What is the General Anti-Abuse Clause (CGAA) under Article 38(2) of the Portuguese General Tax Law?

The General Anti-Abuse Clause (CGAA) under Article 38(2) of the Portuguese General Tax Law (LGT) is an anti-avoidance provision that allows the Tax Authority to disregard or recharacterize transactions that, while formally legal, are structured primarily to obtain tax benefits in a manner contrary to the law's objectives. The clause targets artificial arrangements lacking economic substance or valid business purposes beyond tax savings. When applied, the Tax Authority can determine tax obligations based on the economic reality rather than the legal form of transactions, effectively treating abusive structures as if they were structured according to their true economic nature.

How does the CGAA apply to share acquisitions and capital increases involving SGPS holding companies?

The CGAA applies to SGPS holding companies when the Tax Authority determines that share acquisitions, capital increases, or related transactions lack genuine business substance and are primarily designed to achieve improper tax advantages. In this case, the Tax Authority argued that the acquisition structure and subsequent payment arrangements were intended to transfer Company B's income to common shareholders while avoiding proper IRS taxation. The Authority reclassified the purchase price payments as dividends rather than capital transactions. However, the claimant contested this application, arguing that as a legitimate holding company managing partnership interests, its acquisitions were normal business activities using straightforward legal structures, not artificial arrangements warranting anti-abuse treatment.

Can the Tax Authority impose IRS withholding tax obligations on third parties under the anti-abuse clause?

This case presents a critical legal question about whether the CGAA can impose IRS withholding tax obligations on third parties. The claimant argued that even if the anti-abuse clause were validly applied to reclassify the transaction's nature, it cannot create new ancillary tax obligations for third parties, particularly withholding duties under Article 103 of the IRS Code. The claimant contended that the CGAA's statutory provision regarding ineffectiveness of abusive transactions for tax purposes cannot extend to establishing substitute taxpayer liability for withholding that did not exist under the original transaction structure. This argument challenges whether anti-abuse recharacterization can impose retroactive compliance obligations on parties who structured transactions based on their legal form.

What are the procedural requirements for the Tax Authority when applying the CGAA during a tax inspection?

When applying the CGAA during a tax inspection, the Tax Authority must fulfill specific procedural requirements, including a duty of inquiry to establish the material prerequisites for invoking the anti-abuse clause. The claimant in this case alleged that the Tax Authority failed to properly discharge this duty during the inspection process. Before applying CGAA, the Authority must demonstrate: (1) the existence of acts or transactions; (2) that obtaining tax benefits was the essential purpose; (3) that the chosen means were artificial or improper; and (4) that the result contradicts the law's objectives. The taxpayer must be afforded the right to prior hearing to present arguments against the proposed application of the clause, which the claimant exercised in this case.

Is Article 38(2) of the LGT constitutional in light of legal certainty, proportionality, and property rights under the ECHR?

The claimant challenged Article 38(2) LGT as unconstitutional on multiple grounds: (1) violation of legal certainty and security principles, arguing the provision's vague standards create unpredictability about when transactions will be recharacterized; (2) breach of proportionality principles, contending the clause's broad application exceeds what is necessary to combat tax abuse; and (3) violation of property rights protected under the Additional Protocol to the European Convention on Human Rights (ECHR), arguing that retroactive recharacterization and imposition of tax liabilities interferes with legitimate property and contractual rights. These constitutional arguments challenge whether Portugal's anti-abuse framework strikes an appropriate balance between combating tax avoidance and protecting fundamental taxpayer rights, legal certainty, and the rule of law.

CAAD Case 381/2014-T: IRS Anti-Abuse Clause (CGAA) on...

Process: 381/2014-T

Date: January 30, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

This tax arbitration case (CAAD 381/2014-T) concerns the application of Portugal's General Anti-Abuse Clause (CGAA) under Article 38(2) of the General Tax Law (LGT) to share acquisitions by an SGPS holding company. The Tax Authority issued IRS withholding tax assessments and compensatory interest following an inspection that examined the claimant's acquisition of 90% of shares in Company B between 2009-2010, and subsequent payment of purchase price in 2012. The Tax Authority reclassified these payments as dividends rather than share purchase consideration, arguing the transaction structure was designed to transfer income from Company B to common shareholders without proper IRS taxation and withholding. The claimant contested the assessments on multiple grounds: (1) the Tax Authority failed to fulfill its duty of inquiry and the material prerequisites for applying the anti-abuse clause; (2) the CGAA cannot impose ancillary tax obligations (withholding duties) on third parties when transactions are deemed ineffective for tax purposes; (3) Article 38(2) LGT is unconstitutionally disproportionate and violates legal certainty and property rights under the ECHR Additional Protocol. The claimant argued it was a legitimate holding company managing partnership interests, that the acquisition was part of normal business activity, and that the legal structures used were straightforward, not artificial or abusive. The case raises fundamental questions about the scope and limits of Portugal's anti-abuse rules, particularly whether tax reclassification under CGAA can create new withholding obligations for parties acting as substitutes, and the constitutional boundaries of anti-avoidance legislation in protecting taxpayer rights and legal certainty.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 381/2014 – T

Subject: IRS - General Anti-Abuse Clause (CGAA)

I - REPORT

On May 15, 2014, the company "A", SGPS, NIF …, with registered office in … – …, …-… ..., submitted to the Administrative Arbitration Center (CAAD) a request for the constitution of an arbitral tribunal with a view to annulling the tax acts of IRS assessment (withholding at source) No. 2014 … and compensatory interest No. 2014 …, both dated January 13, 2014.

The Claimant requests the annulment of the withholding assessments identified above, on the following grounds:

i) "the omission of the duty to inquire by the Tax Administration within the scope of the tax inspection that determined it, due to lack of fulfillment of the material prerequisites for the application of the said general anti-abuse clause and, likewise, due to the inadequacy of the said rule to determine the birth of ancillary tax obligations of third parties – particularly in withholding at source – in the face of the ineffectiveness for tax purposes of the acts or legal transactions deemed abusive that constitutes the respective statutory provision;"

ii) "substantive unconstitutionality of article 38, no. 2 of the LGT in the face of the principles of legal certainty and security and proportionality and, likewise, due to an inadmissible violation of the right to private property guaranteed by the Additional Protocol to the ECHR."

In this follow-up, it further petitions that the arbitral tribunal recognize:

i) "the consequential nullity of the compensatory interest assessment challenged or, alternatively, determines its respective annulment due to lack of fulfillment of the respective legal prerequisites provided for in article 35 of the LGT;"

ii) "the error of the Tax Administration Services in issuing the assessments that are the object of the present proceedings and condemns it to the payment of indemnificatory interest, in accordance with article 43, no. 1 of the LGT;"

iii) "condemns the Tax Administration in the costs of the arbitral proceedings, all with the other legal consequences."

