CAAD 377/2014-T: Anti-Abuse Clause on Dividends and IRS Withholding Tax in Share Acquisition

ARBITRAL DECISION

I – REPORT[1]

1. On 19 May 2014, A..., SGPS, S.A., legal entity no. …, with registered office at …- …, …-… …(hereinafter "Claimant"), requested the constitution of an Arbitral Tribunal and presented a petition for arbitral pronouncement, pursuant to article 10.°, no. 1, subparagraph a), and no. 2, of Decree-Law no. 10/2011, of 20 January, as amended (Legal Framework for Tax Arbitration, hereinafter LFTA), for review of the legality of tax acts imposing Personal Income Tax (IRS) no. 2014 … and the corresponding levy of compensatory interest no. 2014 …, both of 13 January 2014, in the total amount of EUR 6,197,119.79, comprising EUR 5,562,533.75 in tax and EUR 634,586.04 in compensatory interest.

2. The aforementioned additional IRS assessment (withholding at source) resulted from the Tax Authority's application of the general anti-abuse clause provided for in article 38.°, no. 2, of the General Tax Law ("GTL") to the Claimant's acquisition, in June and September 2009, of 85.5% of the share capital of B..., S.A, legal entity no. …, and to the increase of the Claimant's share capital by contribution in kind of an additional 4.5% stake in said B..., S.A, in December 2010, with the Tax Authority taking the position that the payment of the acquisition price of shares should be characterized as dividends and that, as such, the Claimant failed to fulfill the obligation to withhold IRS on profits placed at the disposal of shareholders, thereby incurring liability as a tax substitute under article 103.° of the IRS Code.

3. Not accepting the aforementioned tax and compensatory interest assessment – notably by considering the transaction carried out as constituting a perfectly legitimate and straightforward corporate reorganization – the Claimant requested the constitution of an Arbitral Tribunal under article 10.°, no. 1, subparagraph a), and 2.° of the LFTA, formulating the following claims in its petition (hereinafter PI):

i) Declaration of illegality and consequent annulment of the IRS assessment (withholding at source) no. 2014 …, of 13 January 2014, on the grounds:

a) That the Tax Authority failed to carry out the duty to inquire within the tax inspection procedure that determined said tax act through application of the general anti-abuse clause subject of article 38.º, no. 2 of the GTL;

b) That there was a failure to materially satisfy the prerequisites for application of the general anti-abuse clause contained in article 38.°, no. 2 of the GTL; and

c) That the disregard of tax effects resulting from the application of the general anti-abuse clause to the acts in question is not opposable to the Claimant, on the ground that such clause is unsuitable for determining the creation of ancillary withholding at source obligations on third parties;

ii) The annulment of the aforementioned IRS assessment on grounds of material unconstitutionality of article 38.°, no. 2, of the GTL, interpreted as being apt to produce tax effects on third parties other than the taxpayer who acted motivated by obtaining tax advantage, in light of the principles of legal certainty and security and proportionality and, likewise, due to inadmissible violation of the right to private property guaranteed by the Additional Protocol to the ECHR;

iii) Declaration of nullity of the compensatory interest assessment no. 2014 …, of 13 January 2014, in view of the annulment of the IRS assessment of which it is a consequential act or, subsidiarily, annulment of said assessment due to the absence of legal prerequisites necessary for any compensatory interest assessment;

iv) Condemnation of the Tax Authority to pay indemnatory interest pursuant to article 43.°, no. 1, of the GTL, for error attributable to the Services in issuing the impugned tax acts, as well as payment of arbitral proceedings costs.

With the petition, 14 documents were filed, and no witnesses were called.

1. As the Claimant opted for not appointing an arbitrator, pursuant to subparagraph a) of no. 2 of article 6.° and subparagraph b) of no. 1 of article 11.° of the LFTA, as amended by article 228.° of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal Counselor Doctor Jorge Lino Ribeiro Alves de Sousa, Dr. Carla Castelo Trindade and Dr. João Menezes Leitão, who communicated acceptance of the appointment within the applicable time period.

The parties were notified of such appointment, and the Claimant submitted a request for recusal of the appointment of Dr. João Menezes Leitão, which was rejected by order of 23 July 2014 of the President of the Deontological Council of the CAAD.

In accordance with the provisions of subparagraph c) of no. 1 and no. 8 of article 11.° of the LFTA, as amended by article 228.° of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 24 July 2014.

1. On 3 October 2014, the Tax Authority and Customs Authority (hereinafter "Respondent") filed a response (hereinafter "R.") in which it argued for total rejection of the petition for arbitral pronouncement.

By order, also of 3 October 2014, it was decided not to hold the meeting provided for in article 18.° of the LFTA.

1. At the request of the parties, statements were filed.

The Claimant concluded its statement by saying that it concludes as in the arbitral petition, with complete granting of what was requested therein.

The Tax Authority and Customs Authority filed a counter-statement, reiterating its request for total rejection of the present petition for arbitral pronouncement, as unproven, with the consequent legal effects.

The statements filed were taken into consideration in the examination of factual and legal matters.

1. By order of 3.11.2014 of the President of the Deontological Council of the CAAD, given the fact that Counselor Doctor Jorge Lino Alves de Sousa was temporarily unable, for health reasons, to perform his respective functions, Counselor Doctor Jorge Lopes de Sousa was appointed to perform, in a substitute capacity, the functions of arbitrator-president, which substitution ceased on 3.12.2014, pursuant to order of that date of the President of the Deontological Council.

Subsequently, by order of 4.2.2015, the President of the Deontological Council, finding that Counselor Doctor Jorge Lino Alves de Sousa was incapacitated, due to illness, to perform the functions of arbitrator-president of the collective tribunal, terminated his respective mandate and appointed, in his stead, as arbitrator-president, Counselor Doctor Jorge Manuel Lopes de Sousa.

1. By order of 6.1.2015, the Tribunal, pursuant to articles 21.°, no. 2 and 18.°, no. 2 of the LFTA, set, lastly, in light of the complexity of the case, 24.3.2015 as the date for issuance of the arbitral decision. By order of 23.3.2015, pursuant to article 21.°, no. 2, of the LFTA, the arbitration time period was extended by two months and 22.5.2015 was set as the new date for the decision.

II. CASE MANAGEMENT

1. The Arbitral Tribunal was regularly constituted and is materially competent.

The proceedings do not suffer from any nullities and no issues were raised that could prevent examination of the merits of the case.

The parties have legal personality and capacity, are legitimated (articles 4.° and 10.°, no. 2 of the LFTA and article 1.° of Order no. 112-A/2011, of 22 March), and are properly represented.

Having reviewed everything, it is necessary to issue a final decision.

