CAAD 365/2017-T: IRC Tax Benefits for SGPS – Financial Charges Deductibility Under Circular 7/2004

ARBITRAL DECISION

The Arbitrators, Fernanda Maçãs (President), Fernando Miranda Ferreira and Dr. José Eduardo Mendonça da Silva Gonçalves, appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, hereby agree as follows:

I – REPORT

1. "A… SGPS, S.A", with the NIPC …, (hereinafter "Claimant"), filed on 9 June 2017, a request for constitution of a Collective Arbitral Tribunal, in accordance with the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter "LFATM"), in which the Tax and Customs Authority (hereinafter "TA" or "Respondent") is the Respondent.

2. The Claimant requests "the annulment of the tax act embodied in the assessment of Corporate Income Tax ("CIT") No. 2016 …, of 19 December 2016, as well as the statement of compensatory interest No. 2017 … and statement of account adjustment No. 2017…, both of 27 January 2017", all relating to the tax year 2012.

3. The Claimant attaches seven documents, the full content of which it wishes to be reproduced for all legal purposes. It does not request the production of witness evidence.

4. The request for constitution of the Arbitral Tribunal was accepted by the Esteemed President of CAAD and automatically notified to the TA on 9 June 2017.

5. Pursuant to the provisions of paragraph a) of article 2 and paragraph b) of article 1 of article 11 of the LFATM, as amended by article 228 of Law No. 66B/2012, of 31 December, the Deontological Council appointed the arbitrators of the Collective Arbitral Tribunal, who communicated acceptance of the assignment within the applicable time limit.

6. The Collective Arbitral Tribunal was constituted on 22 August 2017, in accordance with the provisions of articles 2, paragraph 1, letter a), 5, 6, paragraph 1, and 11, paragraph 1 of the LFATM (as amended by article 228 of Law No. 66-B/2012, of 31 December).

7. In the request for arbitral decision, the Claimant invokes, in summary, in its favour that:

The correction in question results from the disregard, allegedly in accordance with paragraph 2 of article 32 of the Statute of Tax Benefits ("STB"), of financial charges supported and attributable to the acquisition of capital shares.

The same correction was based on the interpretation of the cited norm recommended by the provisions of Circular No. 7/2004, of 30 March and, exclusively, on the formula proposed by the said Circular to calculate an amount of financial charges not accepted as a fiscally deductible cost.

And, without ever justifying or identifying any difficulties in the use of a method of specific allocation, the Tax Inspectors (hereinafter "TI"), based on the accounting information provided by A… and applying directly the aforementioned formula, calculated the amount of EUR 850,654.13 of "Financial Charges Attributable to Acquisitions of Corporate Shares".

Once an amount was calculated as financial charges allegedly attributable to acquisitions of corporate shares by A…, the TI added it to the taxable income of the company and, consequently, of Group B….

In summary, in the course of the aforementioned inspection action, the TI identified that A… had considered the financial charges supported in the 2012 tax year as a fiscally deductible expense. They did not request from A… any clarification regarding the origin of such payments. They do not identify in the tax inspection report the reasons that prevented recourse to the method of specific allocation of the financial charges supported in that year.

They merely followed the formula provided in Circular No. 7/2004 of 30 March, to calculate the alleged financial charges supported with the acquisition of corporate shares, in violation of the provisions of paragraph 2 of article 32 of the STB, as well as articles 55, 74 and 75, all of the General Tax Law.

In effect, the Claimant argues:

It is incontestable that the legislator, with respect to the impediment to the deductibility of financial charges, established only limits to those connected with the acquisition of capital shares as is inferred from the letter of paragraph 2 of article 32 of the STB, in the wording in force at the date of the facts: "The gains and losses realized by SGPSs, by SCRs and by ICRs from capital shares of which they are holders, provided they are held for a period of not less than one year, and likewise, the financial charges supported with their acquisition, do not contribute to the formation of the taxable profit of these companies" (emphasis added by the Claimant).

Despite this, the TA, in clear violation of the principle of tax legality, decided to distort such legislative choice, to which end it issued the said Circular, considering that, for reasons of practicability, one should have regard to a formula that would make it possible to ascertain a value of remunerated liability that was allocated, even if fictionally, to an alleged acquisition of capital shares.

In this way, the Claimant considers that the determination of non-deductible financial charges using the doctrine presented by the TA in Circular No. 7/2004, of 30 March, by imposing a generic and indicative formula for allocation of financial charges that far exceeds the legal provision, violates the provisions of paragraph 2 of article 32 of the STB and, consequently, also violates the principle of tax legality.

Going beyond the law, through an extensive interpretation, the TA distorted materially and formally the regime provided for in the said article 32 of the STB, creating a new tax incidence norm, in violation of paragraphs 2 and 3 of article 103 and letter i) of paragraph 1 of article 165, both of the CRP.

In other words, Circular No. 7/2004, of 30 March, of the Directorate of CIT Services, densified the tax norm and its restriction with respect to financial charges beyond what was constitutionally permitted and beyond what the tax legislator intended.

Furthermore, the Claimant adds:

It has been the unanimous understanding of arbitral and judicial case-law that it is incumbent on the TA to prove that there would not exist, in the concrete situation, a more just mechanism, more economically rational or more in conformity with specific allocation of financial charges to capital shares, other than the mentioned formula.

Evoking, above all, the awards of the Administrative Court of Appeal (TCAN) No. 00997/12.8BEPRT and No. 269/2015-T of CAAD and applying to the case the supposed understanding set out in such awards, it maintains that the disregard of financing costs depends on the cumulative fulfilment of the following requirements, namely the alienation of shareholdings and the corresponding financing used in their acquisition.

Given that the TA proceeded with the correction and taxation merely by resorting to mere presumptions, forgetting that the legislator did not establish any criterion that would make it possible to distinguish, in the total financial costs of SGPSs, which are due to the purchase of corporate shares and which were used for other purposes.

The TA could only move within the scope of a method that respects direct or specific allocation, because only such a method will be compatible with the principle of legality and impartiality to which it is subject (article 55 General Tax Law) and which results from the wording of paragraph 2 of article 31 of the STB by excluding from the formation of taxable profit the financial charges supported with the acquisition of the alienated shareholdings.

It further adds that the TI never contested the reliability of the Claimant's accounting, from which it can be inferred that the accounting and tax elements of A… benefited from the presumption of truthfulness and good faith in accordance with article 75 of the GTL, whereby also by force of this statute the TI were burdened with the burden of refuting that presumption.

The Claimant concludes:

In light of the above, it appears that the TI apply the formula of Circular No. 7/2004 as if, after deducting loans to subsidiaries from the amount of all remunerated liabilities, the remaining value of financial debt were allocated to assets, in an indirect manner. That is, without ascertaining whether there would be capital shares whose acquisition had been sustained with own capital, hence giving rise to the necessary violation of the burden of proof, provided for in article 74 of the GTL.