The claimant alleges, in summary, that the said assessments were issued by the Tax Administration following an internal inspection action carried out by the Finance Department of ... and resulted from the application of the general anti-abuse clause provided for in article 38-2 of the General Tax Law ("LGT") to the acquisition by the Claimant, in June and September 2009, of 85.5% of the share capital of company "B", S.A., legal entity no. …, and to the increase of the Claimant's share capital by contribution in kind of an additional 4.5% stake in the said company "B", S.A., in December 2010.

In concrete terms, the IRS assessment No. 2014 … has as its reference the payment of part of the purchase price of the shares in question, in March 2012, with the Tax Administration understanding that, assuming (allegedly) the income paid assumes the nature of dividends and not of purchase price of shares, the Claimant breached its duty of withholding at source of IRS on the profits made available, thus giving rise to its accountability as a tax substitute, by virtue of the provision of article 103 of the IRS Code ("CIRS").

The claimant further invoked that, in the course of the inspection process, it exercised its right to be heard, in writing, in which it alleged, synthetically:

· That since its establishment it is a company managing interests in partnerships with real existence and activity;

· That the acquisition of 90% of the share capital of "B", S.A. was within the normal development of its social activity as a company managing stakes in partnerships, being unrelated to any tax treatment that such transmission might have had in the sphere of the sellers;

· That the forms adopted to carry out such acquisition - purchase and sale contract for 85.5% and capital increase by contribution in kind of 4.5% - configured straightforward legal solutions for the intended purposes, not artificial, fraudulent or abusive;

· That, with independence from the position assumed regarding the non-existence of any abusive operation, the hypothetical application of the general anti-abuse clause (CGAA) that would reclassify, for tax purposes, the nature of the income obtained by the previous shareholders of "B", S.A. - from capital gains to capital income -, could never determine the birth of ancillary tax obligations of third parties in accordance with said reclassification, and therefore the intended accountability of the Claimant as a tax substitute was not admissible

see copy of the statement exercising prior hearing, attached as document no. 12.

The Tax and Customs Authority presented a response justifying the application of the anti-abuse clause and arguing that the SGPS Claimant and the contracts entered into with its shareholder "B", S.A., aimed essentially to transfer to the personal sphere of the common shareholders of both companies, the income generated by company "B", S.A., without submission to the proper taxation under IRS and consequent withholding at source.

The AT in conclusion states that the assessments that are the object of the request are legally compliant and requests the dismissal of the arbitral request.

Appointed as arbitrators were Messrs. Judge José Poças Falcão (as arbitrator-president), Dr. Diogo Feio and Dr. Marcolino Pisão Pedreiro, all forming part of the list of arbitrators of the CAAD.

In accordance with the provisions of article 11, no. 1, paragraph c) of the RJAT, the collective arbitral tribunal was constituted on July 18, 2014.

A (sole) meeting of the arbitral tribunal was held on November 12, 2014, in accordance with the terms and objectives provided for in article 18 of the Tax Arbitration Regime (see respective minutes).

Procedural Remedies/Prerequisites

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

The proceedings do not contain vices and no preliminary questions were raised.

II - REASONING

Factual Matter

With relevance for the assessment of the questions raised, the Tribunal considers the following facts as proven:

1st. By application No. … of ….01.2001, registration of the Claimant's establishment was requested in the Commercial Registry of ..., which gave rise to registration No. ….

2nd. The Claimant has as its corporate purpose the "management of interests in other companies as an indirect form of exercise of economic activities".

3rd. The Claimant had as founding shareholders "C", his wife, "D" and three of their four children, with the share capital of € 60,000.00 distributed as follows:

Shareholders | Percentage of share capital of EUR 60,000.00
"C" | 80%
"D" | 5%
"E" | 5%
"F" | 5%
"G" | 5%

4th. In the year 2001, the Claimant acquired the following stakes in companies in the textile sector:

50.8% of the share capital of the joint-stock commercial company "H"…, S.A., legal entity no. …;
97.8% of the share capital of the limited liability commercial company "I", LIMITED, legal entity no. …;

5th. The said acquisitions of stakes by the Claimant were financed through recourse to bank credit, granted by BANK "J", S.A., in the amount of € 19,368,322.64.

6th. At the end of 2003, the Claimant sold to company "B", S.A. – which was then already holding 39.8% of the shares - the stake acquired in company "H", S.A.

7th. Also in 2003, the Claimant acquired a stake corresponding to 34.43% of the share capital of the joint-stock commercial company "K", S.A., legal entity no. …, which in the same year acquired by transfer from the insolvent estate of company "M", S.A., legal entity no. … – in a proceeding that ran its course in the Court of the District of ... under no. 762/2002 –, the respective equipment and factory installations, developing since then successfully activity in the textile sector

8th. On December 31, 2008, the share capital of the Claimant was still € 60,000.

9th. On that date, the Claimant still held interests in the share capital of company "J", Ltd., NIF …, and in the share capital of company "K", S.A., NIF …, mentioned above.

10th. With respect to company "J", Ltd., "C", "D", "E" and "G", besides being managers, were shareholders of the mentioned company.

11th. As regards company "K", S.A., already since September 4, 2000, "E", "G" and "D" belonged to the respective board of directors of the company.

12th. The board of directors of the Claimant, designated for the three-year periods from 2009 to 2011 and from 2012 to 2014, was and is composed of:

In both three-year periods indicated, shareholder "C" was designated to the position of president of the board of directors.

13th. The Claimant has no own or leased facilities or dependent workers.

14th. For the years 2007 and 2008, the statement of results of the Claimant was as follows:

15th. On January 1, 2009, the share capital of company "B", S.A. consisted of 500,000 shares, with a nominal value of € 5.00, held by six shareholders and by the company itself (treasury shares) in the following terms:

Shareholders | Percentage of share capital of EUR 2,500,000.00
"C" | 67.5%
"D" | 4.5%
"E" | 4.5%
"G" | 4.5%
"F" | 4.5%
"N" | 4.5%
"B", S.A. (treasury shares) | 10%
Total: | 100%

16th. Its respective board of directors, designated for the three-year periods from 2008 to 2010 and from 2011 to 2013, - as per Annex I of the Final Inspection Report – was composed of:

17th. Between 2000 and 2009, no dividends were distributed to shareholders, with the exception of the net result of 2008, regarding which it was decided to proceed with the distribution of profits in the amount of € 1,750,000.00.