III. QUESTIONS TO BE DECIDED

1. In view of the positions taken and the grounds alleged by the parties in their pleadings, the questions to be decided in the present arbitral proceedings relate to review of the legality of the IRS assessment (withholding at source) no. 2014 …, relating to the year 2010, in the amount of EUR 5,562,533.75, and the corresponding compensatory interest assessment no. 2014 …, in the amount of EUR 634,586.04, in light of the following defects raised by the Claimant:

I) Regarding the IRS assessment (withholding at source) no. 2014 …:

a) Failure of the duty to inquire, due to the absence of concrete investigative steps undertaken by the Tax Authority in the inspection procedure to determine the factual basis relevant for assessing the prerequisites for application of the general anti-abuse clause, in violation of article 58.° of the GTL;

b) Failure to satisfy the prerequisites for application of the general anti-abuse clause, in violation of the provisions of article 38.°, no. 2, of the GTL, notably by:

i. Absence of an essential or primary motivation of a tax nature for the purchase and sale of shares of B..., S.A and, likewise, for the increase of the Claimant's capital by contribution in kind of shares of said company;

ii. Absence of recourse to artificial or fraudulent means and abuse of legal forms;

iii. Absence of tax advantage obtained as a result of the purchase and sale of shares and, likewise, of the capital increase by contribution in kind;

iv. Absence of non-conformity of the result obtained with the ratio legis of the applicable rules;

c) Non-opposability to the Claimant, as a (hypothetical) tax substitute, of the disregard of tax effects resulting from the application of the general anti-abuse clause to the acts in question, in concurrent violation of article 38.°, no. 2, of the GTL or, if not understood in this manner, due to unconstitutionality of such provision in light of the principles of legal certainty and security and proportionality and, likewise, due to inadmissible violation of the right to private property guaranteed by the Additional Protocol to the European Convention on Human Rights ("ECHR");

II) Regarding the compensatory interest assessment no. 2014 …: absence of legal prerequisites necessary for the application of compensatory interest, should the annulment of the IRS assessment of which it is a consequential act not proceed.

Beyond review of the legality of the impugned tax acts according to the terms indicated above, it is also necessary, given the corresponding claim formulated by the Claimant, to decide on the condemnation of the Tax Authority to pay indemnatory interest, pursuant to article 43.°, no. 1, of the GTL.

IV. FACTUAL FOUNDATION

IV.1. FACTS ESTABLISHED

1. Regarding factual matters, it is important to note, first and foremost, that the Tribunal need not pronounce on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish proven from unproven matters. All in accordance with article 123.°, no. 2, of the Code of Tax Procedures and Proceedings (CTPP) and article 607.°, nos. 3 and 4 of the Code of Civil Procedure (CCP), applicable pursuant to article 29.°, no. 1, subparagraphs a) and e), of the LFTA. In this manner, the facts pertinent to judgment of the case are chosen and selected according to their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (cfr. article 511.°, no. 1, of the former CCP, corresponding to article 596.° of the current CCP).

2. Thus, considering the positions taken by the parties in their respective pleadings (PI and statements of the Claimant, R. and counter-statements of the Respondent), the documentary evidence and the Administrative File (hereinafter, "AF") attached to the case file, the following facts are considered established as relevant to the decision:

A) THE CLAIMANT – A… SGPS S.A.

1. The Claimant was constituted in 2001 as an anonymous commercial company in the form of a company holding shares, with the corporate purpose of "management of holdings in other companies as an indirect form of conducting economic activities," having as founding shareholders and members of its Board of Administration C..., his wife D..., E..., F… and G..., with share capital of EUR 60,000.00 distributed as follows (cfr. document no. 2 attached to PI):

1. In its first year of activity, in pursuit of its corporate purpose, the Claimant acquired stakes in textile industry companies as follows:

a) 50.8% of the share capital of the anonymous commercial company H…, S.A., legal entity no. …;

b) 97.8% of the share capital of the limited commercial company I…, LIMITADA, legal entity no. ….

(Factuality acknowledged by the Claimant and Respondent respectively in article 6.° of PI and in articles 9.°, 103.° and 104.° of R.).

1. On 31 December 2001, the Claimant obtained bank credit, granted by BANCO J…, S.A., in the amount of EUR 19,368,322.64 for acquisition of the stakes referred to in the preceding point (cfr. document no. 3 attached to PI).

2. The shareholders and administrators of the Claimant C..., D..., E... and G... were managing partners of said company I..., LIMITADA from 1 August 1993 (cfr. the registration information attached as document no. 1 to R.).

3. With respect to H…, S.A., since 30 May 2000 the shareholders and administrators of the Claimant C..., D..., E..., G… and F… belonged to its Board of Administration (cfr. copy of publication at pages 54-55 of AF).

4. At the end of 2003, the Claimant sold the stake acquired in H… S.A. to B..., S.A, which at the time already held 39.8% of the shares of the company subject to transfer (Factuality acknowledged by the Claimant in article 9.° of PI and accepted by the Respondent in article 120.° of R. and in nos. 26 and 27 of its counter-statements).

5. Also in 2003, the Claimant acquired a stake corresponding to 34.43% of the share capital of the anonymous commercial company K..., S.A., legal entity no. …, which had as members of its Board of Administration since 4.9.2000 the shareholders and administrators of the Claimant D..., E... and G… (Factuality acknowledged by the Claimant in article 10.° of PI and accepted by the Respondent in article 122.° of R., as well as registration information attached as document no. 2 to R.).

6. In the same year, K..., S.A. acquired by transfer from the insolvency estate of L..., S.A., legal entity no. …, the respective equipment and manufacturing facilities, and has since conducted activity in the textile sector (cfr. deed attached as document no. 4 to PI).

7. The Claimant does not have its own facilities nor dependent workers (cfr. fact acknowledged in article 11.° of PI and accepted in articles 24.°, 25.° and 124.° of R.).

8. In the years 2009, 2010, 2011 and 2012 the Claimant had no employees, as stated in the Simplified Business Information statement (IES) filed for those years, and therefore did not incur personnel expenses (cfr. Tax Inspection Report, hereinafter TIR, respective page 14, attached as document no. 13 to PI and found at page of AF).

B) THE COMPANY – B…, S.A.

1. B..., S.A is a commercial company established in 1964, with a share capital of PTE 2,000,000$00 (EUR 9,975.96), which has as its purpose the manufacture and marketing of wool goods and related products (cfr. publication attached as document no. 5 to PI).

2. At the end of 2006, B..., S.A registered a share capital of EUR 2,500,000.00, divided into 500,000 shares with a nominal value of EUR 5.00 each, and had as shareholders: C...; D...; E...; G...; F…; M… and B..., S.A with own shares, as follows (cfr. publications attached as document no. 6 to PI and article 15.° of PI):

1. From the comparison of the shareholder structures of the Claimant and B..., S.A it follows that M… was only a shareholder of the latter and not of the Claimant and that his stake was acquired by his daughter N…, through succession following his death, which occurred on 11 June 2009 (cfr. TIR, respective pages 8 and 21).

2. The members of the board of administration of B..., S.A, designated for the three-year period from 2008 to 2010 and for the 2011 to 2013 period, are the same as those comprising the board of administration of the Claimant (see above no. 1), for the three-year period from 2009 to 2011 and for the 2012 to 2014 period (cfr. publications of registration acts relating to the two companies attached as annexes to the TIR found in AF).

3. Between 2000 and 2009, no dividends were distributed to shareholders, except for the net result of 2008, for which a distribution of profits in the amount of € 1,750,000.00 was decided (cfr. TIR, respective page 16 and minutes no. 89 attached as document no. 3 to R.).

4. In 2009, the moment when approximately 85.481% of shares representing the share capital of B..., S.A were sold to the Claimant, said company had free reserves worth €93,621,066.18 and financial availability of € 45,757,083.55 (cfr. TIR, page 27).

5. B..., S.A had already reached since 2000 the legal limit of 10% own shares (50,000 shares, at the nominal value of € 5.00) – cfr. TIR, pages 16 and 17.

C) "RESTRUCTURING"

1. In June 2009, the Claimant purchased from its shareholders C..., D..., E... and G..., a total of 404,910 shares representing the share capital of B..., S.A, at the unit price of EUR 215.00 per share (cfr. TIR, page 8).

