CAAD Arbitration on IRS General Anti-Abuse Clause Applied to SGPS Holding Company (2014)

ARBITRAL DECISION

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. Sérgio de Matos and Dr. Mariana Vargas designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 18-07-2014, agree as follows:

1. REPORT

A…, SGPS, S.A., collective person no. …, with registered office at … (hereinafter "Claimant"), came, under article 10.º, n.º 1, subsection a), and n.º 2, of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), to request the constitution of an arbitral tribunal with a view to the declaration of illegality and consequent annulment of the assessment of Personal Income Tax ("IRS") no. 2014 …, of 13-01-2014, relating to the year 2011, in the amount of € 2,756,762.25 and, likewise, of the corresponding assessment of compensatory interest no. 2014 …, in the amount of € 204,226.98.

The Respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY.

The Claimant opted for the non-designation of an arbitrator.

Pursuant to the provisions of subsection a) of n.º 2 of article 6.º and subsection b) of n.º 1 of article 11.º of the RJAT, in the wording introduced by article 228.º of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the assignment within the applicable deadline.

The parties were notified of this designation and did not express any wish to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11.º n.º 1 subsections a) and b) of the RJAT and articles 6.º and 7.º of the Deontological Code.

Thus, in accordance with the provision of subsection c) of n.º 1 of article 11.º of the RJAT, in the wording introduced by article 228.º of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 18-07-2014.

The Tax Authority and Customs Authority submitted a response in which it defended the dismissal of the request for arbitral pronouncement.

By order of 28-10-2014, the holding of the meeting provided for in article 18.º of the RJAT was dispensed with and it was determined that the proceedings continue with successive written submissions.

The Parties submitted submissions.

The Arbitral Tribunal was regularly constituted and is competent.

The parties enjoy legal personality and capacity and are legitimate and duly represented (articles 4.º and 10.º, n.º 2, of the RJAT and article 1.º of Ordinance no. 112-A/2011, of 22 March).

No nullity is apparent.

1. FACTUAL MATTERS

2.1. Proven Facts

The following facts are considered proven:

a) The Claimant A…, SGPS, SA, is a holding company for non-financial social capital, Economic Activity Code (CAE) 064 202;

b) The Tax Authority and Customs Authority carried out an inspection of limited scope on the Claimant following the issuance of Internal Service Orders, OI2013…, OI2013… and OI2013…, of 16-10-2013, aimed at determining withholdings at source in the years 2010, 2011 and 2012, in addition to monitoring abusive tax planning schemes;

c) The holders of the company's capital and the number of shares held are as follows:

d) The Board of Directors of the Claimant, designated for the triennial periods of 2009 to 2011 and 2012 to 2014, was as follows:

e) In the year 2009, the company A…, SGPS proceeded to the acquisition of shares of the company A…, S.A., NIPC …, hereinafter designated as A…, S.A.

f) On 01-01-2009, date prior to the purchase and sale of shares, the capital stock of the company A…, S.A. was composed of 500,000 shares with a nominal value of €5.00, held by the following shareholders:

g) The Board of Directors of A…, SA, designated for the triennial periods of 2008 to 2010 and for the triennial period of 2011 to 2013, is composed of the same members of the Board of Directors of A…, SGPS;

h) In both companies, shareholder A…, was designated to exercise the position of President of the Board of Directors;

i) The unit value for the sale of each share was determined by considering the value of equity, as of 31-12-2008, of the company A…, SA, in the amount of € 96,978,785.23 and the total of 450,000 shares available, having that value been subsequently rounded to the nearest euro below;

j) In the month of June 2009, the company A…, SGPS proceeded to the acquisition of 404,910 shares of A…, SA, having acquired an additional 22,495 shares in September 2009, whose sellers and values involved appear in the following table:

k) The A…, SGPS … assumed itself to be debtor of the amount corresponding to the sale of the shares, and, correspondingly, the sellers of those shares were in the position of creditors of the company A…, SGPS;

l) In the year 2009, no payment was made to the sellers of the shares;

m) On 10-12-2010 (minutes no. 16), the General Assembly of the company A…, SGPS resolved to increase the capital stock from €60,000.00 to €4,334,050.00, with the capital increase being made on account of the debt that the company had to the shareholders, resulting from the purchase and sale of shares of the company A…, SA;

n) The respective accounting entries were made, and in relation to the capital increase, account 27821 – Other accounts receivable and payable/various creditors was debited, namely in the sub-account 2782102 – A…, in the amount of € 3,374,250.00 and in the sub-accounts 2782103 – B…, 2782104 – C…, 2782105 – D… and 2782106 – E…, in the amount of €224,950.00 each, and, in return, account 51101 – Capital was credited in the amount of €4,274,050.00;

o) In the General Assembly of the Claimant on 10-12-2010, it was also resolved to make supplementary contributions of capital by the shareholders, in the amount of €44,877,525.00, likewise on account of the debt referred to at the end of the previous paragraph;

p) On 20-12-2010 (minutes no. 18), the company A…, SGPS proceeded to a new increase in capital from €4,334,050.00 to €4,562,000.00 (€4,562,000.00 – €4,334,050.00 = €227,950.00), by contributions in kind of 22,495 shares with a nominal value of €5.00 of the company A…, SA, belonging to shareholder E…, TIN …, through the issuance of 45,590 new shares of the company A…, SGPS which this shareholder came to hold;

q) Furthermore, on 20-12-2010, shareholder A… made a transfer of credits of which he was holder in the company A…, SGPS, to shareholder E…, in the amount of €2,246,500.00 and the transfer of a credit relating to supplementary contributions, of which he is holder in the same company, in the amount of €2,361,975.00, which amounts to €4,608,475.00, a value that corresponds exactly to the potential gain obtained by the company A…, SGPS with the purchase of the shares below its book value, as well as to the value that would be subject to taxation under IRS in the sphere of shareholder E…, if she had received that amount in consideration for the sale of the shares;

r) The supplementary contributions accounted for on 31-12-2010, following the resolution taken on 20 December of the same year, in the total amount of € 44,877,525.00, belong to the shareholders in the following percentages:

s) In the Tax Inspection Report, whose content is given as reproduced, the following is mentioned, among other things:

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

On 31 December 2008, the capital stock of the company A…, SGPS was €60,000, represented by 12,000 shares with a nominal value of €5, distributed among the various shareholders in the percentages mentioned in Table I (see above).

On that date, the company held social participations in the capital of the company F…, Lda., NIPC … and in the capital of the company G…, SA. NIPC ….

The statement of results by nature presented for the years 2007 and 2008 was as follows:

In the years 2007 and 2008, the revenues of the company A…, SGPS resulted from consulting services, financial gains referring to interest on bank deposits and gains in group companies relating to the accounting of financial investments by 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, on which it holds a financial interest.

Pursuant to no. 8 of article 18 of the CIRC, the income and expenses, as well as any other variations in equity, revealed in the accounting as a consequence of the use of the equity method do not contribute to the determination of taxable profit.

According to the accounting records, on 01/01/2009 and 31/12/2009 the company A…, SGPS had the following financial resources:

Following the acquisition of the shares of the company A…, SA, in the course of 2009, the company A…, SGPS, became indebted to the shareholders identified in table V, in the total amount of € 91,892,075.00 (see line 2 of tables XI, XII, XIII, XIV and XV, below), and it appears, in light of the values shown in the accounting, that the A…, SGPS, would not have available resources that would allow it to settle the debt incurred.

(...)

According to the elements collected in the course of inspection activities, it is verified that, in operational terms, service provision records are registered to a participated company, namely the company F…, Lda., NIPC …, citing, by way of merely illustrative example, invoice no. 13 of 15.12.2009, in the amount of € 200,000.00, plus VAT at the legal rate.