18th. In June 2009, the Claimant acquired 404,910 shares of company "B", S.A. from shareholders "C", "D", "E" and "G".

19th. In September, the Claimant acquired 22,495 more shares of company "B", S.A., from shareholder "F".

20th. The unit value assumed for the sale of each share, at the value of € 215.00, was determined based on its book value and from the equity of company "B", S.A., as of December 31, 2008, which was € 96,978,785.23 and a total of 450,000 shares available.

21st. Prior to the realization of the said purchase by the Claimant of shares of "B", S.A., a favorable opinion was obtained from the Claimant's audit committee regarding the price of € 215.00 per share of company "B", S.A. determined based on an independent valuation of the company, taking into account the value of its respective assets and liabilities.

22nd. In the accounting of the Claimant, such operations were recorded by debit to account 411103 – Financial Investments in Capital Interests of Group Companies/"B", S.A. in the total amount of € 91,892,075.00, with offsetting entries of equivalent value made in account 26821 (other debtors and creditors/various creditors), specifically in the sub-accounts assigned to each of the shareholders,

23rd. More specifically in sub-account 2682102 – "C", in the amount of € 72,546,375.00, and in sub-accounts 2682103 – "D", 2682104 – "E", 2682105 – "G", 2682106 "F", in the amount of € 4,836,425.00, each.

24th. As a result of said onerous acquisitions, the Claimant assumed ownership of 85.5% of the share capital of company "B", S.A., remaining indebted to the respective transferors, its shareholders, in a total amount of € 91,892,075.00.

25th. Between 2000 and 2009, "B", S.A. had the following net results and had free reserves with the following values:

26th. For its part, between 2005 and 2009, the mentioned company presented the following financial availabilities:

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

27th. In 2009, [the moment when approximately 85.481% shares representing the share capital of company "B", S.A. were sold to the Claimant], that company had free reserves in the amount of € 93,621,066.18 and financial availabilities of € 45,757,083.55.

28th. In the same year, company "B", S.A. had also acquired 50,000 treasury shares, at the nominal value of € 5.00, which corresponded to 10% of the share capital of the company.

29th. On January 1, 2009 the Claimant had financial availabilities of € 794,108.62 and on December 31, 2009 of € 863,430.42.

30th. On December 10, 2010, the general meeting of the Claimant decided to increase the share capital from € 60,000.00 to € 4,334,050.00.

31st. For this purpose, the respective accounting entries were made, being that, regarding the capital increase, account 27821 was debited – Other accounts receivable and payable/various creditors, specifically in sub-account 2782102 – "C", in the amount of € 3,374,250.00 and in sub-accounts 2782103 – "D", 2782104 – "E", 2782105 – "G" and 2782106 – "E", in the amount of € 224,950.00, each.

32nd. In return, account 51101 – Capital was credited, in the amount of € 4,274,050.00.

33rd. On December 10, 2010, the general meeting of the Claimant decided to require shareholders to make supplementary contributions in the amount of € 44,877,525.00.

34th. The supplementary contributions were recorded in the accounting, debiting sub-account 2782102 – "C", in the amount of € 35,429,625.00, and sub-accounts 2782103 – "D", 2782104 – "E", 2782105 – "G" and 2782106 – "F", in the amount of € 2,361,975.00, each.

35th. In return, account 531 – Supplementary Contributions was credited for the amount of € 44,877,525.00, translating a change in the accounting nature of the existing credit on the Claimant, which was initially recorded in an account of third parties, then transferring to a capital account.

36th. On December 20, 2010 the Claimant proceeded to a new capital increase, this time from € 4,334,050.00 to € 4,562,000.00, by in-kind contributions of 22,495 shares with a nominal value of € 5.00 of company "B", S.A., belonging to shareholder "P", through the issuance of 45,590 new shares of the Claimant, with a nominal value of € 5.00 each, which this shareholder came to hold.

37th. These 22,495 shares of company "B", S.A. acquired by the Claimant from shareholder "P" for the value of € 227,950.00, had a book value of € 4,836,425.00, which was debited in account 411103 (financial investments in subsidiary companies/"B" S.A.) relating to the financial stake held.

38th. The difference between the book value and the acquisition value, specifically € 4,608,475.00 [resulting from the subtraction of € 4,836,425.00 (book value) – € 227,950.00 (acquisition value)], was recognized in accounting in a reserves account – 5512 Capital Reserves, having been declared in the capital increase resolution that such difference constituted a premium of the Claimant.

39th. Also on December 20, 2010, shareholder "C" made an assignment of credits - of which it was the holder in relation to the Claimant – to shareholder "P", in the amount of € 2,246,500.00 as well as made the assignment of a credit to the same shareholder, relating to supplementary contributions, of which it was the holder in relation to the Claimant, in the amount of € 2,361,975.00.

40th. On December 27, 2010, company "B", S.A. decided to distribute € 33,750,000.00 - part of the values of its free reserves - in the proportion of the shareholders' interests, reaching the value per share of € 75.00, justifying that "the company's financial availabilities are very high and not necessary for normal business operations and far exceed those of any company in the sector. This distribution will promote greater efficiency in the group's capital structure."

41st. Of that amount, company "B" S.A. distributed dividends to company "A" SGPS, of € 33,742,500.00, the payment of which was made on December 28, 2010 by bank transfer.

42nd. This amount received as dividends - € 33,742,500.00 – was partially applied in payment to the debtor-shareholders of the Claimant, with € 1,124,750.00 being paid to each of shareholders "D", "E", "G" and "F" and € 16,871,250.00 to "C" on December 31, 2010, in a total of € 21,370,250.00.

43rd. On October 27, 2011 the claimant paid shareholder "P" the sum of € 2,246,500.00 concerning the assignment of credits in this amount that was made by shareholder "C".

44th. On December 31, 2011, the Claimant proceeded to the payment of another part of the debt incurred with the acquisition of shares from the shareholders, in the total amount of € 10,575,650.00, being € 7,876,250.00 to shareholder "C", € 674,850.00 to shareholder "D", € 674,850.00 to shareholder "E", € 674,850.00 to shareholder "F", € 674,850.00 to shareholder "G".

45th. Also in December 2011, company "B", S.A. again decided to make a distribution of dividends to the Claimant, in the amount of € 8,098,200.00, with the payment made on December 31, 2011.

