CAAD 376/2014-T: Deductibility of Financial Charges on Supplementary Capital Contributions Under Article 23 CIRC and Article 32(2) EBF

ARBITRAL DECISION

Process no. 376/2014 – T

Claimant: A..., SGPS, S.A.

Respondent: Tax and Customs Authority

Subject Matter: CIT – Ancillary contributions; tax deductibility of financial charges.

The arbitrator, Henrique Nogueira Nunes, appointed by the Ethics Board of the Administrative Arbitration Centre ("CAAD") to form the Arbitral Tribunal, hereby decides as follows:

1. STATEMENT OF FACTS

A..., SGPS, S.A., with tax identification number … (hereinafter abbreviated as "Claimant"), requested the constitution of the Arbitral Tribunal pursuant to Article 2, subsection 1, subparagraph a) of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT").

The request for arbitral pronouncement concerns the declaration of illegality of the additional assessment of Corporate Income Tax and compensatory interest no. 2013 ..., relating to the financial year 2009, which resulted in tax and compensatory interest payable in the total amount of € 3,726.48, as well as the demonstration of account adjustment no. 2013 ..., in the same amount.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority (hereinafter abbreviated as "TA") on 19 May 2014, with the aforementioned arbitrator being appointed to the Arbitral Tribunal, who accepted the appointment.

On 3 July 2014, the parties were duly notified of this appointment, having no intention to refuse the arbitrator's appointment, in accordance with Article 11, subsection 1, subparagraphs a) and b) of RJAT and Articles 6 and 7 of the Ethics Code.

The Arbitral Tribunal was constituted on 18 July 2014.

To substantiate its request, the Claimant alleges, in summary, the following:

(i) It does not accept the understanding that formed the basis of the additional CIT assessment no. 2013 ... with reference to the financial year 2009, as it considers it unequivocal that the concept of "capital shares" includes only "shares of capital stock" (i.e. shares and quotas), and is therefore distinct from ancillary contributions.

(ii) It alleges that based on the rules of interpretation of fiscal norms provided for in Article 11 of the LGT, the TA's understanding that gave rise to the additional assessment in dispute in these proceedings is not valid, as it is based on factual and legal error.

(iii) It considers that the concept of capital is associated with capital stock, as if the concept of "capital" appeals to "capital stock," the concept of "capital shares" must, with greater reason, it argues, refer to "shares of capital stock," which would be the same as saying "equity interests" or quotas or shares, depending on whether one is dealing with limited liability companies or joint-stock companies.

(iv) It considers that there can be no doubt that company law treats capital shares as shares of capital stock, and such concept does not encompass ancillary contributions.

(v) And that, in accordance with the rules of interpretation of tax laws provided for in Article 11 of the LGT, the substance over form principle could never be applied, as the TA seeks to do, in order to define the concept of capital shares provided for in subsection 2 of Article 32 of the Tax Benefits Statute.

(vi) And that the provision in subsection 4 of Article 48 of the CIT Code, in the version in force at the time, extended the application of the regime for reinvestment of realization values to "capital shares," including, in addition to sale, their "waiver and amortization with capital reduction."

(vii) It thus argues that given the reference that this regime made to operations of "waiver and amortization with capital reduction," it will be difficult to admit any meaning for "capital shares" other than "equity interests" or "shares of capital stock" (i.e. shares or quotas).

(viii) In light of the foregoing, it considers that there is no doubt that ancillary contributions that follow the regime of supplementary contributions are not included in the concept of capital shares.

(ix) And that, having regard to the spirit underlying the regime provided for in Article 32 of the Tax Benefits Statute, it must be concluded that ancillary contributions that follow the regime of supplementary contributions are not encompassed by the provision in subsection 2 of that norm, since such contributions, in normal circumstances, are not capable of generating capital gains that benefit from the exemption regime established in that norm; for reasons of equity, the financial charges associated with the financing obtained for their provision should be tax-deductible.

(x) Not accepting the position followed by the TA in light of the substance over form principle.

(xi) Concluding that from ancillary contributions that follow the regime of supplementary contributions there arises no direct income that can be categorized as a capital gain, and therefore it is easily understood that financial charges incurred with the provision of ancillary contributions should not be qualified as charges attributable to capital shares, for purposes of subsection 2 of Article 32 of the Tax Benefits Statute, and should be tax-deductible.