No elements were collected that materialized any service provision from A…, SGPS to the company A…, SA, nor other data or elements that would allow concluding towards any change in the level of administration of the company A…, SA, as a result of the dealings involving the purchase and sale of shares of the first of those companies.

In the years 2009, 2010, 2011 and 2012, the A…, SGPS had no persons in the company's employment, as stated in the Simplified Corporate Information Declaration (IES) filed with reference to those years, and therefore incurred no personnel expenses.

The company likewise has no facilities of its own or administrative equipment and pays no rent for the facilities. Administrative expenses refer essentially to specialized services provided by advisors (ROC and TOC) and banking charges.

The A…, SGPS therefore has no physical and human structure whatsoever.

On the other hand, the TOC responsible for the accounting of A…, SGPS is also the TOC responsible for the accounting of A…, SA, having been remunerated, for the exercise of its functions, under IRS – category A (dependent work) by the company A H…, SA, NIPC …, whose Board of Directors includes the administrators of the companies A…, SA and A…, SGPS, see print below and annex VII:

The members of the board of directors of A…, SGPS receive income of category A that are paid by A…, SA, receiving no income paid or made available by SGPS.

In summary, the absence of objective indicators, such as personnel expenses, fixed assets or other equipment, demonstrate the non-existence of human and technical resources, with which the company A…, SGPS could pursue its restricted corporate purpose, and therefore, not having any physical and human structure, the administrative and financial services necessary for the provision of services to other entities (namely to the company F…, Lda.) were, necessarily, provided by other entities.

III – 3. Tax Framework

In the course of the inspection procedure authorized by DI2013…, opened in the name of the company A…, SA, a copy of the minutes of approval of accounts for the fiscal years 2000 to 2012 of that company was collected.

Analyzing the aforementioned minutes, it is verified that during that period no dividends were distributed to shareholders, except for the net result of fiscal year 2008, in relation to which it was resolved to proceed with the distribution of profits in the amount of € 1,750,000.00, see minutes no. 89 of 28.05.2009 (approval of accounts for the year 2008), which were subject to withholding at the liberatory rate provided for in article 71° of the CIRS (Personal Income Tax Code), at the time 20%, with the respective tax, in the amount of € 350,000.00, having been paid through guide no. 80227914759 relating to the period 2009-10.

Examining the aforementioned minutes and combining the information contained therein relating to the net result of each fiscal year and its respective application in reserves or retained earnings, with the values shown in the IES presented for the fiscal years identified below, the following table is obtained:

From the previous table, it follows that the company A…, SA obtained, sustainably, positive net results which were being applied to reserves and retained earnings, and therefore, at the end of 2009, the company had reserves in the amount of € 93,621,066.18.

It should be noted that those amounts, if distributed to shareholders, would satisfy, from their perspective, the incidence rule provided for in article 5° – n.º 2, subsection h) of the CIRS, which covers "the profits of entities subject to CIT placed at the disposal of their respective associates or holders, including advances on account of profits, with the exception of those referred to in article 20°", which would be subject to taxation through the application of the liberatory rates currently provided for in article 71° of the CIRS, without prejudice to the option for aggregation under its terms.

However, as previously noted, taking as reference the time period comprised between the years 2000 to 2009, the year in which shares representing 85.481% (percentage determined taking into account the company's own shares) of the capital stock of the company A…, SA were transferred for the benefit 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 the company A…, SA, that changes to the company's own capital occurred only through the payment of bonuses to employees and administrators, as well as through the acquisition of treasury shares in the year 2000, in the amount of € 12,469,947.43.

With regard to the bonuses referred to in the previous paragraph, their respective values appear in the following table:

As for the acquisition of treasury shares, it is verified that the limit of 10% imposed by article 317° – n.º 2 of the Commercial Companies Code, which imposes restrictions on the acquisition of treasury shares, had already been reached.

Indeed, with the company's capital stock being represented by 500,000 shares, with a nominal value of € 5.00 each, it is verified, in light of the balance of € 250,000.00 recorded in account 52107 – Treasury Shares / Nominal Value / A…, SA, that the 10% limit referred to in the previous paragraph had already been reached, since that value of € 250,000.00 corresponds precisely to 50,000 shares, at the nominal value of € 5.00.

Therefore, with the company A…, SA being the holder of 10% of its own capital stock, it could not acquire further treasury shares, which were acquired for € 12,469,947.00, notoriously above their respective nominal value, without, on the part of the selling shareholders, any taxation regarding the sale of those shares, either through the exclusion of taxation on the transfer of shares held for more than one year provided for, at the time, in no. 2 of article 10° of the CIRS, or through the transitional regime provided for in article 5° of Decree-Law no. 442-A/88 of 30 November, which approved the Personal Income Tax Code.

The purchase of treasury shares had the effect in the accounting of reducing own capital, by the equivalent value.

With the legal prohibition against acquiring further treasury shares in place, any financial flows from the company A…, SA directed to shareholders would have to be effected through the distribution of dividends, with the inherent taxation under IRS.

Now, in clear contrast with the dividend distribution policy adopted until 2009,

in December 2010 the company A…, SA distributed dividends to the company A…, SGPS in the amount of €33,742,500.00.

This resolution is set forth in minutes no. 94 of 27.12.2010 of the company A…, SA (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 participation.

That amount was paid through a bank transfer made by the company A…, SA to the account corresponding to the NIB …, whose holder is A…, SGPS (Annex IX). From the perspective of SGPS, the value referred to in the previous paragraph was not subject to taxation in light of the provision of article 51° of the CIRC, given the fulfillment of the requirements defined in n.º 1 of this provision, nor was there withholding at source in light of the provision of subsection c) of n.º 1 of article 97° of the CIRC.

Instead, if those dividends had been distributed prior to the transfer of shares for the benefit of SGPS, they would have been subject to taxation at the liberatory rates in the sphere of the respective shareholders and in proportion to the shareholdings held, in accordance with the terms previously mentioned.

As was demonstrated in subsection III-2, the company A…, SGPS did not have financial resources that would allow it to settle the debt resulting from the acquisition of shares of the company A…, SA, and therefore the amount received in 2010, by way of dividends – € 33,742,500.00 – was partially but principally applied to the payment to creditors, namely to the former shareholders of A…, SA and simultaneously shareholders of A…, SGPS.

In the year 2010, and on the basis of documents collected in the context of DI2013…, it was found that a total of € 21,370,250.00 were paid to shareholders A…, B…, C…, D… and E…, distributed among them according to the values shown in line 5 of tables XI, XII, XIII, XIV and XV, presented below, with the respective accounting entries reflected in the latter part of the account extract following, extracted from the SAF-T file sent by the inspected company following notification for that purpose:

(...)

Also in December 2011, the company A…, SA once again made a payment of dividends to the company A…, SGPS in the amount of €8,098,200.00 (last movement of the extract reproduced above), whose distribution was approved in minutes no. 97, of 04 June 2011 (Annex X), stating that "The company's financial resources are very substantial and not necessary for the company's normal functioning and far exceed those of any company in the sector".

(...)

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

(...)

On 31 March 2012, the debt resulting from the acquisition of shares of the company A…, SA was, from the perspective of the company A…, SGPS, accounted for as settled, partly through payments made to shareholders, using amounts derived from dividends previously distributed by the company A…, SA to the company A…, SGPS, partly with the conversion of credits into capital increases and supplementary contributions.

