Summary
Full Decision
ARBITRAL DECISION
The arbitrators Counsel Jorge Manuel Lopes de Sousa (chairman arbitrator), Dr. Luís Ricardo Farinha Sequeira and Dr. João Pedro Dâmaso (arbitrator members), appointed by the Ethics Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 13-04-2016, agree as follows:
1. REPORT
A… – Investment Management Company, S.A., NIPC…, with registered office at …, …-… …, hereinafter designated as "Claimant", filed a request for arbitral decision in accordance with the Legal Regime of Arbitration in Tax Matters, approved by Decree-Law no. 10/2011, of 20 January (hereinafter referred to as RJAT), aimed at the annulment of the supplementary assessment of Corporate Income Tax ("IRC") for the fiscal year 2012 no. 2015 … and the corresponding assessment of compensatory interest,
The Respondent is the TAX AND CUSTOMS AUTHORITY.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 12-02-2016.
Under the terms of paragraph a) of article 6, section 2 and paragraph b) of article 11, section 1 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council appointed as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the appointment within the applicable period.
On 29-03-2016 the parties were duly notified of this appointment and did not manifest any intention to challenge the appointment of the arbitrators, in accordance with the combined provisions of article 11, section 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.
Thus, in accordance with the provisions of paragraph c) of article 11, section 1 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 13-04-2016.
The Tax and Customs Authority filed its defence arguing that the claim should be judged unfounded.
By order of 05-07-2016 a hearing was held in which witness evidence was produced and it was agreed that the proceedings would continue with written submissions.
The Parties filed their submissions.
The arbitral tribunal was regularly constituted in accordance with the provisions of articles 2, section 1, paragraph a), and 10, section 1, of Decree-Law no. 10/2011, of 20 January, and is competent.
The parties are duly represented and have legal standing and capacity, are legitimate parties and are represented (articles 4 and 10, section 2, of the same decree and article 1 of Ministerial Order no. 112-A/2011, of 22 March).
The proceedings do not suffer from any nullities and no exceptions have been raised nor is there any obstacle to the assessment of the merits of the case.
2. FACTS
2.1. Proven Facts
Based on the elements contained in the proceedings and documents attached with the request for arbitral decision, the following facts are deemed proven:
a) The Claimant commenced its activity of managing non-financial shareholdings on 22-07-1997, having elected, under IRC, in the fiscal year in question, the Special Taxation Regime for Groups of Companies (RETGS);
b) The Claimant in the fiscal year 2012 held 77.10268% of the share capital of B …, SA. (company identified with NIPC…);
c) Within the scope of this corporate relationship the Claimant, also in the fiscal year 2012, held credits in the total amount of €3,287,000.00, which resulted from loan capital (suprimentos) previously made to B…, SA. (document no. 2 attached with the request for arbitral decision, the contents of which are reproduced herein);
d) The loan capital in question was provided over the years 2009, 2010 and 2011, and the repayment date (01-08-2015) was also stipulated, as well as the applicable interest rate, referred to in clause 3 of the contract (document 2 attached with the request for arbitral decision, the contents of which are reproduced herein);
e) On 22-07-2009, the Claimant concluded with "F…" ("F…") and "G…" ("G…") a shareholder agreement relating to B…, S.A., in the context of investments made by those funds (Document no. 3 attached with the request for arbitral decision, the contents of which are reproduced herein);
f) As consideration for this investment - and by virtue of the Shareholder Agreement – the Claimant undertook to:
i) Transfer a set of shares in B…, S.A. to F… and to G… for the total and global price of 1€, as per clause 4.1, this obligation being subject to the verification of the condition that the valuation attributed to the real estate and do-it-yourself and building materials business areas of the Group, reflected in the valuations of the investee companies: C… SGPS, S.A. (hereinafter "C…") and D… SGPS, S.A (hereinafter "D…") be, together, lower than the amount of € 102,500,000.00 (one hundred and two million five hundred thousand euros), adjusted in accordance with the consumer price index, excluding housing, published by the National Institute of Statistics;
ii) Alternatively to said transfer of shares, the Claimant could choose to make a cash payment to F… and to G… corresponding to said negative difference (clause 4.6) or, if the negative difference verified exceeded 10%, to acquire the shareholdings of F… and of G… as well as the respective loan capital, at a price to be determined in accordance with clause 4.7 (clause 4.6);