2. Before the Claimant's purchase of B..., S.A shares, a favorable opinion was obtained from the Claimant's fiscal council regarding the price of EUR 215.51 per share of B..., S.A, which was determined, according to letter of 8.6.2009 from O… attached as document no. 7 to PI, which is hereby reproduced, in accordance with the equity method indicated by the Claimant's Board of Administration (no. 1), a method which, although "is one of the easiest and simplest approaches to value companies, in specific situations it can be adequate and used," but "it should be noted that in the vast majority of cases, the buyer of a company or business is primarily interested in the future results generated by its acquisition and not specifically in the value of the assets that make up the assets of the company to be acquired" (no. 3).

3. According to this letter from O..., taking into account that: "According to the equity method, the value of a company corresponds to the net value of its revalued assets and liabilities, or, the value of its equity adjusted for the effects resulting from revaluation, and possible corrections resulting from an audit of accounts so that assets and liabilities are presented at market values" (no. 5) and that: "the company to be acquired has certified accounts as of 31.12.2008, we consider the value of equity at that date," it concluded that "the transaction value for the shares of company A…, S.A. is 215.51 euros per share" (no. 6).

4. The unit value of sale of each share, considering the value of B..., S.A's equity, as of 31.12.2008, of EUR 96,978,785.23, and the total of 450,000 shares available, was subsequently rounded down to the nearest euro (EUR 215.00) – cfr. TIR, page 8.

5. In September of the same year, the Claimant purchased from its shareholder F… 22,495 shares representing the share capital of B..., S.A, at the unit price of EUR 215.00 per share (cfr. TIR, page 8).

6. In the Claimant's accounting, such operations were recorded by debit in account 411103 – Financial Investments in Capital Stakes in Companies of P…S.A. in the total amount of EUR 91,892,075.00, with entries of equivalent value in account 26821 (other payables and receivables/various creditors), specifically in the sub-accounts assigned to each shareholder, namely in sub-account 2682102 - Mr. C..., in the amount of EUR 72,546,375.00, and in sub-accounts 2682103 – Mrs. D…, 2682104 – Dr. E..., 2682105 – G…, 2682106 – Eng. F…, in the amount of EUR 4,836,425.00 each (cfr. TIR, page 9 and respective annex III).

7. The Claimant did not have sufficient financial resources to make immediate payment of B..., S.A shares (fact acknowledged in no. 32 of the Claimant's statements).

8. As a result of the aforementioned onerous acquisitions, the Claimant became the owner of 85.5% of the share capital of B..., S.A, remaining indebted to the respective transferors, its shareholders, in a total of EUR 91,892,075.00 (cfr. TIR, pages 8 and 9).

9. On 10 December 2010, the shareholders of the Claimant, met in general assembly, resolved to increase its share capital from EUR 60,000.00 to EUR 4,334,050.00, as well as to make supplementary contributions by 30.12.2010 in favor of the Claimant in the amount of EUR 44,877,525.00, applying for this purpose part of the shareholders' credit relating to the price of the sale of shares of B..., S.A, thereby reducing the amount of such debt to EUR 42,740,500.00 (cfr. minutes no. 16 attached as document no. 8 to PI).

10. By resolution of 20 December 2010, N…, shareholder holding 4.5% of the share capital of B..., S.A who did not hold any shares in the Claimant, came to participate in the capital of the latter, through its increase to EUR 4,562,000.00, by contribution in kind of said shares of B..., S.A, namely, 22,495 shares with a nominal value of €5.00 each, such that "[f]or each 1 share of B…, SA delivered, 2.0266725939097577239386530340076 shares of A…, S.G.P.S., S.A. subscribed at their respective nominal value will be allocated, for which 45,590 shares representing the share capital of A… S.G.P.S., S.A. will be issued," with a premium of € 4,608,475 (cfr. minutes no. 18 attached as document no. 9 to PI).

11. The positive difference of EUR 4,608,475.00 between the value of the shares contributed - valued at EUR 215.00 per share - and the nominal value of the new shares issued by the Claimant and allocated to its new shareholder N… was accounted for in account 5512 - Capital reserves/premium (cfr. TIR, page 12).

12. Also in December 2010, concurrently with the aforementioned swap of shares, the shareholder of the Claimant C... ceded in favor of the new shareholder N…, his granddaughter, the credit resulting from part of the price that was still owed to him by the Claimant by virtue of the sale of his shares in B..., S.A, in the amount of EUR 2,246,500.00, and part of the credit relating to supplementary contributions made of which he was also a creditor of the Claimant, in the amount of EUR 2,361,975.00, all totaling EUR 4,608,475.00 (cfr. document no. 10 attached to PI).

13. On 27 December 2010, B..., S.A resolved to distribute part of the values of its free reserves, specifically EUR 33,750,000.00, in proportion to the shareholders' stakes, reaching the amount per share of € 75.00, justifying that "The company's financial availability is very high and not necessary for the company's normal operation and much higher than any company in the sector. This distribution will promote greater efficiency of the group's capital structure" (cfr. minutes no. 94 attached as annex VIII to TIR).

14. At the time, the shareholders of B..., S.A were the Claimant and the shareholders of the Claimant, who held residual stakes (cfr. TIR, pages 9).

15. From the amount referred to in no. 30 above, B…, S.A. distributed dividends to the company Claimant A…, SGPS in the amount of EUR 33,742,500.00 (cfr. minutes no. 94 attached as annex VIII to TIR and annex IX).

16. On 31 December 2010, the supplementary contributions in the Claimant, in the total amount of EUR 44,877,525.00, belonged, in the percentages indicated below, to the following shareholders (cfr. TIR, pages 12-13):

1. Also on 31 December 2010, the Claimant made a payment of part of the price still owed from the acquisition of 85.5% of the share capital of B..., S.A, in a total of EUR 21,370,250.00, detailed by respective creditors as follows (cfr. TIR, pages 17, 19 and 20):

1. The remainder - EUR 12,372,250.00 - was invested in the establishment of a financial investment at Bank Q…, in the total amount of EUR 12,384,260.15 (plus the initial balance of EUR 12,010.15) – cfr. TIR, page 18.

2. Said financial investment would be liquidated in December 2011, with the Claimant making a payment of another part of the debt incurred with the acquisition of shares from the shareholders, in the amount of EUR 10,575,650.00 (cfr. TIR, page 18).

3. Also in December 2011, B..., S.A again resolved to distribute dividends to the Claimant, in the amount of EUR €8,098,200.00, justifying that "The company's financial availability is very high and not necessary for the company's normal operation and much higher than any company in the sector. This distribution will promote greater efficiency of the group's capital structure" (cfr. minutes no. 97 attached as annex X to TIR).

4. In March 2012, the Claimant used the amount of EUR 8,098,200.00, relating to the dividends distributed by B… S.A., to make another payment of the debt incurred with the acquisition of shares from its shareholders (cfr. TIR, page 19).

5. On 31 March 2012, the debt resulting from the acquisition of shares of company A, S.A., was, from the Claimant's perspective, accounted for as discharged, in part through payments made to shareholders - using amounts from dividends previously distributed -, in part through conversion of credits into capital increase and supplementary contributions (cfr. TIR, page 20).

D) "INSPECTION ACTIVITY"

1. The Tax Authority and Customs Authority conducted a limited-scope inspection of the Claimant, following Order DI…, and under internal service orders nos. OI…, OI… and OI…, of 16.10.2013, aiming to determine withholding of IRS affecting the years 2010, 2011 and 2012 and control of abusive tax planning schemes (cfr. TIR, page 6).

2. On 21 October 2013, the Claimant was notified by the Finance Department of Castelo Branco to exercise, within 30 days, its right of prior hearing regarding the Draft Tax Inspection Report under which the Tax Authority considered that the Claimant's acquisition of 85.5% of the share capital of B..., S.A - in June and September 2009 - and, as well, the increase of the Claimant's share capital by contribution in kind of an additional 4.5% of the shares representing the share capital of B..., S.A - in December 2010 - constituted fiscally abusive legal transactions, amounting to "successive and meticulous chaining of acts constituting abusive legal transactions directed by artificial means at the elimination of taxes that would be due as a result of acts of identical economic purpose" - cfr. document no. 11 attached to PI.