As regards the payments made and likewise as to the capital increase of the company A…, SGPS (table I), see Annex IV, an indirect distribution of dividends to the shareholders was verified, with the achievement of a clear tax advantage, since the distribution of dividends from A…, SA to A…, SGPS is excluded from taxation in accordance with article 51° of the CIRC and is exempt from withholding at source in accordance with article 97° of the CIRC, as opposed to the distribution of dividends to shareholders, which would be subject to taxation and withholding at source, in accordance with article 71° of the CIRS.

As regards the conversion of part of the credit resulting from the purchase and sale of shares of the company A…, SA into supplementary contributions, no correction is proposed, because, in our view, they do not constitute the payment or making available to the partners of any income, which will only occur if and when such supplementary contributions come to be reimbursed in compliance with any resolution of the partners to that effect.

In the specific case of shareholder E…, it should be noted that, if the transaction had been carried out in exactly the same manner as it was for the other shareholders, she would be selling business interests onerous, a situation susceptible of satisfying the incidence rule provided for in subsection b) of n.º 1 of article 10° of the CIRS.

The realization value would be defined for us by subsection f) of n.º 1 of article 44° of the CIRS, corresponding to the value of the consideration. Recall that, for the other shareholders and for an exactly equal participation – 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 E…, namely € 227,950.00.

The participation in the company A…, SA was acquired by E…, through succession opened by the death of her mother B…, who died on 11.06.2009, being her sole heir.

The social participation appears in item no. 8 of the list of assets corresponding to participation no. 768269, in which appear 22,500 shares of the company A…, SA, valued at their respective nominal value of € 5.00, totaling, therefore, € 112,500.00, which, in light of the provision of article 45º – n.º 1 of the CIRS, should be considered as acquisition value, for purposes of determining any category G income (capital gains), by subtracting it from the realization value previously mentioned.

In the case of shareholder E…, the proceeds of the sale of the shares were not directly taken to account 27821 – Other accounts receivable and payable/various creditors (as opposed to the other shareholders), in which is instead recorded another amount – € 2,246,500.00 – whose supporting document would have been the notification of credit transfer sent by shareholder A… to the company A…, SGPS (Annex XI) pursuant to which the shareholder referred to above transferred to E… part of the credits of which he was holder with respect to the company A…, SGPS, namely € 2,246,500.00 relating to the second payment installment of the price provided for in the contract of purchase and sale of shares, concluded between A…, and the Company, by which this acquired from the first 337,425 shares representing 67.485% of the capital stock of A…, SA...".

The credit transfer was reflected in accounting, by debiting account 27821 – Other accounts receivable and payable/various creditors, namely in the sub-accounts 2782102 (Mr. A…) and by crediting the sub-account 2782107 (E…), in the amount of € 2,246,500.00.

This latter account would subsequently be settled, through a movement to debit for the aforementioned amount, as a counter-entry to account 120007 – Demand Deposits / Bank …, which was moved to credit for the payment of the amount of € 2,246,500.00 to shareholder E… (Annex XII).

In the document referred to in the previous paragraph, it also appears that shareholder A… likewise transfers to his granddaughter E…, 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 holder, relating to the supplementary contributions approved in minutes no. 16.

Notwithstanding the differences noted, it seems to us that there is a point of contact between the procedure adopted in relation to shareholder E… and the other shareholders: that of "not opening" the company A…, SA to third parties, maintaining control of it in the family universe, albeit indirectly, through the company A…, SGPS.

However, while in relation to the other shareholders the transfer of shares for the benefit of SGPS did not result in the payment of any tax, either through the exclusion of taxation provided for in n.º 2 of article 10° of the 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 which approved the Personal Income Tax Code, shareholder E… could not benefit from any of the aforementioned provisions.

Indeed, on the date the resolution set forth in minutes no. 18 was taken, article 10° – n.º 2 of the CIRS was already repealed (article 2° of Law no. 15/2010 of 26/07), and the capital gains resulting from the transfer of shares held by E… could not be excluded from taxation.

As for article 5° of Decree-Law no. 442-A/88 of 30.11, it would be inapplicable, given the date of acquisition of the shares.

III – 4. – Application of the General Anti-Abuse Clause

Taking into account the facts described and demonstrated above, according to our understanding, the procedures adopted for the effectuation of the intended result – patrimonial advantages through the evasion of due taxes – it is incumbent upon the Tax Administration to resort to the anti-abuse clause, pursuant to the provision of article 38° – n.º 2 of the LGT (General Tax Law), since we are faced with a successive and meticulous chain of acts constituting abusive legal transactions directed by artificial means to the elimination of taxes that would be due as a result of acts of identical economic purpose.

In accordance with recent case law of the Central Administrative Court of the South (proc. 5104/11 of 31-01-2012) "This legislation [article 38° of the LGT and article 63° of the CPPT – Code of Tax Procedure and Process] has applicability whenever companies practice a series of anomalous acts, inadequate in light of the intended economic purpose, but which in themselves are legal and produce the same economic result (but not tax) as the usual and adequate acts that are defined in the IRC incidence rules."

It should be noted that in the case at hand the incidence rules refer to IRS, and it seems to us, nonetheless, that the judicial guidance resulting from that judgment will be applicable here.

And the aforementioned ruling continues, clarifying that "The acts that the Tax Administration classifies as inserted in n.º 2 of article 38° of the LGT do not have the purpose of tax savings, but rather an action against the essential purposes of the tax law system. What is intended in this case is to combat tax avoidance, materialized in acts that are formally lawful."

Transposing to the case at hand the guidelines laid down by that ruling, it seems to us that the sale of shares of the company A…, SA for the benefit of the A…, SGPS, whose shareholders and administrators, let us recall, are exactly the same, constitutes the practice of an act which, despite being formally lawful, has underlying the intention of obtaining income, more specifically dividends, which would otherwise be subject to effective taxation.

The intention would not have been to transfer the shares for the benefit of third parties, but to transfer them in such a way as to maintain control of the company A…, SA, albeit indirectly, achieving, by another route, albeit likewise indirectly, to receive the dividends of the company A…, SA, without the inherent taxation under IRS, namely in its category E (capital income).

From the perspective of the company A…, SGPS, the dividends distributed by the company A…, SA were not subject to taxation, in light of the provision of article 51° of the CIRC, given the fulfillment of the requirements defined in n.º 1 of this provision, nor was there withholding at source in light of the provision of subsection c) of n.º 1 of article 97° of the CIRC.

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

In view of the foregoing, it seems to us that there are grounds for the application of the general anti-abuse clause, which should be governed by the provision of article 63° of the CPPT.

Having regard to the case law recently established by the Central Administrative Court of the South (proc. 04255/10, of 15-02-2011, www.dgsi.pt), it is incumbent to fulfill the requirements enumerated therein, which are:

i. The means element used for the implementation of the economic operation leading to the tax advantage, which relates to the forms used by the taxpayer, through the legal acts and transactions with which it is proposed to obtain the reduction or elimination of the tax;

ii. The result element obtained, concerning the actual advantage, the illegality of the purpose, the tax consequence sought by the taxpayer, inseparable both from the lawful means used and from the tax motivation on which the taxpayer's conduct is based;

iii. The intellectual element, concerning the tax motivation that served as the basis for the taxpayer's conduct for purposes of reducing or eliminating taxation, notwithstanding that its action may have an exclusively tax nature or otherwise;

iv. The normative element, concerning the legal prohibition of tax evasion, set out in the anti-abuse rules, which the Tax Administration uses to neutralize potential aggressive tax planning and which merit disapproval from the perspective of systematic law, since to obtain tax advantages the taxpayer resorts to forms that are manifestly abusive, whose tax effect must be disregarded.

