal taxation of dividends to be distributed by SGPS (generated by the results distributed to it by E… S.A.) in which the existence of A… SGPS plays an essential and indispensable role - the shareholders achieved the non-taxation desired.

The activity of E… S.A. was not altered in any way by this interposition of a SGPS between itself and its shareholders - who ceased to be such directly, becoming so indirectly - what did change is the form of distribution of dividends, it came to be made to A… SGPS (which benefits from the elimination of double economic taxation in accordance with no. 1 of article 51 of CIRC) which in turn, as a result of the ingenious form used to transfer the capital shares of E… S.A. to A… SGPS, distributes them in the form of payment of debt to the individual shareholders (achieving the non-taxation).

In summary, the shareholders exchanged capital shares for a credit, exchanged income for debt.

It appears therefore evident that the practice of normal acts and transactions of equivalent economic effect would not have as a result the fiscal advantage obtained with the acts and transactions chosen by the shareholders of the companies.

Had the acts and transactions been executed under typical and normal forms, A… SGPS would make the normal distribution of dividends to its shareholders. That would be, and is, the "path" normal and expected, in typical and normal conditions, by shareholders/investors who ambition and expect to obtain dividends from their investments - the remuneration of invested capital - being those capital income subject to IRS in the terms of paragraph h) of no. 2 of article 5 of CIRS.

From the result - the fiscal advantage obtained

Thus, during the years 2011 to 2014, amounts were transferred from A… SGPS to its shareholders - 5,392,409.69 € when in the same period E… S.A. distributed profits to shareholder A… SGPS in the amount of 5,817,622.22 € (if we exclude 600,000.00 € relating to the financing of M… the amount would be 5,217,622.22 €).

The coincidence of these values is a clear and evident demonstration of the intention to eliminate the taxation of the dividends received, the objective of the shareholders of the N… group, achieved through the acts and legal transactions described above.

It is therefore evident the intended result - to receive dividends from A… SGPS as if it were another reality (payment of the amount owed).

Based on the foregoing, we can conclude that the shareholders of A… SGPS received from it, without any tax burden impending on them, dividends in the following amounts:

As a result of the proposed correction, by effect of the application of the anti-abuse rule, the amounts received as payment of debt are considered capital income.

Based on the foregoing, the fiscal classification, the moment in which its taxation should occur and the taxation of dividends and advances on account of profits received are as follows:

They are subject to IRS in accordance with paragraph h) of no. 2 of article 5 of CIRS,

In accordance with point 2 of paragraph a) of no. 3 of article 7 of CIRS, the withholding tax should occur at the moment "in which they are placed at the disposal of their holders".

Profits and advances on account of profits received by natural persons are subject to withholding tax, by way of a final assessment, at the liberatory rates of 21.5% (year 2011) 25% (January to October 2012) 26.5% (November and December 2012) and 28% (January 2013 to December 2014) in accordance with paragraph c) of no. 1 of article 71 of CIRS, at the moment they are paid, or placed at the disposal, and will therefore not be taxed within the sphere of their beneficiaries (in this case the shareholders of A… SGPS who received them).

The entity withholds the tax owed which must be delivered to the State by the 20th day of the month following the one in which it was deducted, as provided in article 13 of Decree-Law no. 42/91, of 22 January, no. 3 of article 98 and paragraph a) of no. 2 of article 101 of CIRS.

In accordance with the foregoing, the total amount of tax not withheld and not delivered is distributed over the years under analysis as follows:

1. Intellectual Element

Also in accordance with no. 2 of article 38 of the General Tax Law, the acts or legal transactions must have been "...essentially or primarily directed...".

In accordance with the transcribed rule, it is required that the choice and form adopted by the T.P. be fiscally driven (tax driven) to obtain the fiscal advantage.

Thus, in the following it will be demonstrated that the choice of form, made by the T.P., was motivated by fiscal reasons, that is, only fiscal reasons explain the option followed by the taxpayers. To demonstrate this we will prove that the acts and transactions carried out, which led to the illegitimate fiscal advantage, are not usual among independent economic agents, did not use the forms and conditions usually used, nor did they have a result in line with that intended in similar transactions.

Would it be typical and normal the creation of a management company for shareholdings for (i) acquiring for 11,277,000.00 €, (ii) without financial means to do so and (iii) with the shareholders and their respective shareholdings practically the same as those of the company to be acquired, (v) without providing SGPS with the financial means to acquire those or other shareholdings?

The administration and shareholders of E… S.A. requested its valuation with reference to the patrimonial situation as at 2007/03/31 - concluded in record time on 2007/04/10. On 2007/03/22, during the conclusion phase of the valuation, the shareholders of E… S.A. established a SGPS, A… SGPS, which commenced activity on the same day as its establishment - on 2007/03/22, to place between themselves and E… S.A. This company, established with only 60,000.00 € of share capital (close to the minimum value for establishment of a SGPS) acquires on 2007/04/02 (before the conclusion of the valuation) E… S.A. for a value (11,277,000.00 €) that exceeds almost 188 times its share capital, not defining any payment conditions beyond the recording of the credit relating to each shareholder in current account in A… SGPS.