g) In accordance with option i) above the following number of shares of "B…, S.A." to be transferred was determined:
– 731,297 shares to F…; and
– 365,648 shares to G…;
h) Clause 4.2 of the Shareholder Agreement referred to was amended in the terms set out in document no. 4 attached with the request for arbitral decision, the contents of which are reproduced herein;
i) In said amendment to the Shareholder Agreement the parties also agreed a suspensive condition (until 31-03-2012) relating to the transfer of shares to F… and to G…, to the cash payment to F… and to G… and to the acquisition of the shareholdings of F… and of G… (Clauses 4.4 to 4.4.4 of the amendment to the Shareholder Agreement which appears in document no. 4);
j) On 31-03-2012 the Claimant could not fulfil the agreed obligations, namely due to the financial difficulties it was experiencing (Recital G of Document no. 5 attached with the request for arbitral decision, the contents of which are reproduced herein), and therefore agreed with F… and G…, as a way of extinguishing the assumed obligations, the assignment (partial), in favour of said funds, of the loan capital credits that the Claimant held with "B…, S.A." (Document no. 5);
k) Under the terms of the Credit Assignment Contract contained in document no. 5, the Claimant transferred to F… credit resulting from loan capital and interest (held over B…, S.A.) in the amount of € 1,310,938.00, and to G… credit was assigned, also relating to loan capital (and interest) provided by the Claimant with B…, S.A., in the amount of € 655,468.00;
l) The credits in question were subject to assignment at the total and global price of 1€, as detailed below:
(i) 0.67€ paid by F… to the Claimant (Clause 2, section 3, of document no. 5)
(ii) 0.33€ paid by G… to the Claimant (Clause 3, section 3, of document no. 5);
m) In said credit assignment contract, it was further agreed that "by virtue of the credit assignments referred to hereby made in accordance with this Contract, F… and G… consider as fully performed the compensation obligations assumed by A… in clause 4" of the "Specific Shareholder Agreement" mentioned in Recital A), with the corrections resulting from the amendment executed on 30 December 2012 and mentioned in Recitals C) and O), all of this Contract, with A… being completely exonerated from all obligations arising from such compensation obligation" (clause 6 of the contract);
n) As a consequence of the credit assignment, the Claimant continued to be the holder of a credit right with "B…, S.A.", in the amount of € 1,320,594.00 (€ 3,287,000.00 - € 1,310,938.00 - € 655,468.00);
o) This credit assignment operation was recorded in accounting in such a way as to reflect the reduction of the loan capital credits held:
(i) Debited to Account #111- Cash the amount of €1 (corresponding to the price paid by F… and G…);
(ii) Debited to Account #68888-Other unspecified the amount of €1,966,405.00 (corresponding to loss resulting from the assigned credit); and
(iii) This latter accounting movement was accompanied by a credit in the same amount to #4113009 (relating to the loan capital provided);
p) As a result of the reduction in loan capital credits held over B…, S.A., an accounting expense of €1,966,405.00 was determined, and the Claimant, for IRC purposes, understood that this accounting expense constituted an expense fiscally acceptable under article 23 of the IRC Code (in the wording in force at the date of the facts);
q) The Tax and Customs Authority conducted an internal inspection procedure directed at the Claimant, relating to IRC for the fiscal year 2012, which was carried out by the Tax Inspection of the Finance Directorate of …, under the Internal Service Order no. OI2015…, dated 05-05-2015;
r) The Tax and Customs Authority, within the scope of the inspection procedure, prepared the Draft Corrections Report from the Inspection which is contained in document no. 7 attached with the request for arbitral decision, the contents of which are reproduced herein, which was notified to the Claimant on 12-08-2015, for the exercise of the right to a hearing;
s) On 26-08-2015, the Claimant exercised the right to a hearing in the terms set out in document no. 8 attached with the request for arbitral decision, the contents of which are reproduced herein;
t) On 21-09-2015 the Tax Inspection Report was prepared which is contained in document no. 10 attached with the request for arbitral decision, the contents of which are reproduced herein, in which it is stated, among other things, the following:
III.2.1 - Analysis of Other Expenses and Losses
A… - SGPS, SA, recorded in its accounting, through a movement made on 15-10-2012 (Annex 3), a loss in the amount of 1,966,406.00€ (1.00€ debited to account "111-…" and 1,966,405.00€ debited to account "68888-Other unspecified"), reflecting a reduction of credits over B…, SA (account 4113009), a company in which it holds 77.10268%.
This accounting movement has an impact on the result of the period for tax purposes, increasing the tax loss by that amount.
