Summary
Full Decision
ARBITRAL DECISION
The arbitrators Advisor Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. António Pragal Colaço and Dr. Carlos Alberto Monteiro da Silva (arbitrators-members), appointed by the Deontological Council of the Center for Administrative Arbitration to form the Arbitral Tribunal, constituted on 29-08-2017, agree as follows:
1. REPORT
A…, SGPS, S.A., legal entity no. … (hereinafter referred to as "Claimant"), filed a request for constitution of the collective arbitral tribunal, under the terms of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as RJAT).
The Respondent is the TAX AND CUSTOMS AUTHORITY.
The Claimant seeks the annulment of the Corporate Income Tax assessment no. 2015…, relating to the tax year 2011, and the respective compensatory interest assessment no. 2015…, in the total amount of € 150,866.38, with restitution of the tax improperly paid, plus indemnity interest.
The request for constitution of the arbitral tribunal was accepted by the President of the CAAD and automatically notified to the Tax and Customs Authority on 21-06-2017.
Pursuant to the terms of article 6, paragraph 2, letter a) and article 11, paragraph 1, letter b) of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the charge within the applicable time period.
On 11-08-2017 the parties were duly notified of such appointment, having manifested no intention to refuse the appointment of the arbitrators, pursuant to the combined terms of article 11, paragraph 1, letters a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.
Thus, in accordance with the provisions of article 11, paragraph 1, letter c) of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 29-08-2017.
The Tax and Customs Authority submitted a response in which it argues that the request should be judged as unfounded.
By order of 04-10-2017 a hearing was dispensed with and it was decided that the proceedings would continue with optional written submissions.
The Parties submitted submissions.
The Tribunal was regularly constituted and is competent.
The Parties have legal personality and capacity, are legitimately interested and are duly represented (arts. 4 and 10, paragraph 2, of the same statute and art. 1 of Ordinance no. 112-A/2011, of 22 March).
The proceedings are free from nullities.
3. FACTS
3.1. Proven Facts
The following facts are considered proven:
a) The Claimant was established on 21-07-2008, having as its object the production and commercialization of transformed chemical and plastic products (document no. 4 attached to the request for arbitral pronouncement, whose content is hereby reproduced);
b) On 07-06-2011, its corporate purpose was changed to management of equity interests in other companies, as an indirect form of exercise of economic activities, acting as a Holding Company (SGPS) (Report of Tax Inspection that is part of document no. 3 attached to the request for arbitral pronouncement, whose content is hereby reproduced);
c) The Claimant is subject to the general regime of Corporate Income Tax, with its tax period coinciding with the calendar year;
d) On 11-09-2008, the Claimant established its subsidiary, company B…, S.A. (B…), whose share capital, in the amount of € 50,000, was fully subscribed, with the Claimant becoming holder of 50,000 shares valued at 1 euro each (document no. 13 attached to the request for arbitral pronouncement, whose content is hereby reproduced);
e) On 19-09-2008, C…– Venture Capital Fund, which held all of the Claimant's capital, granted the Claimant, as capital advances, a loan in the amount of € 15,959,424.00 (document no. 7 attached to the request for arbitral pronouncement, whose content is hereby reproduced);
f) Also on 19-09-2008, C…– Venture Capital Fund granted the Claimant, as capital advances, a loan in the amount of € 97,175.56 (document no. 9 attached to the request for arbitral pronouncement, whose content is hereby reproduced);
g) On 19-09-2008, the Claimant, as sole shareholder of B…, performed in relation to it the following operations, in the total amount of € 34,000,000.00:
· supplementary contributions, in the amount of € 4,750,000.00 (documents no. 5 and 16 attached to the request for arbitral pronouncement, whose contents are hereby reproduced);
· capital advances, in the amount of € 19,200,000.00 (documents no. 5, 15 and 16 attached to the request for arbitral pronouncement, whose contents are hereby reproduced);
· financing, in the amount of € 10,500,000.00 (document no. 14 attached to the request for arbitral pronouncement, whose content is hereby reproduced);
h) Also in September 2008, B… acquired a company, D…, S.A. (D…), for € 34,000,000.00 (Tax Inspection Report);
i) On 19-09-2008, D…, indirectly held by the Claimant, granted it a loan in the amount of € 10,500,000.00, bearing interest (document no. 8 attached to the request for arbitral pronouncement, whose content is hereby reproduced);
j) On 26-12-2008, C…– Venture Capital Fund, granted the Claimant, as capital advances, a loan in the amount of € 103,520.00 (document no. 6 attached to the request for arbitral pronouncement, whose content is hereby reproduced);
k) On 22-12-2009, the merger by incorporation of B… into D… was registered, with the Claimant coming to hold, directly only, company D… (document no. 10 attached to the request for arbitral pronouncement, whose content is hereby reproduced);
l) On 23-12-2009, they agreed to offset the reciprocal credits they held in the amount of € 10,000,000.00 (document no. 10 attached to the request for arbitral pronouncement, whose content is hereby reproduced);
m) On 21-01-2011, the shareholders of C… – Venture Capital Fund resolved to make supplementary contributions according to the supplementary contributions regime by shareholders, in the total value of € 3,299,274.00 (document no. 11 attached to the request for arbitral pronouncement, whose content is hereby reproduced);
n) On 01-09-2011, the Claimant and D… agreed on the reimbursement to the Claimant of the amount of € 10,000,000.00 (part of the loan of € 19,200,000 of capital advances made to B…), plus € 4,487,500.00 of accrued interest (document no. 12 attached to the request for arbitral pronouncement, whose content is hereby reproduced);
o) Within the scope of the service order no. OI 2015…, the Claimant was subject to internal tax inspection, of partial scope, for the tax period of 2011 and Corporate Income Tax (Document 3 attached to the request for arbitral pronouncement, whose content is hereby reproduced);
p) On 22-04-2015, the Claimant was notified of the Draft Report of Tax Inspection ("Draft"), prepared following the inspection action carried out by the Tax Administration, having been notified to submit its comments on the same, in the context of prior hearing rights, which it did;
q) In the said Draft, the Tax Administration proposed a correction to taxable income of Corporate Income Tax in the amount of € 1,364,493.17, relating to the non-acceptance as a tax deduction of financial charges incurred with the "acquisition - and provision of equity capital of equity interests", in accordance with article 32, paragraph 2 of the Tax Benefits Statute ("EBF");
r) Subsequently, through Office no.…, of 03-07-2015, issued by Tax Inspection - Department A - Study and Planning Team, of the Finance Directorate of Lisbon, the Claimant was notified of the Tax Inspection Report (Report), pursuant to which the arguments presented by it were partially accepted, a correction to taxable income remaining in the amount of € 1,087,310.99;
s) In the Tax Inspection Report the following is stated, among other matters:
III.2.2. Financial Charges not accepted tax-wise in light of article 32 of the Tax Benefits Statute (EBF)
III.2.2.1. - Legal framework of article 32 of the Tax Benefits Statute (EBF)
Article 32, paragraph 2 of the Tax Benefits Statute (EBF), in the version in force at the date of the facts now investigated by Tax Inspection (given by Decree-Law no. 108/2008, of 26/06), provides that: "capital gains and losses realized by holding companies and venture capital companies through the onerous transfer, whatever the title by which it is carried out, of equity interests of which they are holders, provided they have been held for a period of no less than one year, and, likewise, the financial charges incurred with their acquisition, shall not concur for the formation of the taxable profit of these companies".