(xii) In summary, it argues that the subsumption of ancillary contributions under the concept of "capital shares" to which subsection 2 of Article 32 of the Tax Benefits Statute appeals cannot be understood as valid, to the extent that (i) company law distinguishes, without room for doubt, the concepts of "capital shares" from ancillary contributions that follow the regime of supplementary contributions; (ii) the indications in the CIT Code point in the same direction, i.e. the reference that the regime of reinvestment of realization values to capital shares makes to the operations of "waiver and amortization with capital reduction" and, likewise, the evolution of the very wording of subsection 3 of Article 45 of the CIT Code; (iii) the same distinction is well-established and settled both in the majority of existing doctrine on this matter and in recent jurisprudence of the Arbitral Tribunal which it invokes throughout its petition; (iv) that the rationale underlying subsection 2 of Article 32 of the Tax Benefits Statute determines the non-inclusion in that norm of financial charges incurred with the provision of ancillary contributions that follow the regime of supplementary contributions; and (v) the guidance contained in Circular no. 7/2004 issued by the TA is clear in the sense of attributing non-deductible financial charges under subsection 2 of Article 32 of the Tax Benefits Statute solely to "equity interests."

(xiii) With regard to the inclusion of "other financial costs or losses" in the calculation of financial charges subject to subsection 2 of Article 32 of the Tax Benefits Statute, it considers that the costs in question must be those related to capital gains not considered as income, that is, costs that are inherent to the original acquisition of equity interests held (interest), and cannot be considered as such other financial costs or losses that prove to be merely ancillary and not connected with the obtaining of income not subject to CIT.

(xiv) In light of the foregoing, it considers that the understanding adopted in the TA's Inspection Report should not be accepted, according to which all charges incurred with the acquisition of capital shares should be included in the calculation of financial charges to be subject to the regime provided for in Article 32 of the Tax Benefits Statute.

(xv) Finally, it petitions for the payment of compensation for a guarantee improperly provided, which was required for suspension of the enforcement proceedings instituted by the TA, pursuant to the provision of Article 53, subsection 2 of the LGT.

The TA responded, arguing that the claim should be dismissed, alleging, in summary, as follows:

(xvi) It recognizes that the issue to be decided is to determine whether financial charges contribute or do not contribute to the formation of the fiscal result, commonly known as taxable profit.

(xvii) It argues that, as with other concepts contained in the CIT, the concept of capital shares used in CIRC and in the Tax Benefits Statute has its origin not in company law, but in accounting law.

(xviii) And thus, it considers that, the legislator not discriminating, for purposes of deductibility of financial charges, those incurred with the realization of supplementary contributions from those incurred with the acquisition of equity interests – and given the uniformity of the remaining fiscal and accounting regime – the interpretive conclusion would be that financial charges incurred for the realization of supplementary contributions should receive the same treatment as those incurred for the acquisition of equity interests.

(xix) And that the expression "capital shares" refers, in the accounting normative in force at the time, to the account "411 – Capital Shares."

(xx) Arguing that this is the meaning of the expression "capital shares" adopted by the legislator.

(xxi) In this way, given what it claims to be an evident fact, it considers that the use of the term "capital share" derives from accounting normative – where the exact term used is found – and not, as the Claimant argues, from company law, supposedly deriving from the expression "equity interest."

(xxii) Notwithstanding, it further invokes the provision of Article 23 of CIRC (as a general rule regarding expense deductibility in CIT) to the extent that only expenses considered deductible therein may ever contribute to the formation of the fiscal result.

(xxiii) It alleges that Article 32, subsection 2, at the end, establishes a rule of non-deductibility of certain expenses, but in no case authorizes the deduction of charges that are not deductible, first and foremost, under Article 23 of CIRC.

(xxiv) It thus argues that the deductibility of said financial charges in light of Article 23 of CIRC assumes a logical precedence over the interpretation of Article 32 of the Tax Benefits Statute.

(xxv) Concluding that for financial charges incurred to be accepted as a fiscal expense, they must meet three requirements: substantiation (justification), indispensability, and the connection to income or gains subject to tax.

(xxvi) It questions whether financial charges incurred with the realization of supplementary or ancillary contributions that follow this regime contain any profit objective, to conclude that the exploitation of the financial asset supplementary or ancillary contribution that follows this regime will never give rise to any taxable income.

(xxvii) It is precisely this incapacity, which it qualifies as genetic, of supplementary or ancillary contributions that follow the supplementary regime to produce taxable income that determines the non-acceptance of expenses incurred with their realization.