With the credit established, by the acquisition of a company of which they were already direct owners, the administration and shareholders of E… S.A. radically altered the policy for distribution of profits to shareholders - distributing in 6 years 5,817,622.22 € to A… SGPS.

Of these profits, 92.6% - 5,392,409.69 €, were subsequently transferred to the shareholders of A… SGPS, as consideration for the credit they had created with the sale of their shareholdings.

Thus it is understood that A… SGPS brought no added value of an economic-financial nature to E… S.A., it served, instead, with the form designed to acquire the shareholdings of E… S.A., to transform one flow - the dividends - into another - the payment of a debt - created for the sole purpose of permitting the elimination of the fiscal burden associated with the receipt of dividends, benefiting in concreto the shareholders of both companies.

What is not at issue is the freedom to create SGPS and subsequently an economic group, A… SGPS holds capital shares that are not only those of A… SGPS, that freedom cannot be used to create a scheme that allows the distribution of dividends generated by that economic group as if it were something else.

An operation with these characteristics - with the creation of a SGPS that predisposes itself to acquire shareholdings in the value of 11,277,000.00 € without possessing either liquidity or own capital for the purpose and which does not resort to any form of financing to effect the payment of the amount owed does not evidence any objective or consequence other than that of the non-taxation of the receipt of dividends and would not have been possible to achieve with the intended result, by any other company that is not one created by the same shareholders of the company to be acquired, with a shareholder structure practically equal to that of the acquired company and with an essential and fundamental objective: to allow, with the acts and transactions described above, the transformation of a taxed monetary flow into another non-taxed monetary flow.

Under typical and normal conditions the shareholders of A… SGPS would not have the opportunity to indebt by 11,277,000.00 € a company they had just created and would have opted (which would be good management practice) for other less costly, more typical and normal alternatives in the context described (e.g. subscription of capital in kind).

1. Normative Element

No. 2 of article 38 of the General Tax Law also refers to:

"...by artificial or fraudulent means and with abuse of legal forms... (essentially or primarily directed; is reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions with an identical economic purpose"

This element underlies the non-conformity of the result obtained with the ratio legis, the spirit or purpose of the law, the principles of the Code in question or of the Tax System.

In summary, it is, in a reflexive exercise, to demonstrate that, although the letter of the law allows the act or transaction carried out to provide the desired fiscal effects, the intention of the law and/or of the Law rejects its obtaining, and as such, the result obtained.

Also regarding this element, there are no doubts that it is present in the case under analysis, inasmuch as the Constitution and tax law presuppose taxation according to the ability to contribute.

Taxes in accordance with no. 1 of the General Tax Law "rest essentially on the ability to contribute, revealed, in accordance with the law, through income or its use and assets", so by simple renomination of an income obtained, resulting from the activity exercised by a company of which they are shareholders, it cannot fail to be treated as such - an income.

The shareholders of A… SGPS received dividends generated by the activity of this - management of shareholdings, which by artificial means they "transformed" into payment of a debt to themselves, without any tax impending on them.

The principles underlying the tax system enshrined in articles 103 and 104 of the Constitution of the Portuguese Republic, as well as the rules of incidence specifically provided in the Personal Income Tax Code, intend the taxation of income actually obtained, a State that is governed by these principles cannot demand contribution owed by some citizens while leaving others, who by reason of the capacity and willingness to design and build schemes that avoid it, out of the contribution owed by their actual income.

Regarding the income of category E - capital income - article 5, no. 1 of CIRS provides that "capital income shall be deemed to be the fruits and other economic advantages, whatever their nature or denomination, whether pecuniary or in kind, arising, directly or indirectly, from patrimonial elements, assets, rights or legal situations, of a movable nature, as well as from the respective modification, transmission or cessation, with the exception of gains and other income taxed in other categories."

Now in the case at issue, the taxpayers obtained an income, received from A… SGPS, but which they transformed into "payment of debt" in order to avoid its taxation, as has been demonstrated.

It should be stressed that the subsumption of the concrete case to the rule was carried out on the basis of a critical and combined analysis, according to judgments of common experience and of normal social, economic and financial conditions of the facts and elements collected which, with reasonable certainty, reveal the abusive nature of the fiscal planning of the taxpayers.

VI - Justification for the Application of the Anti-Abuse Rule

Given all the foregoing and aiming at a normatively rationalized practice of the law, it is understood that the conditions are met for one to be able to rely on the mechanism provided for in no. 2 of article 38 of the LGT, transcribed above.

It thus results from the present information that the procedural requirements provided for in no. 3 of article 63 of the Code of Tax Procedure and Process are met for application of the provision provided for in no. 2 of article 38 of the LGT, specifically:

a) Description of the legal transaction celebrated or of the legal act performed and of the transactions or acts with an identical economic purpose, as well as indication of the rules of incidence that apply to them.

b) The demonstration that the celebration of the legal transaction or the practice of the legal act was essentially or primarily directed to the reduction, elimination or deferment of taxes that would be due in case of transaction or legal act with an identical economic purpose, or to the obtaining of tax advantages.

(...)