With this provision the legislator intended to establish the general rule of exclusion from taxation of capital gains realized on the onerous transfer of equity interests held by holding companies (regardless of the legal transaction that gave rise to it: whether it acquired the shares by purchase or by subscription, whether their acquisition value was or was not subject to appreciation, by incorporation of other assets, namely merger...), for a period equal to or greater than one year, whatever the title by which it is carried out, and at the same time, the legislator understood that, as capital gains do not concur for taxable profit, the financial charges incurred either with the acquisition, reinforcement, or maintenance (capital loans) of equity capital of the holdings held should cease to concur.
In compliance with the legal provisions of the General Tax Law - LGT, namely article 68-A, and based on the need to assist the law applicator, and to standardize technical-arithmetic procedures resulting from the practical application of the aforementioned rule, the Tax Administration, through Instruction no. 7/2004 of 30/03/2004 of the Corporate Income Tax Services Directorate clarifies that:
- The new regime, with respect to financial charges, is applicable "in periods beginning after 1 January 2003, even if they relate to financing obtained before that date" (point 5).
- The tax year in which the financial charges should be disregarded as costs, for tax purposes, "should proceed, in the tax year to which they refer, to the tax correction of those incurred with the acquisition of interests that are likely to benefit from the special regime established in paragraph 2 of article 31 of the EBF, regardless of whether all conditions for application of the special regime of taxation of capital gains have already been met..." (point 6).
- With regard to the method of calculation and attribution to be used for the purpose of allocating financial charges to equity interests, point 7 provides that "given the extreme difficulty of using... a direct or specific allocation method and the possibility of manipulation that the same would allow, such allocation should be effected on the basis of a formula that takes into account the following: the interest-bearing liabilities of holding companies and venture capital companies should be allocated, first and foremost, to the interest-bearing loans granted by these to the participating companies and to other interest-generating investments, allocating the remainder to the remaining assets, namely equity interests, in proportion to their respective acquisition cost".
The disregard of financial charges for purposes of determining taxable profit enshrined in paragraph 2 of article 32 of the EBF is a corollary of the general principle of necessity of costs according to which the tax deduction is conditioned by its connection with the obtaining of income subject to tax and, from which it follows that "(...) if certain costs are related to income not subject to tax they are not tax deductible (...)", principle established in the provision of paragraph 1 of article 23 of the Corporate Income Tax Code, in which it is established that are considered "(...) expenses those that are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the income-producing source (...)".
From the densification of some concepts inherent in the provision of the rule.
With regard to the concept of acquisition value of equity interests
The Revenue Taxation and Expenditure Division, expressed itself, through information from 2008.06, stating that in assessing the acquisition value of equity interests should always be considered that which exists in the Balance Sheet on 31 December of each tax year in which the financial charges are disregarded for purposes of determining taxable profit;
That occurring, in summary, with respect to interests already held, an operation of asset entry, the beneficiary company will experience appreciation, even if the transfer was effected under the tax neutrality regime, and accordingly, the 'new" value of the interest should concur for the determination of the calculation of financial charges, to the extent that this will be, in case of alienation, what will serve as the basis for calculation of the capital gain.
III.2.2.2. Analysis of financial charges incurred
The factuality arising from the analysis carried out on the elements sent by the taxpayer, either via postal services or entered in the Tax Administration Portal (e.g. IES declaration), in compliance with its reporting obligations, implies that, it is sought that in the tax year in question, financial charges were incurred.
These are encompassed in the total of financial charges considered as a tax cost in the respective income statement. The legal obligation to achieve the quantification of non-deductible financial charges based on the provisions of the concatenation of article 23 of the Corporate Income Tax Code with article 32 of the EBF and to effect its disregard in the context of determining taxable profit (in Form DRM22 - table 7 using the accrual method) when filling the annual declaration where it makes the self-assessment of Corporate Income Tax to pay, belongs to the taxpayer.
With regard to the origin and amount of financial charges
Disclosed in the analytical trial balance before the determination of results for the tax year 2011, the taxpayer disclosed accounting the following expenses/losses, further detailed in the table below, which integrate, for the purposes aforementioned, the concept of financial charges. Totaling the global amount of € 2,950,557.14.
Values, materially coinciding with those indicated on page 22 of the IES, and likewise on page 15 of the Management Report.
With regard to the origin and amount of interest-bearing loans obtained
The above financial charges, incurred by the taxpayer, arise from loans obtained, which are listed in the following table, prepared from the elements (accounting and tax) sent by these.
Value (account 26) coinciding with that declared in IES page 22 and likewise on page 10 of the Management Report.
With regard to the origin and amount of Interest-Bearing Loans Granted
Detailed in the table below, prepared from the elements (accounting and tax) presented by the taxpayer.