3. On 18 November 2014, the Claimant exercised in writing its right of prior hearing, contesting the position manifested by the Tax Authority, as per document no. 12 attached to PI.

4. Throughout the inspection procedure, particularly in the prior hearing phase, no additional investigative steps were requested by the Claimant (cfr. documents nos. 12 and 13 attached to PI).

5. On 2 January 2014, the Claimant was notified by the Finance Department of Castelo Branco of the Final Tax Inspection Report, under which the previously notified draft was converted to final form, as per document no. 13 attached to PI, which is hereby reproduced, from which the following passages of relevance to the decision should be transcribed:

i) "III – 2. Accounting and Financial Analysis of Company A…, SGPS

(...) In the years 2007 and 2008, the company A…, SGPS's revenues resulted from consulting services, financial gains from interest on bank deposits and gains in group companies relating to the accounting of financial investments under the equity method, which is a consolidation method provided for in Decree-law no. 238/91 of 2/07, being used whenever a company included in such consolidation exercises significant influence over the management and financial policy of an associated company over which it holds a financial stake.

Under no. 8 of article 18° of CIRC, the revenues and expenses, as well as any other patrimonial variations, disclosed in accounting as a consequence of using the equity method do not compete for the determination of taxable profit.(...)

After the acquisition of shares of company B…, SA, in the course of 2009, company A… SGPS was left with a debt to the shareholders identified in table V, in the total amount of € 91,892,075.00 (...), verifying that, in light of the values evidenced in the accounts, A…, SGPS would not have availability that would permit it to liquidate the debt incurred. (...)

According to the elements collected in the course of the inspection acts, it is verified that, in operational terms, services provided to a participated company are registered, specifically to company I..., Lda., NIPC …, citing, as a merely exemplary matter, invoice no. … of 15.12.2009, in the amount of € 200,000.00, plus VAT at the statutory rate.

No elements were collected that would substantiate any potential services provided by A…, SGPS to company B..., SA nor other data or elements that would allow concluding toward any change in the administration of company B..., SA as a result of the transactions involving the purchase and sale of shares of the first of said companies.

In the years 2009, 2010, 2011 and 2012 A... SGPS had no employees whatsoever, as stated in the Simplified Business Information statement (IES) filed for those years, and therefore did not incur personnel expenses.

The company also does not have its own facilities or administrative equipment and does not pay rent for the facilities. Administrative expenses refer essentially to specialized services provided by consultants (CPA and TOC) and bank charges.

A…, SGPS therefore has no physical or human structure. (...)

In sum, the absence of objective indicators, such as personnel expenses, fixed assets or other equipment, demonstrate the absence of human and technical resources with which company A…, SGPS may pursue its limited corporate purpose such that, lacking any physical and human structure, the administrative and financial services necessary for the provision of services to other entities (notably to company I..., Lda.) were necessarily provided by other entities".

ii) "III – 3. Tax Framework

In the course of the inspection procedure credited by DI…, opened in the name of company B..., SA, a copy of the minutes of approval of accounts for the exercises from 2000 to 2012 of that company were collected.

Analyzing said minutes, it is verified that in that time period dividends were not distributed to shareholders, except for the net result of 2008, for which distribution of profits in the amount of € 1,750,000.00 was decided, cfr. minutes no. … of 28.05.2009 (approval of accounts for 2008), which were subject to withholding at source at the liberatory rate provided in article 71° of CIRS (...), at the time 20%, the respective tax in the amount of € 350,000.00 being paid through guide no. … relating to period 2009-10.

(...) company B... S.A. obtained, consistently, positive net results which were applied to reserves and carryforward results, such that, at the end of 2009, the company had reserves worth € 93,621,066.18.

One must take into account that those amounts, if distributed to shareholders, would meet, from their perspective, the incidence rule provided for in article 5° – no. 2, subparagraph h) of CIRS, which encompasses "the profits of entities subject to IRC made available to their respective associates or holders, including advances on account of profits, except those referred to in article 20°," which would be subject to taxation through the application of liberatory rates provided for in article 71° of CIRS, without prejudice to the option of joining consolidated returns under its terms.

However, (...) taking as reference the time period between the years 2000 to 2009, the year in which shares representing 85.481% (percentage calculated taking into account the company's own shares) of the share capital of company B..., SA were sold in favor of SGPS, only in that last year were dividends paid in the amount of € 1,750,000.00, relating to the net result determined in 2008.

Except for the dividend distribution referred to above, it is verified, in light of the minutes of company B..., SA, that changes to the company's equity occurred solely through the payment of bonuses to workers and administrators, as well as the acquisition of own shares in 2000, in the amount of € 12,469,947.43. (...)

Therefore, being company B..., SA the holder of 10% of its own share capital, it could not acquire more own shares, which were acquired for € 12,469,947.00, notoriously above their respective nominal value, without there being, on the part of the selling shareholders, any taxation relative to the sale of those shares, either through the exclusion of taxation in the alienation of shares held for more than one year provided, at the time, in no. 2 of article 10° of CIRS, or through the transitional regime provided for in article 5° of Decree-law no. 442-A/88 of 30 November, which approved the IRS Code.

The purchase of own shares had as a consequence in accounting the decrease of equity by the equivalent amount.

Being legally forbidden the possibility of acquiring more own shares, any financial flows originating from company B..., SA and directed to shareholders would have to be carried out through the distribution of dividends, with the inherent taxation in the IRS sphere.

However, in contrast (clear, we would say) with the dividend distribution policy adopted until 2009, in December 2010 company B..., S.A distributed dividends to company A..., SGPS in the amount of 33,742,500.00 euros. (...)

Such resolution is expressed in minutes no. … of 27.12.2010 of company B..., S.A (Annex VIII), having been decided to distribute € 75.00 per share, totaling € 33,750,000.00, of which € 33,742,500.00 were distributed to A..., SGPS in proportion to its shareholding.

That amount was paid through a bank transfer carried out by company B..., S.A to the account corresponding to NIB …, the holder of which is A..., SGPS (annex IX).

From the perspective of SGPS, the amount referred to in the preceding paragraph was not subject to taxation in light of the provisions of article 51° of CIRC, given the satisfaction of the prerequisites defined in no. 1 of this provision, nor was withholding at source applicable in light of the provisions of subparagraph c) of no. 1 of article 97° of CIRC.

By contrast, if those dividends had been distributed prior to the transfer of shares in favor of SGPS, they would have been subject to taxation at liberatory rates in the sphere of the respective shareholders and in proportion to the stakes held, under the terms previously referred to.

As was demonstrated in subchapter III-2, company A... SGPS did not have financial means that would allow it to settle the debt resulting from the acquisition of shares of company B..., S.A, such that the amount received in 2010, as dividends – € 33,742,500.00 – was partially but mainly applied in payment to creditors, incidentally, to the former shareholders of B..., S.A and simultaneously shareholders of A..., SGPS.

In the year 2010, and on the basis of documents collected within DI…, it was verified that payments were made to shareholders C..., D..., E..., G… and F…, in a total of €21,370,250.00, distributed among them in accordance with the values evidenced in line 5 of tables XI, XII, XIII, XIV and XV, presented below (...).

The remainder - € 12,372,250.00 - was invested in the establishment of a financial investment at Bank Q…, in the total amount of € 12,384,260.15 (covering the amount referred to above, plus the initial balance of € 12,010.15), as per extract from account … - Bank Q… (...).