VIII - Right to be Heard

The taxpayer exercised, on 2015/11/13 prior hearing (Annex 11) within the period established by the notification contained in letter no. … of 2015/10/14 in compliance with the requirements of articles 60 of the General Tax Law (LGT) and no. 4 of article 63 of the Code of Tax Procedure and Process (CPPT).

Taking into account and weighing the elements raised in the prior hearing, it is important to understand whether these are capable of altering the conclusions of the Draft Report.

The taxpayers base essentially the justification of the right to be heard exercised, in the terms summarized below:

A. Regarding the non-applicability of the anti-abuse rule

The 4 cumulative elements are not met (...) indispensable for the application of the general anti-abuse rule provided for in article 38 of the General Tax Law.

The t.p. brings no new fact to the proceeding so the ground invoked here is rebutted unequivocally by that set out in the report, namely in Chapter V - Appreciation of the Concrete Case.

B. Regarding the expiration of the right of the AT to apply the anti-abuse rule provided for in no. 2 of article 38 of the LGT (correction ours as the T.P. mentions in the hearing, erroneously, article 38 of the CPPT)

B.1 The procedure for application of the anti-abuse rule, in accordance with no. 3 of article 63 of the CPPT, at the date of the facts relating to the year 2011, had a three-year period for its initiation.

The ground invoked here does not hold, since an alteration to the rule of a procedural nature is of immediate application, considering the provision of article 12, no. 3 of the LGT.

The wording of no. 3 of article 63 of the CPPT in force at the date of the initiation of the procedure for application of the anti-abuse rule (wording given by Law no. 64-B/2011, of 30 December) does not provide for any time limit for the initiation of the procedure for application of the anti-abuse rule.

What is not at issue is the right to assess (which as we shall see below, still subsists) but only the faculty of applying a special procedure to a certain set of acts and legal transactions.

This procedure should follow what is established as of the date of its initiation, running the risk of being illegal if this is not the case.

It also does not hold to anchor the defense of this interpretation in "affecting guarantees, rights and legitimate interests previously constituted™", we are not in the case at issue obliterating any guarantee, right or legitimate interest - it is not legitimate in light of constitutional principles, the non-payment of taxes effectively due as a result of an evident patrimonial advantage, revealing a much higher contribution capacity than that declared to the fiscal administration.

The duty to pay the taxes effectively due is not protected by any guarantee, right or interest previously constituted; on the contrary, it is the duty of the tax administration, constitutionally established, to promote just, equal and proportional taxation of income, "respecting the principles of generality, equality, legality and material justice."

Now the principles mentioned above: (i) of generality - the duty of all citizens to pay taxes, in accordance with their ability to contribute; (ii) of equality - the duty to treat equal situations equally, and unequal situations unequally (in which the anti-abuse rule is a fundamental instrument); (iii) of legality - the creation by law of the applicable rules (which is indisputable) and (iv) of material justice - embodied in the so-called fair balancing of interests in light of the judgments of the time and place where administration acts, are fully respected, they are indeed the greatest reason for the present proceeding of which the proposed corrections are a corollary.

It is therefore evident that the guarantees, rights and legitimate interests legally protected are in no way obliterated by the present proceeding, these are the dimensions of citizenship that this intends to protect and achieve.

B.2 The T.P. further defends that the expiration period had already elapsed when the procedure for application of the general anti-abuse clause was initiated (for payments made in 2011),

The t.p. alleges that the correction deals with a withholding tax at the liberatory rate so no. 4 of article 45 of the LGT would not apply. This ground suffers from the outset from an incorrect reading of the legal provision at issue, and the reading and interpretation of it is clear and unequivocal, now let us see:

No. 4 of Article 45 of the LGT

"The statute of limitations period is counted, in periodic taxes, from the end of the year in which the taxable event occurred and, in taxes of single obligation, from the date on which the taxable event occurred, except in the value added tax and in taxes on income when taxation is effected by withholding at a final rate, in which case that period is counted from the beginning of the civil year following that in which the taxability of the tax or the taxable event occurred, as applicable."

As can be verified, the legislator excepted withholdings effected at a final rate, relating to taxes on income, such is the case at issue, from the counting of the statute of limitations period from the date the taxable event occurred, following these, in a distinct manner, the rule of periodic taxes, that is, counting the period from the end of the year in which the taxable event occurred.

C. Arithmetic Errors

The t.p. points out the following arithmetic errors (in euros):

a. 51,000.00 €, relating to credits of the same value, which have as consequence the diminution of the amount received by B… in June 2013;

b. 7,500.00 €, relating to credits of the same value, which have as consequence the diminution of the amount received by C… in June 2013;

c. 4,500.00 €, relating to credits of the same value, which have as consequence the diminution of the amount received by D… in June 2013.

It is found that the credits mentioned above aimed at the regularization of entries made incorrectly in the current account of the t.p. mentioned, so the t.p. is correct on this point.

Conclusion

Taking into account and weighing the elements raised in the prior hearing, we maintain the justification that supports the conclusions of the Draft Report, correcting the proposed corrections in the values relating to the arithmetic errors pointed out by the t.p..

