Summary
Full Decision
ARBITRAL DECISION
The arbitrators José Poças Falcão (president), Vasco Valdez Matias and Francisco Nicolau Domingos (members), designated by the Deontological Council of the Centre for Administrative Arbitration (CAAD) to form this arbitral tribunal, agree as follows:
REPORT
A... SGPS, S.A., collective entity no. ..., with registered office at ..., no. ..., ... – ... Lisbon, hereinafter referred to as the Claimant, submitted on 08/08/2018 a request for constitution of a tribunal and arbitral ruling regarding the act of express dismissal of the gracious appeal no. ...2017... which upheld the self-assessed Corporate Income Tax (IRC) no. 2015... on the grounds that, in its judgment, it suffers from the defect of violation of law, due to errors in the factual and legal assumptions.
The Deontological Council designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the statutory period.
On 17/10/2018 the arbitral tribunal was constituted.
In compliance with the provisions of Article 17, nos. 1 and 2 of Decree-Law no. 10/2011, of 20 January (RJAT), the Respondent was notified on 24/10/2018 to, if it so wished, submit a response, request the production of additional evidence and forward the administrative file (PA).
On 28/11/2018 the Respondent submitted its response, in which it argues for the complete dismissal of all claims formulated in this arbitral proceeding.
The tribunal on 30/11/2018 decided to waive the holding of the meeting to which Article 18, no. 1 of the RJAT refers, based on the absence of exceptions to be addressed and the unnecessary nature of inviting the parties to correct the procedural documents, granted twenty days for them, if they so wished, to submit simultaneous final written submissions and set 07/02/2019 as the deadline for issuing the arbitral decision.
The Claimant did not submit final written submissions.
The Respondent submitted its final written submissions on 12/12/2018, maintaining its initial position.
POSITION OF THE PARTIES
The Claimant begins by arguing that the decision of express dismissal of the gracious appeal suffers from the defect of violation of law due to error in the factual assumptions, as the Tax and Customs Authority (AT) considers that financial charges (interest) are not deductible, as they were not incurred or borne by the taxpayer to obtain or secure income subject to Corporate Income Tax (IRC), as required by Article 23 of the Corporate Income Tax Code (CIRC), since the Claimant is a Company Managing Holdings (SGPS), its income benefits from the exemption under Article 51-C of the CIRC.
In its view, the interest borne is related to the obtaining of income subject to IRC, the interest earned from the financing provided to B..., S.A. (B...).
Second, it argues that the decision of express dismissal also suffers from the defect of violation of law, due to error in the legal assumptions, as the interpretation advocated by the AT, when it maintains that, despite the repeal of Article 32 of the Tax Benefits Statute (EBF), the deductibility of interest on financing incurred by an SGPS for the acquisition of shareholdings continues to be denied by Article 23 of the CIRC, which, systematically, should be interpreted in conjunction with Article 67, also of the CIRC. And this latter normative provision limits the deductibility of interest to 30% of the taxpayer's EBITDA, Article 67, no. 1, paragraph b) of the CIRC, although for the calculation of EBITDA, capital gains benefiting from the participation exemption regime under Article 51-C of the CIRC are not included, as results from Article 67, no. 13, paragraph d) of the CIRC. Thus, if a company that only earns capital gains exempt under Article 51-C of the IRC has no EBITDA for these purposes and, having none, has no income subject to IRC, consequently, interest is not deductible for tax purposes, by virtue of Article 23 of the CIRC.
The Claimant argues that the erroneous interpretation and application of legal norms occurs, as the legislator considered the exclusion of taxation on capital gains and the non-deductibility of interest as associated and reflexive consequences, not attributing to them a character of temporal indivisibility. Consequently, its intention was for interest associated with financing intended for the acquisition of shareholdings to be added back for purposes of determining taxable profit, to the extent that capital gains resulting from the disposal of these shareholdings would not, in principle, be subject to taxation.
Furthermore, Circular no. 7/2004, of 30 March, provided that: "...in case it is concluded, at the moment of disposal of the shareholdings, that not all requirements for the application of that regime are met, the financial charges that were not considered as costs in previous years shall, in that year, be considered as a tax cost". Thus, it argues that in the year in which the impossibility of benefiting from the exclusion of taxation regime for capital gains was materialised, the financial charges borne should be deducted.