Also that financial investment would be liquidated in December 2011, with company A…, SGPS making another payment of the debt incurred with the acquisition of shares from the shareholders, in the amount of € 10,575,650.00, (see line 6 of tables XI, XII, XIII, XIV and XV, presented below). (...)

Also in December 2011, company B..., S.A again made a payment of dividends to company A..., SGPS in the amount of 8,098,200.00 euros (...), whose distribution was approved in minutes no. …, of 04 June 2011 (Annex X), justifying that "The company's financial availability is very high and not necessary for the company's normal operation and much higher than any company in the sector".

In March 2012, company A..., SGPS used the amount of 8,098,200.00 euros, relating to the dividends distributed by B..., S.A, to make another payment of the debt incurred with the acquisition of shares from its shareholders, (see line 8 of tables XI, XII, XIII, XIV and XV, presented below).

[Tables omitted for brevity]

On 31 March 2012, the debt resulting from the acquisition of shares of company B..., S.A was, in the view of company A..., SGPS, accounted as discharged, in part through payments made to shareholders, using amounts from dividends previously distributed by company B..., S.A to company A..., SGPS, in part through conversion of credits into capital increase and supplementary contributions.

Regarding the payments made and likewise regarding the capital increase of company A..., SGPS (table I), cfr. Annex IV, there was thus verified an indirect distribution of dividends to shareholders, with the obtainment of a clear tax advantage, since the distribution of dividends from B..., S.A to A…, SGPS is excluded from taxation under article 51.° of CIRC and exempted from withholding at source in accordance with article 97.° of CIRC, unlike the distribution of dividends to shareholders, which would be subject to taxation and withholding at source, under article 71.° of CIRS.

Regarding the conversion of part of the credit resulting from the purchase and sale of shares of company B..., S.A into supplementary contributions, no correction is proposed, because, in our view, they do not constitute the payment or placing at the disposal of the partners of any revenues, which will only occur if and when such supplementary contributions come to be restored in compliance with a possible resolution of the partners to that effect.

In the concrete case of shareholder N…, one must take into account that, if the transaction had been carried out in the exact manner in which it was carried out in relation to the other shareholders, the same would be onerous alienation of share stakes, being such situation capable of meeting the incidence rule provided for in subparagraph b) of no. 1 of article 10° of CIRS.

The realization value would be defined for us by subparagraph f) of no. 1 of article 44° of CIRS, corresponding to the value of the consideration. Recall that, in relation to the other shareholders and for a shareholding exactly equal – 5% – the value of € 4,836,425.00 was fixed, different from that attributed to the contribution in kind made in December 2010 by shareholder N…, namely € 227,950.00.

The stake in company B..., S.A was acquired by N…, through succession opened by death of her mother M…, who died on 11.06.2009, being her sole heir.

The share stake appears in item no. 8 of the list of assets corresponding to stake no. …, in which appear 22,500 shares of company B..., S.A, valued at their respective nominal value of € 5.00, totaling, therefore, € 112,500.00, which, in light of the provisions of article 45º – no. 1 of CIRS, should be considered as acquisition value, for purposes of determining any capital gains in category G, by subtracting from the realization value previously referred to.

In the case of shareholder N…, the product of the alienation of shares was not directly taken to account 27821 – Other accounts payable and receivable/various creditors (unlike the other shareholders), in which is instead registered another amount – € 2,246,500.00 – whose supporting document must have been the notice of credit transfer sent by shareholder C... to company A... SGPS (annex XI) under which the above-identified shareholder ceded to N… part of the credits of which he was holder with respect to company A..., SGPS, specifically € 2,246,500.00 "...relating to the second installment of the purchase price provided for in the share purchase agreement, concluded between C... and the Company, through which the latter acquired from the first 337,425 shares representing 67.485% of the share capital of B…, SA...".

The credit transfer was accounted for, by debit of account 27821 – Other accounts payable and receivable/various creditors, namely in sub-accounts 2782102 (Mr. C...) and by credit of sub-account 2782107 (N…), in the amount of € 2,246,500.00.

This latter account would subsequently be discharged, by means of a movement by debit in the amount referred to above, by counterpart of account 120007 – Demand Deposits/Banco Espírito Santo, which was moved by credit through payment of the amount € 2,246,500.00 to shareholder N… (Annex XII).

In the document referred to in the preceding paragraph, it also states that shareholder C... also cedes to his granddaughter N…, a credit of € 2,361,975.00, corresponding to part of the credit of which the first of the shareholders referred to above was originally the holder, relating to supplementary contributions decided in minutes no. ….

Notwithstanding the differences noted, it appears to us that there is a point of contact between the procedure adopted regarding shareholder N… and the other shareholders: that of "not opening" company B..., S.A to third parties, maintaining control of the same in the family universe, albeit indirectly, through company A....

However, while with respect to the other shareholders the transfer of shares in favor of SGPS did not determine the payment of any tax, either through the exclusion of taxation provided for in no. 2 of article 10° of CIRS or through the transitional regime established for category G income of IRS in article 5° of Decree-law no. 442-A/88 of 30.11 that approved the IRS Code, for shareholder N... could not benefit from any of the provisions previously cited.

In fact, at the date that the resolution embodied in minutes no. … was taken, article 10° – no. 2 of CIRS was already repealed (article 2° of Law no. 15/2010 of 26/07), and capital gains resulting from the transfer of shares held by N... could not be excluded from taxation.

Regarding article 5° of Decree-law no. 442-A/S8 of 30.11, the same would be inapplicable, given the date of acquisition of shares".

iii) "III - 4. - Application of the General Anti-Abuse Clause

Taking into account the factuality described above and demonstrated, as it appears to us, the procedures adopted for carrying out the intended result - patrimonial advantages through subtraction from the payment of taxes due - it is incumbent upon the Tax Administration to resort to the anti-abuse clause, under the provisions of article 38° - no. 2 of the GTL (...), since we are faced with successive and meticulous chaining of acts constituting abusive legal transactions directed by artificial means at the elimination of taxes that would be due as a result of acts of identical economic purpose.

(...) it appears to us that the sale of shares of company B… SA in favor of A…, SGPS, whose shareholders and administrators (...) are exactly the same, constitutes the practice of an act that, despite being formally lawful, has underlying the intention to obtain revenues, more specifically dividends, which otherwise would be subject to effective taxation.

The intention will not have been to alienate the shares in favor of third parties, but to alienate them in such a manner as to maintain control of company B… SA, albeit indirectly, achieving, through another route, albeit equally indirectly, receiving the dividends of company B…, SA, without the inherent IRS taxation, specifically in its category E (capital income).

From the perspective of company A…, SGPS, the dividends distributed by company B…, SA were not subject to taxation, in light of the provisions of article 51° of CIRC, given the satisfaction of the prerequisites defined in no. 1 of this provision, nor was there withholding at source in light of the provisions of subparagraph c) of no. 1 of article 97° of CIRC.

If such dividends had been distributed prior to the transfer of shares in favor of SGPS, they would have been subject to taxation through liberatory rates provided for in article 71° of CIRS.

Given the above, it appears to us there are grounds for application of the general anti-abuse clause, which should be governed by the provisions of article 63° of CTPP. (...)

Element Means

Company B…, SA obtained, in a reiterated manner, positive net results which were applied to reserves and carryforward results, such that, at the end of 2009, the company had reserves worth € 93,621,066.18, (...).

In the time period between the years 2000 to 2009, the year in which the transfer of 85.481% (percentage calculated taking into account the company's own shares) of the share capital of company B…, SA in favor of SGPS took place, there was only distribution of profits, in the amount of € 1,750,000.00, relating to the net result determined with respect to the 2008 exercise.