Given the foregoing, the proposed corrections relating to Personal Income Tax that now appear in this Final Report are those contained in the following table:

d) Following the authorization for application of the general anti-abuse clause, the Tax Inspection Report was prepared which appears in the "Group IV" section of the administrative process, the substance of which is given as reproduced;

e) Following the inspection, the following assessments were issued on 10-02-2016, based on the application of the general anti-abuse clause (documents nos. 1 to 4 attached with the request for arbitral decision, the contents of which are given as reproduced):

– Demonstration of assessment of income tax withholdings no. 2016…, in the amount of €612,750, and respective demonstration of assessment of compensatory interest of € 109,516.87, relating to the year 2011;

– Demonstration of assessment of income tax withholdings no. 2016…, in the amount of € 312,579.41, and respective demonstration of assessment of compensatory interest of € 40,559.26, relating to the year 2012;

– Demonstration of assessment of income tax withholdings no. 2016…, in the amount of €193,080.05, and respective demonstration of assessment of compensatory interest of € 14,569.50, relating to the year 2013;

– Demonstration of assessment of income tax withholdings no. 2016…, in the amount of €151,308.05, and respective demonstration of assessment of compensatory interest of € 5,857.20, relating to the year 2014;

f) Tax enforcement proceedings were initiated for coercive collection of the assessed amounts (document no. 5 attached with the request for arbitral decision, the substance of which is given as reproduced);

g) On 15-06-2016, the Claimant effected payment of the assessed amounts, increased with default interest, in these terms the provisions contained in documents nos. 5 and 6 attached with the request for arbitral decision, the contents of which are given as reproduced;

h) On 29-01-2016, the Claimant submitted the request for constitution of the arbitral court that gave rise to the present proceedings.

2.2. Unproven Facts

There are no facts relevant to the decision of the case that have not been proven.

2.3. Justification for the Establishment of Factual Matters

The proven facts are based on the documents attached by the Claimant with the request for arbitral decision and on the administrative process.

3. Question of Material Incompetence of the Arbitral Court Regarding the Request for Reimbursement of Default Interest and Costs Paid in Tax Enforcement Proceedings

In accordance with the provision of paragraph b) of article 24 of RJAT, the arbitral decision on the merits of the claim regarding which there is no recourse or challenge binds the Tax Administration from the end of the period provided for for recourse or challenge, and this must, in the exact terms of the finding of the arbitral decision in favor of the taxpayer and until the end of the period provided for for spontaneous execution of sentences of tax courts, "restore the situation that would exist if the tax act that was the object of the arbitral decision had not been performed, adopting the acts and operations necessary for this purpose", which is in harmony with the provision of article 100 of the LGT [applicable by force of the provision of paragraph a) of no. 1 of article 29 of RJAT] which establishes that "the tax administration is obliged, in case of total or partial finding in favor of the taxpayer in a claim, judicial challenge or appeal, to the immediate and full re-establishment of the legality of the act or situation that was the subject of the dispute, including the payment of indemnifying interest, if applicable, from the end of the period for execution of the decision".

Although article 2, no. 1, paragraphs a) and b), of RJAT uses the expression "declaration of illegality" to define the competence of arbitral courts operating in CAAD, making no reference to condemning decisions, it should be understood that the powers attributed to tax courts in judicial challenge proceedings are included in their competences, and this is the interpretation that is in harmony with the sense of the legislative authorization on which the Government based itself to approve RJAT, in which it proclaims, as the first guideline, that "tax arbitration proceedings should constitute an alternative procedural means to judicial challenge proceedings and to the action for recognition of a right or legitimate interest in tax matters".

The judicial challenge proceeding, although it is essentially an annulment proceeding for tax acts, allows for the condemnation of the Tax Administration to the payment of indemnifying interest, as can be inferred from article 43, no. 1, of the LGT, in which it is established that "indemnifying interest is due when it is determined, in administrative appeal or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount greater than legally due" and from article 61, no. 4 of CPPT (in the wording given by Law no. 55-A/2010, of 31 December, which corresponds to no. 2 in the original wording), which "if the decision recognizing the right to indemnifying interest is judicial, the period for payment shall be counted from the beginning of the period for its spontaneous execution".

Thus, no. 5 of article 24 of RJAT, by stating that "payment of interest is due, regardless of its nature, in accordance with the terms provided in the general tax law and in the Code of Tax Procedure and Process", should be understood as allowing the recognition of the right to indemnifying interest in arbitration proceedings.

However, as the Tax Authority and Customs Authority rightly defends, regarding default interest and costs of tax enforcement proceedings, there is no legal support whatsoever for its examination in judicial challenge proceedings and, reflexively, in arbitration proceedings.

We thus find that the exception of material incompetence raised by the Tax Authority and Customs Authority regarding the examination of the request for reimbursement of the amount of default interest and costs paid in tax enforcement proceedings is well-founded.

3. Matters of Law

The Claimant raises, in summary, the following issues:

– regarding the expiration of the right of the Tax Authority and Customs Authority to initiate the procedure for application of the general anti-abuse clause;

– regarding the verification of the requirements for its application, including its application to the Claimant, in the capacity of tax substitute, which is connected with the verification of the "result" element.