46th. On March 31, 2012, the Claimant again proceeded to payment of debt to the shareholders in the total amount of € 8,548,100.00 being € 6,748,500.00 to shareholder "C", € 449,900.00 to shareholder "D", € 449,900.00 to shareholder "E", € 449,900.00 to shareholder "F", € 449,900.00 to shareholder "G".

47th. On October 21, 2013, under the service orders nos. OI…, OI… and OI…, the Claimant was notified by the Finance Department of ... to exercise, within 30 days, prior hearing regarding Draft Inspection Report within the scope of which the Tax Administration considered that the acquisition by the Claimant of 85.5% of the share capital of company "B" S.A. – in June and September 2009 – and, likewise, the increase of the Claimant's share capital by in-kind contribution of an additional 4.5% of the shares representing the share capital of "B", S.A. – in December 2010 – constituted legally abusive legal transactions, in accordance with the contents of document no. 11 attached with the request for arbitral ruling.

48th. On November 18, 2014, the Claimant exercised its right to be heard in writing, in accordance with the contents of document number 11 attached with the request for arbitral ruling.

49th. On January 2, 2014, the Claimant was notified by the Finance Department of ... of the Final Inspection Report.

50th. On January 20, 2014, in implementation of the conclusions of the Inspection Report, the Claimant was notified of the IRS assessments and compensatory interest nos. 2014 … and 2014 …, in the total amount of € 2,274,028.79, relating to the year 2012, and whose tax value is reported as of March 31, 2012.

51st. On March 13, 2014 the Claimant proceeded to the payment of the alleged tax debt, in the amount of € 274,028.79.

UNPROVEN FACTS

That in 2009, some of the shareholders of company "B", S.A. – those who were also shareholders of the Claimant – demonstrated availability to sell shares to the Claimant as a way to concentrate the management of all the textile sector activity of the family … presenting as justifications for that sale, particularly: (i.) the desire to boost the textile activity of Group "B" through the integration of the activity of the various companies that compose it under the direction of the Claimant; and (ii.) the reinforcement of the professional character in the management of "B", S.A., gradually distancing itself from the reductive image of small family business.

It should be noted that the Tribunal could have opted, in line with other arbitral decisions issued by Tribunals constituted within the scope of the CAAD [see, e.g., the arbitral decisions in cases nos. 47/2013, 62/2014, 267/2013, by considering unproven that the claimant carried out the acts and legal transactions listed above with the sole or main intent to obtain tax advantages, particularly at the level of IRS taxation.

Given the matter is on the borderline between "facts" and "conclusions" it was decided, in this case, to address such matter in the legal reasoning of the decision (see infra).

REASONING FOR THE DECISION ON FACTUAL MATTER

As for the proven facts, the Tribunal's conviction was based on the administrative instructional proceedings, on the documents submitted by the claimant and by the defendant, which were not subject to challenge, all analyzed critically.

Regarding the unproven facts, the Tribunal's decision is based on the total absence of proof regarding this matter, and it should also be noted that the allegations in question are not consistent with various proven and undisputed facts such as the absence, in the claimant, of physical and human structures (it has no employees in its service, nor own or leased physical facilities) and also by the fact that the proven factual matter regarding company "B", S.A. does not result in a "reductive image of small family business", incompatible with the financial indicators of that company, particularly with the net results obtained consistently over the years.

THE LAW

Article 38, no. 2, of the General Tax Law establishes a general anti-abuse clause, whereby "the following are ineffective within the tax sphere: acts or legal transactions essentially or mainly aimed, by artificial or fraudulent means and with abuse of legal forms, at the reduction, elimination or temporary deferral of taxes that would be due as a result of facts, acts or legal transactions with identical economic purpose, or at the obtaining of tax advantages that would not be achieved, fully or partially, without the use of such means, with taxation being effected in accordance with the applicable rules in their absence and the said tax advantages not being produced"

The ancestral cause of anti-abuse measures is the achievement of tax equality and justice in the distribution of tax burdens.

And it was especially from the 1990s onward, due to the strong influence of EU tax harmonization, that the first anti-abuse measures against international evasion and fraud appeared in Portugal (see, e.g., Decree-Law no. 37/95, of February 14).

Let us examine the case at hand and then return to the legal framework.

The Tax Administration decided on the application of the general anti-abuse clause considering, in summary, the artificiality of the acquisition by the Claimant, in June and September 2009, of 85.5% of the share capital of company "B", S.A., legal entity no. …, and of the increase of the Claimant's share capital by in-kind contribution of an additional 4.5% of the shares representing the share capital of "B", S.A., in December 2010, acts and operations that would be nothing more or would translate, indirectly, than the payment of dividends relating to the stake of the shareholders of company "B", SA., considering that the shareholders of both companies are common, thereby avoiding subjection to the obligation of withholding (of IRS) at source.

The said financing of the SGPS and the purchase and sale of the stakes of "B", S.A., would be the set of acts that would lead to the ineffectiveness of the reimbursement acts for tax purposes, acts which should be characterized as distribution of dividends and, as such, subject to the obligation of withholding (of IRS) at source.

The Claimant seeks to challenge in this arbitral venue the acts of IRS withholding assessment No. 2014 … (€ 2,137,025.00) and compensatory interest No. 2014 … (€ 137,003.79), both of January 13, 2014, in the total amount of € 2,274,028.79, on the ground that the conditions provided for in article 38 of the LGT were not fulfilled for such assessments.

Making this more concrete:

The claimant alleges, in summary, that there were serious and valid business motivations underlying the decision to acquire the stakes of the shareholders of the family group and that the claimant's entry into the capital of company "B", S.A., would allow the claimant, as a managing company, "to establish new and deeper synergies in the administration and functioning of the various companies in the group (…)" – see paragraph 17 of the initial pleading.

On the other hand, the acquisition was preceded by a favorable opinion from the claimant's audit committee, with the price of € 215.00 per share of "B", S.A." being determined based on an independent valuation of the company (see copy of the letter from the official accounting auditors' firm – Document no. 7, attached to the initial petition).

Furthermore, the exchange of interests made by shareholder "N" was made in light of the provisions of articles 73-5 and 77 of the CIRC, the latter provision aiming to encourage operations concentrating interests.

Finally, the claimant alleges that there is no basis to consider that the AT that the acquisition by the claimant of 85.5 of the share capital of "B", S.A. – in June and September 2009 – and, likewise the increase of the share capital by in-kind contribution, in December 2010, of an additional 4.5% of the shares of that company, would be legal transactions that are fiscally abusive by virtue of their being reducible to "a successive and meticulous chain of acts configuring abusive legal transactions aimed by artificial means at the elimination of taxes that would be due as a result of acts with identical economic purpose".