(xxviii) It states that by accepting the deductibility of financial charges with supplementary contributions because these somehow enhance the company upon its disposal, one would be accepting an expense that will never be offset by taxable income.

(xxix) It invokes extensive case law from superior courts to draw the conclusion that under Article 23 of the CIT Code only costs relating to the activity carried out by the taxpayer itself should be considered deductible and that, even when there is a relationship of dependence or control, companies have distinct legal personalities and tax capacities, and that unless this were the case, one could impute to a company the exercise of the activity of another with which it had some relationship.

(xxx) It disagrees with the interpretation contained in Circular no. 7/2004 regarding the provision of Article 32 of the Tax Benefits Statute which the Claimant makes.

(xxxi) As regards the inclusion of other financial costs or losses in the calculation of financial charges subject to subsection 2 of Article 32 of the Tax Benefits Statute, it argues that jurisprudence makes no distinction between interest and other financial charges as to their deductibility or not, citing the judgment of the Administrative Supreme Court handed down in process no. 0171/11 dated 30/05/2012.

(xxxii) Finally, as regards the claim for compensation for provision of guarantee, it recognizes that it depends on the success of the arbitral request formulated.

(xxxiii) It argues, in summary, for the complete dismissal of the Claimant's request.

Given the extensive documentary evidence presented by the parties and considering that the issues to be resolved in these proceedings are merely of law, the Arbitral Tribunal, by order inserted in the CAAD's procedural system and notified to the parties, deemed it appropriate to dispense with the meeting of the Arbitral Tribunal provided for in Article 18 of RJAT, as well as the presentation of arguments, considering that both parties have sufficiently substantiated their positions on matters of fact and law.

No exceptions were identified.

The deadline for the arbitral decision was set for the end of the 6-month period provided for in subsection 1 of Article 21 of RJAT.

2. PRELIMINARY MATTER

The Tribunal has material competence and is regularly constituted, pursuant to Articles 2, subsection 1, subparagraph a), 5, subsection 2, and 6, subsection 1, of RJAT.

The parties have legal standing and capacity, are legitimate and are duly represented, pursuant to Articles 4 and 10, subsection 2, of RJAT and Article 1 of Regulation no. 112-A/2011, of 22 March.

The proceeding is not affected by any nullities and no issues were raised that would prevent examination of the merits of the case.

3. MATTERS OF FACT

A) FACTS ESTABLISHED

Based on the facts alleged by the parties and not contested, as well as on the documentation attached to the proceedings, including the administrative file ("PA"), the following relevant facts are established:

The Claimant was subject to a general inspection action by the Directorate of Finance of Lisbon regarding its accounting and fiscal elements with reference to the financial years 2009, 2010 and 2011, following Service Orders no. … (see Document no. 2 attached by the Claimant and PA attached by the Respondent).

The Claimant is a Management Company for Equity Participations (SGPS).

Said inspection action resulted in a correction to the taxable income base for CIT of the Claimant with reference to the financial year 2009 in the amount of € 2,236,846.13, relating to the amount of financial charges attributable to capital shares that are not deductible pursuant to the provision of subsection 2 of Article 32 of the Tax Benefits Statute in the version in force at the time of the tax facts in question in these proceedings (see Documents nos. 2 and 4 attached by the Claimant and PA attached by the Respondent).

With relevance to these proceedings, there is evidence of the existence of ancillary capital contributions that follow the regime of supplementary contributions (see Document no. 4 attached by the Claimant and PA attached by the Respondent).

As a result of said inspection action, the Claimant was notified on 7 November 2013 by the Administrative Justice Division of the Directorate of Finance of Lisbon of the Draft Tax Inspection Report and to exercise its right of prior hearing if it wished (see Document no. 2 attached by the Claimant and PA attached by the Respondent).

On 26 November 2013, the Claimant exercised its right of prior hearing (see Document no. 3 attached by the Claimant and PA attached by the Respondent).

On 12 December 2013, the Claimant was notified of the Final Tax Inspection Report, by order of 10 December 2013, which contains the correction of the tax loss determined by the Claimant in the amount of € 2,019,017.62, converting it into taxable profit of € 217,828.51 (see Document no. 4 attached by the Claimant and PA attached by the Respondent).

The Claimant was notified on 20 December 2013 of account adjustment demonstration no. 2013 ..., CIT assessment demonstration no. 2013 ... and interest assessment demonstration no. 2013 ... (see Document no. 1 attached by the Respondent), which contains a total amount payable of € 3,726.48, corresponding to € 3,267.43 of outstanding tax and € 459.05 of compensatory interest.