The Means Element

The company A…, SA obtained, repeatedly, positive net results which were being applied to reserves and retained earnings, and therefore, at the end of 2009, the company had reserves in the amount of € 93,621,066.18, see Table IX.

In the time period comprised between the years 2000 to 2009, the year in which the transfer of 85.481% (percentage determined taking into account the company's own shares) of the capital stock of the company A…, SA occurred for the benefit of SGPS, there was only a distribution of profits, in the amount of € 1,750,000.00, relating to the net result determined with reference to fiscal year 2008.

Except for that distribution of dividends, approved on 28.05.2009, it is verified, in light of the minutes of the company A…, SA, that changes to the company's own capital occurred only through the payment of bonuses to employees and administrators (see Table X above), as well as through the acquisition of treasury shares in the year 2000, in the amount of € 12,469,947.43.

As for the acquisition of treasury shares by the company A…, SA, it should be noted that the limit of 10% imposed by article 317° – n.º 2 of the Commercial Companies Code, which imposes restrictions on the acquisition of treasury shares, had already been reached, and it is not legally permissible to acquire treasury shares beyond that limit, except in the circumstances provided for in n.º 3 of that provision.

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

Having reached the maximum ceiling for the acquisition of treasury shares in the proportion of 10%, A…, SA became unable to continue participating in its own capital. And the shareholders, unable to continue selling their social interests to a company whose majority capital belongs to them.

The purchase of treasury shares had as a consequence in the accounting the reduction of own capital, by the equivalent value.

Also the distribution of dividends by the company A…, SA in favor of the company A…, SGPS had as a consequence in the accounting the reduction of the own capital of the first of the aforementioned companies.

The amounts accumulated over several years in the reserve account, if distributed to shareholders, would be susceptible to taxation under IRS, namely within Category E, in accordance with the incidence rule provided for in article 5° – n.º 2, subsection h) of the CIRS (Personal Income Tax Code), which covers "the profits of entities subject to CIT placed at the disposal of their respective associates or holders, including advances on account of profits, with the exception of those referred to in article 20°.

The taxation of such income from the shareholders' perspective should be effected through the application of the liberatory rates currently provided for in article 71° of the CIRS, without prejudice to the option for aggregation in its terms.

The choice made by the shareholders to transfer the shares of the company A…, SA to the company A…, SGPS (recalling that the shareholder structure and the Board of Directors of both companies is exactly the same) allowed them to establish a credit against SGPS, which was partially paid through dividends distributed by the first to the second of the aforementioned companies.

Such credit was paid through amounts derived from the reserves accumulated over successive fiscal periods by the company A…, SA, which, if directly distributed to its shareholders, would be subject to taxation through liberatory rates, in the terms previously mentioned.

With the "interposition" of the company A…, SGPS between the company A…, SA and the holders of the capital stock of the latter company (on the date prior to the successive purchases and sales of shares of the company A…, SA for the benefit of SGPS) in the terms described in subsection I of this document which is hereby given as fully incorporated by reference, the shareholders of the company A…, SA managed to receive amounts that were recorded in the reserve accounts of the 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 A…, SA to A…, SGPS, what would have been a regular distribution of dividends to the shareholders was transformed into a set of transfers of shares on which no effective taxation ultimately fell in the personal sphere of the participants.

Supplementary contributions also remained to be reimbursed by being made in consideration of the debt resulting from the sale of the shares, in the amount of € 44,677,525.00, which may even have been made in violation of the provision of n.º 3 of article 210° of the Commercial Companies Code, according to which "Supplementary contributions always have money as their object".

In the case of taxpayer E…, notwithstanding the fact that the procedure followed was not equal to that of the other shareholders, the truth is that it also aimed to avoid the payment of Taxes arising from the transfer of shares made to A…, SGPS, seeking to circumvent, from the outset, the taxation of the transaction within category G of IRS, under the artifice of a credit transfer made by her grandfather, and, in turn, those credits resulted from the sale of almost all of the shares of which A… was holder in the company A…, SA.

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

That premium is reflected in the accounting of the company, and any capital gain arising from the sale of that asset will be covered by the tax benefit provided for in n.º 2 of article 32° of the EBF (Tax Benefits Statute), and therefore, from the perspective of that company, the acquisition value attributed to the shares would be relatively immaterial.

Not so, however, with respect to shareholder E…, since in relation to her, the sale of the shares in exactly the terms in which it was carried out by the other shareholders (for a value higher than the nominal value) would have determined its taxation under IRS (category G).

It should therefore be noted that, in relation to shareholders A…, B…, C…, D… and E…, a per-share value notoriously higher than its respective nominal value was stipulated, since, for them, the same would be irrelevant, as it would not determine any effective taxation under IRS (see article 5° – n.º 2 of Decree-Law 442-A/88 of 30.11 and article 10° – n.º 2 of the CIRS, in force at the time), the same not occurring in relation to taxpayer E…, in relation to whom the stipulation of a per-share value identical to that fixed for the other shareholders would determine her taxation under IRS, as the aforementioned provisions would not be applicable to her.

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

The Result Element

With the legal prohibition against acquiring treasury shares in place, any financial flows from the company A…, SA to shareholders would have to be effected through the distribution of dividends, with the inherent taxation under IRS.

Now, in violation of the dividend distribution policy adopted between fiscal years 2000 and 2009, in December 2010 the company A…, SA proceeded to distribute dividends to the company A…, SGPS in the amount of €33,742,500.00.

Such distribution appears in minutes no. 94 of 27.12.2010 of the company A…, SA, having been resolved 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 participation.

That amount was paid through a bank transfer made by the company A…, SA to the account corresponding to the NIB …, whose holder is A…, SGPS (Annex IX).

Subsequently, in December 2011, the company A…, SA once again made a payment of dividends to the company A…, SGPS in the amount of €8,098,200.00, whose distribution was approved in minutes no. 97, of 04 June 2011.

From the perspective of SGPS, the amounts referred to in the previous paragraphs were not subject to taxation in light of the provision of article 51° of the CIRC, given the fulfillment of the requirements defined in n.º 1 of this provision, nor was there withholding at source in light of the provision of subsection c) of n.º 1 of article 97° of the CIRC.

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

The Intellectual Element

As mentioned in subsection III-2, the company A…, SGPS did not have financial resources that would allow it to settle the debt resulting from the acquisition of shares of the company A…, SA, and therefore the amount received in 2010, by way of dividends – € 33,742,500.00 –ended up being applied to the payment to the respective creditors, namely former shareholders of A…, SA and simultaneously shareholders of A…, SGPS.

Regarding the amount referred to in the previous paragraph, and on the basis of documents collected in the context of DI2013…, it was found that, in the year 2010, the same was used to make payments to shareholders A…, B…, C…, D… and E…, in a total of € 21,370,250.00, distributed among them according to the values shown in line 5 of tables XI, XII, XIII, XIV and XV, presented previously.

The remainder – € 12,372,250.00 was used to constitute another financial application at Bank ….

This financial application would later be liquidated in December 2011, with the company A…, SGPS proceeding to the payment of another part of the debt incurred with the acquisition of shares to shareholders, in the amount of €10,575,650.00, (see line 6 of tables XI, XII, XIII, XIV and XV, see above).

Also in December 2011, the company A…, SA once again made a payment of dividends to the company A…, SGPS in the amount of €8,098,200.00, whose distribution was approved in minutes no. 97, of 04 June 2011, by the General Assembly, stating that "The company's financial resources are very substantial and not necessary for the company's normal functioning and far exceed those of any company in the sector".