With regard to the determination and calculation of the actual acquisition value of equity interests, excluding the effect of the equity method
In following the path corresponding to the determination of the value of non-tax deductible financial charges, based on the provisions of the concatenation of article 23 of the Corporate Income Tax Code with article 32 of the EBF, the "auxiliary calculation model" disclosed in the aforementioned instruction was used, given the fungible nature of money.
Having regard to the elements sent by the taxpayer, the following table was prepared:
Proceeding in the determination of the value of financial charges to be disregarded in determining taxable profit, (on line 779 of Table 7 of Form DRM22.) comes:
(...)
From which it results that, although it is the responsibility of the taxpayer, with reference to the tax period, the determination of taxable profit, following for this purpose the methodology described by the tax legislator, aiming at the taxation of real effective income, should this have effected the increase in order to disregard, as the law commands, the financial charges incurred with its acquisition - and provision of equity capital of equity interests, in the amount of € 1,364,493.17.
Analyzing table 7 of Form DRM22 line 779 (formerly 752), it appears that the taxpayer made no increase to the net result of the accounting year, so as not to include the above value in the determination of Taxable Profit.
Here arrived, and faced with the absence of manifestation of will by the taxpayer, embodied in the referred Form DRM22 -table 7, the Tax Administration is led to effect the necessary corrections, in order to, in compliance with what is established in article 32 of the EBF, exclude from the net result of the year (accounting) the financial costs incurred, which do not concur for the determination of taxable profit. In this sense, the amount of € 1,364,493.17 is added in Table 7 of Form DRM22 line 779.
(...)
PRIOR HEARING RIGHTS
(...)
In these points, it develops a set of factual matters that run through the description of its corporate purpose (points 9 and 10), through the reference to the fact that it contracted, with its shareholders, a loan of euro 19,401,896, having used almost all of this to grant interest-bearing capital advances to its subsidiary company D….
It should be noted that the position of the taxpayer, save as to the value of "other assets", converges (with those that Tax Inspection set out in point III.2.2.2) in terms of overall amounts to be considered, in the calculation formula subject to the disregard of financial charges, in light of the final part of the provision of paragraph 2 of article 32 of the EBF. In this regard there is, so far, any quantitative divergence; Not agreeing, however, with the final result obtained, resulting, as developed below, from divergence of criterion (annual/monthly) to be used.
Proceeding
It states, points 12 to 14, that, of the € 19,200,000.00 of capital advances granted to Company D…, the amount of € 10,000,000.00 was converted into supplementary contributions, in the same manner proceeded with respect to the interest to be received, in the amount of € 4,487,400.00. Totaling, at the end of the 2011 tax period, the supplementary contributions the amount of € 14,487,500.00
And, as it well expresses, (points 15 and 16) during the procedure, the claimant when questioned, why it did not proceed to the disregard of financial charges, in light of the provision in the final part of article 32, paragraph 2 of the EBF, clarified that it had used the direct allocation method. Overlooking, however, the information that was provided to it at that time, this method is not, by the Tax Administration, considered, having regard to the legislative intent of the prescribed rule.
As to the second part - Grounds
The company states that, point 19, it cannot agree with the amount presented in "other assets", nor with the use of a criterion that is based on an "method" of annual calculation. Proceeding, points 20 to 24, that the Tax Administration considered the amount of interest-bearing liabilities of € 9,200,000.00 and the amount of € 4,727,305.49 as "other assets". Understanding the claimant that the amount of "other assets" to be considered in the calculation of non-deductible financial charges, under article 32 of the EBF should amount to € 14,727,305.49 and not to € 4,727,305.49. Setting forth its argumentative position.
On what is argued, in support of the Tax Administration's position, add to this that in the calculations of Financial Charges to be disregarded, presented by the taxpayer, it agrees with the same interpretation and quantification of the amount of remunerated active loans, and not as erroneously indicated by the taxpayer (interest-bearing liabilities), with reference to the end of the year, in the amount of € 9,200,000.00. As for the amount of "other assets", having weighed the exposure and clarification of the taxpayer, and based on the elements brought to the procedure by the taxpayer, we note that, contrary to the first interpretation drawn from reading the trial balance, did not occur, as previously thought, by Company D… the payment of part of the loan of € 19,200,000.00, obtained from the company (parent) A… SGPS SA, but rather, the partial conversion of this (in the amount of € 10,000,000.00) into supplementary contributions.
Attentive to the above, we are to understand that the calculations should be altered accordingly, considering that the "Other assets", in the calculation formula above presented in point III.2.2.2. Analysis of financial charges incurred, amount to € 14,727,305.49.
From the sub-part of the determination of financial charges
The company A… argues, points 25 and 26, that in the calculations for determining financial charges, to be disregarded in the concatenation of the provision in article 32, paragraph 2 of the EBF, the Tax Administration only took into account the Balance Sheet values at the date of closing of accounts. Understanding the claimant that this consideration does not reflect the natural variation of the values of assets that occur throughout the entire economic cycle, in this case, the annual one.
Proceeding, in the following points, that circular 7/2004 of 30 March 2004, allows "Degrees of Freedom" regarding the methodology to be adopted by taxpayers, namely, (point 30 and 31) that, by the Claimant, the monthly criterion be used, which does not contradict the above Circular.
In this regard, point 32, the Claimant redid its calculations, namely by using the same values as those determined by Tax Inspection, with the exception of the value of other assets, to which we have already adhered to the taxpayer's position, using, however, in its methodology the monthly criterion, instead of the annual one. From the Claimant's calculations result € 380,442.47 to be disregarded for purposes of determining taxable profit (annex 2).
From the Tax Administration's Position
Paragraph 2 of article 32 of the EBF, in the version applicable at the time, imposes the application to holding companies of the rule of tax non-deductibility of financial charges incurred with the acquisition of equity interests, realizable, in its calculation, through the interpretation consented in Circular no. 7/2004, of 30 March. It should be noted, as jurisprudence emphasizes, that generic guidelines on tax matters have, comparatively with prescriptions contained in law, a much more restricted space of free interpretation. Its prescriptions in modern fiscal systems, including ours, are directed outward, outside the creating service (and with legal competence to do so) and issuing entity of the Circular: its first and natural recipients are on the outside (the taxpayers, as primary applicators, by legal determination, in modern tax systems, of tax rules in general, and especially in the case of the tax – Corporate Income Tax - in the case of the generic and abstract provision of the Tax Administration that is discussed here): they are published (by legal determination)".