However, it is our understanding that such operation should not influence the taxable result for tax purposes, as it does not fall within fiscally accepted expenses, under article 23 of the IRC Code, and should give rise to a correction in table 07 of Form 22 of income, in the amount of 1,966,405.00€, making said operation neutral for tax purposes.
We enumerate and describe what led us to form the opinion we express:
The basis of such accounting operation by the taxpayer was based on the documents contained in Annexes 4, 5 and 6.
Annex 4 - Specific Shareholder Agreement between A…, S.G.P.S., S.A. (hereinafter "A…") and F…(hereinafter "F…") and G…(hereinafter "G…"), provides in its section 3.4 that "for the total and symbolic price of 1€ (one euro)" A… may compensate the other two contracting parties, F… and G…, for the non-compliance with the requirements contained in section 3.1. of said document.
The same document states in section 4.1.6 that A… will compensate, through sale "for the total and symbolic price of 1€ (one euro)" the other two contracting parties for the failure to achieve certain conditions, contained in sections 4.2. to 4.10.7 of the document under analysis.
Annex 5 - "Amendment to the Shareholder Agreement relating to B…, SA" (hereinafter "B…") provides in its section 4.5." that "...A…S.G.P.S. ,SA may acquire all of the participation of F… and of G…, as well as the respective loan capital and accrued interest...".
Annex 6 - "Credit Assignment Contract" in its preamble, paragraph G)9, refers to "...A… being in treasury difficulties, but intending to fulfil its compensation obligations before F… and G…, came subsequently A… to propose to F… and G…, as an alternative to the modes above referred to, the transmission in favour of said Funds of credits over "B…" (...) in an amount equivalent to the money obligation, credits arising from loan capital provided by A… to B… ."
Now, based on the above, A… assumes in clauses 2 and 3 of Annex 6 the payment of compensations to the contractual counterparties, and in this option of A…'s management we do not perceive any act determinative of obtaining income for the company, or maintenance of the productive source, but rather a legitimate liberality of business administration, with reflection in the patrimony of the company.
In view of the documents presented by the taxpayer, it does not seem to us defensible that the accounting expense evidenced in Annex 3 can be considered as an expense fiscally accepted.
For such expense to be fiscally accepted and thus influence taxable profit, the operation carried out would have to be demonstrably indispensable to the realization of income subject to tax or maintenance of the productive source. In fact, the wording of Article 23 of the IRC Code (hereinafter "CIRC") states: "Expenses are those which demonstrably are indispensable for the realization of income subject to tax or for the maintenance of the productive source, ...".
The literal text is based on a "construction that privileges the element of result or purpose of the cost (...) and which (...) restricts the acceptance of fiscal deductibility of expenses to those that produce results".
In this regard, José de Campos Amorim states that "Article 23 of the CIRC uses the accounting terminology of expenses and revenue, without even giving any definition or determining the relationship between these two concepts and other concepts. Now, there is no doubt that there is a clear relationship between expenses and revenue, which has precisely to do with the fact that expenses are reflected, directly or indirectly, in revenue, whenever a company has to bear expenses to obtain revenue. As a general rule, associated with revenue is an expense or loss.".
In the case at hand, we do not perceive a relationship between the expense of the operation carried out, of assignment for one euro of credits in the amount of 1,966,406.00€, with a possible profit that may arise therefrom for A… SGPS, SA ("A…").
We could consider the opinion of Rogério Fernandes Ferreira in defending that "a cost [expense], rarely, corresponds to pure loss; it may, on a certain occasion, be embodied in asset values, this while not recovered (by transformation into profit), or lost (transformation into loss)", but, resorting again to José de Campos Amorim, "A loss is only generated in the case of excess of expenses in relation to revenue or in the case of expenses not generating any revenue.", leads us to consider that, in fact, in the case at hand, the sale of a credit over a company controlled by A…SGPS, SA, "for the total and symbolic price of 1€ (one euro)", as appears in Annex 4 already mentioned, is to be considered as an excess of expenses in relation to revenue, at the limit, an expense that generates no profit, such is the disproportion between profit and expense of this operation.
Our position of not considering a liberality as a fiscal expense is also corroborated, for example, by the Decision of the Central Administrative Court South no. 00184/03, of 12-10-2004, when it states in its section 2.2.2 that "As a general rule, liberalities, because they are not indispensable to the realization of profits or gains subject to tax and for the maintenance of the productive source, are not considered costs nor negative patrimonial variations (cf. art. 24, section 1, paragraph a), of the CIRC)." and the same Decision states in its conclusions "III - For tax purposes, liberalities are not considered as indispensable to the realization of profits or gains subject to tax and for the maintenance of the productive source, and hence they are not considered costs nor negative patrimonial variations, unless the law expressly qualifies them otherwise, as occurs with respect to some liberalities of a social nature, which, for reasons of fiscal policy, the law qualifies as costs (cf. art. 40 of the CIRC).".