The Claimant, pursuant to Article 10 of the Regime on Tax Arbitration and Articles 1 and 2 of Regulation no. 112-A/2011, of 22 March, petitions for the annulment of the tax assessment act no. 2013 ..., with payment deadline of 14 February 2014, relating to the CIT for the financial year 2009 (see Document no. 1 attached by the Claimant).

The Claimant provided guarantee in the amount of € 4,906.46 to suspend the enforcement proceedings instituted by the Finance Department of Lisbon - …, for coercive collection of the tax and compensatory interest debt in question in these proceedings, to which the number … was assigned (see Documents nos. 7 and 8 attached by the Claimant).

B) FACTS NOT ESTABLISHED

There are no further facts with relevance to the decision on the merits that have not been established.

C) STATEMENT OF REASONS FOR THE DECISION ON MATTERS OF FACT

As to the essential facts, the settled matters are shaped identically by both parties and the Tribunal's conviction was formed based on the documentary (official) elements attached to the proceeding and above listed, whose authenticity and truthfulness were not questioned by either party.

4. ISSUES TO BE DECIDED

The Claimant seeks a decision on the following issues:

1. Are financial charges incurred by the Claimant with the realization of ancillary contributions subject to the regime of supplementary contributions tax-deductible under Article 32, subsection 2 of the Tax Benefits Statute and are they indispensable for purposes of deductibility and classification under Article 23 of the CIT Code?

2. Are "other financial costs or losses," in addition to interest, encompassed by the provision of subsection 2 of Article 32 of the Tax Benefits Statute?

3. Does the Claimant have the right to be compensated for the provision of guarantee to suspend fiscal enforcement proceedings, instituted for coercive collection of the debt arising from the assessment act whose legality is contested in these proceedings?

5. LAW

Having considered the facts, let us now examine the law.

As to the first issue to be decided, namely whether financial charges incurred by the Claimant with the realization of ancillary contributions subject to the regime of supplementary contributions are tax-deductible under Article 32, subsection 2 of the Tax Benefits Statute and are indispensable for purposes of deductibility and classification under Article 23 of the CIT Code.

Pursuant to subsection 2 of Article 32 of the Tax Benefits Statute, in force at the time of the tax facts now subject to review: "capital gains and losses realized by SGPSs, by SCRs and by ICRs from capital shares held by them, provided that held for a period of not less than one year, as well as financial charges incurred with their acquisition do not contribute to the formation of the taxable profit of these companies."

In the instant case, the Claimant is an SGPS that incurred financial charges to make ancillary contributions with the nature of supplementary contributions. If these contributions fall within the concept of "capital shares," the situation will be encompassed by the regime provided for in subsection 2 of Article 32 of the Tax Benefits Statute, excluding their tax deduction.

As expressly acknowledged by the parties, the contentious matter is, therefore, to determine whether the concept of "capital shares" includes only equity interests or also includes supplementary contributions or, in the case of these proceedings, ancillary contributions that follow the regime of supplementary contributions.

The definition of the scope of "capital shares" has already been extensively addressed in proceedings that have been conducted at CAAD under nos. 9/2012-T, 69/2012-T, 12/2013-T, 24/2013-T and 39/2013-T, to cite only a few, available at http://www.caad.org.pt/tributario/tributario-jurisprudencia, to whose conclusions in their essential lines this Tribunal adheres.

The Tax Benefits Statute (approved by Decree-Law no. 215/89, of 1 July) as well as other tax legislation do not contain a definition of "capital shares" for tax purposes. Thus, there is a need to apply the provision of Article 11 of the LGT, which establishes the rules of interpretation of tax norms.

Notwithstanding the absence of such definition in systematic terms, the legislator clearly separates the concept of capital shares from the concept of equity capital in subsection 3 of Article 45 of CIRC, in the version given to it by Law no. 60-A/2005, of 30 December, by stating that: "The negative difference between capital gains and capital losses realized through paid transmission of capital shares, including their waiver and amortization with capital reduction, as well as other losses or negative patrimonial variations relating to capital shares or other components of equity capital, namely supplementary contributions, contribute to the formation of taxable profit in only half their amount."