The interpretation espoused as to the meaning and scope of paragraph 2 of article 2 of the STB is that which results, moreover, in accordance with the constitutional principles of tax equality, capacity to contribute, and taxation of real income.

The tax act in question is thus tainted with illegality, which implies that it should be annulled, as it is affected by error regarding the factual presuppositions on which it was based, but also by legal defect by violation of law.

1. Pursuant to the notification, the TA presented its Response, accompanied by the Administrative File, arguing for the total lack of merit of the Claimant's request, arguing, fundamentally, the following:

Article 32 of the STB, in determining that financial charges supported with the acquisition of corporate shares do not contribute to the formation of the taxable profit of SGPSs, did not establish the method to be used for purposes of allocating charges to such corporate shares.

That is, since that norm does not expressly provide which calculation methods are to be used in allocating financial charges, the TA, faced with the difficulty and sometimes the total impossibility of using a direct method, must interpret and apply the law, under the provisions of paragraph 2 of article 9 of the Civil Code, using an allocation method, without, however, failing to comply with the basic principles of tax law.

In effect, Circular No. 7/2004 does nothing more than interpret the legal rules, in this case paragraph 2 of article 32 (former article 31) of the STB, issuing norms and practical examples applicable, and nothing in the letter of that tax norm allows one to infer the non-applicability and necessary application of a method of allocation to the acquisition of capital shares of the financial charges supported by SGPSs.

Now, the ratio legis of the norm provided for in paragraph 2 of article 32 of the STB is to ensure a regime of fiscal neutrality of income (benefits) and expenses (costs) associated with gains that do not contribute to the formation of the tax result of SGPSs, ensuring that if an income does not have tax relevance, the respective expense (cost) also does not have tax relevance, so that in order to achieve this fiscal neutrality an indirect method of allocation in the absence or impossibility of adoption of a direct method is acceptable.

Furthermore, since it is a matter of the application/control of a tax benefit, it does not make sense to speak of an indirect method as that found in articles 85 and 87 of the GTL, given that these norms aim at the determination of the taxable matter of a given tax only in situations of non-existence or anomalies of accounting that make it totally impossible to ascertain the taxable matter.

And, in the case in question, it is merely sought to calculate the expenses that should be removed from the taxable matter of CIT, considering the objective advocated by the legislator to achieve neutrality between income and expenses aimed at by said tax benefit.

What is important to note from this is that the tax act of assessment here in question is not vitiated or affected by any illegality (by violation of any constitutional principle) that may be attributed to it on the basis of this question of allocation of financial charges, associated with the issuance of Circular No. 7/2004, of 30 March.

Furthermore, the disregard of financial charges results solely from the applicable regulatory framework and not from the possible application of the criteria set out in the aforementioned Circular No. 7/2004, of 30/03.

From which it follows that it is not Circular No. 7/2004 that creates norms of incidence, but it is the law itself, interpreted in the manner set out above, that excludes the deductibility of financial charges (incurred with financings linked to the acquisition of alienated corporate shares that realize, even if potentially, gains excluded from taxation), for purposes of ascertaining the taxable profit of the year in which they are incurred.

As such, the interpretation iuris constans of Circular No. 7/2004 is in accordance with the letter of the law, in that it does nothing more than undertake the discovery of its more precise meaning, in respect, moreover, of the general theory of interpretation of the law and the regulatory framework that shapes it.

The Respondent therefore did not proceed with the creation of any tax incidence norm, the understanding set out in Circular No. 7/2004, of 30/03, merely attempting to clarify the emerging doubts regarding the tax regime applicable to SGPSs and SCRs, provided for in article 31 of the STB, in the wording given to it by Law 32-B/2002, of 30/12 (State Budget for 2003).

As is known, the recourse to the application of an indirect method for allocation of financial charges to corporate shares becomes imperative whenever there does not exist the possibility to unequivocally proceed with a direct and specific allocation between them, and nothing in the letter or spirit of paragraph 2 of article 32 of the STB excluded that possibility.

Thus, through Circular No. 7/2004, by requirement of the principle of legality, the TA, in consonance with what was established in paragraph 2 of article 32 of the STB, in terms of results to be achieved, merely disclosed the formula and procedures to be followed, with the aim of creating conditions for practicability of that regulation and of ensuring uniform treatment of taxpayers.

It is therefore manifest the lack of merit of the arguments put forward by the Claimant.

As to the question of the burden of proof incumbent on the TA, it should be noted that the correction in question is fully substantiated in the Tax Inspection Report, within which the Claimant was notified to exercise its right to be heard on the correction proposed by the Tax Inspection.

Now, the Claimant chose not to comment, waiving the opportunity afforded to it by the TA to fully clarify its tax situation, namely regarding "the origin of such payments" as well as to present to the Tax Inspection the method of specific allocation it had adopted to calculate the financial charges supported and declared.

Therefore, it is not clear how the Tax Inspection could have set out in the Report the reasons that prevented recourse to the method of specific allocation of financial charges supported in the 2012 tax year or justify or identify the difficulties in the use of a method of specific allocation of which it had no knowledge, as the Claimant intends.

Similarly, the Claimant neither invokes nor proves in the present arbitral action any method of specific allocation of the financial charges supported in the 2012 tax year.

Pursuant to paragraph 1 of article 74 of the General Tax Law: "The burden of proof of the facts constitutive of the rights of the tax administration or of taxpayers falls on whoever invokes them," from which it follows, as constitutes settled case-law, an apportionment of the burden of proof, incumbent on the TA and taxpayers the burden of proving the facts they allege as a prerequisite of the right they seek to exercise.

In effect, letter b) of paragraph 3 of article 17 of the CIT Code, in conjunction with the special regime provided for in paragraph 2 of article 32 of the STB, determines the obligation to identify the financial charges directly or indirectly related to the acquisition of capital shares targeted by the exclusion of deduction for purposes of, if necessary, proceeding with their increase to taxable profit.

From which it follows that it would be incumbent on the Claimant to identify specifically the financings obtained and the corresponding financial charges, managing to prove that these were not intended for the acquisition of capital shares.

Thus, in order to discharge its burden of proof, the Claimant would have had to be in a position to identify the funds it channeled for acquisition of corporate shareholdings and to note that information in its accounting documentation, under penalty of, in accordance with article 75, paragraph 2 of the GTL, such omission causing the presumption of truthfulness of its accounting to cease.

The Claimant merely confines itself to invoking, in support of its claim, case-law and doctrine, refraining from indicating the method it had used to specifically calculate the financial charges supported with the acquisition of alienated corporate shareholdings.

To accept the understanding advocated by the Claimant and to assent to the annulment of the assessment in the face of the "pure and simple absence of any method" would mean totally subverting the ratio of the norm contained in article 32, paragraph 2 of the STB, and incurring clear violation of the constitutional principles of tax equality, capacity to contribute, and taxation of real income.