Therefore, if this impossibility was materialised with the repeal of the tax regime for SGPS (Article 32 of the EBF) effective 1 January 2014 and without the Claimant having ascertained any untaxed capital gain, it is in the year 2014 that the financial charges should be deducted.
In summary, the Claimant argues for recognition of the right to deduct the financial charges borne in the acquisition of the shareholdings, for if this were not the case, we would be faced with taxation heavier than that applicable to other commercial companies, and this interpretation would violate the principle of equality provided for in Article 13 of the Constitution of the Portuguese Republic (CRP).
The Respondent in its response defends itself as follows:
Violation of law due to error in the factual and legal assumptions
First, the framing that the Claimant makes of the decision of express dismissal of the gracious appeal is not relevant, as what is truly at issue is whether it actually has the right, in the year 2014, to deduct all of the financial charges since it did not sell the shareholding in question. Or, in other words, it anchors its claim, not in the occurrence of any tax event, but in the repeal of the regime provided for in Article 32 of the Tax Benefits Statute (EBF).
Second, it defends itself by arguing that: the modus operandi of the repeal of Article 32 of the EBF was implemented by circular 7/2004, of 20 March, in which no. 6 provides that: "In case it is concluded, at the moment of disposal of the shareholdings, that not all requirements for the application of that regime are met, the financial charges that were not considered as costs in previous years shall, in that year, be considered as a tax cost". That is, the application of this number occurs at the moment of disposal of the shareholdings, a condition that is not present in the present proceedings.
In parallel, it adds that, with Law 2/2014, of 16 January, the participation exemption regime was introduced in the CIRC, which came to encompass all companies, in which the legislator extended the exemption method, previously applicable to SGPS, to all IRC taxpayers who carry on, as a principal activity, a commercial, industrial or agricultural activity when the application requirements established in Article 51-C of the CIRC are observed. The new regime, as a matter of simplicity, thus reinforces the restriction on the deductibility of financing costs provided for in Article 67 of the CIRC, avoiding the creation of further special rules limiting deductibility. Thus, for all IRC taxpayers from 01/01/2014, financial charges can be expenses provided the requirements set out in Articles 23 and 67 of the CIRC are met.
Third, it further argues that the Claimant's claim for retroactive and one-time application of the rule of deductibility of charges borne from 2006 to 2010 with the acquisition of shareholdings and whose capital gains or losses did not enter into the calculation of taxable profit, under Article 32, no. 2 of the EBF, implicitly entails the expansion, without legal authorization, of the special taxation regime for SGPS (Law no. 32-B/2002, of 30 December). Thus, unconstitutional by violation of the principle of legality, equality, taxpaying capacity and taxation by actual profit.
Finally, it argues that the Claimant's claim for the deduction of € 196,056 from its 2014 tax result, on the basis of financial charges borne from 2006 to 2010 with the acquisition of shareholdings cannot proceed as it does not unequivocally demonstrate the said amount. That is, it does not meet its burden of proof – the documents presented are not supported by accounting elements that could sustain the Claimant's position.
In this sequence, it is the following question that the tribunal must assess: whether the express dismissal of the gracious appeal suffers from the defect of violation of law due to error in the factual and legal assumptions.
PRELIMINARY EXAMINATION
The arbitral tribunal was regularly constituted based on Articles 2, no. 1, paragraph a) and 10, no. 1 of the RJAT, and is competent to assess and decide on the request for arbitral ruling.
The parties, which are duly represented, have legal personality and legal capacity and have standing (Articles 4 and 10, no. 2, of the same statute and 1 of Regulation no. 112-A/2011, of 22 March).
The process is not affected by nullities.
4. FACTUAL MATTER
4.1. Facts considered proven
4.1.1. The Claimant in the period 2007 to 2013 was subject to the Special Taxation Regime for Groups of Companies (RETGS).
4.1.2. The Claimant's object is the management of shareholdings of other companies as an indirect form of carrying out economic activities and the provision of administration and management services to companies in which it holds shareholdings, being subject to Decree-Law no. 495/88, of 30 December, which defines the legal regime for companies managing shareholdings and Article 32 of the EBF, in force until 31 December 2013.