As emerges from the submissions presented, for the taxpayer it follows from the interpretation of the Circular that it is possible to accept "Degrees of Freedom" from which it derives that in the determination of financial charges incurred with the acquisition of equity interests is effected with recourse to a calculation methodology, application of pro rata formula, based on a specific periodicity, namely the monthly one, instead of the annual criterion.
As emanates from Jurisprudence, (op cit), the constant interpretation of law from Circular no. 7/2004, is in conformity with the letter of the law, insofar as it does nothing more than undertake the discovery of its more precise meaning, in respect, moreover, for the general theory of interpretation of law and regulatory framework that conforms it. In this respect it is not susceptible, in its application, to extensive interpretation, which would allow, as the taxpayer states 'Degrees of Freedom", in concrete terms, in the objectification of the use of a monthly criterion in the calculation of financial charges to be disregarded.
In this same sense, in accordance with the understanding of the Tax Studies Center, the Corporate Income Tax Services Directorate has, repeatedly, sustained the position that as to the possibility of use of average monthly values of interest-bearing loans obtained, the circular indicates that the patrimonial situation to be considered should be the one expressed on the Balance Sheet date and not monthly values of a given tax year.
In this point, we do not adhere to the taxpayer's position.
Concluding
Having examined the elements brought to the record and having weighed the argument adduced, we are to understand, following the aforementioned course, that:
a) To proceed with respect to the alteration of the value of "other assets" to be considered in the calculation formula referred to above, considering the value of € 14,727,305.49,
b) Not to proceed with respect to the use of a methodology based on a monthly criterion in the determination of the value of financial charges to be disregarded.
For all the above, we redo the calculations
In the determination of the value of financial charges to be disregarded in determining taxable profit, (on line 779 of Table 7 of Form DRM22.) comes:
From which it results, following for this purpose the methodology described by the tax legislator, aiming at the taxation of real effective income, the increase, in order to disregard, as the law commands, the financial charges incurred with the acquisition of equity interests, amounts to € 1,087,310.99 and not the value claimed, part III of the prior hearing rights, by the taxpayer, in the amount of € 380,442.47. (annex 2).
In light of all the above, the correction in table 7 of Corporate Income Tax form 22 - field 779 - shall amount to € 1,087,310.99.
t) The correction in question resulted in an additional Corporate Income Tax assessment no. 2015…, in the amount of € 150,966.00, an assessment of Compensatory Interest no. 2015…, in the amount of € 14,900.38, and an account settlement statement no. 2015…, from which resulted tax to pay in the amount of € 150,866.38 (document no. 2 attached to the request for arbitral pronouncement, whose content is hereby reproduced);
u) On 09-10-2015, the Claimant paid the assessed amount (document 2, attached to the request for arbitral pronouncement, whose content is hereby reproduced);
v) The Claimant filed an appeal for reconsideration of the assessment;
w) By office of 22-03-2017, from the Finance Directorate of Lisbon, the present Claimant was notified of the Order of the Deputy Director of Finance of the Finance Directorate of Lisbon, dated 21-03-2017, which dismissed the appeal for reconsideration;
x) The decision on the appeal for reconsideration manifests agreement with an information, which is part of document no. 1, attached to the request for arbitral pronouncement, whose content is hereby reproduced, in which it states, among other matters the following:
III-ANALYSIS OF THE REQUEST
1 - The appellant has legitimacy (art° 9 of the Code of Tax Procedure and Process) and the request is legal (art° 68° of the CPPT) and was presented in time, within the 120-day period referred to in paragraph 1 of art° 70° of the CPPT (date limit for payment of the assessed value, 12-10-2015, fl. 88; appeal filed on 27-11-2015, fl. 1).
For purposes of article 111, paragraph 3 of the CPPT, it was verified, by consultation of the Computer System, that to date no judicial challenge with the object of the appeal under analysis has been filed.
2 - The appellant alleges that there was no direct purchase of the interest in D…, S.A., which should be financed.
However, the operations it describes lead to the conclusion that it was an onerous acquisition, via B…, S.A.
3 - The appellant disagrees with the methodology imposed by circular no. 7/2004 in determining the amount of financial charges that do not concur for the calculation of taxable profit, based on paragraph 2 of article 32 of the EBF (in the version in force in 2011), arguing that such methodology is not exact and that a direct allocation method would be more appropriate, attaching a table (fl. 4-verso) in which it matches obtaining contracts to funding granting contracts.
However, both because the tax administration is bound by the guidelines contained in circulars, as provided in paragraph 1 of article 68-A of the LGT, and by the difficulty, invoked in the circular, of effecting direct attribution of financial charges to acquisitions of equity interests, the use by Tax Inspection of the methodology advocated by the circular seems correct.
4 - The appellant also argues that, since variations occurred in values throughout the year, the allocation according to the method provided in circular no. 7/2004 should be effected taking as a basis the monthly values of interest-bearing loans granted and other assets, instead of balance sheet values (table on fl. 80).
This argument was already presented in the phase of prior hearing of the conclusions of the report (cf. point II-2-d above), being informed in the report that it is the understanding of the Tax Studies Center that the patrimonial situation to be considered should be the one expressed on the Balance Sheet date and not on a monthly basis.
5 - As to the amount of "Other assets" to be considered in the calculations in accordance with points 7 and 8 of Circular no. 7/2004, the appellant argues that in this item the supplementary contributions attributed to D… should be considered and that the value of "other assets" considered in these calculations includes only part of the supplementary contributions, € 10,000,000, when the total value attributed was € 22,537,500.
Consulting the report, it is verified that in "Other assets" the amount of € 4,727,305.49 was initially considered (fl. 100), corresponding to the value of Current Assets from the balance sheet (fl. 113-verso) and that in the phase of prior hearing the value of € 10,000,000 was added to that amount, corresponding to the value of capital advances reimbursed by D… to the appellant and by it converted into supplementary contributions to that company.