It should be noted that the justification presented above appears, word for word, in minutes no. 94 in which the distribution of € 33,742,500.00 of dividends to A…, SGPS was resolved, in the terms previously mentioned.

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

In this context, it will be pertinent to note that, in previous years, the company A…, SA already presented relatively high financial resources, whose values appear in the IES submitted and reproduced below:

2005–€36,265,198.34; 2006–€43,356,063.91; 2007–€35,383,253.32; 2008–€42,840,951.52; 2009–€45,757,083.55.

Notwithstanding that in the aforementioned fiscal years, the company already had liquidity that would have allowed it to distribute dividends, this was not resolved in the proportion in which it would come to be in 2010 and 2011.

Recall that only in the year 2009, part of the net result of 2008 was distributed, in the amount of € 1,750,000.00, involving the payment of € 350,000.00 as withholding at source, in the terms previously set out.

In light of the accounting and financial situation of SGPS, described in subsection III-2 and notwithstanding the execution of the legal transaction embodied in the transfer of shares of A…, SA for the benefit of the company A…, SGPS, an effective transfer of social interests will not be at issue, given the maintenance of the voting rights that the former shareholders of SA came to hold in SGPS and indirectly in it.

Given the limitation arising from article 317° of the Commercial Companies Code, the shareholders of the company A…, SA sought a solution that would allow them, at one and the same time, the transfer of their shares to a company over which they held total control and to proceed with the transfer of their social interests in the company A…, SA for the benefit of this new company, thereby removing the limitation of the acquisition of own capital of 10% of shares.

In this context, it will be pertinent to bring once again to bear the fact that there is total coincidence between the partners of both companies involved in the transaction, both with respect to voting rights and as to the percentages in the capital stock.

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

The Normative Element

Given that we are dealing with dividends, they are subject to taxation, pursuant to the CIRS, from the outset, in accordance with the general incidence rule provided for in n.º 1 of article 1° of the CIRS, according to which

"Personal Income Tax (IRS) is levied on the annual value of income from the following categories, even when derived from unlawful acts, after the corresponding deductions and allowances have been made:

(...) Category E – Capital income; (...)"

Specifically with regard to that category and income, n.º 2 of article 5° of the CIRS provides that "The fruits and economic advantages referred to in the previous number include, in particular:

(...)

h) The profits of entities subject to CIT placed at the disposal of their respective associates or holders, including advances on account of profits, with the exception of those referred to in article 20°;(...)"

Upon citizens rests the duty to pay taxes, such duty being assessed in light of their respective tax-paying capacity, in accordance with the provision of article 4° of the LGT, according to which "Taxes are essentially based on tax-paying capacity revealed, in accordance with the law, through income or its use and assets.", thereby implementing some of the constitutionally enshrined principles, namely those of equality and just distribution of income and tax burdens.

Such duty is not compatible with tax planning schemes that defraud the law.

Thus, operations that are carried out in order to avoid taxation are sanctioned with their respective inefficacy in the tax sphere, pursuant to article 38° of the LGT.

Analyzing the financial operation at issue, its facts and documentary elements, it is concluded that a situation of tax planning is at stake, given the tax advantages obtained through the transfer of shares of A…, SA to the company A…, SGPS.

Note that, among all the taxpayers (individual and collective) involved, there are special relationships, in accordance with the provision of subsections a), b), c) and d) of n.º 1 of article 63° of the C IRC.

Pursuant to the provision of n.º 2 of article 38° of the LGT "Acts or legal transactions essentially or principally directed, by artificial or fraudulent means and with abuse of legal forms (...) to obtaining tax advantages that would not be achieved, totally or partially, without the use of such means... are ineffective in the tax sphere".

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

It is considered that the tenor of article 38° n.º 2 of the LGT is fulfilled in that a legal transaction is involved which, in an artificial manner, aimed only at the purpose already described above: the manifest intention to eliminate the taxation of dividends generated by the company A…, SA over several years.

Having regard to the facts that involved the entire operation at issue, we venture even to transcribe an excerpt from the Judgment of the TCA South (proc. 04255/10, of 15-02-2011, www.dgsi.pt), where it appears that: "We are here faced with the so-called step by step transactions in which there is a complex fact pattern, involving a succession of acts/transactions coordinated between themselves, although they may occur at different temporal moments and with the common objective of achieving a tax advantage. Faced with this type of operations, the law applier must operate an integrated treatment visualizing them as a single transaction, tending toward a single and final result."

III – 5. The Sanctionary Element

Throughout this document, we have sought to demonstrate that the objective and consequence of the execution of the successive legal transactions was the distribution of dividends generated by the company A…, SA through the company A…, SGPS, excluded from taxation under IRS, in the form of payment of a debt previously established and arising from the sale of shares made by the shareholders of A…, SA to A…, SGPS, and it is pertinent to note that the shareholder structure of both companies is, ultimately, exactly equal, albeit at different temporal moments, see Tables I and III.

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 reimbursement of said amount deferred in time, assuming, materially, the nature of true dividends which, in tranches, may come to be distributed by the shareholders, integrating their patrimonial sphere, without suffering any type of taxation.

However, according to our understanding, such a matter will arise if and when the reimbursement of supplementary contributions to the partners is resolved, pursuant to article 213° – n.º 2 of the Commercial Companies Code, since it will be at that moment that the relevant tax event for IRS purposes will occur, through the payment or making available of the respective amount to the shareholders.

Not so, however, as regards the amounts already paid to shareholders by the company A…, SGPS, whose values 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 true distribution of dividends, since they provided the availability of money to the partners without suffering any taxation under IRS.

In the understanding of Gustavo Lopes Courinha ("General Anti-Abuse Clause in Tax Law – Contributions to its Understanding", page 15) "To study the general anti-abuse clause is equivalent to studying the sole dynamic and existing response in the Portuguese Tax System to combat tax avoidance. Now the concept of tax avoidance, as we understand it, corresponds to that of abusive tax planning, that is, the planned action of the taxpayer that results in conduct that is apparently lawful, generating a tax advantage not admitted in the tax system. Although the conduct is not contrary to law, the result obtained is not admitted."

Further on, on page 88, the same author concludes that this figure of the general anti-abuse clause "...is composed of real transactions structured, by full agreement between the parties, with a view to achieving a fiscally less burdensome transaction, while simultaneously obtaining an economic effect close to what would be achieved through the fiscally more burdensome transaction."

Having regard to the facts set out and, in our view, demonstrated in this document, it is proposed, in summary, the disregard for tax purposes of these operations and the consequent taxation under IRS, as dividends, of the amounts received by the shareholders.

According to article 101° – n.º 2, subsection a) of the CIRS, the obligation to proceed with withholding at source would be incumbent on the company A…, SGPS, since it was this entity that placed these income items at the disposal of the shareholders.

The withholding rate is provided for in subsection c) of n.º 3 of article 71° of the CIRS, and the wording in force on the date of the making available of the income is to be applied, namely:

• 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 taxpayers through withholding at source at the liberatory rate provided for in article 71° of the CIRS has the nature of liberatory payment, without prejudice to the option for aggregation, in accordance with article 71° n.º 6 of the CIRS.

Article 103° of the CIRS typifies responsibility in the case of substitution, indicating the entity to which the missing tax is exigible, as well as compensatory interest, having regard to the status of resident, or not, in Portuguese territory of the beneficiaries of these income items, and in the case at issue, n.º 4 of article 103° of the CIRS would be applicable.