3.1. Question of Expiration of the Right of the Tax Authority and Customs Authority to Initiate the Procedure for Application of the General Anti-Abuse Clause

The Claimant defends that, regarding the payments made by it to its shareholders in 2011, when the AT initiated the inspection action, on 07-08-2015, the statute of limitations period for opening the Procedure for Application of the General Anti-Abuse Clause by the AT had already elapsed.

Article 63 of CPPT, in its original wording, established the following, insofar as relevant:

1 - The assessment of taxes based on any anti-abuse provisions in accordance with the codes and other tax laws depends on the opening of a special procedure for this purpose.

2 - For the purposes of this Code, anti-abuse provisions are considered to be any legal rules that establish the ineffectiveness before the tax administration of transactions or legal acts celebrated or performed with manifest abuse of legal forms resulting in the elimination or reduction of taxes that would otherwise be due.

3 - The procedure referred to in the previous number may be opened within three years following the performance of the act or the celebration of the legal transaction that is the subject of the application of anti-abuse provisions.

Law no. 64-A/2008, of 31 December, altered no. 3, which came to have the following wording:

3 – The procedure referred to in no. 1 may be opened within three years counting from the beginning of the civil year following the performance of the legal transaction that is the subject of anti-abuse provisions.

With Law no. 64-B/2011, of 30 December, no longer was any reference made to a time period for the opening of the procedure for application of the general anti-abuse clause.

The Claimant defends, in summary, that, considering that the first three payments occurred, respectively, in March, April and June 2011, the period for the AT to initiate the special procedure provided for in article 63 of CPPT regarding these payments ended on 31-12-2014.

The Tax Authority and Customs Authority defends, in summary, that with the elimination, operated by Law no. 64-B/2011, of the period for opening the procedure for application of the general anti-abuse clause, its opening is not subject to any time period, so it can be opened, regarding facts that occurred in 2008, after the three years provided for in the said wordings of no. 3 of article 63 of CPPT.

As referred to in the arbitral award of 09-05-2013, delivered in proceedings no. 123/2012-T, in the wordings that were in effect until the entry into force of Law no. 64-B/2011, from no. 3 of article 63 it manifestly resulted for the taxpayer the "guarantee" that the procedure for application of the general anti-abuse clause could not be opened after the stated period had elapsed.

Thus, the expiration of the stated period extinguished the potestative right enjoyed by the Tax Authority and Customs Authority to initiate the referred procedure.

Delimiting temporally the potestative right of the active subject, the period established in article 63, no. 3, of CPPT, in those wordings, was a statute of limitations period: "statute of limitations or preclusion is an institute by means of which potestative rights are extinguished by the fact of their non-exercise prolonged for a certain time" ( [1] ); "statute of limitations, also called preclusion, is the institute by which rights, which, by force of law or agreement must be exercised within a certain period, are extinguished by their non-exercise during that period" ( [2] ).

"The active subject has the potestative right – it could be said, in another perspective, that it has a power-duty – to open the procedure up to a certain moment. The statute of limitations period under analysis is justified by objective reasons of legal certainty, having the ultimate purpose of generating the definition of the situation of the obligated taxpayer within a reasonable period, whose expiration leads to the preclusion of the State's right relating to the exercise of the right subject to the statute of limitations period". ( [3] )

Article 12, no. 3, of the LGT, by establishing that "procedural and process rules are of immediate application, without prejudice to the guarantees, rights and legitimate interests previously constituted of the taxpayers", has as its effect, regarding the application of the law in time of Law no. 64-B/2011, that, regarding the rights to initiate the procedure for application of the general anti-abuse clause that had not yet expired at the date of its entry into force, the statute of limitations ceases to apply, as the new law does not provide for a time period for the said initiation.

In fact, when a period for the extinction of a right is running, there is a legal situation in the process of extinction, which is extinguished when that period is exhausted.

Facing a succession of laws governing a legal situation in the process of extinction, if that situation did not become extinct during the validity of the old law, the law competent to determine the regime of its extinction (including its non-extinction) is the new law.

But, for the new law to which retroactive effect is not attributed to be able to regulate that legal situation, it is necessary that it still exists at the date the new law enters into force, that is, that the right in question has not yet become extinct, before this entry into force. If the right became extinct during the validity of the old law, the new law cannot be applicable to it, without retroactivity, as it has no temporal connection with the situation already extinct, and a problem of application of the new law in time does not even arise, if the latter is not retroactive.

Article 297 of the Civil Code, which contains special rules for the application in time of laws on periods, evidences the legal support for this understanding, by conditioning its application to the periods that are running, at the moment the new law enters into force.

The law that eliminates a period constitutes, in light of this article 297, even by merely declarative interpretation, a law that establishes "a longer period", as the non-existence of a period is equivalent to a period of infinite duration.

Thus, the new law is applicable to periods that are running, but only to those, not applying to periods that have already fully elapsed.

In other words, the certainty and legal security conferred by the expiration of the right only constitutes itself if the period elapses in its entirety without the potestative right being exercised, but, after its full expiration, there will be a situation in which there is no longer the right to initiate the procedure, and there is no legal support to understand, without retroactivity, that it is reborn by the fact that the new law comes to eliminate the period.