However, it is not concluded that the amount of € 10,000,000 was included in "Other assets" because it was considered that, as a rule, supplementary contributions should be included in that item, since the total value of supplementary contributions was not included (for example, still in point IX-Prior Hearing of the report, a higher value of supplementary contributions is mentioned, € 14,487,500 - fl. 102).
Consulting point III.2.3.1 of the report of the inspection action relating to Corporate Income Tax/2012 (service order no. 012015… - fls. 117 and 118), in which there is a correction to financial charges with similar grounds to the correction here under analysis, it is stated therein that, in accordance with accounting standards, supplementary contributions are to be integrated into the equity capital of the beneficiary entity (and not into "Other assets").
In fact, it appears from the IES/2011 of D… that the value of € 22,537,500 mentioned by the appellant was integrated into the equity capital of that company (fl. 116-verso).
It would seem, therefore, that the concept of equity interests, which derives from that of capital of a company, is expressed, in accounting terms, by equity capital.
As to the concept of acquisition of capital, for purposes of application of paragraph 2 of article 32 of the EBF, the report relating to Corporate Income Tax/2012 also provides an answer to this question, namely in point III.2.3.1, where it states that "occurring [...] an operation of asset entry, the beneficiary company will experience its appreciation, [...] and accordingly, this should be the value to concur for the determination of the calculation of financial charges, to the extent that this will be, in case of alienation, what will serve as the basis for calculation of the capital gain or loss."
It does not seem, therefore, justified the allegation that the supplementary contributions in question should be considered as "Other assets".
6 - As to the assessment of compensatory interest, the appellant argues that in the report the prerequisites on which the assessment of compensatory interest depends were not demonstrated.
The assessment of compensatory interest results from article 35 of the LGT, whose paragraph 1 states that compensatory interest is due in cases in which there is delay in the assessment of part or all of the tax due, by a fact attributable to the taxpayer.
Given that the correction to the Corporate Income Tax/2011 was made by Tax Inspection to the taxable result declared by the appellant and to the self-assessed tax, it seems evident that it is a fact attributable to the appellant.
7 - Given that, as set out in the preceding points, the appellant has no basis for its argument, the rejection of the request is proposed, maintaining the assessment object of the appeal.
It is added that, as the prerequisites of paragraph 1 of article 43 of the LGT are not met in this case, the appellant does not have the right to indemnity interest.
y) On 20-06-2017, the Claimant filed 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. Justification of the Finding of Facts
The proven facts are based on the documents attached by the Claimant with the request for arbitral pronouncement and on the administrative proceeding.
3. LEGAL ISSUES
Article 32, paragraph 2, of the Tax Benefits Statute (EBF), as amended by Law no. 64-B/2011, of 30 December, establishes the following:
2 - Capital gains and losses realized by holding companies of equity interests of which they are holders, provided they have been held for a period of no less than one year, and likewise, the financial charges incurred with their acquisition, shall not concur for the formation of the taxable profit of these companies.
Circular no. 7/2004, of 30 March, of the Corporate Income Tax Services Directorate, establishes in its point 7 the following:
Method to be used for purposes of allocating financial charges to equity interests
7. As to the method to be used for purposes of allocating financial charges incurred with the acquisition of equity interests, given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that the same would allow, such allocation should be effected on the basis of a formula that takes into account the following: the interest-bearing liabilities of holding companies and venture capital companies should be allocated, first and foremost, to the interest-bearing loans granted by these to participating companies and to other interest-generating investments, allocating the remainder to the remaining assets, namely equity interests, in proportion to their respective acquisition cost.
The general regime of relevance of capital gains and losses and financial charges for the formation of taxable profit of entities subject to Corporate Income Tax, was translated into the concurrence of capital gains and financial charges, in total [articles 20, paragraph 1, letter h), and 23, paragraph 1, letter a), of the Corporate Income Tax Code in the version resulting from Decree-Law no. 159/2009, of 13 July), and in the concurrence of losses at 50% [pursuant to articles 23, paragraph 1, letter l) and 45, paragraph 3, of the same Code].
For holding companies, article 32, paragraph 2, of the EBF (in addition to other situations provided for in its paragraph 3), established a special regime, which did not necessarily translate into a benefit, which was generally translated into the irrelevance for the formation of taxable profit of holding companies of capital gains and losses realized from equity interests held for at least one year, accompanied by the non-concurrence for the formation of taxable profit of financial charges incurred with their acquisition.
In paragraph 2 of article 32 of the EBF it is established that "financial charges incurred with their acquisition" do not concur for the formation of taxable profit, referring to equity interests, so that it must be concluded that its literal content indicates that only financial charges that are connected with the acquisition of equity interests are covered by the non-deductibility established therein.
In addition to this interpretation resulting from the literal content, it is corroborated by the explanation for its introduction in the EBF that was given in the Report of the State Budget for 2003 (Law no. 32-B/2002, of 30 December).
In fact, as referred to in Circular no. 7/2004, the regime of this rule was introduced in the EBF by Law no. 32-B/2002, of 30 December, which approved the State Budget for 2003, giving new wording to article 31, whose regime came to be contained in article 32 after the renumbering effected by Decree-Law no. 108/2008, of 26 June.
In Bill no. 28-IX, which came to give rise to the Budget Law for 2003, the text of this article 31, paragraph 2, appeared with wording identical to that in force in 2012 (in article 32, paragraph 2), being the only difference the addition of the reference to "venture capital investors", which is irrelevant for the interpretation of the rule.
In the said Report of the State Budget for 2003 ( [1] ), after observing a shortfall in the execution of the 2002 budget regarding Corporate Income Tax ( [2] ) the introduction of several measures aimed at the "broadening of the tax base and measures for moralization and neutrality", among which that of the non-deductibility of financial charges of a nature directly associated with the acquisition of equity interests by holding companies, which is announced in the following terms:
"The non-deductibility of deduction is established, for purposes of determining taxable profit, of financial charges of a nature directly associated with the acquisition of equity interests by holding companies";
It is thus unequivocal that only financial charges directly associated with the acquisition of equity interests were intended to be covered by the non-deductibility.