Now, in the case at hand, we cannot consider that the liberality has a social nature, definitively precluding its consideration as a fiscally accepted expense, as it aims at the satisfaction of an agreement between the contracting parties identified in Annex 4 and not an object of a social nature.
Thus, as set forth above, we are of the opinion that the loss for tax purposes in the year 2012 should be increased by the amount of 1,966,405.00€.
III.3 — Proposed Corrections
With basis in the grounds presented throughout this chapter, we summarize in the following table, the arithmetical corrections proposed in this working document, emphasizing the fact that, being a group of companies that elected the application of the Special Taxation Regime for Groups of Companies (hereinafter "RETGS"), the corrections will be made on the basis of the result determined by the respective group:
Table III.2 - Proposed Taxable Profit
(...)
IX. Right to a Hearing
Through letter no. …, of 10-08-2015, with registration of "CTT Correios" no. RM … PT (Annex 7, 01 page), the taxpayer was notified in accordance with article 60 of the General Tax Law and article 60 of the Supplementary Regulation of the Procedure of Tax and Customs Inspection, for the period of 15 (fifteen) days to exercise the right to a hearing on the draft tax inspection report.
IX.1 - Exercise of the Right to a Hearing
On 26-08-2015, as per Tax Authority entry no. 2015…, the taxpayer exercised the right to a hearing (DA), through which it requests, taking into account the arguments presented and described below, that the correction not be considered under IRC, with "The acceptance of the expense in accordance with article 23 of the IRC Code..." and "The consequent fiscal deductibility of the amount of €1,966,405.00, with reference to the year 2012." (Annex 8, 45 pages).
In the first eight points of the request the taxpayer made a factual framing of the situation, and in the following fifteen points presents its justification for not agreeing with the interpretation of the Tax Authority as to the non-consideration as a fiscal expense of the value of 1,966,405.00€. In the remaining thirteen points of the request, the taxpayer presents the need for good execution of the management act for the development of business activity and the maintenance of the source of income generation, considering, therefore, that the accounting operation is in accordance with tax rules, with the Tax Authority not being obliged to make any alteration to the values determined in the tax returns filed.
IX.2 - Assessment of the Right to a Hearing
Presented the grounds of the proposal requested within the scope of the right to a hearing, we proceed to its assessment:
The taxpayer comes to argue that it cannot conform to the Tax Authority's draft decision regarding the non-consideration, for tax purposes, of the accounting movement in question, arguing that the operation was necessary for the operation of the company (item 20), however, according to the taxpayer's own argument, in item 19, "... the assignment of part of the loan capital, (...) through a symbolic price, only represents a form of compensation between shareholders...". Now, if any doubts could still remain as to the liberality executed by the administration of A…, SGPS, SA, they are, in our view, completely dispelled in this exposition.
Nor can we accept the argument of non-existence of "animus donandi" embodied in this operation (item 14) as, considering as a price a monetary amount that represents only approximately 0.0000005 of the value of the "good transacted", seems to us only a superposition of form over substance. In fact, the absurdity of the consideration received is of such an order that only in form can we consider that there was a "sale", as the substance of the transaction in question is clearly that of a gift, making the "compensation between shareholders" previously referred to, resorting to a liberality.
The taxpayer further invokes that the chain of agreements and operations whose outcome does not merit our agreement to be in consonance with the provisions of article 23 of the CIRC, was fundamental for the operability and financial viability of A…, is merely the justification of the management choice made. In no way was the legitimacy of the management choice called into question, but we could point out that the choice made would certainly not be the only option for the capitalization of the company, as this objective could be achieved in alternative ways, for example, through a capital increase by issuance of new shares, an alternative that would not lead to the "compensation between shareholders" invoked.
Now, not only do we not accept the arguments presented by the taxpayer, but the same corroborates our understanding of the operation. There is, in fact, a liberality on the part of the company's administration. Nor does the invocation in item 31 that the loan capital, used to compensate the shareholders, would be a source of income subject to income tax in the sphere of the taxpayer, deter us from our opinion, as the interest referred to here was, in fact, not received and accounted for by A…, as appears evidenced in table 03-A of Annex A of … (IES of 2012) (Annex 9, 01 page), since the same are part included in the value of 1,966,406.00€, as the Credit Assignment Contract makes explicit in its paragraphs F) to l), not having generated any income tax in the sphere of the taxpayer, as it was considered a fiscal expense by A… .