4.1.3. In the context of its activity, it resorted to financing with the aim of acquiring shareholdings in other entities, without proceeding to the deduction of the interest borne.
4.1.4. As a result of the interest arising from these financings, the following amounts were added to its taxable profit:
i) € 48,118.14, in 2006, resulting from financial charges borne by virtue of financing contracted for the acquisition of 33.05% of the capital of B...;
ii) € 5,551.17, in 2007, resulting from financial charges borne by virtue of financing contracted for the acquisition of said shareholding;
iii) € 8,901.60, in 2008, resulting from financial charges borne by virtue of financing contracted for the acquisition of said shareholding;
iv) € 74,016.72, in 2009, resulting from financial charges borne by virtue of financing contracted for the acquisition of said shareholding;
v) € 59,468.36, in 2010, resulting from financial charges borne by virtue of financing contracted for the acquisition of said shareholding.
4.1.5. In the years 2006 to 2010, the Claimant added to its taxable profit, financial charges in the total amount of € 196,056.00.
4.1.6. The Claimant made advances to its subsidiary B..., advances that earned interest.
4.1.7. On 26/05/2015 the Claimant submitted the IRC income tax return – Form 22 – relating to the tax period of the year 2014.
4.1.8. From the submission of the return resulted an amount to be refunded of € 37,717.66.
4.1.9. The Claimant on 18/05/2017 filed with the Finance Office of Lisbon a gracious appeal against the IRC tax assessment act of the year 2014, requesting a partial correction of taxable profit of € 196,056.00 by considering an expense deductible in that amount.
4.1.10. By order, dated 22/05/2018, notified on 24/05/2018, the gracious appeal was expressly dismissed.
4.1.11. The request for arbitral ruling was submitted on 08/08/2018.
4.2. Facts not considered proven
There are no facts with relevance to the arbitral decision that have not been found to be proven.
4.3. Reasoning regarding the factual matter considered proven
The factual matter found to be proven has its origin in the documents used for each of the alleged facts, the authenticity of which was not called into question.
5. LEGAL MATTER
The Applicable Law
The matter sub judice has been subject to assessment within CAAD, and various arbitral decisions have been drawn, of which we highlight decision 285/2017-T, of 2018-05-24 (in favour of the taxpayer) and decision 610/2017-T, of 2018-09-17 (against the taxpayer). There are also arbitral decision 645/2017-T, of 2018-05-10, equally favourable to the taxpayer and the one drawn in the context of proceeding 754/2016-T, of 2017-06-14, also favourable, but in a substantially different context, since, before the repeal of Article 32 of the EBF, the SGPS had renounced its status, becoming a "normal" company, without the advantages and constraints arising from the regime mentioned in that article.
Basically, as mentioned in the description of the arguments of the Claimant and the Respondent, the issue has to do with the fact that A... SGPS, S.A. acquired shareholdings, as is proper to its corporate purpose, resorting to financing, but not deducting the respective financial charges.
This resulted from the fact that the legislation, more specifically, Article 31, no. 2 of the EBF (subsequently renumbered by Decree-Law no. 108/2008, of 26 July as Article 32), in the wording given by Law no. 32-B/2002, of 30 December (State Budget Law for 2013) provided as follows:
The capital gains and losses realized by SGPS and SCR through the onerous transfer, by whatever title, of capital shares of which they are holders, provided they are held for a period of no less than one year, and likewise, the financial charges borne with their acquisition, do not contribute to the formation of taxable profit of these companies.
The provision of Article 32 of the EBF underwent, over the years, several amendments, but without significance for the issue now in question, as it maintained no. 2, as previously transcribed, for SGPS.
However, with Law no. 83-C/2013, of 31 December (State Budget Law for 2014), Article 32 of the EBF is entirely repealed.
Finally, for the analysis we have been making of this matter, it is also important to take into account Circular no. 7/2004, in particular its no. 6, which provided:
With regard to the year in which financial charges should be disregarded as costs for tax purposes, a fiscal correction should be made in the year to which they refer to the financial charges that were borne with acquisitions of shareholdings that could benefit from the special regime established in no. 2 of Article 31 of the EBF, regardless of whether all conditions for the application of the special taxation regime for capital gains are already met. In case it is concluded, at the moment of disposal of the shareholdings, that not all requirements for the application of that regime are met, the financial charges that were not considered as costs in previous years shall, in that year, be considered as a tax cost.