In view of everything set out above, it is proposed that the company A…, SGPS be taxed, for the failure to withhold IRS at source, in accordance with the values and with reference to the periods shown in the following tables:

(...)

t) By order of 18-12-2013, the Director General of the Tax Authority and Customs Authority authorized the application of the general anti-abuse clause (1st page of the Tax Inspection Report);

u) Following the corrections made, the Tax Authority and Customs Authority issued the IRS assessment no. 2014 …, relating to the year 2011 and relating to withholdings at source, and the assessment of compensatory interest no. 2014 …, both dated 13-01-2014, in the total amount of €2,960,989.23, being € 2,756,762.25 of IRS and € 204,226.98 of compensatory interest, with a payment deadline of 13-03-2014 (doc no. 1 attached with the request for arbitral pronouncement, whose content is given as reproduced);

v) On 13-03-2014, the Claimant paid the sum of € 2,960,989.23, relating to the IRS and compensatory interest assessments referred to in this case (document no. 14, attached with the request for arbitral pronouncement, whose content is given as reproduced);

w) On 15-05-2014, the Claimant submitted the request for arbitral pronouncement that gave rise to the present proceedings.

2.2. Unproven Facts

There are no facts relevant to the decision of the case that have not been proven.

2.3. Substantiation of Factual Matters

The substantiation of the decision on factual matters is based on the Tax Inspection Report and the documents attached with the request for arbitral pronouncement.

1. LEGAL MATTERS

3.1. Issues to be Decided

3.1.1. Defects Imputed to the Acts of IRS and Compensatory Interest Assessment

The present proceedings concern the assessment of the legality of the IRS assessment no. 2014 …, of 13-01-2014, relating to the year 2011, in the amount of € 2,756,226.98, and the corresponding assessment of compensatory interest no. 2014 …, in the amount of € 204,226.98, resulting from the application of the general anti-abuse clause to the acquisition by the Claimant of 85.5% of the capital stock of the company A…, S.A. and to the increase of the capital stock of the Claimant by contribution in kind of an additional participation of 4.5% in that same company.

The Tax Authority and Customs Authority understood that the requirements for the application of the general anti-abuse clause, set out in article 38.º, n.º 2, of the LGT, are fulfilled, and therefore "disregard for tax purposes of these operations and the consequent taxation under IRS, as dividends, of the amounts received by the shareholders" must occur, and that "in accordance with article 101º - n.º 2, subsection a) of the CIRS, the obligation to proceed with withholding at source would be incumbent on the company A…, SGPS, since it was this entity that placed these income items at the disposal of the shareholders" (page 29 of the Tax Inspection Report).

The Claimant imputed the following defects to the IRS assessment in question:

a) Failure to fulfill the duty to inquire, due to the lack of concrete measures taken by the Tax Administration in the inspection procedure for the determination of the factual basis relevant for assessing the requirements for the application of the general anti-abuse clause, in violation of article 58.º of the LGT;

b) Failure to fulfill the requirements for the application of the general anti-abuse clause, in violation of the provision of article 38.º, n.º 2, of the LGT, specifically by:

i. Non-existence of motivation that is essential or principal in nature of a tax character for the purchase and sale of shares of A…, S.A. and, likewise, for the increase in capital of the Claimant by contribution in kind of shares of the company referred to;

ii. Non-existence of resort to artificial or fraudulent means and abuse of legal forms;

iii. Non-existence 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. Non-existence of non-conformity of the result obtained with the ratio legis of the rules applied;

c) Non-opposability to the Claimant, as a tax substitute, of the disregard of tax effects resulting from the application of the general anti-abuse clause to the acts in question, in concomitant violation of article 38.º, n.º 2, of the LGT or, should this not be the case, on the grounds of unconstitutionality of that rule in the face of the principles of certainty and inadmissibility of the right to private property guaranteed by the Protocol Additional to the European Convention on Human Rights ("ECHR").

With regard to the assessment of compensatory interest, in addition to its nullity as a consequent act should the illegality of the IRS assessment be declared, the Claimant argues that in any case the legal prerequisites necessary for any assessment of compensatory interest are not fulfilled.

Should the illegality of any of the assessment acts be declared, the Claimant's claim for payment of indemnification interest must be assessed.

3.1.2. Order of Assessment of Defects

In accordance with the provision of article 124.º of the CPPT, subsidiarily applicable by virtue of the provision of article 29.º, n.º 1, of the RJAT, inasmuch as no defects have been imputed to the IRS declaration that would lead to the declaration of non-existence or nullity, nor has a relation of subsidiarity been indicated, the order of assessment of defects must be that which, according to the prudent judgment of the judge, provides the most stable or effective protection of the interests offended.

In the case at hand, the defect imputed by the Claimant that provides the most stable and effective protection of the Claimant's interests is the one referred to in subsection c) above, since it is based on the unconstitutionality of the general anti-abuse clause if interpreted as being capable of the effects of its application reaching the tax substitutes.

This defect, should it be verified, will definitively eliminate the possibility of imposing on the Claimant any taxation at the level of IRS in the capacity of a tax substitute, the only one possible in relation to a legal person, independently of the verification or not of the prerequisites for the application of the general anti-abuse clause, in the terms in which its application was made to the situation at hand or in any other.

In any event, at most, the alleged non-fulfillment of the prerequisites for the application of the general anti-abuse clause will provide protection equivalent to that defect of unconstitutionality, and therefore it is clear that it will be immaterial to begin the assessment of the legal issues raised by the Claimant by one or the other of these defects of subsections b) or c) referred to.

For this reason, since questions of unconstitutionality are logically prioritary, as "in proceedings submitted to judgment, courts cannot apply rules that infringe the provisions of the Constitution or the principles enshrined therein" (article 204.º of the CRP), it is justified that the priority assessment of the question raised by the Claimant referred to in that subsection c) is chosen.

As regards the defect indicated by subsection a), having a purely procedural nature, it is manifest that it provides unstable protection of the Claimant's interests, since its eventual verification would not prevent the possibility of a renewed IRS assessment with the same tenor as the one that is the object of the present proceedings, following the correction of the hypothetical instructional deficiency.

As is the corollary of the establishment by the aforementioned article 124.º of the CPPT of an order of assessment of defects, if a defect that ensures the effective protection of the rights of the challengers is ruled upon favorably, it will not be necessary to assess the remaining ones, since, if it were always necessary to assess all the defects imputed to the challenged act, it would be immaterial what the order of their assessment was.

3.1.3. Irrelevance of Ex Post Facto Reasoning

The Claimant, in §§ 29 and 30 of its submissions raises the question of the irrelevance of ex post facto reasoning, understood as not appearing in the acts whose declaration is requested.

The arbitral tax proceedings were created by the RJAT as an alternative to the judicial challenge proceedings, is, like this, a means of purely annulment contention.

In a pure legality contention, as is that provided for in the RJAT for arbitral tribunals operating in the CAAD, in which only the declaration of illegality of acts of the types provided for in subsections a) and b) of n.º 1 of its article 2.º is sought, the legality of the challenged act must be assessed as it occurred, with the reasoning used in it, other possible reasonings that could serve as support for other acts, with decision content totally or partially coinciding with the act practiced being irrelevant. Thus, reasonings invoked ex post facto, after the end of the tax procedure in which the act whose declaration of illegality is requested was practiced, including those put forth in the judicial proceedings, are irrelevant.

Thus, the Tribunal cannot, faced with the finding of the invocation of an illegal ground as support for the administrative decision, assess whether its action could be based on other grounds, invoked only in the contentious proceedings, and fail to declare the illegality of the concrete act practiced because, possibly, there might exist the abstract possibility of a hypothetical act with decision content totally or partially identical, with another reasoning, which would be legal, but was not practiced.

Therefore, it is only in light of the tenor of the challenged act that its legality is assessed.