That is, the legislator uses the concept of equity capital in the exact commercial and accounting sense, which allows for the conclusion that, in light of the literal and systematic elements, the concept of "capital" in the expression "capital shares" is not synonymous with "equity capital," with supplementary and ancillary contributions explicitly included in the latter.

On the other hand, the absence of a tax definition of "capital shares" leads the interpreter – in observance of the aforementioned Article 11 of the LGT – to seek that definition in commercial law and accounting law, having regard, in the latter case, to the model of partial dependence established between accounting and tax law in the determination of taxable profit.

Supplementary contributions "are cash inflows that can be made by members of a limited liability company to reinforce its assets, in addition to the capital stock, bear no interest and can be returned to them, which are not included in the capital stock of the company" (LUÍS BRITO CORREIA, in Commercial Law, 2nd vol., 1989, p. 297).

In the specific case of joint-stock companies, which corresponds to the legal status of the Claimant, the members conferred on ancillary contributions the nature of supplementary contributions, and consequently, the rules provided for in Articles 210 to 213 of the Commercial Code apply to them.

Under subsection 1 of Article 210, supplementary contributions may only be required of members if provided for in the bylaws, which must establish: (i) the total amount of supplementary contributions; (ii) the members who are obligated to make supplementary contributions and among the members obligated to do so, and (iii) the criteria for distributing supplementary contributions among the members obligated to do so.

The restrictions on the return of supplementary contributions provided for in Article 213 constitute one of the most important – if not the most relevant – characteristics of this institution: supplementary contributions may only be returned to members when the following conditions are met: (i) provided that the net situation does not fall below the sum of capital and legal reserves; (ii) the member has already paid in their quota, and (iii) insolvency has not been declared for the company.

This regime is clearly distinct from the obligation to make capital contributions (Articles 25 to 30 of the Commercial Code and special rules for general partnerships – 176, subsection 1, subparagraph a), 178 and 179; for limited liability companies – 202 to 208; and for joint-stock companies – 277 and 285 and 286).

In accounting terms, supplementary contributions are part of, along with other items – namely capital stock – the so-called equity capital of the entity – the residual interest in the company's assets after deducting all its liabilities (cf. paragraph 49 of the Conceptual Framework, Notice no. 15652/2009 in DR no. 173 – II Series, of 7 September).

However, the aggregation in equity capital of the item capital stock, of supplementary and ancillary contributions does not mean the equalization of their nature. In no way are equity capital and capital stock synonymous, particularly since only capital stock is transferable.

From all of the foregoing, it is concluded that the application of the regime of Article 32, subsection 2 of the Tax Benefits Statute to financial charges incurred with ancillary contributions has no legal support, since such contributions do not meet the concept of capital shares, and are deductible for tax purposes.

The Respondent also alleges that financial charges with ancillary contributions are not indispensable and have no connection with its income, pursuant to the provision of Article 23, subsection 1 of CIRC.

In this regard, it should be said that this issue has also already been subject to judicial treatment, both in administrative and fiscal courts and in arbitral tribunals, and reference can be made to this respect to the judgment handed down in process 107/11 of 30/11/2011, available at www.dgsi.pt, which addresses the question of the indispensability of financial charges incurred for the realization of financing of invested companies, as well as, at the arbitral level, decisions in processes that have been conducted at CAAD under nos. 9/2012-T; 69/2012-T; 12/2013-T; 24/2013-T and 39/2013-T, available at http://www.caad.org.pt/tributario/tributario-jurisprudencia.

From the in-depth analysis of the issue raised in those arbitral judgments, it results, above all, that, in light of the decision of the Administrative Supreme Court cited above, it cannot be asserted that financial costs incurred with the realization of supplementary or ancillary contributions that follow the regime of the former are, outright, dispensable for the maintenance of the income-generating source.

As the management of equity interests constitutes the activity carried out by the company type – SGPS – and that of the Claimant in these proceedings, it will be against this social purpose that one can assess whether costs are indispensable or not for the development of its objective.

Now, the management of these companies involves all operations for the purchase and sale of equity interests, administration and financing operations for their reinforcement or enhancement.

As stated in the judgment of CAAD no. 39/2013-T, "(…) the financing of an invested company results from the interest of the investing company, in order to, ensuring the financial support of the acquired asset, to increase its potential as a source of income generation. In such case, financial charges resulting from financing obtained to subsequently reinforce the equity capital of an invested company are included in, are part of the scope of, the activity of a SGPS. There is no doubt about this given the provision of the aforementioned norm that governs its activity."