The Respondent concludes with the due lack of merit of the arguments put forward by the Claimant, since from its perspective, the burden incumbent on it in accordance with articles 342 of the Civil Code and 74, paragraph 1, of the GTL is not shown to be met, the alleged defect of violation of law.

Since payment of the tax debt was not made, the TA cannot be condemned to refund the "amount unduly paid plus the respective indemnatory interest," in accordance with the provisions of article 43 of the GTL.

On the other hand, articles 53 of the GTL and 171 of the Code of Civil Procedure in Tax Matters, invoked by the Claimant to support the request for payment of indemnatory interest, what they establish is the right to indemnification for provision of undue guarantee, a request that was not formulated in the present proceedings.

1. On 29 September 2017 an order was issued dispensing with the holding of the hearing (article 18 of the LFATM), as there was no evidence to be produced, providing that the case should proceed to the final arguments phase. 22 February 2018 was set as the deadline for delivery of the arbitral decision.

2. Claimant and Respondent presented, respectively, written arguments and counter-arguments.

II – PROCEEDINGS MANAGEMENT

11.1. The Tribunal is competent.

11.2. The parties have legal personality and capacity and enjoy procedural standing, in accordance with articles 4 and 10, paragraph 2, of the LFATM and article 1 of Ordinance No. 112-A/2011, of 22 March.

11.3. The TA appointed its representatives in the proceedings and the Claimant attached a power of attorney, with the Parties thus being duly represented.

11.4. The proceedings do not suffer from nullities.

11.5. No preliminary or subsequent issues, prejudicial or exceptional, that would obstruct the appraisal of the merits of the case were raised, the conditions being met for a final decision to be delivered.

III. MERITS

III.1. FACTUAL MATTER

1§ Proven facts

With respect to the factual matters relevant to the decision of the case, the following facts are considered proven:

a) A… is a Holding Company for Corporate Shareholdings ("SGPS") engaged in the activity of managing shareholdings in other companies, as an indirect form of conducting economic activities, being the dominant company of the so-called Group B….

b) The said Group B… is taxed in accordance with the Special Regime for Taxation of Groups of Companies ("SRTGC"), provided for in articles 69 et seq. of the CIT Code.

c) In the 2012 tax year, A… aggregated its tax results with the companies identified in the Report, opting, for CIT purposes, for the Special Regime for Taxation of Groups of Companies (SRTGC) provided for in Articles 69, 70 and 71, all of the CIT Code.

d) In the course of an inspection action, the TI made corrections to the taxable matter of the Group in the total amount of EUR 1,608,632.51, which resulted from corrections to the following companies: A… SGPS, S.A. (considered individually), in the amount of EUR 850,654.13; C…, S.A., in the amount of EUR 12,642.04; D…, S.A., in the amount of EUR 554,293.55; E…, S.A., in the amount of EUR 191,042.79.

e) The arbitral challenge had, only, as its object, the annulment of the tax act in the part influenced by the corrections to the taxable matter of A… SGPS, SA, as an individual company.

f) In the course of the aforesaid inspection action, a correction was made to A… SGPS, SA, in the amount of €850,654.13, relating to financial charges supported and attributable to the acquisition of financial shareholdings, on the grounds of paragraph 2 of article 32 of the Statute of Tax Benefits (STB), and there was a tax assessment act as identified above.

g) The documents attached to the proceedings do not show in a specified manner the association between the investments (including those relating to the acquisition of capital shares) and the manner in which these were financed, whether by own capital or by third-party capital, and therefore do not show the association between the financial charges (which represent the remuneration of third-party capital financings) and the investments.

h) In the course of the aforesaid Inspection, the TI, as to the calculation of the financial charges supported and attributable to the acquisition of financial shareholdings (capital shares), followed the following formula: i) Allocation of remunerated liabilities to remunerated loans granted and to other investments generating financial income, and in the case in question, this allocation is null, due to the non-existence of remunerated assets of that nature; ii) Allocation of the remainder of remunerated liabilities to the remaining assets; iii) Proportional ascertainment of the value of such remunerated liabilities to the acquisition of financial shareholdings (capital shares) (see pages 10/12 et seq. of the Administrative File attached to the proceedings, which is hereby reproduced).

i) The Claimant provided adequate security and requested suspension of the enforcement proceedings instituted for coercive collection of the tax act challenged in the present proceedings.

2§ Unproven facts

There are no other facts with relevance to appraisal of the merits of the case that have not been proven.

3§ Substantiation of the proven and unproven factual matter

With respect to factual matters, the Tribunal does not have to pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and discriminate between proven and unproven matters [see article 123, paragraph 2, of the Code of Civil Procedure in Tax Matters and article 607, paragraph 3 of the Civil Procedure Code, applicable ex vi article 29, paragraph 1, letters a) and e) of the LFATM].

Accordingly, the facts pertinent to the judgment of the case are chosen and delimited according to their legal relevance, which is established having regard to the various plausible solutions of the legal question(s) [see former article 511, paragraph 1, of the Civil Procedure Code, corresponding to the current article 596, applicable ex vi article 29, paragraph 1, letter e), of the LFATM].

Thus, having regard to the positions assumed by the parties (in the light of article 110/7 of the Code of Civil Procedure in Tax Matters) and the documentary evidence attached to the proceedings, all the facts listed above were considered proven, with relevance for the decision, and there is no factual matter given as unproven.

III.2 – LEGAL MATTER

III.2-1-As to the alleged violation of article 32, paragraph 2, of the STB

The central issue revolves around the meaning and scope of article 32, paragraph 2, of the STB and its articulation with Circular No. 7/2004, of 30 March, a matter that was the subject of analysis in the Award of CAAD, case No. 258/2015-T, which by its specific pertinent identity, we will follow very closely.

In the aforementioned Award, it was recorded, among other things:

"(...) GENERAL TAX REGIME OF SGPS

A.1. The tax regime of SGPSs, from its creation by Decree-Law No. 495/88 until 31 December 2000, was regulated in article 7 of the said diploma, which provided that "to the gains and losses obtained by SGPSs, by means of the sale or exchange of the shares or securities of which they are holders, the provisions of article 44 of the CIT Code apply, provided that the respective realization value is reinvested, in whole or in part, in the acquisition of other shares, securities or titles issued by the State, within the time limit set therein" (wording introduced by Decree-Law No. 318/94).