This is what results from the express content of no. 3 of article 12 of the LGT, which establishes as a limit to the immediate application of procedural rules the existence of "rights and legitimate interests previously constituted of the taxpayers", which has as a corollary that, before being constituted, with the full expiration of the statute of limitations period, the right of the taxpayer not to see the procedure initiated for taxation for application of the general anti-abuse clause, there is no obstacle to the law altering the requirements for the constitution of that right.

In the case at issue, Law no. 64-B/2011, of 30 December, does not attribute retroactive effect to the new wording that it introduced in article 63 of CPPT, namely the elimination of the period for initiating the procedure for application of the general anti-abuse clause, so the elimination of the period, with the consequent possibility of initiating the procedure, must be understood to produce effects in relation to all periods that were running at the date of its entry into force, which occurred on 01-01-2012 (article 215 of that Law). [4]

Applying this legal regime to the case of the proceedings, it is found that there is no obstacle to the opening in 2015 of the procedure for application of the general anti-abuse clause which has as its presuppositions facts (payments in the case) made in 2011.

Thus, the defect of expiration of the right to initiate the procedure invoked by the Claimant regarding facts that occurred in 2011 is without merit. ( [5] )

3.2. Question of Verification of Requirements for Application of the General Anti-Abuse Clause to the Claimant

Article 38, no. 2, of the General Tax Law establishes a general anti-abuse clause, in accordance with which "acts or legal transactions that are essentially or primarily directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions with an identical economic purpose, or to the obtaining of tax advantages that would not be achieved, in whole or in part, without the use of such means, shall be ineffective within the scope of taxation, and taxation shall then be effected in accordance with applicable rules in their absence and the tax advantages referred to shall not be produced".

In the definitions elaborated by Saldanha Sanches ( [6] ): legitimate tax planning "consists of a technique for reducing the tax burden by which the taxpayer renounces a certain behavior because it is linked to a tax obligation or chooses, among the various solutions provided by the legal order, that which, by intentional action or omission of the tax legislator, is accompanied by fewer tax burdens"; while illegitimate tax planning "consists of any behavior of undue reduction, because it contravenes principles or rules of the tax legal order, of the tax burdens of a certain taxpayer".

Within the framework of tax planning we can thus distinguish situations in which the taxpayer acts against the law, outside the law and within the law.

When this acts against the law, its conduct is frontal and unequivocally illicit, as it directly infringes tax law, and constitutes tax fraud ( [7] ) liable, even, to be subject to administrative offense or criminal censure.

Acting outside the law occurs when the taxpayer abusively takes advantage of the law to reach a more favorable fiscal result, even though this does not directly violate it. It adopts "a behavior that has as its exclusive or primary purpose to circumvent one or more tax legal rules, in order to achieve the reduction or suppression of tax burden" ( [8] ). And from those or those tax legal rules an attempt to circumvent "a clear intention to tax affirmed by the structuring principles of the system" ( [9] ) must be detected. This type of action is commonly referred to as "abuse of tax law" but, as Saldanha Sanches warns, intending to better illustrate and distinguish these situations from those of tax fraud, also designated "abusive evasion of tax burdens", "abusive tax evasion" or still "tax avoidance" ( [10] ).

Only conduct within the law appears to be legitimate – and thus legitimate tax planning or non-abusive – to act. Indeed, the obtaining of a tax saving does not constitute a conduct prohibited by law, provided that the action does not fall within the aforementioned conduct outside the law ( [11] ).

The doctrine and case law have come to deconstruct the letter of the rule pointing to five elements within it. Corresponding to one of the elements to the provision of the rule, the remaining four appear as cumulative requirements that allow one to assess – as if it were a test – regarding the verification of an activity characterizable as abusive tax planning ( [12] ).

These elements, around which both parties indeed construct their argument, consist of:

– the instrumental element, which concerns the path freely chosen – act or legal transaction, isolated or part of a structure of sequential, logical and planned acts or legal transactions, organized in a unitary manner – by the taxpayer to obtain the desired fiscal gain or advantage; as results from the text of article 38, no. 2, of the LGT, the means relevant for application of the general anti-abuse clause have to be "artificial or fraudulent and with abuse of legal forms" ;

– the resultant element, which deals with the obtaining of a fiscal advantage, by virtue of the choice of that means, when compared with the tax burden that would result from the practice of "normal" acts or legal transactions and of equivalent economic effect ( [13] );

– the intellectual element, which requires that the choice of that means be "essentially or primarily directed [to] [...] the reduction, elimination or temporal deferment of taxes" (article 38, no. 2 of the LGT), that is, it requires not merely the verification of a fiscal advantage, but rather that one ascertain, objectively, whether the taxpayer "intends an act, a transaction or a given structure, only or essentially, for the prevailing fiscal advantages it provides" ( [14] );

– the normative element, which "has as its primary function to distinguish cases of tax avoidance from cases of legitimate fiscal saving, in consideration of the principles of Tax Law, and only in cases in which an intention of the law contrary to or not legitimizing the result obtained is demonstrated can one speak of that »( [15] );

– and, finally, the sanctioning element, which, presupposing the cumulative verification of the remaining elements, leads to the sanction of ineffectiveness, in the exclusive scope of taxation, of the acts or legal transactions deemed abusive, "and taxation shall then be effected in accordance with applicable rules in their absence and the tax advantages referred to shall not be produced" (final part of article 38, no. 2, of the LGT).