IX.3- Conclusions
As described in the assessment made of the right to a hearing exercised by the taxpayer, the corrections proposed in the draft report will be maintained.
Thus, for the purposes of correction, the competent correction document (single DC) will be prepared and for the penalization of the infraction verified, the competent administrative notice will be drawn up, in accordance with article 57 of the RGIT for an act punishable as an administrative offense.
u) Regarding this Tax Inspection Report, the Team Leader issued an opinion whose contents are reproduced herein, in which it is stated, among other things, the following:
I confirm the contents of this report as well as the procedures adopted in the partial scope internal inspection action under IRC, which aimed to verify compliance with tax obligations, in accordance with paragraph b) of article 14, section 1 of the RCPITA, relating to the fiscal year 2012.
The company A…, SA, as the parent company of a group of companies elected the application of the special taxation regime for groups of companies, provided for in article 69 of the CIRC, which is why the corrections to be made within the scope of this inspection procedure, despite being corrections to the taxable result of A…, SA, will be made in the periodic tax return where the taxable result of the group is determined, as provided for in article 70 of the CIRC, as it is from this return that the tax assessment notice is generated.
From the analysis carried out and as described in chapter III of the report the company A…, SA as the holder of credits over the company B…, SA, NIF…, in the total amount of 3,287,000.00 euros. as a result of loans (loan capital) made to it, assigned in favour of third parties (F… G…), during the fiscal year 2012, part of these credits.
The amount of credits assigned/transferred to these two entities totals 1,966,406.00 euros, having been assigned as the price thereof the value of 1.00 euro. Based on this operation, the taxpayer A…, SA proceeded to account for an expense in the amount of 1,966,405.00 euros, as per the movement made in 2012 in account 68888, influencing by this amount the determination of the taxable result of the fiscal year. Being faced with a decision of the business sphere, and despite being supported in established agreements, the same is not sufficient reason for it to be proven that it is indispensable for the realization of income subject to tax or for the maintenance of the productive source, as established by article 23 of the CIRC. Thus being, and faced with the non-existence of elements that allow proving the indispensability of this expense, it is proposed that the value of 1,966,405.00 euros be added to the taxable result declared by the company A…, SA and consequently to the result declared by the group of companies, resulting in the determination of a taxable profit of the group of companies equal to 381,241.02 euros for the fiscal year 2012.
The taxpayer was notified to, in accordance with articles 60 of the LGT and RCPITA, if it so wishes, exercise the right to a hearing, within 15 days.
The taxpayer exercised the right to a hearing, however the facts alleged by the taxpayer are not capable of altering the corrections proposed in the draft report, as per the grounds contained in chapter IX of the report, which is why they are maintained.
In view of the foregoing, the final report was prepared, in accordance with article 62 of the RCPITA, the respective correction document (single DC) was collected, as well as the drawing up of the competent administrative notice, in accordance with article 57 of the RGIT.
v) On 24-09-2015, the Finance Director of … issued an order with the following contents: "I agree with the proposed corrections contained in the opinions, in view of the grounds set forth in the report. Proceed accordingly";
w) On 28-09-2015, the Tax and Customs Authority sent a letter with proof of receipt for notification of said order, of the Tax Inspection Report and attachments to the Claimant, which was returned undelivered;
x) On 30-09-2015, the Tax and Customs Authority issued the IRC assessment no. 2015…, which is contained in document no. 1 attached with the request for arbitral decision, the contents of which are reproduced herein;
y) On 09-10-2015, the Claimant sent a new letter for notification to the Claimant of the order, Tax Inspection Report and attachments, which was received by the Claimant on 14-10-2015, after having been notified of the assessment (document no. 10 attached with the request for arbitral decision, the contents of which are reproduced herein);
z) On 02-12-2015, the Claimant made payment of the amount assessed (document no. 9 attached with the request for arbitral decision, the contents of which are reproduced herein);
aa) On 26-01-2016, the Claimant filed the request for constitution of the arbitral tribunal 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. Rationale for the Determination of Facts
The proven facts are based on the documents attached by the Claimant with the request for arbitral decision and, subsequently, in a request of 19-09-2016.
The testimony of witness E… corroborated what is inferred from the credit assignment contract that this assignment was not carried out with the intention of proceeding to a liberality, all the more implausible in relation to funds of a public nature, whose proprietary interests are unrelated to the Claimant.