That is, the positive difference between gains and losses did not contribute to taxable profit, provided that the realization value was reinvested by the end of the second fiscal year following that of its realization. From 2001, with the approval of Law No. 30-G/2000, of 29 December, which approved the State Budget (SB) for 2001, this regime came to be regulated in article 31 of the Statute of Tax Benefits (STB), which provided that "to the gains and losses obtained by SGPSs and SCRs, by means of the sale or exchange of the shares or securities of which they are holders, the provisions of article 45 of the CIT Code apply, provided that the respective realization value is reinvested, in whole or in part, in the acquisition of other shares, securities or titles issued by the State, within the time limit set therein." This norm is nothing more than the transposition of the norms provided for in article 45 of the CIT Code (CIRC), relating to "charges non-deductible for tax purposes." Thus, a regime of deferral of the positive difference between gains and losses for the five following years was adopted, provided that the intention to reinvest was manifested, and such reinvestment subsequently occurred.

SGPSs, for their part, came to benefit from a regime of deferral of taxation of gains obtained by means of the sale or exchange of the corporate shareholdings held by them, having to reinvest the realization value by the end of the third fiscal year following that of realization. The entry into force of Law No. 109-B/2001, of 27 December, which approved the SB for 2002, determined the application to SGPSs of paragraphs 1 and 4 of article 45 of the CIRC (in the wording in force at that time), by way of reference in article 31 of the STB. Therefore, the new norm provided that, if the shareholding had been held for one year on the date of alienation, and if in the fiscal year prior to realization, in the same fiscal year or by the end of the second fiscal year following, the realization value was reinvested, 50% of the net gain would be subject to taxation (as per paragraph 1 of article 45 of the CIRC).

With the publication of Law No. 32-B/2002, of 20 December, which approved the SB for 2003, the regime for taxation of gains and losses for SGPSs was again modified, through amendments introduced in paragraphs 2 and 3 of article 31 of the STB, this being the regime that came to be in force, although with later renumbering of the article (which became article 32).

The new wording came to provide that gains and losses realized in the onerous transfer of capital shares, and the financial charges supported with their acquisition, would not contribute to the formation of taxable profit, provided that such capital shares were held for a period of not less than one year.

A.2. From 1 January 2003 (by force of Law No. 32-B/2002), that specific regime of SGPSs came into full force: the application of paragraph 2 of article 31 of the STB (later, article 32) excepted from the general regime provided for in articles 23, 42 and 45 of the CIRC, which applied again to losses ascertained in the transfer of capital shares if the transfer embodied paragraphs 5, 6 and 7 of article 23 of the CIRC but the conditions for application of the norm of the STB were not met.

As a general rule, it would result from the application of article 31 (later 32) of the STB that losses and the financial charges supported with the financing of capital shares do not contribute to the formation of taxable profit (a disregard that would only not occur if one of the exceptions provided for in paragraph 3 of that article 31 were met).

For what concerns us more specifically, in the period in question the wording of paragraph 2 of article 32 of the STB remained practically unchanged until its repeal: - Until March 2010 the wording introduced by Law No. 10/2009, of 10 March was in force: "The gains and losses realized by SGPSs, by SCRs and by ICRs from capital shares of which they are holders, provided they are held for a period of not less than one year, and likewise, the financial charges supported with their acquisition do not contribute to the formation of the taxable profit of these companies." - The same wording remained in force until December 2010, notwithstanding the amendments introduced in the statute by Law No. 3-B/2010, of 28 April - And the same occurred until December 2011, notwithstanding the amendments introduced by Law No. 55-A/2010, of 31 December - Only with Law No. 64-B/2011, of 30 December, was a slight modification of the provision introduced, which did not alter its meaning and merely eliminated the reference to SCRs and ICRs: "The gains and losses realized by SGPSs from capital shares of which they are holders, provided they are held for a period of not less than one year, and likewise, the financial charges supported with their acquisition do not contribute to the formation of the taxable profit of these companies." - And it was this wording that remained until December 2013, when it was repealed by Law No. 83-C/2013, of 31 December.

A.3. Even if the reason for this regime introduced by Law No. 32-B/2002 were understood, doubts soon arose regarding a possible negative impact thereof. For while the regime applicable until 2003 provided for deferral or exclusion of taxation of the positive balance between gains and losses – thus taking losses into account for the formation of taxable profit, the regime instituted in 2003 and in force until 2013 provided that losses ceased to contribute to the formation of taxable profit, except when the shareholdings had been held for a period of less than one year, in which case the general regime provided for in the CIRC applied.

Thus, when a company ascertained a negative balance between gains and losses it could not include that balance in the determination of taxable profit. Apparently, the rule of non-deductibility of financial charges was a penalizing aspect of the SGPS regime; in reality, the regime was critically dependent on the definition of the concept of financial charges, on the manner of distribution and calculation of such financial charges, and even on the definition of the application of the regime over time.

In truth, the aforementioned non-deductibility of charges and losses was intended to operate symmetrically with the fact that gains realized by SGPSs came to be exempt from contributing to the formation of taxable profit in CIT – which results from the State Budget Report for 2003, in which, under the heading "Principal amendments to CIT," and with the epigraph "Expansion of the tax base and moralization and neutrality measures", the exemption from taxation in CIT of gains realized by SGPSs with the alienation of capital shares held for more than one year is pointed out as a measure associated with the establishment of a regime of disregard of deductibility, for purposes of determining the taxable profit of such companies, of charges of a financial nature directly associated with the acquisition of the corresponding corporate shares – all seeking to constitute measures conducive to preventing abusive tax planning, approximating the national regime to the Dutch model (aiming thereby to confer greater competitiveness on the national tax regime and at the same time to promote expansion of the tax base).

In other words, the objective of the regime instituted in 2003 was to counterbalance the granting of a benefit – the total exclusion of taxation of gains – with the non-contribution of certain financial charges supported, creating an environment of neutrality between possible gains from certain assets (certain financial fixed assets) and the liability necessary to create the conditions for obtaining such gains, that is, the liability related to the acquisition of such shareholdings.

Fundamentally, the legislator did not want two benefits to be cumulated: SGPSs already saw their gains from capital shares become exempt from tax; so when that occurred, they could not cumulate with the benefit of acceptance of the interest supported with the financing for the acquisition of those capital shares. In that respect, the legislator sought to approximate the regime applicable to SGPSs to the discipline of the participation exemption in force in various European countries.

Referring to the favorable treatment that SGPSs received regarding gains recorded in their capital shares, José Engrácia Antunes summarized: "this fiscal advantage, moreover, is to a large extent mitigated or annulled by the fact that the financial charges supported with the acquisition of shareholdings are not regarded as eligible costs, and thus do not contribute to the calculation of the taxable profit of the SGPS."

Complicating understanding of the situation, however, and deepening the impression of departure from the principle of a trend toward taxation of companies on real income, was the fact that, as we have seen, several regimes for the same reality succeeded each other in rapid succession from the beginning of 2001: from an exemption from taxation of the positive difference between gains and losses realized with the alienation of capital shares (regime in force until 31 December 2000), there was a passage to the application of a deferral of taxation of the positive difference between gains and losses, for a period of five years, conditioned on reinvestment (regime in force in 2001), followed by the solution of the exclusion of 50% of the positive difference between gains and losses, this also being conditioned on reinvestment (regime in force in 2002); culminating, in the period from 2003 to 2013, in an exclusion, in certain circumstances, of the deductibility of losses and charges supported with the alienation of capital shares (irrespective of any reinvestment). In a certain sense, that "burst" succession of tax regimes created the impression of a true "puzzle," and generated the opportunity and incentive to exploit that informational / normative "entropy."