Despite this deconstruction, the analysis of the elements cannot be compartmentalized, as, as Courinha emphasizes, "the fixation of one element may, in practice, depend on another", so these "shall not frequently [...] fail to assist each other mutually" ( [16] ).

In the case at issue, the Claimant bases its claim primarily on the non-verification of the resultant element, because no fiscal advantages are verified in relation to it itself, as a tax substitute, so we will begin by examining this issue of the applicability of the general anti-abuse clause to tax substitutes, when the fiscal advantages are verified in relation to the substituted.

3.2.1. Question of Application of the General Anti-Abuse Clause to Tax Substitutes, in Situations in Which Fiscal Advantages Are Verified in the Substituted

The final part of article 38, no. 2, of the LGT (wording of Law no. by Law no. 30-G/2000, of 29 December), by establishing the consequences of the application of the general anti-abuse clause "and taxation shall be effected in accordance with applicable rules in their absence and the tax advantages referred to shall not be produced" points decisively in the direction that application has to be effected in terms that allow the production of the fiscal advantages to be avoided.

Indeed, although the first part of this article 38, no. 2, contains an apparent distinction between the objectives sought by the taxpayer between "reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions with an identical economic purpose and "obtaining of tax advantages", it is manifest that what is at issue in the reduction, elimination or temporal deferment of taxes is always the obtaining of tax advantages, the express and generic reference to tax advantages having only the objective of extending the scope of the rule to any tax advantages, beyond those specifically indicated, which are clearly the most frequent cases of realization of tax advantages, which are the reduction, elimination or temporal deferment of taxes.

That is, with the wording given by Law no. 30-G/2000, of 29 December, the general anti-abuse clause came to be able to apply to all situations of obtaining tax advantages and not only to the situations of reduction or elimination of taxes, already provided for in the original wording, and to that of temporal deferment, which was also expressly added in the new wording. ( [17] )

In this light, the reference made in the final part of article 38, no. 2, to the non-production of the "tax advantages referred to" relates to all those referred to, both the most common that are specifically referred to (reduction, elimination or temporal deferment of taxes) and the generically referred to, through the allusion to the "tax advantages that would not be achieved".

Moreover, nor would any other interpretation be constitutionally admissible, since, in all cases of obtaining abusive tax advantages, it would be arbitrary and violative of the constitutional principle of equality (article 13 of CRP) a hypothetical distinction of treatment between the situations specifically referred to and the generically referred to.

Being this elimination of tax advantages the manifest objective of the general anti-abuse clause, the destination of application, in whose patrimony the effects of application will be produced, cannot fail to be the one who has enjoyed these tax advantages.

In the case at issue, the tax advantages detected by the Tax Authority and Customs Authority that justified the application of the general anti-abuse clause were not verified in the patrimony of the Claimant, as all the amounts it paid without withholding tax were delivered to its shareholders.

If tax advantages existed indebtedly in the situation in question, namely because the amounts received should be taxed as dividends, as the Tax Authority and Customs Authority argues, it is manifest that those who obtained them were the shareholders, who received the amounts without any deduction of tax, and not the Claimant, who paid the amounts in full.

Being the shareholders the beneficiaries of the advantages referred to, the application of the general anti-abuse clause as it was carried out does not allow these advantages to be avoided, as, by imposing on the Claimant the payment of the amounts equivalent to these advantages, it is only to it that these burdens are imposed, with the shareholders remaining in intact ownership of the amounts received.

It is true that it could be ventured that, sooner or later, the patrimonial prejudice with the taxation that is imposed on the company will be reflected on the shareholders, but it is also evident that this may not occur in relation to the shareholders who benefited from the undue advantages, as they may cease to be shareholders before the prejudice imposed on the company has an effective impact on the value of their shares.

The interpretation of the final part of article 38, no. 2, of the LGT, as a tax legal rule from which taxation is imposed, cannot fail to take into account the characteristic of generality, indispensable in rules of taxation by force of the provision in article 5, no. 2, of the LGT, which is a corollary of the principle of equality in the distribution of public burdens. Therefore, the correct interpretation of article 38, no. 2, will have to apply generally, in relation to any type of corporations, including those listed on the stock exchange in which the shareholder structure constantly changes, in relation to which it is evident that the imposition of taxation on the corporation because, through its intermediation, the shareholders have created for themselves undue tax advantages would have no effect on those who enjoyed these advantages and later ceased to be shareholders.

Now, in this light, it is evident that the scope of that article 38, no. 2, by establishing as a necessary effect of the application of the general anti-abuse clause the non-production of tax advantages, presupposes the legislative understanding that the "taxation in accordance with applicable rules" should be imposed on those who obtained the advantages and not on those who merely had intervention in the acts from which they result without benefiting from those, as only thus is it possible to guarantee the intended effect of the tax advantages specially or generically referred to not being produced.