More specifically still:

In the understanding of the AT the acquisition by the Claimant of a total of 90% of the share capital of "B", S.A., had underlying the intention to provide the respective sellers with income not taxed under IRS, stating in that sense the following:

"...it seems to us that the sale of the shares of company "B", S.A. in favor of "A", SGPS [...] constitutes the practice of an act which, although formally lawful, has underlying the intention to obtain income, more specifically dividends, which would otherwise be subject to effective taxation. The intention will not have been to alienate the shares for the benefit of third parties, but to alienate them so as to maintain control of company "B" S.A., albeit indirectly, achieving, by another route, albeit equally indirectly, to receive the dividends of company "B" S.A., without the inherent IRS taxation, specifically in the respective category E (capital income).

[...]

If such dividends had been distributed prior to the transmission of the shares in favor of the SGPS, they would have been subject to taxation, through the liberatory rates provided for in article 71 of the CIRS" - see document no. 11.

On November 18, 2014, within the scope of the tax procedure, the Claimant exercised its right to be heard in writing, vehemently rejecting the understanding manifested by the Tax Administration and stressing:

· That since its establishment it is a company managing interests in partnerships with real existence and activity;

· That the forms adopted to carry out such acquisition - purchase and sale contract for 85.5% and capital increase by in-kind contribution of 4.5% - configured straightforward legal solutions for the intended purposes, not artificial, fraudulent or abusive;

· That, with independence from the position assumed regarding the non-existence of any abusive operation, the hypothetical application of the general anti-abuse clause that would reclassify, for tax purposes, the nature of the income obtained by the previous shareholders of "B", S.A. - from capital gains to capital income -, could never determine the birth of ancillary tax obligations of third parties in accordance with said reclassification, and therefore the intended accountability of the Claimant as a tax substitute was not admissible - see copy of the statement exercising prior hearing, attached as document no. 12.

Questions for Decision

The claimant considers illegal the IRS assessment No. 2014 …, of January 13, 2014 (and respective compensatory interest), basing such illegality on the following defects attributed to the act:

a) Omission of the duty to inquire, due to lack of concrete actions in the inspection procedure, in violation of the provision of article 58 of the LGT;

b) Error in the factual and legal prerequisites, in the application of the general anti-abuse clause (CGAA), in violation of the provision of article 38-2 of the LGT;

c) Non-opposability to the claimant (hypothetical tax substitute), of the disregard of tax effects resulting from the application of the CGAA and

d) Alternatively, unconstitutionality of article 38-2 of the LGT, due to violation of the principles of legal certainty and security, proportionality and the right to private property guaranteed by the Additional Protocol to the European Convention on Human Rights (ECHR).

Considering the regime of article 124 of the CPPT, applicable ex vi article 29 of the RJAT, the tribunal will assess the following questions and in their respective order:

A. Alleged violation of procedural rules concerning the protection of the Claimant's rights and guarantees, specifically the omission of the duty to inquire, in accordance with article 58 of the LGT [see articles 38 to 56 of the initial petition];

B. Prerequisites for the application of the general anti-abuse clause (articles 57 to 146 of the initial petition;

C. Erroneous notification of the assessments challenged in the person of "A", SGPS (or, in the claimant's wording, "non-opposability of the application of the general anti-abuse clause" [see articles 147 to 174 of the initial petition] and

D. Unconstitutionality of article 38-2 of the LGT, due to violation of the principles of legal certainty and security, proportionality and the right to private property guaranteed by the Additional Protocol to the European Convention on Human Rights (ECHR) [see articles 175 and following of the initial petition].

A – The Question of the Alleged Violation of Procedural Rules

The claimant alleges that the AT omitted the performance of essential and necessary actions for the formation of the tax assessment act, thereby violating the provision of article 58 of the LGT.

More specifically: the AT did not carry out any concrete investigative action aimed at confirming or denying the fulfillment of the prerequisites for the application of the CGAA, instead limiting itself, in summary, to adopting a passive stance in terms of instruction translated into mere examination of documents (certificates, minutes, notification of credit assignments), without seeking to determine the intention underlying the behavior and that would be expected in light of the claimant's position in prior hearing.

The AT's position on this matter is set forth in articles 175 and following of the response.

The AT alleges that the necessary acts and actions were carried out in that the tax acts were preceded by two external orders aimed at "consultation, collection and cross-referencing of elements", specifically of company "B", S.A. and "A", SGPS, and that the RIT makes reference to these inspection actions (see pages 26 of the same).

Deciding this question:

It is not clear what specific actions the claimant would have wished the AT to perform and did not perform within the scope of carrying out the inspection action and that would be essential and necessary to support (or not) the assessment acts.

In fact, article 58 of the LGT imposes, in the procedure, the performance of all actions necessary to satisfy the public interest and to discover material truth without being subordinate to the initiative of the person requesting.

That is: notwithstanding non-subjection to the principle of request, the actions that are considered essential or necessary presuppose a justification of indispensability.

However, such indispensability is not confused with an objective and unambiguous imperative character.

That is: the judgment about the essentiality of the action can only be accepted when it proves to be indisputable in order to support (or not) the taxation act.

"The inquisitorial principle imposes, merely, the performance of actions necessary for the formation of the Administration's decision-making will" – see Decision of the STA of September 25, 2003, 1st Section, decision in Sub-section – Case no. 507-03.

Well: if the AT considered it sufficient to form its conviction regarding the fulfillment of the prerequisites or elements of application, in this case, of the application of the CGAA, the scrutiny of that judgment or conviction can only be carried out on the basis of the illegality of the act itself, due to violation of the provision of article 38 of the LGT and not, upstream, on the basis of illegality due to absence of necessary actions in violation of the provision of article 58 of the LGT. The contrary would only occur if the action or actions omitted were so essential or relevant that, without them, the act would be devoid of any justification or meaning.

In light of these brief considerations, it is considered that there is no basis to invoke the illegality of the act by virtue of the omission of the duty to inquire, in accordance with article 58 of the LGT [see articles 38 to 56 of the initial petition];

B – The Question of the Alleged Violation of the Prerequisites for Applying the General Anti-Abuse Clause.

It must be emphasized, from the outset, the nature of an exceptional norm [absolutely exceptional] of the CGAA.

This results both from the fact that it allows taxation to be effected by application of rules other than the general norms provided by law for the business(es) actually carried out, and, more importantly, because it constitutes a deviation from the principle of legal security, in its dimension of predictability of the applicable tax law, which is a basic principle of tax law.

Security and predictability imply that taxpayers can rely on the typicality of the legal type of tax, that they can be certain that, once they carry out the businesses that the tax rule provides for, they will be taxed in accordance with their statutory provision.