This testimony also confirmed the existence of financial difficulties that prevented it from making the payments that were an alternative to the assignment of credits and that it could not transfer the shares as it was performing guarantee functions.
3. LEGAL ISSUES
3.1. The Question of Notification of the Assessment Act Prior to Notification of the Tax Inspection Report
The first issue raised by the Claimant is whether the assessment was notified to it before the notification of the Tax Inspection Report which provides the basis for the assessment, as the assessment makes reference to "the basis already referred to".
The Claimant argues that, under these conditions, the basis is not contemporaneous with the assessment act, nor is it a posterior basis, which is only that produced after the assessment act was performed.
The notification of tax acts is an act subsequent to the act being notified, therefore the fact that notification was made after the notified act does not constitute a defect of that act, and can only affect its effectiveness.
What is relevant to determine the existence of a basis for the assessment act is not that it has been notified, but rather that the act contains it, either directly or by reference.
The regime of article 37 of the Tax Procedure Code, sections 1 and 2, which establish the consequences of the failure to communicate the basis, is unequivocal that this failure does not imply a defect of the notified act, and can only defer its effectiveness.
In the case at hand, the basis contained in the Tax Inspection Report and opinions issued on it already existed before the assessment act was performed and, therefore, the basis to which the assessment refers (which is permitted by article 77, section 1, of the General Tax Law) is contemporaneous with this act.
There is thus no defect due to failure to notify the basis, susceptible of affecting the validity of the assessment act.
3.2. The Question of the Existence of Posterior Basis in the Response Presented in the Present Proceedings
Different from this is the question of the existence of posterior basis in the Response of the Tax and Customs Authority presented in the present proceedings.
In a proceeding of mere legality, as is that provided for in the RJAT for the arbitral tribunals functioning in CAAD, which aims only at the declaration of illegality of acts of the types provided for in paragraphs a) and b) of section 1 of its article 2, the legality of the impugned act must be assessed as it occurred, with the basis used in it, it being irrelevant whether there are other possible bases that could serve to support other acts, of decision content totally or partially coincident with the act performed. Thus, bases invoked posteriorly are irrelevant, after the end of the tax procedure in which the act whose declaration of illegality is requested was performed, including those ventured in the jurisdictional process.
Thus, the Tribunal cannot, upon finding the invocation of an illegal ground as the support of an administrative decision, assess whether its action could be based on other grounds and refrain from declaring the illegality of the concrete act performed by, eventually, the existence of the abstract possibility of a hypothetical act with decision content totally or partially identical, with another basis, which would be legal, but was not performed. ( [1] )
Thus, on this point, the Claimant is correct, and the legality of the assessment act must be assessed in light of the basis of the Tax Inspection Report and the opinions issued on it, to which the assessment act and the order determining the notification of said Report refer.
3.3. The Relevant Basis of the Assessment Act
The assessment refers to the grounds of the Tax Inspection Report.
In the Tax Inspection Report to which the order of the Finance Director of … refers ( [2] ), the understanding is invoked as the basis of the correction made that a liberality was made by the Claimant, in assigning its credits for 1 euro, since "the absurdity of the consideration received is of such an order that only in form can we consider that there was a 'sale', as the substance of the transaction in question is clearly that of a gift, making the 'compensation between shareholders' previously referred to, resorting to a liberality".
On the other hand, although the Opinion of the Team Leader refers, with apparent greater amplitude, that we are faced with "a decision of the business sphere, and despite being supported in established agreements, the same is not sufficient reason for it to be proven that it is indispensable for the realization of income subject to tax or for the maintenance of the productive source, as established by article 23 of the CIRC", ultimately it refers to the grounds of the Tax Inspection Report, saying: "The taxpayer exercised the right to a hearing, however the facts alleged by the taxpayer are not capable of altering the corrections proposed in the draft report, as per the grounds contained in chapter IX of the report, which is why they are maintained".
Namely, it is unequivocal that the lack of connection between the operation of assignment of loan capital to funds F… and G… and the interest of pursuing the Claimant's own activity, which the Tax and Customs Authority invokes in article 167 of its Response, was not a ground of the correction made.
Thus, it must be concluded that the judgment on the nature of liberality of the credit assignment is the essential ground of the correction made and subsequent assessment.
3.4. On the Error in the Assessment Act
It is against this basis of the assessment that its legality must be assessed.
It resulted from the evidence produced, both documentary and testimonial evidence, that the assignment of credits (part of the loan capital that the Claimant made to B…, S.A) was not carried out with the "animus donandi", inherent in liberalities, invoked in the Tax Inspection Report.