Except for that dividend distribution, decided on 28.05.2009, it is verified, in light of the minutes of company B…, SA, that changes to the company's equity occurred solely through the payment of bonuses to workers and administrators (...), as well as the acquisition of own shares in 2000, in the amount of € 12,469,947.43.

As regards the acquisition of own shares by company B…., SA, it should be noted that the legal limit of 10% imposed by article 317° - no. 2 of the Commercial Companies Code had already been reached, which imposes restrictions on the acquisition of own shares, it not being legally permissible to acquire own shares beyond that limit, except in the circumstances provided for in no. 3 of that provision.

Therefore, being company B…, SA the holder of 10% of its own share capital, it could not acquire more own shares, which were acquired for € 12,469,947.00, notoriously above their respective nominal value.

Having reached the maximum ceiling for acquisition of own shares in the proportion of 10%, B…, SA became unable to continue to participate in its own capital. And shareholders could not continue to alienate share stakes to a company the majority of whose capital belonged to them.

The purchase of own shares had as a consequence in accounting the decrease of equity by the equivalent amount.

Also the distribution of dividends from company B…, SA in favor of company A…, SGPS had as a consequence in accounting the decrease of equity of the first of the above-mentioned companies.

The values accumulated over several years in the reserves account, if distributed to shareholders, would be susceptible to taxation in the IRS sphere, specifically within Category E, in accordance with the incidence rule provided for in article 5.º - no. 2, subparagraph h) of CIRS (IRS Code), which encompasses "the profits of entities subject to IRC placed at the disposal of their respective associates or holders, including advances on account of profits, except those referred to in article 20.º".

The taxation of such revenues from the perspective of shareholders should be effectively carried out through the application of liberatory rates provided for in article 71° of CIRS, without prejudice to the option of joining consolidated returns under its terms.

The option taken by shareholders to transfer the shares of company B…, SA to company A…, SGPS (recalling that the shareholder structure and Board of Administration of both companies is exactly equal) allowed them to constitute a credit against SGPS, which was partially paid through dividends distributed by the first to the second of the above-identified companies.

Such credit was paid through values from the reserves accumulated over successive business exercises by company B…, SA, which, if distributed directly to its shareholders, would be subject to taxation through liberatory rates, under the terms previously referred to.

With the "interposition" of company A…, SGPS between company B…, SA and the holders of the capital of this latter company (at the date prior to the successive purchases and sales of shares of company B…, SA in favor of SGPS) (...), the shareholders of company B…, SA managed to receive values that were recorded in the reserve accounts of SA and which, if directly distributed to them, would be subject to taxation in Category E of IRS.

That is, through the sale of shares of B…, SA to A…, SGPS, it was possible to transform what would be a regular distribution of dividends to shareholders into a set of alienations of shares on which ultimately no effective taxation fell in the personal sphere of those involved.(...)

In the case of taxpayer N..., notwithstanding the procedure followed not being equal to that of the other shareholders, the truth is that it also aimed at avoiding the payment of taxes resulting from the transfer of shares carried out to A…, SGPS, seeking to avoid, first and foremost, the taxation of the transaction within category G of IRS, under the artifice of a credit transfer carried out by her grandfather, while in turn those credits resulted from the sale of practically all shares of which C... was holder in company B…, SA.

From the perspective of company A…, SGPS, there was a difference, furthermore, between the value attributed to the shares of company B…, SA, in which the contribution in kind of shareholder N... in the capital of that company was constituted, and the nominal value of those shares.

That premium is reflected in the company's accounting, such that a potential capital gain resulting from the alienation of that asset will be encompassed by the tax benefit provided for in no. 2 of article 32° of EBF (Tax Benefits Statute), such that, from the perspective of that company, the acquisition value attributed to the shares would be relatively indifferent.

Not so regarding shareholder N..., since, with respect to her, the sale of shares in the exact terms in which it was carried out by the other shareholders (at a value higher than nominal value), would determine their taxation in the IRS sphere (category G).

It should therefore be noted that, in relation to shareholders C..., D…, E..., G… and F…, a unit value per share notoriously higher than its respective nominal value was stipulated, since, for them, the same would be irrelevant, not determining any effective taxation in the IRS sphere (cfr. article 5° - no. 2 of Decree-Law 442-A/88 of 30.11 and article 10° - no. 2 of CIRS, in force at the time), the same not occurring with respect to taxpayer N..., as regards whom the stipulation of a unit value per share identical to that fixed for the other shareholders would determine her taxation in the IRS sphere, as the provisions above cited would not apply to her.

But it seems pertinent to us to insist that the objective sought with the legal transactions celebrated was not an effective transfer of the shares in favor of third parties but solely to obtain the distribution of dividends by company B…, SA, since this continued to be controlled by its former shareholders, albeit indirectly, through company A…, SGPS.

Element Result

Being legally forbidden the possibility of acquiring own shares, any financial flows from company B…, SA to shareholders would have to be carried out through the distribution of dividends, with the inherent taxation in the IRS sphere.

However, contrary to the dividend distribution policy adopted between the 2000 and 2009 exercises, in December 2010 company B…, SA proceeded to distribute dividends to company A… SGPS in the amount of 33,742,500.00 euros.

Subsequently, in December 2011, company B…, SA again made a payment of dividends to company A…, SGPS in the amount of 8,098,200.00 euros (...).

From the perspective of SGPS, the amounts referred to in the preceding paragraphs were not subject to taxation in light of the provisions of article 51° of CIRC, given the satisfaction of the prerequisites defined in no. 1 of this provision, nor was there withholding at source in light of the provisions of subparagraph c) of no. 1 of article 97° of CIRC.

By contrast, if those dividends had been distributed prior to the transfer of shares in favor of SGPS, they would have been subject to taxation at liberatory rates in the sphere of the respective shareholders and in proportion to the stakes held, at the liberatory rates provided for in article 71° of CIRS.

Element Intellectual

(...) company A… SGPS did not have financial means that would allow it to settle the debt resulting from the acquisition of shares of company B… SA, such that the amount received in 2010, as dividends - € 33,742,500.00 - ended up being applied in payment to the respective creditors, incidentally, former shareholders of B…, SA and simultaneously shareholders of A..., SGPS (...).

Also in December 2011, company B…, SA again made a payment of dividends to company A..., SGPS in the amount of 8,098,200.00 euros (...).

In March 2012, company A..., SGPS used the amount of 8,098,200.00 euros, relating to the dividends distributed by B…, SA, to make another payment of the debt incurred with the acquisition of shares from shareholders (...).

Given the accounting and financial situation of SGPS (...) and notwithstanding the celebration of the legal transaction constituted in the alienation of shares of B…, SA in favor of company A..., SGPS, there will not be at issue an effective alienation of share stakes, given the maintenance of voting rights that the former shareholders of SA came to hold in SGPS and indirectly therein.

Given the limitation resulting from article 317° of the Commercial Companies Code, the shareholders of company B…, SA sought a solution that would allow them, at one and the same time, the alienation of their shares to a company over which they held total control and to proceed with the alienation of their share stakes in company B…, SA in favor of this new company, thereby removing the limitation on the acquisition of own capital of 10% of shares.

In this context, it will be pertinent to bring again into focus the fact that there is total coincidence between the partners of both companies involved in the transaction, both regarding voting rights and the percentages of share capital.

The board of administration of both companies is also the same, with its members remunerated only by B…, SA.

Normative Element

(...) Having analyzed the financial transaction in question, its factuality and the documentary elements, it is concluded that we are faced with a situation of tax planning, given the tax advantages obtained through the alienation of shares of company B…, SA to company A..., SGPS.