On the other hand, as can be seen from this explanation of the scope of this final part of paragraph 2, it is an autonomous legislative measure in relation to the part in which it is established that capital gains and losses realized do not concur for the formation of taxable profit, since it is obvious that the non-concurrence of capital gains for the formation of taxable profit does not broaden the tax base, rather it narrows it and, therefore, that reason for being does not apply.
By that express reference in the Report to the need for financial charges to be directly associated with the acquisition of equity interests (which is also expressed in the text of the rule through the reference to "financial charges with its acquisition"), it is concluded that, to determine the non-deductibility of financial charges, it is not sufficient to observe that the holding company is a holder of equity interests and incurred financial charges, being necessary to demonstrate that there is a direct relationship between certain financial charges and the acquisition of certain equity interests.
It is a corollary of this interpretation, imposed by the literal content of article 32, paragraph 2, that, if certain interests were not acquired with liabilities generating financial charges (namely, those obtained by contributions in kind or with use of equity capital), they are irrelevant for the purpose of applying that rule, in the part that refers to the non-deductibility of financial charges.
It is also a corollary of this interpretation that, regarding equity interests acquired with financing generating charges, only the charges derived from financing relating to their acquisition are non-deductible.
There is thus no legal basis for departing from the rule of deductibility of financial charges, which is contained in letter c) of paragraph 1 of article 23 of the Corporate Income Tax Code, with respect to charges that are not directly associated with the acquisition of equity interests. ( [3] )
For this reason, it is clear, in light of the letter of the final part of paragraph 1 of article 32 and the explanation given in the Report of the Budget for 2003, that the non-deductibility of charges applies only to those directly derived from financing used for acquisition of equity interests.
Being this the regime that is provided for in law, it cannot be altered through regulatory acts, since precepts created by acts of a legislative nature cannot be, with external efficacy, interpreted, integrated, modified, suspended or revoked by acts of another nature (article 112, paragraph 5, of the CRP).
Furthermore, the definition of the prerequisites of taxation is a matter subject to the principle of legality, first and foremost by virtue of the provision of article 103, paragraph 2, of the CRP which establishes that "taxes are created by law, which determines the incidence, the rate, the tax benefits and the guarantees of taxpayers".
This principle of legality is reaffirmed and expanded by the LGT, in its article 8.
It is thus clear that rules relating to the assessment of taxes, namely those that define incidence and tax benefits, are subject to the principle of legality, and consequently the possibility of, through administrative means, creating rules resulting in an actual burden on taxpayers is excluded. ( [4] )
Point 7 of Circular no. 7/2004, to be applied by the Tax Administration, with external efficacy, in such a way as to dismiss the deductibility of charges that it is proven are not connected with the acquisition of equity interests, will constitute an innovative rule on the determination of taxable income of Corporate Income Tax, creating situations of non-deductibility of financial charges not provided for in law (those in which there is no relationship between charges of that type and the acquisition of equity interests), and will therefore be invalid for violation of the principle of legality.
But, nothing prevents the Tax and Customs Authority from issuing a circular containing its understanding of the application of article 32, paragraph 2, of the EBF, to be applicable in cases in which direct determination of charges derived from financing used in the acquisition of equity interests is not viable, since such possibility of issuing generic binding guidelines for its services is provided for in article 68-A of the LGT.
As results from paragraph 1 of article 68-A of the LGT and has been peacefully understood, circulars have binding efficacy only for the Tax and Customs Authority, having external effects only of an informative nature for taxpayers, who may know in advance what understanding will be adopted by it.
In this line, one can see the Constitutional Court judgment no. 42/2014, of 09-01-2014, rendered in case no. 564/12, in the wake of Casalta Nabais, Tax Law, 5th edition, page 201, in which it is stated:
These are "internal regulations which, because they have as their addressee only the tax administration, only this one owes them obedience, being, therefore, binding only for the bodies hierarchically subordinate to the body that created them.
For this reason they are not binding on either individuals or courts. And this whether they are organizational regulations, which define rules applicable to the internal functioning of the tax administration, creating working methods or modes of action, or interpretive regulations, which proceed to the interpretation of legal (or regulatory) provisions.
It is true that they densify, make explicit or develop legal provisions, previously defining the content of acts to be performed by the tax administration when applying them. But this does not convert them into a pattern of validity of the acts they support. In fact, the assessment of the legality of acts of the tax administration should be effected through direct comparison with the corresponding legal provision and not with the internal regulation, which interposed itself between the norm and the act".
These acts, in which circulars stand out, emanate from the power of self-organization and the hierarchical power of the Administration. They contain generic service orders and it is for this reason and only within its subjective scope (of the hierarchical relationship) that observance is assured. They incorporate directives of future action, transmitted in writing to all subordinates of the administrative authority that issued them. They are modes of standardized decision-making, assumed to rationalize and simplify the functioning of services. Although indirectly they can protect the legal security of taxpayers and ensure equal treatment through uniform application of law, they do not regulate the matter on which they bear in confrontation with these, nor do they constitute a rule of decision for the courts.
Not being illegal the issuance of circulars that interpret legislative statutes with internal efficacy, the illegality of acts in tax matters that apply the understandings contained therein cannot derive from their application, in itself, but, only, from the illegality of that understanding in light of the legal regime applicable provided for in the legislative statute interpreted.
The abstract illegality of the method provided for in point 7 of the said Circular cannot be affirmed, if understood as only being applicable subsidiarily, as an indirect method, in cases in which direct determination of the amount of charges connected with financing used in the acquisition of equity interests is not viable, as allowed by articles 85, paragraph 1, and 87, paragraph 1, letter b), of the LGT.
In this context, it should be noted that there are only two types of methods of evaluation of the taxable matter provided for in law: direct and indirect ones. Direct evaluation aims at the determination of the real value of income or assets subject to taxation; indirect evaluation aims at the determination of the value of taxable income or assets from indications, presumptions or other elements available to the tax administration (articles 81, paragraph 1, and 83 of the LGT). For this reason, a method of "direct evaluation" not based on the establishment of actual allocation of financial charges to the acquisition of equity interests, but rather on a calculation formula that will have underlying that allocation occurs on the terms presupposed therein and not proven, lacks legal support.