The CGAA will thus only be applicable in cases where it should be considered that the value of legal security is not at issue, the idea of confidence in the legal rule inherent in the idea of a State of Law, because the taxpayer, objectively, should know that the act or transaction that it carried out, in the circumstances in which it occurred, cannot be framed in the legal provision because it is not coherent with the "spirit of the law", even though, formally, it may find "support" in the literal element of the norm.

However, differently from what occurs regarding norms with identical intent, which we find in other branches of the legal order, such as the institute of abuse of law or the principle of good faith, the CGAA is not an open general clause (underlined) that allows the interpreter to depart from the legal solution (taxation) that results from the applicable norm (from the tax rule whose hypothesis the facts fulfill) by invoking considerations of material justice or substantive coherence of the tax legal system.

The CGAA is, also itself, a typical norm – as it could not be otherwise, given that it is a norm that directly bears on tax rules – which can only be applied when, indubitably, all and each of its prerequisites are verified.

This means that the interpreter must refrain from any judgments about, in particular, whether the tax saving achieved is or is not "justified" or "acceptable", whether the concrete situation hurts or does not a supposed horizontal equality between taxpayers.

The interpreter, the judge, has only the duty to verify whether, in the concrete case, or not, indubitably, each of the prerequisites for application of the CGAA are present.

And such analysis, such interpretation, must be carried out in a restrictive manner, as required by the rules of legal hermeneutics regarding exceptional norms.

It is completely forbidden for the interpreter to give the CGAA a scope of application broader [make an extensive interpretation] than that which results from the legal text itself, even if under the pretext of achieving material justice in the concrete case.

It will be said that, thus being, the effectiveness of the CGAA in combating forms of tax avoidance that could reasonably be considered abusive is greatly reduced. It may be reality, but this indubitably results from the exceptional nature of the norm and from what such nature imposes on the interpreter, on the judge.

The Concrete Case

In the disputed question, at issue is the provisions of paragraph h) of no. 2 of article 5 of the IRS Code which provides "2 - The fruits and economic advantages referred to in the previous number comprise, in particular:

(…)

h) The profits of entities subject to IRC made available to their respective associates or holders, including advances on account of profits, with the exclusion of those referred to in article 20 (…)".

By virtue of no. 1 of the same article (article 5 of the IRS Code), profits distributed to holders of capital (partners/shareholders) are capital income subject to IRS.

The question that arises is whether the claimant, SGPS, was merely or essentially an instrument to defraud the provision of article 5, no. 2/h), of the CIRS, that is, it served to give "dressing" or appearance of payment of the purchase price of transfer of interest in a partnership (then not taxed) to a real or effective payment of dividends (taxed).

This is a question that always has some delicacy and requires revisiting the established elements, whose fulfillment is mandatory, of the mentioned clause.

Elements of the CGAA

Within the framework of tax planning we can distinguish situations in which the taxpayer acts against legem, extra legem and intra legem.

When the taxpayer acts against legem, its action is frontal and unequivocally unlawful, as it directly breaches tax law, and constitutes tax fraud, subject, even, to being the object of administrative offense or criminal proceedings.

Action extra legem occurs when the taxpayer abusively takes advantage of the law to arrive at a more favorable tax result, albeit without directly breaching it. This adopts "a behavior that has as its sole or main purpose to circumvent one or more tax legal rules, so as to achieve the reduction or suppression of the tax burden".

Provided that from such tax legal rule(s) an attempt must be detected to circumvent "a clear intention to tax affirmed by the structuring principles of the system". This type of action is commonly referred to as "fraud to tax law" but, as Saldanha Sanches cautions, wishing to better illustrate and distinguish these situations from tax fraud, also referred to as "abusive avoidance of tax burdens", "abusive tax avoidance" or "tax avoidance".

Only action intra legem appears legitimate – and thus legitimate tax planning or non-abusive planning – can be accomplished. Indeed, the obtaining of a tax saving does not constitute behavior prohibited by law, as long as the action does not fall within the above-referred action extra legem.

It is accepted in both doctrine and case law that the applicability of the CGAA presupposes the verification of four prerequisites (or elements): means element; result element; intellectual element; normative element.

Regarding the rule in question – article 38 of the LGT - the Court of Appeal Decision of February 15, 2011 (Case 4255/10) states that "(…) the provision of the rule under analysis establishes four prerequisites for its application, which are:

1 - The means element - which relates to the form used, therefore, to the practice of certain acts or transactions aimed, essentially or mainly, at the reduction, elimination or temporary deferral of taxes;

2 - The result element - which aims at the tax advantage as the purpose of the taxpayer's activity, therefore, the reduction, elimination or temporary deferral of taxes;

3 - The intellectual element - which relates to the taxpayer's tax motivation, therefore, to the fact that the acts or transactions practiced by it are essentially or mainly directed toward the result that is the tax advantage;

4 - The normative element - which relates to the normative-systematic disapproval of the advantage obtained, therefore, the taxpayer acts with manifest abuse of legal forms (see article 63, no. 2, of the Tax and Procedural Code).

In the statutory provision of the norm we will find the sanctioning element that is translated in the ineffectiveness, within the tax sphere, of the acts or legal transactions in question, which become inoponible to the Tax Authority (see J. L. Saldanha Sanches, The Limits of Tax Planning, Coimbra Editor, 2006, p. 169 and following; Gustavo Lopes Courinha, The General Anti-Abuse Clause in Tax Law - Contributions to its Understanding, Almedina, 2004, p. 165 and following).

The sanctioning element thus corresponds to the statutory provision of the rule under consideration, with its application depending on the cumulative verification of the prerequisites enshrined in its provision (…)"

a) Means Element

"This element corresponds to the route chosen by the taxpayer to obtain the desired gain or tax advantage, i.e., the act(s) or legal transactions whose structure is determined as a function of a given tax result (Gustavo Courinha, The General Anti-Abuse Clause in Tax Law, 2009, p. 165).

"It is, in conclusion, from the level of incoherence between the form or structure chosen and the taxpayer's factual economic-tax purpose, between the purpose for which that concretely adopted form is delivered and the cause that is proper to it" (idem, p. 166) that the verification of this element will be ascertained.

Given a sequence of pre-ordered legal transactions (step by step doctrine) "it is important to note, however, that in a case of such a structure it will be this that must possess the anomalous character required by the current wording of the CGAA, even though the acts or transactions that compose it are, in themselves, typical or common" (idem, p. 168).