Reason for Being of the Normative Provisions relating to SGPS
It should first be said that the legislator established a generous tax regime for the taxation of capital gains with respect to capital gains realized by SGPS, with requirements far less demanding than for other companies.
One aspect that was amended, as mentioned above, had to do with the new wording given to Article 31, no. 2 of the EBF (subsequently renumbered to 32), which established the principle that there is an exemption of capital gains realized in the onerous transfers of capital shares by SGPS provided that these were held for a period of no less than one year. In exchange, as in this case there was an exemption, it was the understanding of the legislator, for reasons of fairness and greater tax justice, to disregard the financial charges that occurred to finance the acquisition of such shareholdings. In other words, if there was a non-taxation of capital gains, then financial charges relating to their acquisition should also be disregarded, under pain of the regime being too imbalanced in favour of SGPS.
Indeed, in some way, the State Budget report for 2013 makes clear such justification by stating that the disregard of deductibility, for the purposes of determining taxable profit, of financial charges directly associated with the acquisition of shareholdings by SGPS is established.
In fact, in the arbitral decision issued in proceeding 610/2017-T, a detailed analysis is made of the reasons that presided over such modification, for which purpose it draws on what was written in other arbitral decisions, so we will transcribe some excerpts:
In other words, the objective of the regime instituted in 2003 was to counterbalance the awarding of a benefit – the complete exclusion of taxation on capital gains – with the non-concurrence of certain financial charges borne, creating an environment of neutrality between possible gains with certain assets (certain financial fixed assets) and the liability necessary for creating the conditions for obtaining such gains, that is, the liability related to the acquisition of such shareholdings.
In essence, the legislator did not want two benefits to be cumulative; SGPS already saw its capital gains on shareholdings exempt from tax: so when that happened, they could not cumulate with the benefit of tax acceptance of interest borne with financing for the acquisition of these capital shares.
As we have said, the regime of Article 32, especially its no. 2, remained essentially the same over the years, namely from 2003 to 2014, as mentioned above, since the mentioned article was repealed in the State Budget Law for 2014.
If nothing special appears in the Report of the bill presented to the National Assembly as justification for the repeal in question, the same must be understood in light of the justifications presented by the IRC Reform Commission (whose materialization would be implemented by Law no. 2/2014, of 16 January and producing generic effects as of 1.1.2014), in its report of June 2013, more specifically regarding the participation exemption regime where it is stated:
In a concern of diametrically opposite scope, the adoption of the new participation exemption regime made redundant, from the Reform Commission's perspective, several special tax regimes currently in existence. For this reason, it is proposed to eliminate the following regimes: (...)
c) given that the new regime also consumes the tax regime provided for SGPS, and given that these have failed to achieve the originally proposed objective of establishing themselves as a fiscally competitive investment vehicle at the international level, it is proposed to eliminate Article 32 of the EBF, and it is further recommended that the legal-corporate regime of these entities, currently provided for in Decree-Law no. 495/88, of 30 December, be eliminated.
Materially, the participation exemption regime was implemented in Article 51-C which was to be added to the CIRC, in terms of granting exemption from IRC to capital gains realized with the onerous transfer of shareholdings (under the conditions provided therein), while simultaneously allowing companies to deduct financing charges in general terms, in the manner provided for in Article 67 of the CIRC and this regime to be valid for all companies, regardless of whether they are SGPS or not.
Finally, a reference to Circular no. 7/2004, in particular its no. 6. It is clear that such circular is binding on AT services (at that time DGCI), but not on individuals or courts, as is well established.
Consequently, the regime established therein shall apply to the extent that AT cannot disregard it, as is understandable. A different matter from this is whether the reading made of said circular corresponds to what is advocated by the Claimant, a fact to which we will attempt to provide an answer in the following section where we will take a position on the various issues in question.