In fact, it is concluded from the final part of no. 2 of article 38 of the LGT, in the wording of Law no. 30-G/2000, that the general anti-abuse clause does not aim merely to grant the Tax Administration compensation for acts that have caused it loss of tax revenue, but rather aims, concomitantly, to eliminate the illegitimate tax advantages that someone obtained, which reveals that it underlies concerns of equality and tax justice, which can only be satisfied with the imposition of the omitted taxation on those who obtained these advantages.

Otherwise it is this the only interpretation that is compatible with the constitutional principles of taxation according to the ability to contribute (article 104, no. 2, of the CRP) and the principle of taxation with respect for material justice (article 5, no. 2, of the LGT).

Indeed, these principles impose that income tax be imposed on those who obtained the income and not on those who did not obtain it, and the value of material justice is clearly violated when, in a situation in which there are undue tax advantages, the amount corresponding to those will be demanded from those who did not benefit from those advantages, leaving untouched those who undeservedly benefited from them.

In fact, if there is a duty to withhold tax at a final rate in payments to be made by the tax substitute, there is no legal provision that assures it the possibility of recovering the amount it must pay, even if it has not effected the withholding, as the responsibility of the substituted is merely subsidiary, by force of the provision in no. 3 of article 28 of the LGT (which reproduces no. 3 of the repealed article 103 of CIRS), and there is no legal provision that assures the right of recourse of the original responsible against the subsidiary.

In these situations falling within no. 3 of article 28 of the LGT, the rule of article 21 of CIRS applies fully, in which it is established that "when, through tax substitution, this Code requires the payment in full or in part of IRS to a person other than the one in relation to which the respective requirements exist, the tax substitute is considered, for all legal purposes, as principal debtor of the tax, without prejudice to the provisions of article 103". ( [18] )

The right of recourse can result from law or contract ( [19] ), existing, namely, in solidary debts (articles 497, no. 2, 521 and 524 of the Civil Code), which is not the case with tax debts that have to be paid by the substitute through withholding tax.

In the specific case of the application of the general anti-abuse clause, which takes place after the delivery of the amount subject to tax to the taxpayers, it would be inexplicable that a legislator who must be presumed to enact the most correct solutions (article 9, no. 3, of the Civil Code), concerned with making the consequences of the application affect those who obtained tax advantages, would do so through a private intermediary, whose acts it does not command, instead of assuring it through its own efficient services.

Furthermore, the legal institute provided for in tax laws for compensation of tax debts paid by those who are not the debtor, which is subrogation (articles 41 of the LGT and 91 of the CPPT), has no application in situations of tax substitution, as the substitute is not a third party in the tax legal relationship, but rather the principal debtor (articles 28, no. 3, and 41 of the LGT and 21 of CIRS), "for all legal purposes" and, therefore, also for this purpose of application of the general anti-abuse clause, which cannot fail to be included in the indelible and irreducible scope of the word "all".

On the other hand, nor is it even possible to venture the possibility of the Claimant recovering what it paid to the extent of the enrichment of the shareholders, on the basis of civil law, unjust enrichment, as the application of the general anti-abuse clause only allows acts or transactions to be considered ineffective "in the scope of tax law", as results from the text of no. 2 of article 38 of the LGT, so the transactions celebrated maintain their full effectiveness for civil purposes, and in terms of civil law, the integral receipt of the amounts received by the shareholders has legal cause, as it is the consideration for the transmission of the shares of these to the Claimant, within the scope of the purchase and sale. In light of the civil legal relationship embodied in the transmission of the shares, which the application of the general anti-abuse clause does not alter because the ineffectiveness of transactions and acts that it determines is restricted to the "scope of taxation", the sellers have the right to receive the entirety of the price provided for in the contract.

Moreover, as results from the aforementioned article 21 of CIRS, the substitute is the principal debtor of the tax "for all legal purposes", so the demand of the tax made to it also has legal cause, as it is a debt of its, whose payment can only hypothetically be demanded of the substituted, as a subsidiary responsible, through reversal in tax enforcement proceedings and only in case of insufficiency of attachable assets of the substitute (article 23, nos, 2 and 3, of the LGT). ( [20] )

To this is added that the shareholders of the Claimant in relation to which one could venture, if it were provided for in law, a right of recourse, are not even party to the present proceedings, so any decision in that sense that were issued by an arbitral court would not be enforceable against them, so only by guesswork could one affirm that the position of the Claimant was safeguarded by a hypothetical right of recourse, whose affirmation is, moreover, manifestly outside the competences of arbitral courts operating in CAAD, defined in article 2, no. 1, of RJAT.

Being thus, it is certain that the wording of no. 2 of article 38 of the LGT introduced by Law no. 30-G/2000, by determining as an effect of the application of the general anti-abuse clause the non-production of the undue tax advantages, presupposes that the destination of application is the one who enjoys them, as the effects of application are not transferable from the substitute to the substituted. ( [21] )

Therefore, in the case at issue, as the Claimant has not enjoyed the tax advantages resulting from the non-taxation of the amounts paid to its shareholders,