A.4. A problem that emerges in the generic context of company taxation, and therefore gains special relevance within group relationships and in the taxation of SGPSs, is that of the indispensability of certain expenses for purposes of applying the regime of article 23 of the CIRC, namely the indispensability of "supplementary contributions," insofar as it may be understood that such contributions integrate the concept of "capital share" that was prominent in the wording of article 23 at the date of the facts.

In general terms, it would be said that for the application of article 23 of the CIRC (in any of its wordings) the "indispensability" is a nexus of relation between costs and income that is assessed in an economic sense, and the expense incurred for the purpose of obtaining the income, or at least to ensure the viability and maintenance of the company and its activity, should be deemed necessary, and therefore "indispensable" the fiscal cost incurred in the company's own self-interested and egotistical interest for which such cost is recorded. The concept of "indispensability" thus refers to functionalization to the corporate purpose, seeking to avoid, generically and to the extent possible, appraisals from any subjective judgment of the law applier, grounded in calculations of opportunity or in technical discretion.

In a more restrictive sense, indispensability will necessarily result from the direct and reciprocal connection between an income and a cost that supported it; in its broadest sense, the indispensability that renders costs fiscally deductible will correspond to a broad integration of expenses presented in operations related to the corporate scope, regardless of whether or not it contributes to the obtaining of income.

There are still those who admit intermediate senses, giving as "indispensable" costs those that are necessarily supported by virtue of the activity of companies, regardless of consideration of results. None of the foregoing considerations prevented the concept of indispensability, being indeterminate, from coming to be filled on a case-by-case basis by case-law, which had as a corollary that each of the disputed situations had to be analyzed individually. It was always accepted as a principle that, under penalty of violation of the principle of capacity to contribute, the Administration could only exclude expenses not directly ruled out by law under a justification that would convince that they were incurred beyond the corporate objective, or at least with excess "deviation" in relation to the objective needs and capacities of the company, that is, that these were costs that, although thus accounted for by the company, are not in reality business costs (serving instead, for example, to camouflage personal expenses of administrators).

In contrast, from the outset there was perceived a need to emphasize the adverb "provably" which, at the time, was found in paragraph 1 of article 23 of the CIRC: "Expenses that are provably indispensable for the realization of income subject to tax or for the maintenance of the income-producing source shall be considered as expenses" – meaning, quite simply, that expenses incurred cannot be accepted as costs merely by being the type of expenses a company might incur within the scope of its corporate purpose, it being necessary that it be proven, at a minimum, some relation of the expenses to the income-generating activity, which allows such expenses to be considered as acts of business management – pointing decisively toward the more restrictive meaning of "indispensability" that we have stated above.

Article 23 permitted, in summary, the tax relevance of all expenses actually incurred that were potentially capable of producing income or gains, regardless of the success or failure they had concretely achieved, regardless even of whether or not they generated a taxable income, it being enough that, at the moment they were incurred and in the face of the rules of common experience, provably, they could appear as potentially income-generating, and only what could not be considered as an act of management with that demonstrated potential should be excluded, as it could not be expected, with acceptable probability, that a probable income would result from the expense incurred. In other words, the control of the Tax Administration, even if based on the more restrictive concept of "indispensability," must be a negative control, eliminating as costs only those that clearly do not have the potential to generate an increase in gains.

A.5. Specifically as to the indispensability of supplementary contributions, the issue was not only whether they were deductible as "capital shares," for purposes of article 23 of the CIRC, but also whether, as "capital shares," they were deductible for purposes of article 32, paragraph 2, of the STB, possibly by implying financial costs indispensable to the realization of such supplementary contributions, interfering with the generation of profit in a way that should be considered for ascertainment of taxable profit – being countered by the understanding that within the relationships of SGPSs with their subsidiaries such supplementary contributions, even if they passed the indispensability test of article 23 of the CIRC, would be encompassed in the expression "acquisition of capital shares" and should, therefore, be disregarded in accordance with paragraph 2 of article 32 of the STB, for the peculiar reasons that dictated this STB norm, the reasons of "counterbalance" or "fiscal neutrality" between gains and losses, which we stated before.

The penalizing aspect of this article 32 of the STB re-emerged, or could re-emerge, with the finding that, in truth, the regime of paragraph 2 of article 32 of the STB, even if confined to operations on "capital shares" of SGPSs, could, by the ambiguity of criteria on which it was based, lead to the non-deduction of financial charges that did not really integrate into such operations. For example, it could be the case that the cost incurred, say a debt, had not been contracted with the specific objective of acquiring corporate shares, but for the general business activity, namely for the granting of loans by the SGPS to its subsidiaries – a case in which there would no longer be a direct correspondence of the debt with the acquisition of the corporate shares. In effect, SGPSs resort to bank financing in a treasury management perspective, to subsequently lend to their subsidiaries, in what constitutes a normal and legitimate procedure.

Thus, in addition to the financial charges effectively supported with the acquisition of corporate shareholdings, and insofar as SGPSs normally support financial charges from financing loans acquired from credit institutions for other purposes, these charges should escape the scope of paragraph 2 of article 32 of the STB and be accepted fiscally as a cost.

But, let us insist, it is the ambiguity of criteria regarding what constitute financial charges, regarding the manner in which they should be allocated and regarding the temporal regime to which they are subject that truly generates a risk of over-extension of the regime of paragraph 2 of article 32 of the STB. There, the first party interested in the reasons for non-application of paragraph 2 of article 32 of the STB being transparent, because otherwise it would also be the first burdened, was the SGPS itself, which should proceed with an analytical and discriminated application of its resources (own capital and third-party capital), with each application duly defined, documented and justified.

If this did not happen it is because fundamentally the margin of indefinition generated a possibility of manipulation of values, whether on the side of SGPSs or on the side of the TA itself.

In the absence of consensus, paragraph 2 of article 32 of the STB could be interpreted in the sense of permitting interest to be effectively deducted as long as the presuppositions for exclusion of the gain for purposes of ascertainment of taxable profit were not met. In this context, a possible solution for interest would be the following: in the acquisition of a corporate shareholding from a related entity or subject to privileged taxation, the interest incurred would be deductible from the outset, being entirely added back to taxable profit in the fiscal year in which alienation occurred, if it took place after the minimum period of three years of holding. That solution of "tax credit," which in practice would correspond to an externalization of risks on the part of the taxpayer, was never adopted; but we shall return to consider it.