Note even that, among all taxpayers (individual and collective) involved, there are special relationships, as provided for in subparagraphs a), b), c) and d) of no. 1 of article 63° of CIRC. (...)

The Tax Administration does not intend to call into question the alienation of the shares, which is a lawful transaction.

It is considered that the content of article 38° no. 2 of the GTL is satisfied since we are faced with a legal transaction that, in an artificial manner, aimed solely at the purpose above described: the manifest intention of elimination of taxation of dividends generated by company B…, SA over several years.

Given the factuality that involved the entire transaction in question, we dare even to transcribe an excerpt from the Judgment of TCA South (case 04255/10, of 15-02-2011, www.dgsi.pt), where it states that: "We are here faced with the so-called step by step transactions in which a complex factual situation is found, involving a succession of acts/transactions coordinated with each other, although they may occur at different time moments and with the common objective of achieving a tax advantage. Faced with this type of transaction, the law's applier should operate an integrated treatment visualizing them as a single transaction, tending toward a single and final result".

III - 5. Sanctioning Element

Throughout this document, it was intended to demonstrate that the objective and consequence of carrying out the successive legal transactions was the distribution of dividends generated by company B…, SA through company A..., SGPS, excluded from taxation in the IRS sphere, in the form of payment of a debt previously constituted and resulting from the sale of shares carried out by the shareholders of B…, SA to A..., SGPS, being pertinent to note that the shareholder structure of both companies is, in the final analysis, exactly equal, albeit at different time moments (...).

Furthermore, the contractualization of supplementary contributions by the partners in favor of A..., SGPS in the amount of € 44,877,525.00 will allow the deferred repayment in time of said amount, materially assuming the nature of true dividends that, by tranches, may come to be distributed by shareholders, integrating their patrimonial sphere, without suffering any kind of taxation.

However, as it appears to us, such question will arise if and when the restitution of supplementary contributions to the partners comes to be decided, under the terms of article 213° - no. 2 of the Commercial Companies Code, because it will be at that moment that the tax-relevant event will occur for IRS purposes, through payment or placing at the disposal of the respective amount to shareholders.

Not so regarding the amounts already paid to shareholders by company A..., SGPS, whose amounts and payment dates appear in tables XI, XII, XIII, XIV and XV, as well as the capital increase by contributions in kind, which are proposed to be qualified as the true nature of distribution of dividends, since they provided availability of money to the partners without suffering any taxation in the IRS sphere. (...)

Given the facts exposed (...), it is proposed, in summary, the disregard for tax purposes of these transactions and the consequent taxation in the IRS sphere, as dividends, of the amounts received by shareholders.

In accordance with article 101° - no. 2, subparagraph a) of CIRS, the obligation to proceed with withholding at source would be incumbent on company A..., SGPS, since it was this entity that placed these revenues at the disposal of shareholders.

The withholding rate is provided for in subparagraph c) of no. 3 of article 71° of CIRS, being applicable the wording in force at the date of placement at the disposal of the revenues, specifically:

• 26.50% - from 30.10.2012 to 31.12.2012 - Law 55-A/2012 of 29/10

• 25.00% - from 01.01.2012 to 29.10.2012 - Law no. 64-B/2011 of 30/12

• 21.50% - from 01-07-2010 to 31/12/2011 - Law no. 12-A/2010 of 30/06

• 20.00% - from 01-01-2006 to 30-06-2010 - Decree-Law no. 192/2005 of 7/11

The taxation of dividends distributed to resident subjects through withholding at source at the liberatory rate provided for in article 71° of CIRS has the nature of liberatory payment, without prejudice to the option to join consolidated returns, under the terms of article 71° no. 6 of CIRS.

Article 103° of CIRS typifies liability in case of substitution, indicating the entity to which the tax in arrears is exigible, as well as compensatory interest, taking into account the status of resident, or otherwise, in Portuguese territory of the beneficiaries of these revenues, and that, in the case in question, would be applicable no. 4 of article 103° of CIRS.

In view of all the foregoing, it is proposed that company A..., SGPS be taxed for the failure to withhold IRS at source, in accordance with the amounts and with reference to the periods evidenced:

(...)"

iv) "Right of Prior Hearing – Reasoning

(...)

Within the time granted for the right of prior hearing, company A..., SGPS SA., came to exercise the right of prior hearing, through a document received at this Finance Department on 18.11.2013, corresponding to entry no. … (Annex XIII).

In points 1 to 3 of the document sent, the inspected company merely limits itself to reproducing excerpts from the Draft Corrections sent in the prior hearing phase.

In point 4, the taxpayer rejects the position advocated by the Tax Administration, arguing that the acquisition of share stakes amounts to a perfectly normal and transparent transaction, properly framed in the pursuit of its corporate purpose, subsequently detailing the reasons underlying its disagreement with the proposed corrections.

In points 5 to 14, company A..., SGPS provides a historical overview since its establishment, which took place in 2000, to the present date, concluding that «...the Claimant is, since its establishment, for more than 10 years, a company holding shares with actual existence and that unequivocally develops its business activity.»

In point 15, it complements the information provided, informing that «...it has the appropriate human and technical resources for the development of its corporate purpose, through the activity of its administrators and the recourse to external service providers when necessary, having never the lack of its own facilities represented any obstacle to the proper pursuit of that.»

Regarding the historical summary carried out, it appears to us that, absent a better opinion, it does not contest the proposed corrections, because facts prior to the acquisition of stake holdings in company B…, SA are reported.

Moreover, analyzing the arguments invoked by the inspected company in this context, specifically in point 10 of the document in which its right of prior hearing is embodied, it becomes possible to identify yet another difference between the procedures adopted regarding the acquisition of stake holdings in companies H…, SA and I..., Limitada, on the one hand, and regarding the acquisition of stake holdings in company B…, SA, on the other hand.

In fact, while with respect to the first two bank loans were contracted, with respect to the acquisition of stake holdings in B…, SA it was verified that the same was partially paid with financial means derived from this latter company, through the distribution of dividends to SGPS, contrary to what was, up to that point, the dividend distribution policy previously followed in that company, both as to the frequency of dividend distribution as to the distributed amounts, under the terms referred to in Chapter III of the present Report.

In practice, the shareholders of company B…, SA, Messrs. C..., D…, E..., G… and F…, ended up receiving, indirectly, amounts derived from SA, which, if distributed to them directly, would be subject to withholding at source, under the terms previously exposed (...).

With respect to point 15 of the right of prior hearing, it appears to us that the same stems from the considerations made in subchapter III-2 of the present Report, whose title is Accounting and Financial Analysis of Company A..., SGPS.

As the title above reproduced immediately suggests, the considerations made in it are strictly based on the company's accounting, in which, with respect to the exercises analyzed, no recording of any costs underlying personnel, fixed assets or other equipment was detected.

Even admitting the recourse to external service providers, as advocated in the right of prior hearing, neither in this item was there detection of any recording of values resulting from any expenses with those providers.

In points 16 to 19 of the document sent within the prior hearing phase, the inspected company argues that «...the acquisition of a dominant position in the capital of company B..., S.A was seen as a clear business opportunity, allowing it to gain much greater scale as a company holding shares (...)», adding further that «...The motivation underlying the decision to acquire the stake in question was therefore completely alien to any tax treatment...» (...).

Analyzing the activity of company A..., SGPS after the acquisition of stake holdings in company B…, SA, taking as basis, particularly the information contained in the IES's - Simplified Business Information presented, as well as in the accounting records themselves, it is verified that there are no differences between the services provided by SGPS before and after that acquisition.