In fact, beyond the manifestly symbolic amount of 1 euro, the Claimant obtained as patrimonial consideration, which was produced in its legal sphere, the release from the compensation obligations it assumed in the Shareholder Agreement with F… and G…, namely the extinction of the obligation to transfer a set of shares in B…, S.A, and from the alternative obligations to make cash payment corresponding to the negative difference and of the obligation to acquire the shareholdings of F… and of G… as well as the respective loan capital.
Therefore, it must be concluded that the impugned act suffers from the defect of error regarding the factual presuppositions, as there is no grounds to affirm that the assignment of credits was carried out with the intention of making a gratuitous patrimonial attribution to the aforementioned public funds.
On the other hand, as the Claimant states, it cannot be grounds for the exclusion of deductibility under article 23 of the CIRC, a critical judgment of the Tax and Customs Authority on the Claimant's management choices in entering into the Shareholder Agreement, namely, whether instead of it, it could have made "a capital increase by issuance of new shares, an alternative that would not lead to the 'compensation between shareholders' invoked".
The concept of indispensability of costs contained in article 23, section 1, of the CIRC, does not require a causal link between costs and revenues, it being sufficient that the expenses have a relationship with the object of the company, are incurred within the scope of its activity or evidence a business purpose. ( [3] ) It is for companies to decide which negotiating options they consider preferable to ensure their interests. In truth, there is no legal support for the Tax and Customs Authority to exclude the deductibility of expenses by considering that the business-related choices of companies do not correspond to the acts of management that the Tax and Customs Authority considers preferable.
As set forth above, it is concluded that the impugned act, in resting on the wrong presupposition that the assignment of credits was carried out with the intention of making a liberality and in excluding the deductibility of its negative consequences, suffers from the defect of error regarding the factual presuppositions that justifies its annulment (article 163 of the Code of Administrative Procedure).
4. REIMBURSEMENT OF THE AMOUNT PAID AND COMPENSATORY INTEREST
The Claimant paid the amount assessed and requests its reimbursement, with compensatory interest.
In accordance with the provision of paragraph b) of article 24 of the RJAT, the arbitral decision on the merits of the claim for which no appeal or challenge is available binds the Tax Administration from the end of the period provided for appeal or challenge, and the latter, in the exact terms of the success of the arbitral decision in favour of the taxpayer and until the end of the period provided for voluntary execution of decisions of tax courts, "re-establish the situation that would have existed if the tax act subject of the arbitral decision had not been practiced, adopting the acts and operations necessary for that purpose", which is in harmony with what is provided in article 100 of the General Tax Law [applicable by virtue of the provision in paragraph a) of section 1 of article 29 of the RJAT] which establishes that "the tax administration is obliged, in case of total or partial success of a claim, judicial challenge or appeal in favour of the taxpayer, to the immediate and full reestablishment of legality of the act or situation subject of the dispute, including the payment of compensatory interest, if applicable, from the end of the period of execution of the decision".
Although article 2, section 1, paragraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals functioning in CAAD, making no reference to condemning decisions, it should be understood that it includes in its competencies the powers attributed to tax courts in judicial challenge proceedings, and this is the interpretation that harmonizes with the sense of the legislative authorization upon which the Government based itself to approve the RJAT, in which it proclaims, as the first directive, that "the tax arbitration proceeding should constitute an alternative procedural means to the judicial challenge proceeding and to the action for recognition of a right or legitimate interest in tax matters".
The judicial challenge proceeding, although essentially a proceeding for annulment of tax acts, admits the condemnation of the Tax Administration in the payment of compensatory interest, as can be inferred from article 43, section 1, of the General Tax Law, which establishes that "compensatory interest is due when it is determined, in a gracious claim or judicial challenge, that there was error attributable to the services as a result of which payment of the tax debt was made in an amount greater than legally due" and from article 61, section 4 of the Tax Procedure Code (in the wording given by Law no. 55-A/2010, of 31 December, which corresponds to section 2 in the initial wording), which states that "if the decision that recognized the right to compensatory interest is judicial, the period for payment is counted from the beginning of the period of voluntary execution thereof".
Thus, section 5 of article 24 of the RJAT, in saying that "payment of interest is due, regardless of its nature, as provided for in the general tax law and in the Tax Procedure and Process Code", should be understood as allowing the recognition of the right to compensatory interest in the arbitration proceeding, as well as the reimbursement of the amount paid, which is the basis of calculation of the interest.
It is thus necessary to assess the request for reimbursement of the amount unduly paid, plus compensatory interest.