The prevailing indefinition could not be perpetuated, so the need was felt to establish clear criteria, endowed with some objectivity, that would permit advancement in the assessment of CIT applicable to SGPSs – allocation criteria, for example, that would permit the determination of the percentage of remunerated liabilities not allocated to remunerated assets, or the ascertainment of the percentage of corporate shareholdings in assets not yet subject of specific allocation to remunerated liabilities, including financial shareholdings at acquisition price. Criteria that, combined, would permit the allocation of interest associated with acquisitions of capital shares that were, or possibly were not, fiscally admissible for calculating taxable profit.

It is in response to such a need that Circular 7/2004, of 30 March, of the Directorate of CIT Services, emerged, which, recognizing (in its point 7) "the extreme difficulty of using, in this matter, a method of direct or specific allocation and [the] possibility of manipulation that the same would permit," presented a formula for calculating the value of financial charges not considered as a cost and effectively added to taxable profit – a metric to quantify the financial charges supported with the acquisition of capital shares and which, therefore, would not be deductible.

The "direct allocation" for secure ascertainment of the value of financial charges supposedly supported with the acquisition of capital shares would always be especially difficult given the fungibility of money and the non-need for consignment of the borrowed funds, and hence, without losing sight of the need to maintain recourse to case-by-case analysis (as was acknowledged in point 9 of the Circular), in its point 7 it was established that "such allocation should be made on the basis of a formula that takes into account the following: the remunerated liabilities of SGPSs and SCRs should be allocated, first of all, to remunerated loans granted by these to the participating companies and to other investments generating interest, allocating the remainder to the remaining assets, namely corporate shareholdings, in proportion to their respective acquisition cost."

Circular 7/2004 came, for its part, to raise two issues: 1) could a simple Circular resolve the ambiguities raised by the interpretation of a legal provision? 2) could the TA arrogate to itself, through the Circular or independently thereof, the power to scrutinize economic decisions of company management beyond what would be the strict fulfillment of the conditions for application of the pertinent norms?

A.6. The first issue raised by Circular 7/2004 was this: could a simple Circular resolve the ambiguities raised by the interpretation of a legal provision? The problem is especially delicate because paragraph 2 of article 32 of the STB was a norm of incidence, so the calculation provided for in the Circular had a direct impact on the incidence of taxes.

A.6.1- Restrictive arguments - On one hand, and in general terms, it is true that Circulars consist of administrative guidance of a generic character, according to which the executive power proceeds with an interpretation of tax norms, so the generic instructions contained in Circulars can only purport to be no more than that: mere instructions, which only bind the administration, and nowhere in the GTL is it established that the Circulars of the TA apply to both sides of the relationships this entity establishes with the governed. If this were so, it could raise – and did raise – a problem of illegality, particularly in the face of the provisions of the GTL, to the extent that it could raise the hypothesis of creation, through the appearance of the Circular, of a new tax incidence norm. One of the incontestable principles with relevance for the case is that the appraisal of the legality of acts of the tax administration should be made by direct confrontation with the corresponding legal norm and not with the internal regulation or the Circular that was interposed between the norm and the act, so the circumstance that the TA is bound by the generic guidance contained in Circulars that were in force at the time of the tax fact (article 68-A, 1, of the GTL), and has the duty to convert the binding information or other type of understanding provided to taxpayers into administrative circulars, in certain circumstances (article 68, 3 of the GTL), does not alter this perspective – simply because it does not transform that content into a norm with external efficacy, being only under the principle of good faith and legal certainty, and not by way of any normative value, that the content of the Circulars prevails. Thus, generic administrative guidance – whether or not contained in a Circular – can only contain commands or densifying statements that are operative in relation to those who, in a strict legal point of view, are their exclusive recipients, the services integrated in the tax administration that issued the guidance. Such generic administrative guidance becomes illegal if they come to have taxpayers themselves as recipients, whether because they explicitly manifest that intention, whether because they densify norms in a manner that binds the individuals – a densification that, if necessary, should be operated through a legal norm, not at a lower level –, or still because, more subtly, they refer to a densification of the norm that can only be operated by acts of the individuals and not already by mere acts of the Administration.

And they become illegal still if they determine in a general and abstract manner, as occurs in Circulars, and in that determination transgress the safeguards that seek to prevent them from serving as substitutes for proper legal norms. To be understood in this manner, Circular 7/2004, in seeking to establish, in a general and abstract manner, a method of ascertainment of charges supported by SGPSs, within the scope of the acquisition of capital shares held, namely when the charges are not allocated in a direct manner, and by having clear consequences at the level of tax incidence, was a candidate for declaration of illegality, specifically by violation of the reserve of formal law of the Parliament.

Hence some interpretations sustained that Circular 7/2004, through the extensive interpretation of the regime provided for in article 32 of the STB that it would have consumed, distorted, materially and formally, that article, creating a new tax incidence norm – in violation of articles 103, 2 and 3 and 165, 1, i) of the Constitution. As we stated, the method provided for in Circular 7/2004 permitted ascertainment of which amounts of the SGPS's financial charges were not deductible, establishing a method that permitted allocation of liabilities to the different assets of SGPSs: first, remunerated liabilities of SGPSs were allocated to interest-generating investments; then, the remainder of the liabilities was allocated to the remaining assets, proportionally to their respective acquisition cost. In this manner, it was sought, it is insisted, to remedy the fact that article 32, paragraph 2, of the STB was silent on the method to be used for purposes of allocation of financial charges to corporate shareholdings.

The calculation formula adopted in such Circular is thus apparently simple, but its application results complex from the point of view of the presuppositions used in the classification of the headings to be considered, as it is based solely on the distinction between remunerated and non-remunerated assets and liabilities.

Now, the classification of active and passive elements, between "remunerated" and "non-remunerated," was not established expressly in the accounting-legal order existing at the date of the facts (Official Chart of Accounts, POC), nor in the subsequently in force order (Accounting Standards System, ASS). Therefore, it emerges in an innovative manner in Circular 7/2004, whereby the Circular itself should have defined what it understood by each of those concepts – which it did not, merely enumerating examples of remunerated and non-remunerated active and passive elements.

More specifically still as to what concerns the case of SGPSs, the definition of concepts underlying the bipartition between "remunerated assets" and "other assets" was imperative, and its absence was critical, given that there is, or can scarcely be, a direct factual relation between the total funds obtained (those that implied the payment of interest) and the funds invested in the acquisition of corporate shareholdings. It is thus understood that the opinion was reached that the TA, when issuing Circular 7/2004, did not confine itself to applying tax norms and facilitating their application, going beyond its function of incidence regulator to assume the function of creator of new tax incidence, insofar as, substituting itself for the norm and the interpreter of the norm, it conditioned erga omnes the application of the regime of article 32, paragraph 2, of the STB through the interposition of criteria not authorized by article 11, paragraph 4, of the GTL.