In fact, taking the year 2009 as reference, it was verified that, in that year, the turnover resulted from services provided to company I... Lda., in the amount of € 200,000.00, which is replicated in the following years (2010, 2011 and 2012), such that no facts are discerned that support the assertions formulated by the inspected company, under the terms above reproduced.

In other words, nothing is argued that would allow establishing any significant difference between what would be the activity of company A..., SGPS prior to the acquisition of stakes in company B…, SA and the activity of SGPS after that acquisition.

Next, in points 20 to 22, considerations are made on the calculation of the unit price fixed for the shares, which are hereby reproduced.

In this context, we need only clarify that, both in the Draft Corrections already sent and in the present Tax Inspection Report, no assessment is made with respect to that calculation, having limited ourselves to noting such fact.

Evidence of this will be the fact that the inspected company "...manifests its total incomprehension of the apparent understanding of the Tax Administration...».

Such words suggest that the inspected entity itself could not identify any understanding of TA regarding this matter, for the simple reason that no conclusion was formulated or any understanding was established on the same, having been our intention to refer, purely and simply, to the calculation method.

In the following points (23 and 24), the inspected entity refers to the increase of its share capital and the making of supplementary contributions.

On this matter, it appears to us that it is appropriate to bring again into focus the arguments previously adduced (subchapter III-1), insisting on the fact that the capital increase was supported by part of the credit constituted as a result of the purchase and sale of shares of company B..., S.A, as well as the fact that the supplementary contributions result from another part of the same credit, and may even be restored if such comes to be decided by the partners.

Moving now to points 25 to 29, the inspected entity states that «...the sole individual shareholder of B…, S.A, who was not a shareholder of the Claimant manifested her intention to begin to participate in the capital of the Claimant, for which she was prepared to contribute in kind her stake in B..., S.A, while maintaining only, like the other individual shareholders, a residual participation that would allow her to participate in the shareholders' meetings.»

Unlike the other shareholders, the procedure adopted with respect to shareholder N… was qualified as a swap of share stakes, framed, in tax terms, in articles 73° and 77° of CIRC. (...)

As already had the opportunity to refer, in the concrete case of shareholder N…, one must take into account that, if the transaction had been carried out in the exact manner in which it was carried out in relation to the other shareholders, the same would be onerous alienation of share stakes, being such situation capable of meeting the incidence rule provided for in subparagraph b) of no. 1 of article 10.° of CIRS.

However, nothing would prevent that with respect to shareholders C..., D…, E..., G… and F…, the same regime be applied that, in 2009, was provided for in articles 67° no. 5 and 71° of CIRC, which, after the renumbering of that code, carried out by Decree-law no. 159/2009 of 13/07, transitioned, without changes, to articles 73° - no. 5 and 77° of CIRC.

The stake of shareholder N... was therefore valued at 4,836,425.00 euros, an amount that was subsequently divided into two portions:

• one portion corresponding to the nominal value of new shares issued following the capital increase decided in minutes no. 18 of 20.12.2010, relating to company A..., SGPS (€ 227,950.00);

• the remainder was qualifed accounted for as premium, in the amount of € 4,608,475.00.

However, as already appears in the present Tax Inspection Report, on 20 December 2010 shareholder C... made a credit transfer of which he was a creditor of company A..., SGPS, to shareholder N…, in the amount of 2,246,500.00 euros, which were paid through a bank transfer made on 27.10.2011 (Annex XII).

For the benefit of shareholder N..., a credit relating to supplementary contributions was also ceded by her grandfather, in the amount of 2,361,975.00 euros, which totals 4,608,475.00 euros, an amount that corresponds exactly to the potential gain obtained by company A..., SGPS with the purchase of shares below its accounting value.

In our view, the facts above described configure, from the perspective of shareholder N..., the receipt of counterparties that exceed the tax regime of a swap of share stakes, since, albeit indirectly, she received amounts that, notoriously, exceed the limit of 10% of the nominal value of the share stake swapped, in accordance with the provisions of the closing part of no. 5 of article 73° of CIRC, with the consequent effects, specifically the non-applicability of the benefit provided for in article 77° of the same code.

Regarding the argument raised in point 30, only to note that, as is mentioned by the inspected entity itself, we only analyzed and described the accounting movements made as a result of the operations of purchase and sale of share stakes of company B... SA, nothing having been stated about its correctness or incorrectness.

Finally, in points 31 to 34, company A…, SGPS states that «...the hypothetical application to the situation in question of the General Anti-abuse Clause in no case could, contrary to what is intended by the Tax Administration, constitute the Claimant in tax liability for failure to withhold at source of IRS upon payment of shares acquired», concluding that «...not having the Claimant intended, as broadly demonstrated, the obtainment of any tax advantages, its liability for failure to withhold at source of IRS has no basis whatsoever.»

As regards the arguments above reproduced, it appears to us that it should, from the outset, clarify the fact that in the present Tax Inspection Report it is not intended to impute to company A..., SGPS the obtainment of any tax advantage.

As was stressed throughout the present Tax Inspection Report, what is intended to be taxed are the revenues obtained by the shareholders of company B…, SA, framed in category E of IRS, by virtue of, in our understanding, the factuality described being subsumable in the incidence rule provided for in subparagraph h) of no. 2 of article 5º of CIRS.

The taxation of such revenues is carried out through withholding at source at the liberatory rate provided for in article 71° no. 1, subparagraph c) of CIRS, which has the nature of liberatory payment, without prejudice to the option to join consolidated returns, under the terms of article 71° no. 6 of CIRS.

It bears noting that these revenues are not subject to mandatory consolidation, under the terms of article 22° - no. 3, subparagraph a) of CIRS.

In accordance with article 101° - no. 2, subparagraph a) of CIRS, the obligation to proceed with withholding at source falls on company A..., SGPS, since it was this entity that placed these revenues at the disposal of shareholders.

This is the reason why the proposed corrections, should they merit the necessary higher authorization, should be effectuated in the sphere of company A..., SGPS.

Given all the foregoing and no arguments having been presented capable of challenging the corrections proposed in the Draft Tax Inspection Report, it is proposed that the same be maintained, and further proposed that, prior to the conclusion of the inspection procedure, the present Report be sent to the Director General of TA, under the terms and for the purposes of the provisions of no. 7 of article 63° of CTPP".

1. On 20 January 2014, in implementation of the conclusions of the Tax Inspection Report, the Claimant was notified of the IRS assessments (withholding at source) and compensatory interest nos. 2014 … and 2014 …, in the total amount of EUR 6,197,119.79, relating to the year 2010 (cfr. document no. 1 attached to PI).

2. On 13 March 2014 the Claimant proceeded to make payment of the amount of EUR 6,197,119.79 subject to the assessments referred to in the preceding number (cfr. document no. 14 attached to PI).

3. On 15 May 2014, the Claimant requested the constitution of an Arbitral Tribunal under article 10.°, nos. 1, subparagraph a), and 2.° of the LFTA seeking the annulment of the IRS assessment (withholding at source) no. 2014 … and the corresponding compensatory interest assessment no. 2014 …, both of 13 January 2014, and, likewise, the condemnation of the Tax Authority to payment of indemnatory interest, which gave rise to the present proceedings.

4. The Tribunal's conviction regarding the established factuality resulted from examination of the documents contained in the case file and the AF attached, including the TIR relating to the factual elements that are not challenged or contested by the Claimant (cfr. article 76.°, no. 1 of the GTL and 115.°, no. 2 of the CTPP), as well as from the acknowledgment of facts resulting from allegations of PI that were accepted by the Respondent, all as specified in each of the points of the factual basis enumerated above.

IV.2. UNPROVEN FACTS

1. As for the [text continues beyond translation request]