On the other hand, the Tax and Customs Authority's thesis that with indirect evaluation "the aim is to determine the taxable matter of a given tax only in situations of non-existence or anomalies of accounting that make it completely impossible to determine the taxable matter" also has no legal support, since indirect evaluation is permitted whenever there is "impossibility of proof and quantification direct and exact of the elements indispensable to the correct determination of the taxable matter of any tax", pursuant to letter b) of paragraph 1 of article 87 of the LGT. The "extreme difficulty of using, in this matter, a method of direct or specific allocation" invoked in point 7 of Circular no. 7/2004, as a reason for using the indirect method, is not, in light of the rule of subsidiarity of indirect evaluation in relation to direct evaluation imposed by article 85, paragraphs 1 and 2, of the LGT, a basis for the use of an indirect method.
Furthermore, the Tax and Customs Authority's thesis that with paragraph 2 of article 32 of the EBF the intention was to achieve the "neutrality between income and expenses aimed at by the said tax benefit" also has no correspondence in the text of this rule, since the irrelevance for the formation of taxable profit is not restricted to cases of realization of capital gains, also occurring in cases in which losses occur, in which any hypothetical "neutrality between income and expenses" is undetectable: in these cases, the taxpayer is doubly penalized by the application of the "tax benefit", in relation to what would result from the application of the general regime, since neither does it see recognized the negative relevance for the formation of taxable profit of losses, nor of financial charges incurred, which would be possible for it with the application of the general regime provided for in article 23, paragraph 1, letters c) and l), and 45, paragraph 3, of the Corporate Income Tax Code.
For the same reason, article 32, paragraph 2, of the EBF cannot be understood as a manifestation of the rule of indispensability of expenses as a condition for their relevance to the formation of taxable profit, which is contained in paragraph 1 of article 23 of the Corporate Income Tax Code, since the existence or not of income (capital gains) is absolutely irrelevant for the irrelevance of expenses with financing obtained for the acquisition of equity interests.
On the other hand, even if it were understood (as may be underlying point 7 of Circular no. 7/2004, but also without support in the text of law) that article 32, paragraph 2, of the EBF has inherent to it a presumption that there is association between financial charges and the acquisition of equity interests, such hypothetical presumption would always admit proof to the contrary, by virtue of the provision of article 73 of the LGT, which refers to rules of incidence in the broad sense, which encompasses all those that "define the scope of incidence, that is, the complex of prerequisites whose combination results in the birth of the tax obligation, as well as the elements of the same obligation". In this sense, rules of incidence are those that determine the active and passive subjects of the tax obligation, those that indicate what taxable or collectible matter is, the rate and tax benefits. ( [5] )
For this reason, a conclusion to the effect of the non-deductibility of the financial charges referred to by the Claimant could only be reached by the Tax and Customs Authority following the appreciation of the proof presented by the now Claimant, relating to how the equity interests it indicated were acquired.
For this reason, in the case at hand, to conclude that the financial charges referred to by the Claimant in form 22 should not be deducted from taxable profit by virtue of the final part of paragraph 2 of article 32 of the EBF, the Tax and Customs Authority should demonstrate that such charges were incurred with the acquisition of the equity interests referred to by the Claimant. Or, at the very least, could only use the indirect method provided for in point 7 of Circular no. 7/2004, if it were demonstrated that the use of the direct method was not viable and to the extent that direct method was not applicable, as imposed by the rules of subsidiarity of indirect evaluation in relation to direct evaluation, which are contained in paragraphs 1 and 2 of article 85 of the LGT.
In the case at hand, the Tax and Customs Authority, when faced with the explanation given by the Claimant in the inspection procedure that it had used the direct allocation method, did not even attempt to assess whether such direct allocation was or was not correct, merely ruling out such possibility, by understanding that it resulted from the said Circular, as evidenced by this excerpt from the Tax Inspection Report:
And, as it well expresses, (points 15 and 16) during the procedure, the claimant when questioned, why it did not proceed to the disregard of financial charges, in light of the provision in the final part of article 32, paragraph 2 of the EBF, clarified that it had used the direct allocation method. Overlooking, however, the information that was provided to it at that time, this method is not, by the Tax Administration, considered, having regard to the legislative intent of the prescribed rule.
For this reason, in light of the justification contained in the Tax Inspection Report, the Tax and Customs Authority did not even admit the possibility of using a direct method to ascertain the allocation of financial charges to the financing obtained, by, in its understanding, the legislative intent of article 32, paragraph 2, of the EBF opposing such.
Thus, it must be concluded that the correction made suffers from an error of interpretation of article 32, paragraph 2, of the EBF.
It is true that in the present proceeding the Tax and Customs Authority came to argue that it proves that "the funds obtained, between 2008 and 2012, were intended for the acquisition of equity interests of company D…" (articles 24 and 27 of the Response and 14 of the pleadings of the Tax and Customs Authority), which, if exact, would even demonstrate that, after all, it was always possible to ascertain by direct method whether there was allocation of financing to the acquisition of equity interests.
But, this hypothetical basis for the correction made was not invoked in the Tax Inspection Report, so its invocation constitutes after-the-fact justification which has no relevance in a contentious proceeding of mere annulment, as the tax arbitration proceeding is. In fact, the tax arbitration proceeding, as an alternative means to the judicial impeachment proceeding (paragraph 2 of article 124 of Law no. 3-B/2010, of 28 April), is, like this one, a procedural means of mere legality, in which the aim is to eliminate the effects produced by illegal acts, annulling them or declaring their nullity or non-existence [articles 2 of the RJAT and 99 and 124 of the CPPT, applicable by virtue of the provision of article 29, paragraph 1, letter a), of that one], so that acts must be reviewed as they were made, the court being unable, when confronted with the observation of the invocation of an illegal ground as the basis for the administrative decision, to examine whether its action could be based on other grounds. ( [6] )
It is thus concluded that the challenged act suffers from a defect of violation of law, by having been based on an erroneous interpretation of article 32, paragraph 2, of the EBF.