Similarly, ANTÓNIO MARTINS argues that "costs derived from financing income-generating assets should also constitute deductible charges. They are unequivocally related to the obtaining of taxable income and, in light of the balancing of income and costs, one could not understand that they would be fiscally disregarded." (ANTÓNIO MARTINS, in "A note on the concept of income-generating source contained in Article 23 of the CIT Code: its relationship with capital shares and ancillary contributions," Journal of Public Finance and Tax Law no. 2, Year I, p. 50).

Thus, as is, it appears clear that, where there is a company that manages equity interests, whose activity, by its very nature consists of the enhancement of the equity interests held by it, the provision of an invested company with equity capital, by allowing it to better and more efficiently exercise its respective activity, with the consequent increase in profit, is an act suited to the maintenance and enhancement of the income-generating source of the managing company.

Indeed, in a situation where the managing company, by virtue of its position in the financial market regarding obtaining credit, is capable of obtaining it on more advantageous terms than the invested company, the use of credit obtained by the former for the benefit of the latter will manifestly be an economically sound decision, to the extent that the overall costs of the operation and of the group will be reduced.

In summary and in light of all of the foregoing, to the extent that the Respondent makes an incorrect application of Articles 32(2) of the Tax Benefits Statute and 23 of CIRC, the contested assessment must be annulled, the Claimant's claim succeeding in this regard.

As to the second issue, namely to determine whether "other financial costs or losses," in addition to interest, are encompassed by the provision of subsection 2 of Article 32 of the Tax Benefits Statute, and despite considering that the success of the claim regarding the invalidity in question in the contested assessment provides safe and effective protection of the Claimant's interest in these proceedings, thus prejudicing examination of this issue, the Tribunal nonetheless deems it appropriate to pronounce briefly on the same.

The Respondent considers in the corrections made to the Claimant that it did not factor in the remaining financial charges incurred with reference to the financial year 2009 (the relevant one in these proceedings) in addition to interest, in the calculation of financial charges subject to the provision of subsection 2 of Article 32 of the Tax Benefits Statute.

In particular, in the context of the Tax Inspection Report, the Respondent alleges that "subsection 2 of Article 32 of the Tax Benefits Statute is clear when it refers not only to interest but to '(…) financial charges incurred (…)'".

Indeed, one recognizes that the provision of Article 32, subsection 2 of the Tax Benefits Statute is not clear as to what should be understood by financial charges, as the legislator did not define this concept.

However, the Tribunal considers that the ratio legis of the provision in question only makes sense if interpreted to exclude costs that do not have a relationship with non-taxed capital gains, that is, costs that are inherent to the original acquisition of the equity interests held, interest, and it does not seem to make sense that other charges that prove to be merely ancillary and not connected with the obtaining of income not subject to CIT would be encompassed.

In fact, following the Claimant's position, the legislator apparently understood that two different realities should be treated differently: on the one hand, expenses incurred directly with loans obtained to finance the acquisition of capital shares (interest); and on the other hand, expenses of an ancillary nature in relation to such loans, as for example, expenses incurred with the payment of stamp duty.

This same direction is followed by the known doctrine on this matter.

Thus, RUI TEOTÓNIO DOMINGUES and CIDÁLIA MOTA LOPES, with regard to the taxation regime of SGPSs' income, note that "financial charges are understood to be interest incurred by direct indebtedness of SGPSs for the acquisition of equity interests."

In the same vein, we can see MIGUEL PINTO DE MELO when he states that "The Law does not clarify the concept of financial charges incurred with the acquisition of equity interests. In principle, it refers to interest incurred from loans obtained for acquisition of capital shares from which they obtained gains or losses upon disposal."

And one understands the reason for this exclusion, as only this type of financial charge has a direct and immediate relationship with the non-taxed income, the capital gain.

The decision handed down at CAAD in process no. 12/2013-T, which we follow, also pronounced itself in the same direction, when it stated that: "The legislator did not want two benefits to be cumulated. The SGPS already sees its capital gains on equity interests being exempt from tax; but when this happens, it cannot cumulate with the benefit of tax acceptance of interest incurred with financing for the acquisition of those capital shares."

And it will not be worthwhile spending much time on the provision of Article 23 of CIRC, as it is clear, one need only read it to immediately understand that this type of charge is deductible, only not being so in case (at the time of the tax facts in question) such cost was not deemed indispensable to the formation of income or maintenance of the Claimant's income-generating source, a thesis which, as seen above, does not merit acceptance by this Tribunal.