3.2. Question of Non-Opposability to the Tax Substitute of the Disregard of Tax Effects Resulting from the Application of the General Anti-Abuse Clause

3.2.1. Position of the Claimant

The Claimant alleges on this question, in articles 147.º and following of the request for arbitral pronouncement, in summary, the following:

– The Tax Administration does not impute to the Claimant any action susceptible of being subsumed under the normative provision of article 38.º, n.º 2, of the LGT, basing the impugned IRS assessment solely on the alleged responsibility for non-withholding of tax at source upon the payment of part of the price owed for the acquisition of shares of A…, S.A. – the Tax Administration considering that such withholding should have occurred in light of the inefficacy of the acquisition of shares and consideration of the price paid as distribution of dividends;

– Article 38.º, n.º 2, of the LGT does not have the capacity to trigger, vis-à-vis third parties, the birth of tax obligations – specifically withholding at source – existing only in light of the reconfiguration of legal-tax effects operated in the context of the application of the general anti-abuse clause, under penalty of unconstitutionality of the rule in the face of the principles of certainty and legal security, inherent to the democratic rule of law enshrined in article 2.º of the CRP, and, likewise, of inadmissible violation of the right to private property guaranteed by article 1.º of the Protocol Additional to the European Convention on Human Rights, in light of the concept of law found therein;

– As appears from the Tax Inspection Report, the Tax Administration considers that the sellers of shares of A…, S.A. obtained income, paid by the Claimant, which, had acts not been practiced by that entity that were held to be artificial or fraudulent and with abuse of legal forms (to circumvent the incidence rules of taxation), would have corresponded to payments of dividends proceeding from the aforementioned A…, S.A.;

– It happens that the elevation of the Claimant to the status of obligated taxpayer in the case at hand translates to an erroneous interpretation by the Tax Administration of the reach of the application of article 38.º, n.º 2, of the LGT – in that measure rendering the impugned assessment illegal –, since the general anti-abuse clause does not operate to bring about the birth of tax obligations – that is, to impose on third parties instrumental obligations such as that of withholding and delivering tax to the Public Treasury;

– Indeed, faced with a situation of abuse, the scope and purpose of article 38.º, n.º 2, of the LGT is to allow the birth of the principal tax obligation, making it possible for the Tax Administration to assess the tax abusively avoided by the taxpayer (neutralizing the tax effects of the abusive conduct);

– Even in the specific context of the taxation of income through withholding at source of tax with a liberatory nature – and perhaps there with greater urgency – it is important to distinguish between the tax obligation that is accessory and that impends upon a tax substitute, of withholding part of the amount of which it is debtor to the taxpayer upon the fulfillment of the payment obligation – to deliver it, not to the creditor, but to the Tax Administration –, and the principal tax obligation, of bearing the burden of the tax, that impends upon the respective taxpayer;

– It is true that through the delivery of the amount withheld by the tax substitute, particularly when withholding has a liberatory nature, the tax debt is extinguished without the taxpayer having any direct contact with the active party to the tax relationship, but this does not alter the fact that the tax substitute obligated to withhold is the passive subject of an obligation different from the tax obligation of the taxpayer, and that therefore cannot exclude the latter, the passive subject of the tax, from the sphere of the tax relationship;

– In this context, as is clear to see, it cannot reasonably be expected that the tax would have been collected by a third party, in observance of an accessory duty of withholding existing only in light of the application, promoted ex post facto by the Tax Administration, of article 38.º, n.º 2, of the LGT;

– In fact, as the Tax Administration itself acknowledges, in relation to the Claimant it cannot be said that any of the requirements for the application of the general anti-abuse clause are fulfilled (intellectual, means, result and normative elements);

– Even assuming that in the case at hand the prerequisites for the application of the general anti-abuse clause were fulfilled in relation to the sellers of shares of A…, S.A. – which is in no way conceded –, it is evident that upon the payment of the price for the acquisition of that social interest – and in relation to that legal act – no obligation to withhold tax at source impended on the Claimant, and therefore this cannot be held responsible for the non-fulfillment of such an obligation;

– Indeed, on the payment of the price due for the acquisition of shares – which constitutes in truth the only legal transaction practiced by the Claimant – there is no rule that determines for the acquirer an accessory obligation of withholding tax at source;

– The Tax Administration cannot claim, on the basis of the application of the general anti-abuse clause, to operate a reconstitution of the hypothetical and alternative reality that would exist if dividends had actually been distributed instead of capital gains income, to the point of holding responsible a taxpayer that did not evidence any abusive conduct – in the case, the Claimant – for having failed to comply with an obligation to withhold tax at source existing only in the imagined reality for the assessment of the tax advantage whose production, because abusively obtained, article 38.º, n.º 2, of the LGT prevents.

– Indeed, one might say that, if the Tax Administration could in fact legally redefine reality in light of the situation it assumes would have existed in the absence of legal transactions deemed abusive – and not only hold these as ineffective for tax purposes for the subtraction of the advantage abusively obtained –, the third party that would be obligated to withhold the tax in question would be A…, S.A. and not the Claimant;

– In any case, through the application of the general anti-abuse clause, the Tax Administration can only demand (of the respective taxpayers) the principal tax obligation that was abusively avoided, invoking for that purpose the inefficacy of the acts and legal transactions that materialized that abuse, without however changing the effects and legal qualification of such acts vis-à-vis third parties;

– Indeed, it clearly follows from the very letter of article 38.º, n.º 2, of the LGT that the consequence of the application of the general anti-abuse clause is limited to the inefficacy of the acts and legal transactions considered abusive solely and exclusively for tax purposes, with it following a contrario sensu that all the other effects produced by those acts and transactions are maintained, remaining inviolate, in particular, their legal qualification;

– Now, as appears from the factuality described, the Claimant did not proceed to any payment of dividends but rather to the payment of a price for shares acquired by it, a fact that does not change with the hypothetical application of the general anti-abuse clause;

– In other words, the inefficacy for tax purposes of the abusive transactions permits the Tax Administration to proceed with the taxation that would exist in the absence of those transactions in the case at hand – namely, to tax the dividends that it considers would have been distributed –, but article 38.º, n.º 2, of the LGT does not determine nor permit the feigning of accessory duties of third parties, which would only exist if the legal transactions practiced had been, in fact, other;

– Appealing once more to the very letter of article 38.º, n.º 2, of the LGT, it is verified that the enactment of the aforementioned rule imposes very clearly that the tax advantage obtained be eliminated, which will only occur naturally if the effects of its application repercuss directly in the sphere of the taxpayer who abusively exempted himself from the tax obligation;

– In light of the foregoing, it is easily concluded that, in the case at hand, no obligation to withhold tax at source was established on the Claimant in accordance with articles 71.º, n.º 1, subsection c), and 101.º, n.º 2, subsection a), of the CIRS, nor does the application of the general anti-abuse clause result in the feigning of the birth of such obligation in the sphere of the Claimant, reason for which the holding responsible of the Claimant on the basis of article 103.º CIRS is illegal;

– Different understanding, interpreting the general anti-abuse clause in the sense of producing tax effects on third parties other than the taxpayer that acted motivated to obtain a tax advantage, clearly offends the constitutionally enshrined values of certainty and legal security, deriving from the concept of democratic rule of law postulated in article 2.º of the CRP, as well as the principle of proportionality in the restriction of the Claimant's right to private property, deriving from articles 18.º, n.º 2, and 62.º, n.º 1, of the CRP;

– To admit that a third party may be held responsible for non-withholding of tax at source in situations in which that obligation does not exist in light of the concrete legal acts in which the third party had involvement, but derives only from the conduct of the respective counterparty deemed abusive by the Tax Administration, would be equivalent to imposing on the tax substitute a disproportionate and inadmissible burden of monitoring that abuse;