Application of the Law to the Case in Point
From the outset, it should be said that we will follow closely, given our agreement with them, the arguments put forth in arbitral decision 610/2017-T.
Accordingly, we will begin by mentioning that the Claimant, under the provisions of point no. 6 of Circular 7/2004, believed that it would be possible in the year 2014 to deduct the financial charges borne with the acquisition of the shareholdings in the amount of € 196,056.00, which corresponded to the charges that had successively been added to taxable profit in the years 2006 to 2010.
As a consequence of the dismissal of the gracious appeal it had made against the self-assessment, it brought the present challenge.
We will begin by mentioning, in line with what was said in the mentioned arbitral decision, that, in our view, the entity Claimant is not correct in invoking Circular no. 7/2004, in its point no. 6, since this expressly stated that such recognition was to be made at the moment of disposal of the shareholdings, a fact that did not occur, so we do not see how we can understand that the factual requirement is met that would allow the consideration as a tax cost of the financial charges.
That is, while the regime of Article 32 of the EBF lasted, the Claimant never disposed of the shareholdings that would give it the right to consider as a tax cost the financial charges, in accordance with the Circular.
As stated in the arbitral decision issued in proceeding 610/2017-T:
In fact, under the framework of Article 32, no. 2 of the EBF, SGPS were only permitted, at the moment of disposal of the shareholdings, to deduct the charges (until that moment incurred) with their acquisition, in case the benefit obtained (the exemption from capital gains) could not be obtained.
Now what the Claimant seeks is, without disposing of the shareholdings, to immediately deduct the charges incurred in the past with the acquisition of shareholdings, in a legal framework in force that guarantees it simultaneously the exemption from taxation of any capital gains it may obtain.
What would mean favouring the Claimant in relation to all other SGPS that have not formulated an identical claim.
On the other hand, this situation could not have been unknown to the legislator, and it is verified that, both within the scope of the State Budget Law for 2014, and in the extensive provision with transitional regimes contained in the IRC Reform Law – which, it is repeated – produced its effects in January 2014, there is no provision that disciplines the situation now in question, enshrining an exceptional regime for regularization of financial charges that had ceased to be deducted, resulting from the repeal of Article 32 of the EBF.
As mentioned in the arbitral decision we have cited, in fact the legislator provided for transitional provisions for the situations described above of entry into force of the new law, so that, if it had wanted to safeguard the deduction of financial charges in the year 2014, it would have provided for it in the Law that repealed Article 32 of the EBF or, at the limit, in the IRC Reform Law.
Therefore, having not established a transitional provision regarding financial charges not deducted under the old law, the interpreter cannot create that transitional provision, admitting the deduction of financial charges, in their entirety, in the year 2014.
Finally, as can be inferred from what was stated above, the alleged defects of violation of law perpetrated within the scope of the gracious appeal, to which the Claimant refers, do not merit acceptance because, as we have seen, the issue sub judice does not have to do with the realization of benefits resulting from loans to subsidiaries being onerous, but, as exhaustively stated, with the law directing the disregard of financial charges in the acquisition of shareholdings by virtue of the SGPS being exempt from capital gains on the disposal of such shareholdings and the recognition of financial charges claiming to be made in the year 2014 and not at the moment of sale, if later, under the terms and conditions of Article 67 of the CIRC. There is no violation whatsoever of the principle of equality.
DECISION
The tribunal hereby decides:
To dismiss the request for arbitral ruling as unfounded, maintaining the act of dismissal of the gracious appeal and the tax assessment act of self-assessed IRC, in the part challenged, relating to the year 2014;
To absolve the Respondent of the claims formulated;
To condemn the Claimant in costs.
VALUE OF THE CASE
The value of the case is set at € 196,056.00 (one hundred and ninety-six thousand and fifty-six euros), under Article 296, no. 1 of the CPC and Article 97-A, no. 1, paragraphs a) and b) of the CPPT and Article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings.
COSTS
Under Article 22, no. 4 of the RJAT, the value of costs is set at € 3,672.00 as provided in Table I thereof, to be borne entirely by the Claimant.
Lisbon, 28 February 2019
The Arbitrators:
(José Poças Falcão – President)
(Vasco Valdez – Member)
(Francisco Nicolau Domingos – Member)
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