The Respondent invokes the judgment of the Administrative Supreme Court handed down in process no. 0171/11, of 30/05/2012 to support its thesis.

However, this judgment contains within itself a factual situation different from the facts established in these proceedings, first and foremost because in that case the appellant engaged in real estate activity, and the financial charges assumed and applied in free financing of its associated companies were not directly related to its social purpose, which was the purchase and sale of real estate assets and not the management of equity interests or financing of venture companies, as indeed and properly the learned Administrative Supreme Court identified and acknowledged.

In light of all the above, the understanding adopted by the Respondent in the Tax Inspection Report, according to which all charges incurred with the acquisition of capital shares should be included in the calculation of financial charges to be subject to the regime provided for in subsection 2 of Article 32 of the Tax Benefits Statute, does not prevail, with the Claimant's claim also succeeding in this regard.

Finally, as to the claim for compensation for the provision and maintenance of guarantee intended to suspend fiscal enforcement proceedings, instituted for coercive collection of the debt emerging from the assessment act whose legality is contested in these proceedings, it should be noted that this matter has already been subject to decision in the context of CAAD arbitral process no. 1/2013-T, in the terms now transcribed and to whose conclusions we adhere:

"In accordance with the provision of subparagraph b) of Article 24 of RJAT, the arbitral decision on the merits of the claim to which no appeal or challenge is available binds the tax administration from the end of the period provided for appeal or challenge, and this administration, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for voluntary enforcement of decisions of tax judicial courts, must 'restore the situation that would exist if the tax act subject of the arbitral decision had not been executed, adopting the acts and operations necessary for that purpose.'

In the legislative authorization on which the Government based its approval of RJAT, granted by Article 124 of Law no. 3-B/2010, of 28 April, it is proclaimed, as a paramount directive of the institution of arbitration as an alternative form of judicial resolution of disputes in tax matters, that 'the tax arbitral process must constitute an alternative processual means to the process of judicial challenge and to the action for recognition of a right or legitimate interest in tax matters.'

Although Article 2, subsection 1, subparagraphs a) and b), of RJAT uses the expression 'declaration of illegality' to define the competence of arbitral tribunals operating at CAAD and makes no reference to constitutive (annulling) and condemnatory decisions, it should be understood, in harmony with the aforementioned legislative authorization, that the same competencies include the powers that in judicial challenge proceedings are attributed to tax courts in relation to acts whose assessment of legality falls within their competencies.

Although judicial challenge proceedings is essentially a process of mere annulment (Articles 99 and 124 of the Code of Tax Procedure), a condemnation of the tax administration to pay indemnificatory interest and compensation for undue guarantee may be handed down therein.

In fact, although there is no express rule to that effect, it has been peacefully understood in tax courts, since the entry into force of the codes of the fiscal reform of 1958-1965, that a claim for condemnation to payment of indemnificatory interest may be cumulated in judicial challenge proceedings with a claim for annulment or declaration of nullity or non-existence of the act, as in those codes it is stated that the right to indemnificatory interest arises when, in amicable recourse or judicial process, the administration is convinced that there was factual error attributable to the services.

This regime was subsequently generalized in the Code of Tax Procedure, which established in subsection 1 of its Article 24 that 'there shall be a right to indemnificatory interest in favor of the taxpayer when, in amicable recourse or judicial process, it is determined that there was error attributable to the services,' then, in the LGT, in whose Article 43, subsection 1, it is established that 'indemnificatory interest is due when it is determined, in amicable recourse or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount exceeding that legally due,' and finally, in the Code of Tax Procedure, where it was established, in subsection 2 of Article 61 (to which subsection 4 in the version given by Law no. 55-A/2010, of 31 December corresponds), that 'if the decision that recognized the right to indemnificatory interest is a judicial one, the period for payment is counted from the beginning of the period for its voluntary enforcement.'

With regard to the claim for condemnation to payment of compensation for undue provision of guarantee, Article 171 of the Code of Tax Procedure establishes that 'compensation in case of bank guarantee or equivalent unduly provided shall be claimed in the process in which the legality of the executable debt is contested,' and that 'compensation must be requested in the amicable recourse, challenge, or appeal, or if its basis is subsequent, within 30 days of its occurrence.'

Thus, it is unequivocal that judicial challenge proceedings encompasses the possibility of condemnation to payment for undue guarantee, and indeed it is, in principle, the appropriate processual means to formulate such claim, which is justified by evident reasons of processual efficiency, as the right to compensation for undue guarantee depends on what is decided regarding the legality or illegality of the assessment act.