In the concrete case, we find that the legal transactions that led to the realization of capital gains not subject to taxation (as we will see below, this is the crux of the question, it is because of these transactions that the "tax advantage" in question was achieved) were the acquisition by the claimant – an SGPS – of a commercial company of which its partners were previously the holders (the commercial company "B", S.A.) and the distribution of dividends by this company at a date subsequent to the transmission of these stakes to the claimant.

No "anomalous character" can be detected in each of these legal transactions: if the purpose pursued is the creation of a company having for its object the holding of shares, the corporate form chosen, SGPS, was the appropriate one; if the company wishes to acquire the shares necessary to realize its corporate purpose, the form chosen (purchase and sale) is correct, in that this is the typical legal form that the law provides for the acquisition for a consideration, inter-vivos, of property and rights. The sequence of transactions is, also "normal": it would not be understood that the creation of the company would occur without the subsequent acquisition of the shares in question.

However, the non-existence of "anomalous legal transactions", or of an "anomalous sequence of legal transactions", is not, in our view, sufficient to exclude the possible application of the CGAA: it is still necessary to ascertain whether the set of transactions practiced is not, in itself artificial, was merely a facade that changed nothing substantial regarding the previous reality, which we will analyze in the following points.

For now, it should be noted that, where there are different typical legal routes for achieving a given economic result, the taxpayer is not obliged to choose the route that, for it, would result in greater burden.

Nor is it obliged to choose the times for its transactions so as to translate a greater worsening of its tax situation, particularly to sell or buy interests in partnerships after the entry into force of law that is announced as a tax penalty for the transaction that one intends to carry out.

b) Result Element

"In this result element it matters only to demonstrate that the subject achieved, through its acts, the verification of a certain tax advantage and the equivalence of the economic effects with those of the normally taxed act" (Gustavo Courinha, cit., p. 176).

In the concrete case, it is proven that, in achieving a very large capital gain, the partners of the Claimant obtained a significant tax advantage, which they would not have achieved if they had refrained from carrying out the legal transactions referred to above and, therefore, had not transmitted their shares in "B", S.A. and/or the dividends had been distributed at a date prior to such transmission.

Simply nothing obliged them to proceed with such distribution at a date prior to the transmission of those shares so as not to avoid or exclude the taxation of the dividends.

c) Intellectual Element

This is, without doubt, the most characteristic prerequisite of the CGAA

"The manifestation of fraud to the law is revealed in the taxpayer's pretension to obtain primarily a tax advantage, directing toward this end the transactions or acts that it practices. The non-tax purpose that, for its part, must guide the action of any subject (…) is here replaced, in its normal preponderance, by a tax purpose, ending up secondary" (idem, p. 179)

In the concrete case, we have, as proven facts, the tax advantage - which is, recall, very significant - and the legal-economic consequences of the transactions practiced.

However, it was not proven that "(…) in 2009, some of the shareholders of company "B", S.A. – those who were also shareholders of the Claimant – demonstrated availability to sell shares to the Claimant as a way to concentrate the management of all the textile sector activity of the family… presenting as justifications for that sale, particularly: (i.) the desire to boost the textile activity of Group "B" through the integration of the activity of the various companies that compose it under the direction of the Claimant; and (ii.) the reinforcement of the professional character in the management of "B", S.A., gradually distancing itself from the reductive image of small family business (…)" [see above, unproven facts].

The focus of this factual framework was on the shareholders' motivations.

However, the relevance of this absence of proof is reduced or limited in that one cannot conclude, without more, that not being proven this factuality, it means that the motivations were exclusively or essentially fiscal, more specifically of illegitimate tax saving.

That is: it does not clearly emerge, at least, an intention of tax fraud and even less that the claimant should have been aware of it at the purported moment of taxation.

Note that a dubious factual framework permits the conclusion of "unproven" when – as is the case – the facts in question would favor the respective party (in this case, the Tax and Customs Authority).

The fulfillment of the intellectual element is thus, also from this perspective, irremediably compromised.

In any case, in the concrete case, the weight that should be attributed to the intellectual element results relatively de-valued, in the weighing of interests that it is necessary to make here, due to what will be said below regarding the normative element.

d) Normative Element

"It can be said, considering the existence (and requirement) of this element, that the CGAA is, after all, not a mere expedient for obtaining tax revenue at any cost, based on the fact that the taxpayer obtains a tax advantage [underlined]. The disregard of such acts or transactions will only occur when, combining all the aforementioned requirements, it is demonstrated that the tax effect obtained (always considering effects similarly obtained) merits a judgment of disapproval by the Law" (Courinha, idem, p. 189).

We will begin by emphasizing the following: one question, which has already been addressed, is that of the taxpayer's tax motivation of the transaction(s) practiced; another, different, is that of, in the presupposition that the transactions practiced are not anomalous or artificial, knowing "of the contradiction of the result with the Law". It is only of this latter question that we will now take care.

What is at issue in this point is the fact that an alienation of shares, generating capital gains (which, economically, correspond, beyond other factors, to the realization [receipt] of dividends accumulated in the company) is not subject to taxation under IRS, verified certain prerequisites, while the distribution of dividends is (and was) subject to taxation under this tax, as capital income.

Now, it is unequivocal that this different tax treatment of different legal forms of obtaining income that are, to a large extent, economically equivalent [i.e., the privileged tax treatment of the alienation of shares] corresponded, as long as that regime was in force, to a deliberate choice of the legislator.

Well: it seems evident that the CGAA cannot prevent the choices of taxpayers who, faced with the choice between dividends (distributable or merely potential) opt, even if for tax reasons, for the obtaining of capital gains.

In truth, the application of the CGAA, in this context, would result in the disregard of the legislator's own tax choice that, deliberately, promoted precisely this legal formula, maximizing to the utmost the tax advantage associated with capital gains through their pure and simple non-taxation (…), in sharp contrast with the taxation of the respective dividends.

This understanding is accepted in both doctrine and in the arbitral case law of the CAAD, with numerous decisions already issued with a bearing on this issue, which, with a single exception, go in the direction that we advocate, that is, that it is absolutely legitimate the choice of the taxpayer to organize their legal transactions so as to realize non-taxed capital gains (e.g. transforming a limited liability company into a joint-stock company and then alienating, with gain, the shares thus obtained), even when the sole motivation of the change in corporate form has been of a tax nature (cf., e.g., Arbitral Decisions, CAAD nos. 123/2012, of May 9, 2013, 124/2012, of June 6, 2013, 138/2012, of July 12, 2013 and 139/2013, of December 19, 2013, the latter signed also by the president of this arbitral tribunal).