In the case at hand, it is manifest that, as a consequence of the illegality of the assessment act, there is cause for reimbursement of the tax paid, by virtue of the aforementioned articles 24, section 1, paragraph b), of the RJAT and 100 of the General Tax Law, as this is essential to "re-establish the situation that would have existed if the tax act subject of the arbitral decision had not been practiced".
As regards compensatory interest, it is also clear that the illegality of the assessment act is attributable to the Tax Administration, which, on its own initiative, performed it without legal support.
Consequently, the Claimant has the right to compensatory interest, in accordance with article 43, section 1, of the General Tax Law and article 61 of the Tax Procedure Code.
The compensatory interest will be paid from the date on which the Claimant made the payment until full reimbursement of the amount paid, at the legal suppletive rate, in accordance with articles 43, section 4, and 35, section 10, of the General Tax Law, article 61 of the Tax Procedure Code, article 559 of the Civil Code and Ministerial Order no. 291/2003, of 8 April.
5. DECISION
In these terms, the Arbitral Tribunal hereby agrees to:
a) Judge the request for arbitral decision founded;
b) Annul the IRC assessment no. 2015 … and respective statement of compensatory interest and account settlement;
c) Condemn the Tax and Customs Authority to reimburse the Claimant the sum of € 101,617.81, plus compensatory interest from the date of payment until the date on which reimbursement is made.
6. VALUE OF THE CASE
In accordance with the provision of article 306, section 2, of the Code of Civil Procedure and article 97-A, section 1, paragraph a), of the Tax Procedure Code and article 3, section 2, of the Regulations on Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 101,617.81.
7. COSTS
In accordance with article 22, section 4, of the RJAT, the amount of costs is fixed at € 3,060.00, in accordance with Table I attached to the Regulations on Costs in Tax Arbitration Proceedings, charged to the Claimant.
Lisbon, 03-10-2016
The Arbitrators
(Jorge Manuel Lopes de Sousa)
(Luís Ricardo Farinha Sequeira)
(João Pedro Dâmaso)
[1] Essentially in this sense, the following decisions of the Supreme Administrative Court can be seen, concerning a parallel situation that arises in contentious appeal proceedings:
– of 10-11-98, of the Plenary, pronounced in appeal no. 32702, published in Appendix to the Official Gazette of 12-4-2001, page 1207;
– of 19/06/2002, case no. 47787, published in Appendix to the Official Gazette of 10-2-2004, page 4289;
– of 09/10/2002, case no. 600/02;
– of 12/03/2003, case no. 1661/02.
In the same sense, the following can be seen:
– MARCELLO CAETANO, Manual of Administrative Law, volume I, 10th edition, page 479 in which he states that it is "irrelevant that the Administration, already pending the contentious appeal, invokes as determining reasons other reasons, not set forth in the act", and volume II, 9th edition, page 1329, in which he writes that "the responding authority cannot (...), in the response to the appeal, justify the practice of the act appealed by different reasons than those contained in its express motivation";
– MÁRIO ESTEVES DE OLIVEIRA, Administrative Law, Volume I, page 472, where it is written that "the reasons objectively existing but which are not expressly adduced as grounds of the act cannot be taken into account in assessing its legality".
[2] The order has the following contents "I agree with the proposed corrections contained in the opinions, in view of the grounds set forth in the report. Proceed accordingly".
[3] In this sense, the arbitral decision handed down in case no. 587/2014-T can be seen, among others, in which it refers, citing TOMÁS TAVARES, On the relationship of partial dependence between accounting and fiscal law in determining the taxable income of legal persons: some reflections at the level of costs, in Science and Fiscal Technique, no. 396, 1999, pages 136-137:
"The legal notion of indispensability is thus carved out on an economic-business perspective, by fulfillment, direct or indirect, of the ultimate motivation for obtaining profit. Indispensable costs are equivalent to expenses incurred in the interest of the company or, in other words, in all acts abstractly subsumable in a profitable profile. This objective brings, in a purposeful manner, the economic and fiscal categories closer together, through a primarily logical and economic interpretation of legal causality. The essential expense is equivalent to every cost incurred in order to obtain income and which represents an economic decline for the company. As a general rule, therefore, the fiscal deductibility of the cost depends only on a causal and justified relationship with the productive activity of the company".
" …Indispensability is subsumed to any and all acts performed in the interest of the company…The legal notion of indispensability thus restricts acts that do not conform to the purpose of the company, not insertable in the social interest, especially because they do not aim at profit…".
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