The opinion was not limited to maintaining that with the Circular the constitutional principles framing tax incidence would have been affronted, but went further, suggesting that with the Circular distortions would even have been introduced to the principle of taxation of companies on real income – although, as to this necessary consequence of the application of any indirect method, it should be observed that what the Constitution imposes, as to the taxation of companies, is not that incidence be "exclusively," but only that it be "fundamentally," on its real income (article 104, paragraph 2, of the CRP).

A.6.2. Expansive arguments- On the other hand, a Circular, like Circular 7/2004, can and should be interpretative of tax law, and will not be illegal if, in helping to dispel doubts and overcome difficulties, it confines itself to providing methods of "densification" and application of legal norms without falling into extensive interpretation or analogy – here forbidden – and without contributing to the creation of new norms in violation of articles 103, paragraph 2 and 3 and 165 paragraph 1 letter i) of the Constitution. What the law permits, and what the Constitution imposes on the TA, is that, in the interpretation it makes of tax norms, it confines itself to issuing generic guidance that fills in concepts, when this proves necessary. One cannot therefore presume – at least in good faith – that every and any filling in of such concepts, any densification, even in areas of greater uncertainty and complexity and therefore more in need of this "regulation of incidence," is ipso facto an illegality, and specifically consists in the exercise of the legislative function under the "diaphanous mantle" of an extensive interpretation of law.

It therefore appears legitimate to use the formula contained in Circular 7/2004, although this may have to be "corrected" as necessary so that the ratio legis of paragraph 2 of article 32 of the STB is fully respected. This is to say that, obviously, the adoption of the formula recommended by the Circular does not bind the taxable person to the consequences derived therefrom when these result against law. The truth is that nothing, in the letter of paragraph 2 of article 32 of the STB, deprived any method, direct or indirect, of allocation of SGPS financial charges from legitimacy to achieve the objectives pursued with that norm.

The pro rata allocation provided for in point 7 of Circular No. 7/2004, an indirect method of allocation, was therefore as legitimate and as compatible with the ratio legis of the norm as any other method – and that, in contrast, it cannot be maintained that the objectives of that norm (of any norm) could be achieved in the absence, pure and simple, of any method.

The objective of that norm, as we have seen, was to – in the presupposition that SGPSs could come to benefit from the exclusion of taxation applicable to income from gains realized with the alienation of corporate shareholdings – prevent relevant costs that were related to obtaining such income from being able to have relevance in terms of ascertainment of the taxable profit of the taxable person who had obtained them.

From this it logically follows that it was not Circular 7/2004 that created, with its interpretatio juris authorized by the letter of the law, conclusive presumptions of non-deductible costs, but rather the law itself, interpreted in the manner just set out, that excluded the deductibility of financial charges incurred with financings linked to the acquisition of corporate shareholdings whose alienation realized gains excluded from taxation. Recapping: if paragraph 2 of article 32 of the STB called for a method of application and any method was legitimate, it is not clear in what manner Circular 7/2004, choosing a method and making it explicit, consisted ipso facto in new incidence norms, in violation of principles of tax legality. If it was fact that the disregard of financial charges resulted in increased tax, that resulted from the regulatory framework in force and not from the application of Circular 7/2004.

It therefore appears that what was the subject of criticism was not Circular 7/2004, but rather, through it, the rule itself contained in paragraph 2 of article 32 of the STB, playing on the fact that in this there is a disregard of expenses that is not from the common regime of company taxation – camouflaging the fact that this exceptionality of SGPS regime is bivalent and results from a counterpart, which we recall here: being an SGPS in a position to be able to benefit from the exclusion of taxation as soon as it realized gains with the alienation of corporate shareholdings, it was no longer in a position equivalent to that of other companies, which, realizing gains from gains with the alienation of corporate shareholdings, did not benefit from the aforementioned exclusion of taxation – whereby it was understood that it was only within that exceptional regime that the justice of the disregard of charges as a counterpart to the disregard of gains would be a matter for consideration.

And why is the reason for being of the rule contained in paragraph 2 of article 32 of the STB purposefully camouflaged? Frequently it is because it is alleged that the expenses subject to disregard of taxation are antecedent to the income with which those expenses are connected – emphasizing that those gains are purely eventual and may come to not occur, leaving it subtly to be understood, either that the "counterbalance" that presided over the normative solution (the non-contribution of certain financial charges supported, creating an environment of neutrality grounded in the presupposition that such charges represented, potentially, elements capable of placing the SGPS in a position to realize gains already excluded from taxation) is in truth a sinallagma; either that, since all financial charges are, by nature, surrounded by risks and uncertainties, all should be tax-relevant.

In this peculiar understanding, to which we alluded previously in referring to a proposal for a "tax credit" (an externalization of part of the risks of the taxable person, which would imply the payment of tax only at the end), the tax disregard operated by paragraph 2 of article 32 of the STB would violate the principle of proportionality, beyond principles of equality, neutrality, capacity to contribute and the trend toward taxation of real income: already because it would unjustifiably discriminate between SGPSs and other companies (insofar as others could be equally holders of "capital shares" – omitting here that other companies would not equally benefit from the exemption from taxation by gains, equally provided for in paragraph 2 of article 32 of the STB), already because there would be an equally unjustified dissociation over time between present negative effect and possible future positive effect, in violation of the "discount rate" of money (a variant of the "tax credit" proposal). One returns to the critical perspective regarding Circular 7/2004, which is accused of having ceased to be a mere instrument of interpretation, of "regulation of incidence," of the regime of paragraph 2 of article 32 of the STB, to become a "conclusive presumption," that of "the financial charges which by recourse to it are ascertained are deemed to be supported with the acquisition of capital shares whose alienation has benefited (or is likely to benefit) from exemption from taxation of gains" – a "fiction that does not admit contradiction" and which would be contained in the formula set out in the Circular, a formula "with intention of mandatory application" aggravated by the fact that it occurs in an area of law reservation.

One arrives, in this sharpening of criticism, at the point of questioning generically the application of indirect methods of allocation of charges, contrasting with them the alternative of direct and real methods that – by not being specified and expressly contradicting one of the premises of Circular 7/2004 – seem to be no more than appeals to an unrestricted casuism in the taxation of SGPSs. Let us acknowledge that, although it appears convoluted to associate to Circular 7/2004 the establishment of "presumptions," and more still of "conclusive presumptions," on the other hand it is not unreasonable for us to discern the danger of such Circulars attempting to interfere with the distribution of the burden of proof, or to wound the principle enshrined in article 75 of the GTL, according to which "the declarations of taxpayers presented in accordance with the terms provided by law are presumed to be true and in good faith, as well as the data and calculations recorded in their accounting or records, when these are organized in accordance with commercial and tax legislation" – particularly when the TA feels tempted to alleviate its burden of proof by mere invocation of a Circular, as if it, more than providing a probative procedure, constituted already the proof itself.