The claim for constitution of the arbitral tribunal has as a corollary that it will be in the arbitral process that the 'legality of the executable debt' will be discussed, and thus, as results from the express wording of that subsection 1 of the aforementioned Article 171 of the Code of Tax Procedure, the arbitral process is also appropriate for examining the claim for compensation for undue guarantee.

Moreover, the cumulation of claims relating to the same tax act is implicitly presupposed in Article 3 of RJAT, when speaking of 'cumulation of claims even if relating to different acts,' which makes it clear that cumulation of claims is also possible with regard to the same tax act, and the claims for compensation for indemnificatory interest and condemnation for undue guarantee are capable of being encompassed by that formula, whereby an interpretation in this sense has, at least, the minimum verbal correspondence required by subsection 2 of Article 9 of the Civil Code.

The regime regarding the right to compensation for undue provision of guarantee is contained in Article 53 of the LGT, which establishes the following:

'Article 53

Guarantee in case of undue provision

1. The debtor who, to suspend enforcement, offers bank guarantee or equivalent shall be indemnified in whole or in part for losses resulting from its provision, if he maintained it for a period exceeding three years, in proportion to the success in administrative recourse, challenge, or opposition to enforcement that have as their object the guaranteed debt.

2. The period referred to in the previous number does not apply when it is verified, in amicable recourse or judicial challenge, that there was error attributable to the services in the assessment of the tax.

3. The compensation referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed amount of the rate of indemnificatory interest provided for in this law and may be claimed in the amicable recourse or judicial challenge itself, or autonomously.

4. Compensation for undue provision of guarantee shall be paid by offsetting tax revenue of the year in which payment is made.'

In the case of these proceedings, it is manifest that the error in the issuance of the additional assessment of tax and compensatory interest, embodied in the disregard of financial charges relating to the realization of ancillary contributions in question in these proceedings, for purposes of the formation of the Claimant's taxable profit, is exclusively attributable to the Respondent, as the initiative for the realization of the tax inspection and the issuance of the additional assessment now contested pertain only to it.

For this reason, the Claimant is entitled to compensation for the guarantee provided.

However, considering that the Claimant did not allege and prove the charges it incurred to provide the bank guarantee, this Tribunal cannot determine in these proceedings the compensation to which the Claimant is entitled, which may only be determined in enforcement of this arbitral decision.

6. DECISION

In light of the foregoing, this Arbitral Tribunal hereby decides:

• To judge the claim meritorious, and in consequence:

a) to declare the illegality of the tax assessment act for additional Corporate Income Tax and compensatory interest no. 2013 ... in the amount of € 3,726.48, as well as the account adjustment demonstration no. 2013 ... of the same amount;

b) to judge meritorious the claim for condemnation of the Respondent to payment of compensation for the guarantee provided, in the terms to be determined in enforcement of this arbitral decision.

The value of the case is set at Euro 3,726.48, in accordance with the provision of Articles 3, subsection 2 of the Regulation on Costs in Tax Arbitration Proceedings (RCPAT), 97-A, subsection 1, subparagraph a) of the Code of Tax Procedure, and 306 of the Code of Civil Procedure.

The amount of costs, in the value of Euro 612.00, pursuant to the provision of Article 22, subsection 4 of RJAT and Schedule I annexed to RCPAT, shall be borne exclusively by the TA, in accordance with the provision of Articles 12, subsection 2 of RJAT and 4, subsection 4 of RCPAT.

Let it be notified.

Lisbon, 16 January 2015

The Arbitrator,

Henrique Nogueira Nunes

Text prepared by computer in accordance with Article 131, subsection 5 of the Code of Civil Procedure, applicable by reference to Article 29, subsection 1, subparagraph e) of Decree-Law no. 10/2011, of 20 January, with blank verses and reviewed.

The drafting of this arbitral decision is governed by the spelling prior to the Orthographic Agreement of 1990.

[Footnotes:]

1 Domingues, Rui Teotónio and Lopes, Cidália M. Mota, in "The taxation regime of SGPSs' income – comparative study in the European Union (II)" in Journal no. 99 of June 2008, OTOC.

2 Pinto de Melo, Miguel, in "The taxation of Capital Gains Realized in Paid Transmission of Capital Shares by SGPSs" in Almedina, 2007.