– The disproportionate nature of such a burden is evident: any potential tax substitute, in relation to all legal acts in which it had involvement, would have to proceed not only to the determination of the respective (and normal) legal-tax framework, but also to ascertain whether, and to what extent, the respective counterparties would be taking part in such acts motivated essentially or principally by concerns of a tax nature and, likewise, whether from the perspective of those counterparties the legal acts in question could be considered as abusive – in the meaning of article 38.º, n.º 2, of the LGT –, in which case it would be incumbent on the substitute to proceed with the withholding that might show itself necessary in light, not of the legal act practiced, but of that which would presumably take place should the abusive action not exist;

– To admit that the Tax Administration, having ascertained ex post facto the existence of abusive conduct, would be competent only to demand of the substitute the tax abusively avoided by the taxpayer with the argument that an accessory duty of withholding at source was breached, would correspond to transferring entirely to the sphere of the substitute, not only the duty of monitoring tax conducts that are fiscally abusive – an obligation of the Tax Administration –, but also the very burden of the tax – an obligation of the taxpayer –, since once abusive conduct is ascertained ex post facto, the substitute will invariably find itself in a situation in which it will not already have the amounts on which withholding should have occurred, thus bearing directly in its sphere the Tax as a consequence of the application of article 103.º of the CIRS;

– Faced with such normative interpretation of article 38.º, n.º 2, of the LGT, tax substitutes would find themselves permanently faced with a highly complex (or even impossible) task of investigating and determining the intellectual motivations of their counterparties in the context of the normal course of legal traffic, running the risk of the abusive nature of the conduct of those parties and living in the contingency of their respective holding responsible for non-fulfillment of a duty of withholding existing only in light of that possible abuse;

– The principle of protection of certainty and legal security is enshrined in article 2.º of the CRP, deriving from the concept of rule of law;

– In tax matters, the principle of certainty and legal security clearly implies that passive subjects – among which tax substitutes – be guaranteed a measure of security with regard to the correct fulfillment of tax rules, imposing on the legislator that it state expressly and in detail the legal and factual prerequisites of tax obligations, so that these can be adequately fulfilled;

– It is in no way compatible with that security the conclusion that the existence or not of an obligation to withhold tax at source of tax – which, if not fulfilled, will determine the tax responsibility of the substitute – depends, not on the act or legal transaction practiced by the tax substitute, but on the subjective motivation of its counterparty;

– On the other hand, from article 18.º, n.º 2, of the CRP there also derives a general principle of proportionality – or prohibition of excess – in the restriction of rights, freedoms and guarantees;

– If it is true that the limitation implicit in article 18.º, n.º 2, of the CRP results inapplicable to the tax obligation stricto sensu, the same does not occur with regard to accessory tax obligations – as occurs with the obligation to withhold tax at source that the Tax Administration understands to impend on the Claimant –, such accessory obligations not being reconductible already to an immanent limit to rights, freedoms and guarantees, but only to a duty of cooperation, determined legally;

– Thus, even though the existence and necessity of these duties of cooperation is not questioned, it is clear that the extent and intensity of the legal concretization of the same cannot fail to be subject to the principle of proportionality;

– It is the understanding of the Claimant, having regard to the aforementioned impossibility of ascertaining with the necessary certainty the subjective motivations of its counterparties in the referred transaction, that such interpretation of article 38.º, n.º 2, of the LGT collides frontally with the principle of proportionality of rules restrictive of rights, freedoms and guarantees – enshrined in article 18.º, n.º 2, of the CRP and whose protective scope covers, having regard to the provision of article 17.º of the CRP, its right to private property, enshrined in article 62.º, n.º 1, of the CRP;

– The rule of article 38.º, n.º 2, of the LGT, if interpreted as bringing about the birth in third parties of accessory tax obligations – specifically withholding at source – existing only in light of the legal-tax reconfiguration operated by such general anti-abuse clause, is materially unconstitutional, for violation of the constitutional principles referred to above, and cannot therefore be applied, which is invoked for the necessary legal effects and will determine the illegality of the impugned IRS assessment;

– It should always be understood that the referred taxation constitutes in any case a violation of article 1.º of the Protocol Additional to the European Convention on Human Rights, which enshrines a subjective right in favor of individuals: the right to non-illegal interference by the State in their private property;

– As to the concept of law for purposes of applying the exception provided in the final part of article 1.º of the Protocol Additional to the ECHR, the Case law of the European Court of Human Rights is settled in the sense that it is necessary that the normative support through which the tax is instituted has the quality of "law", not only from a formal point of view, but also, substantively, in light of the common principles of the rule of law;

– The European Court of Human Rights stated that unclear Tax legislation, given its lack of ordering capacity, cannot serve as a basis to justify an affecting of the individual patrimony of individuals through taxation, translating into a violation of article 1.º of the Protocol Additional to the ECHR by not having the quality of "law" in the sense of the final part of that rule;

– That same Court understood that it is necessary first of all that the "law" be sufficiently accessible: the citizen must be able to dispose of sufficient information, in accordance with the circumstances of the case, about the legal rules applicable to a given situation and that only a rule enunciated with sufficient precision can be considered as "law" that permits the citizen to regulate its conduct: if necessary by seeking appropriate advice, he must be capable of foreseeing, with a degree of certainty reasonable within the circumstances of the case, the practical consequences of a determined action;

– The concern to ensure a "fair balance" between the demands of the general interest of the community and the imperatives of safeguarding the Fundamental rights of the individual is reflected in the structure of article 1.º as a whole and translates into the necessity of a reasonable relationship of proportionality between the means employed and the objective pursued";

– In the concrete case of the present proceedings, and as amply demonstrated above, the uncertainty deriving from article 38.º, n.º 2, of the LGT with regard to the existence of an accessory obligation of withholding tax at source in the sphere of the Claimant is manifest, reason for which that rule – which combined with article 103.º of the CIRS determines the patrimonial responsibility of the Claimant for non-fulfillment of that obligation – cannot be deemed as having the quality of "law" necessary for the compatibility of the taxation determined by it with the protection of private property enshrined in article 1.º of the Protocol Additional to the European Convention on Human Rights;

– All things considered, it is clear that the application of article 38.º, n.º 2, of the LGT to bring about the birth in the sphere of the Claimant of an accessory tax obligation of withholding tax at source is reduced to an interference in the Claimant's right to property contrary to article 1.º of the Protocol Additional to the ECHR, which translates into the illegality and consequent annulability of the IRS assessment in reference, in accordance with article 135.º of the CPA.

3.2.2. Position of the Tax Authority and Customs Authority

The Tax Authority and Customs Authority defends, on this question, in articles 352.º and following of its Response, in summary, the following:

– In the case at hand, one cannot from the start consider the Claimant to be a "third party", since the interveners in the operations at issue are exactly the same, and thus the Claimant cannot by this route allege ignorance as to the motivations of those involved;

– This fact likewise results from the TIR, where it is referred that the sale of shares of the company A…, SA for the benefit of A…, SGPS, constituted the practice of an act which, despite being formally lawful, had underlying the intention of obtaining income, more specifically dividends, which would otherwise be subject to effective taxation, with the "shareholders and administrators, let us recall, are exactly the same";

– Being the Claimant itself that assumes it does not have other collaborators beyond its administrators, who, being the same administrators of A…, S.A., could not be unaware of the motivations that lay behind the operations;

– From article 31.º, n.º 2, of the LGT it follows that the Claimant's obligation to withhold IRS...

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