Let us then return to the admission that the Circulars of the Tax Administration have external efficacy, binding taxpayers and also Courts – an admission that should be accompanied by the caveat, already formulated, that it is under the principle of good faith and legal certainty, and not by any normative value that could represent usurpation of constitutionally assigned competences, that the content of the Circulars prevails.

The governed only comply with them if, and so long as, it suits them, for the same reasons that justify that they may invoke binding individual information that favors them. But none of this interferes with the regime established in paragraph 2 of article 32 of the STB, with the necessity of interpretation of that regime and with the legitimacy of Circular 7/2004 to establish (and stabilize) that interpretation. Respect for the normality of the relationships that are protected by Tax Law imposes recognition that, within the scope of the exercise of the powers of administration of the tax system that are incumbent on the TA, it has full legitimacy to issue generic guidance containing prescriptions that appropriate normative spaces outside the law reservation and that do not conflict with the space of normativity already occupied by law.

That is: if it is a matter of generic guidance, issued under a legally foreseen competence and there is respect for these boundaries, it is not clear what legitimacy a judge or taxpayer will have to ignore it and, in its place, or in place of the administrator of the tax system – which is the TA by legal incumbency – determine a different normativity for the specific case under appraisal.

The interpretation of norms and legal regimes cannot become the subversion of rules and the path to aporia. It was on these premises that Award No. 42/2014 of the Constitutional Court grounded its decision of "not finding unconstitutional the norm contained in article 31, paragraph 2, of the Statute of Tax Benefits, in the wording given by Law No. 32-B/2002, of 30 December, in the part in which it imposes the tax non-deductibility of financial charges supported with the acquisition of capital shares as soon as these are incurred, irrespective of the realization of gains exempt from taxation with the alienation of such capital shares."

For everything we have just seen, to the first issue raised by Circular 7/2004 – could a simple Circular resolve the ambiguities raised by the interpretation of a legal provision? – we must answer affirmatively.

A.7. The second issue raised by Circular 7/2004 was this: could the TA arrogate to itself, through the Circular or independently thereof, the power to scrutinize economic decisions of company management beyond what would be the strict fulfillment of the conditions for application of the pertinent norms? Without having to become entangled in the endless subtleties of the theme of discretion in Public Law, and without having to tread the long path traversed by the concept of "discretion," let us concentrate instead on the specific scope of the problem: this second issue rests on the possibility of there being costs, and namely supplementary payments that, fitting unequivocally in the capacity of the company, in its profit-making purpose, nonetheless, by not having as their specific objective the acquisition of corporate shares, escaped the provision and regime of paragraph 2 of article 32 of the STB.

As to that, it appears settled that the financial costs supported with the realization of supplementary payments can be indispensable for the maintenance of the income-producing source, specifically to the extent that the endowing of a subsidiary with own capital is an act suitable for the maintenance and enhancement of the income-producing source of the SGPS itself, and especially in situations in which the managing company, by virtue of its position in the market regarding credit, may be able to obtain credit on more favorable terms than the subsidiary, cases in which the use of credit obtained by the former for the benefit of the latter will, manifestly, be an economically founded decision.

Even if such payments do not correspond to the accrual of interest, the SGPS will be acting objectively within its capacity, to the extent that the enhancement of its subsidiaries is compatible with its profit-making purpose, if it cannot even be said that the enhancement of the subsidiaries is its main purpose. These are economic decisions of the management of an SGPS that do not have as their specific objective the acquisition of corporate shares, and which, insofar as they are costs of financing of an asset producing income, should be deductible under the general terms of article 23 of the CIRC; and tax law does not likewise contain any specific rule (anti-abuse norm or other) that would prevent or curtail this freedom of management.

What is defended is that such expenses should be subject to the general regime of article 23, paragraph 1, of the CIRC, circumventing the "blockage" imposed by paragraph 2 of article 32 of the STB. In the wording in force at the time, article 23, paragraph 1, of the CIRC imposed a relation of expenses to the realization of income subject to tax – but here the understanding was subscribed that all gains obtained by SGPSs are subject to tax, it merely happening that afterwards, they come to have an exemption, with various requirements, that prevented taxation in a second line –. Now the fact is that, perhaps for fear that the creditor of tax would ignore that duality of situations (perhaps as a result of an "interpretive bias" induced by the design to increase tax revenues), some contested the possibility of the TA scrutinizing economic decisions of company management, so as to separate, with some discretionary margin, those that fell under the scope, and those that fell outside the scope, of paragraph 2 of article 32 of the STB.

A.8. Scope of application- Insofar as article 32, paragraph 2, of the STB did not define what it understood by "financial charges," part of the doctrinal and case-law discussion concentrated on the definition of what could be understood by "capital share," as from that definition – to a large extent sought despite what already resulted from Circular 7/2004 – would result in a more broad or more narrow object of incidence of the regime of paragraph 2 of article 32 of the STB. From the demand for the concept of "capital shares" two understandings emerged: - "Minimalist" understanding: if it were understood that the allusion was to the notion of "share capital" (corporate shareholdings, shares or quotas), privileging the "commercial" perspective from which the figure of "supplementary contribution" is excluded, the scope of paragraph 2 of article 32 of the STB would be restricted – and concomitantly increased the possibilities of consideration of financial charges as fiscally deductible costs; - "Maximalist" understanding: if it were understood that the allusion was to "own capital," privileging the "accounting" sense and therein integrating the figure of "supplementary contribution," the scope of paragraph 2 of article 32 of the STB would be broadened – and concomitantly reduced the possibilities of consideration of financial charges as fiscally deductible costs.

This difference in consequences profoundly conditioned the discussion, even doctrinal, the prevailing opinion being that the reference to "capital share" in article 32, paragraph 2, of the STB refers to shares of share capital, thus excluding from the incidence of that norm the "supplementary contributions" (which, being "components" of "own capital," would not be "capital shares") – subscribing, in sum, a "minimalist" understanding as to the incidence of article 32, paragraph 2, of the STB.

In concrete terms, the "minimalist" understanding was embodied in the following regime: only interest linked to the acquisition of capital shares (specifically: shares or quotas) would be disregarded in tax terms; those related to the third-party capital used in supplementary contributions, or in ancillary contributions that followed the regime of supplementary contributions (including the coverage of losses), by not including themselves, or being able to include, in the concept of "share capital," would have the nature of fiscally deductible costs.

This would be, therefore, a matter of tuning article 32, paragraph 2, of the STB with article 45, paragraph 3, of the CIRC regarding the understanding of what "capital shares" are for tax purposes, and of subtracting those supplementary contributions (and their equivalents) from the regime of article 32, paragraph 2, of the STB, subjecting them exclusively to the indispensability requirements of article 23 of the CIRC (reserving the special cases of paragraphs