Essentially in this sense decided the Supreme Administrative Court in the judgment of 08-03-2017, rendered in case no. 0227/16: "point 7 of Circular no. 7/2004, of 30.03, of the Corporate Income Tax Services Directorate, establishes an indirect, presumptive method, of allocation of financial charges in disrespect of articles 87 to 90 of the LGT being, for this reason, illegal".
This defect justifies the annulment of the challenged assessment, pursuant to article 163, paragraph 1, of the Code of Administrative Procedure subsidiarily applicable pursuant to article 2, letter c), of the LGT.
The decision rejecting the appeal for reconsideration suffers from the same defect, as it maintains the assessment, with the grounds contained in the Tax Inspection Report.
Compensatory interest are integrated into the tax debt itself (article 35, paragraph 8, of the LGT), so that the assessment of compensatory interest is affected by the defect that affects the Corporate Income Tax assessment, and should also be annulled.
3.1. Questions of Prejudicial Knowledge
Being to judge as procedent the request for a declaration of illegality of the assessment and rejection of the appeal for reconsideration, due to error of interpretation of article 32, paragraph 2, of the EBF, these acts must be annulled, so that the examination of the remaining questions of legality raised becomes moot, as it is useless, as results from article 130 subsidiarily applicable by virtue of the provision of article 29, paragraph 1, letter e), of the RJAT.
4. INDEMNITY INTEREST
The Claimant requests the payment of indemnity interest on the amount to be reimbursed.
In accordance with the provision of letter b) of article 24 of the RJAT, the arbitral decision on the merits of the claim from which no appeal or challenge is possible binds the Tax and Customs Authority from the end of the deadline provided for appeal or challenge, and the latter, in the exact terms of the procedence of the arbitral decision in favor of the taxpayer and until the end of the deadline provided for the spontaneous execution of judgments of tax courts, shall "restore the situation that would exist if the tax act that is the subject of the arbitral decision had not been made, adopting the acts and operations necessary for this purpose", which is in line with the provision of article 100 of the LGT [applicable by virtue of the provision of letter a) of paragraph 1 of article 29 of the RJAT] which establishes that "the tax administration is obligated, in case of total or partial procedence of an appeal, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation that is the subject of the dispute, comprising the payment of indemnity interest, if applicable, from the end of the deadline for execution of the decision".
Although article 2, paragraph 1, letters a) and b), of the RJAT uses the expression "declaration of illegality" to define the jurisdiction of arbitral courts operating in the CAAD, not making reference to condemning decisions, it should be understood that it includes in its jurisdiction the powers that, in judicial challenge proceedings, are attributed to tax courts, this being the interpretation that is in line with the meaning of the legislative authorization on which the Government based itself for approving the RJAT, in which it proclaims, as the first guideline, that "the tax arbitration proceeding must constitute an alternative procedural means to the judicial challenge proceeding and to the action for recognition of a right or legitimate interest in tax matters".
The judicial challenge proceeding, although essentially a proceeding for annulment of tax acts, allows for the condemnation of the Tax Administration to payment of indemnity interest, as can be inferred from article 43, paragraph 1, of the LGT, in which it is established that "indemnity interest is due when it is determined, in an appeal for reconsideration or judicial challenge, that there was error attributable to the services from which resulted payment of the tax debt in an amount greater than legally due" and from article 61, paragraph 4 of the CPPT (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds paragraph 2 in the original wording), which "if the decision that recognized the right to indemnity interest is judicial, the period for payment is counted from the beginning of the deadline for its spontaneous execution".
Thus, paragraph 5 of article 24 of the RJAT, when it says that "payment of interest, regardless of its nature, is due, in the terms provided for in the general tax law and in the Code of Tax Procedure and Process", should be understood as allowing for recognition of the right to indemnity interest in the arbitration proceeding.
It is thus necessary to examine the request for indemnity interest.
The substantive regime of the right to indemnity interest is regulated in article 43 of the LGT, which establishes, as far as is relevant here, the following:
Article 43
Improper Payment of Tax Obligation
1 – Indemnity interest is due when it is determined, in an appeal for reconsideration or judicial challenge, that there was error attributable to the services from which resulted payment of the tax debt in an amount greater than legally due.
2 – It is also considered that there is error attributable to the services in cases in which, despite the assessment being made on the basis of the taxpayer's declaration, the latter has followed, in filling it, the generic guidelines of the tax administration, duly published.
On 09-10-2015, the Claimant paid the assessed amount.
The error in the assessment is attributable to the Tax and Customs Authority, which made it on its own initiative.
Consequently, the Claimant is entitled to the restitution of the amount improperly paid plus indemnity interest, pursuant to article 43, paragraph 1, of the LGT and 61 of the CPPT from the date of improper payment (09-10-2015), until reimbursed.
Indemnity interest is due at the statutory default rate, pursuant to articles 43, paragraphs 1, and 35, paragraph 10 of the LGT, article 24, paragraph 1, of the RJAT, article 61, paragraphs 3 and 4, of the CPPT, article 559 of the Civil Code and Ordinance no. 291/2003, of 8 April (or other or others that alter the statutory rate), from the date of payment until full reimbursement.
5. DECISION
In these terms, this Arbitral Tribunal agrees:
a) To judge procedent the request for arbitral pronouncement and to annul the Corporate Income Tax assessment no. 2015…, relating to the tax year 2011, and the respective compensatory interest assessment no. 2015…;
b) To judge procedent the requests for restitution of the amount paid and for indemnity interest and to condemn the Tax and Customs Authority to restitute to the Claimant the amount of € 150,866.38, plus indemnity interest calculated on that amount, at the statutory default rate, from 09-10-2015 until full reimbursement.
6. VALUE OF THE CASE
In accordance with the provision of article 306, paragraph 2, of the Civil Procedure Code and 97-A, paragraph 1, letter a), of the CPPT and 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings the value of the case is fixed at € 150,866.38.
7. COSTS
Pursuant to article 22, paragraph 4, of the RJAT, the amount of costs is fixed at € 3,672.00, pursuant to Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.
Lisbon, 22-11-2017
The Arbitrators
(Jorge Lopes de Sousa)
(António Pragal Colaço)
(Carlos Alberto Monteiro da Silva)
Frequently Asked Questions
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