Concluding:

It constitutes legitimate tax planning, in the face of the CGAA, for taxpayers to practice legal transactions that have as their result the realization of capital gains not subject [at the time] to taxation under IRS, even when the realization of such transactions has as motivation the exclusive or principal motivation tax saving thus obtained.

Legal transactions practiced by taxpayers with such purpose will only be subject to censure, under the CGAA, when they are a mere "facade", resulting only in a mere legal-formal alteration of the previous situation, which, in essence, remained unchanged.

What is not evidenced to occur in the case sub judicio.

Or, at least, there remains a margin of doubt as to the effective demonstration of this essential factual reality.

It should be noted that doubt concerning a reality is resolved against whoever this (reality) would favor (in this case, the AT) – See article 414 of the CPC.

The means and normative elements are thus not verified in the concrete case, whose verification, cumulatively with the result element (which occurred), is a necessary condition for the fulfillment of the typicality of the CGAA.

C - The Erroneous Notification of the Assessments Challenged in the Person of "A", SGPS (or, in the claimant's expression, "non-opposability of the application of the general anti-abuse clause" [see articles 147 to 174 of the initial petition]

Given what we have just concluded, one could consider the reasoning of this decision complete in its essential part, as it results in the assessment of the remaining grounds invoked by the AT to support the assessments now at issue being prejudiced.

In any case, since an "exhaustive" reasoning (that is, covering the different questions raised) will always contribute better to the total clarification of the motivation that led to the arbitral decision, the following will be added, regarding the question raised by the claimant, whose assessment would be prejudiced by the above conclusions regarding the lack of substantiation of the prerequisites for application of the CGAA:

It is the question of whether, even if the prerequisites for application of the anti-abuse general clause embodied in article 38 of the LGT were considered to be met, the sanctioning element provides for ineffectiveness for tax purposes, translating into the fact that it must be reconstructed for tax purposes the situation, had the ineffectiveness not occurred.

What in the present case translates into the disregard of the alienation of the shares of "B", S.A., to the claimant for tax purposes, meaning that, for tax purposes the distribution of dividends by "B", S.A. to "A", SGPS, now claimant, is disregarded.

It is as if this did not exist for tax purposes, the financial flow between these two commercial companies but rather between "B", S.A. and its shareholders, the transferors of the stakes to the SGPS.

Now, being so, how will taxation of the income distributed by "B" S.A. to those shareholders be effected?

The answer to this question is found in the final part of no. 2 of article 38 of the LGT which provides "(…) with taxation then being effected in accordance with the applicable rules in their absence and the said advantages not being produced".

What leads us to have to consider that the income distributed by "B", S.A. to those shareholders should have the nature of dividends subject to taxation for purposes of IRS by framing in the "E" category. This type of income by virtue of the provisions provided for in the CIRS is taxed in the form of withholding at source assuming the withholding rate the nature of a liberatory rate. By virtue of being in a situation of tax substitution, it is incumbent on the substitute, "B", S.A., to effect the withholding of tax.

An equally relevant question will be to know when taxation of the income resulting from the application of the general anti-abuse clause should occur.

The answer is in the final part of no. 1 of article 38 of the LGT which provides "(…) at the moment when this should legally occur, should the economic effects intended by the parties already have occurred" which in the disputed question coincides with the moment when the distribution of dividends by "B", S.A. to "B", SGPS occurs.

From the above, in summary, combining nos. 1 and 2 of article 38 of the LGT, it can be concluded that:

a) The establishment of the SGPS would be ineffective for tax purposes;

b) Due to the tax disregard of "A", SGPS by virtue of the tax ineffectiveness, the income distributed by "B", S.A. must assume the nature of dividends and it must be considered that the real beneficiaries thereof are its shareholders, natural persons

c) By virtue of b), such income assumes the nature of dividends being subject to taxation under IRS framed in category E;

d) The taxation of such income operates in the form of withholding at source subject to a liberatory rate and should occur at the moment when they are made available or paid to the real beneficiaries, which in the disputed case would coincide with the financial flow between "B", S.A. and "A", SGPS in 2009 and should then be considered real beneficiary not "A", SGPS but the shareholders, natural persons, by virtue of the tax ineffectiveness [See proven facts: "(…) In June 2009, the Claimant acquired 404,910 shares of company "B", S.A. from shareholders "C", "D", "E" and "G" (…) and (…) in September, the Claimant acquired 22,495 more shares of company "B", S.A., from shareholder "F" (…)"..

Now, being so, it was incumbent on "B", S.A. to effect the withholding at source for purposes of IRS and not on the claimant, "A", SGPS, as tax substitute, whereby the assessments challenged are illegal once the party notified was "A", SGPS and not "B", S.A.

In truth, the law does not invalidate or nullify acts or transactions carried out with fraudulent intent, it merely renders them ineffective for tax purposes, providing for the restoration of that which would be the typical taxation that would weigh on the true substance of the acts or transactions.

However, the Respondent did not fully and correctly implement the statutory provision of no. 2 of article 38 of the LGT embodied in its sanctioning element – tax ineffectiveness – as, for the reasons described above, the assessments for purposes of IRS regarding withholdings at source should have been made in the person of "B", S.A. and not in that of "B", SGPS.

Thus, hypothetically admitting that this tribunal could have a different conviction regarding the existence of the prerequisites for application of the general anti-abuse clause as to the means, result, intellectual and normative elements, as to the sanctioning element, for the reasons above, the claimant's understanding that the assessments challenged should then have been made in the person of the commercial company "B", S.A. and not of the claimant, "A", SGPS, must be upheld.

Hence, the assessments that are the object of the present request for arbitral ruling are also illegal, from this perspective.

Indemnificatory Interest

The claimant requests the reimbursement of the tax paid and of the compensatory interest.

And it requests such reimbursements plus indemnificatory interest, at the legal rate, in accordance with article 43 of the LGT and 61 of the CPPT.

Let us see:

In accordance with the provision of paragraph b) of article 24 of the RJAT, the arbitral decision on the merits of the claim for which no appeal or challenge applies binds the tax administration as of the end of the deadline provided for appeal or challenge, and the latter must, in the exact terms of the substantiation of the arbitral decision in favor of the taxpayer and until the end of the deadline provided for the spontaneous execution of the sentences of the tax courts, "restore the situation that would exist if the tax act that is the object of the arbitral decision had not been carried out, adopting the acts and operations necessary for that purpose", which is in line with what is provided for in article 100 of the LGT [applicable by virtue of the provision of paragraph a) of no. 1 of article 29 of the RJAT] which establishes that "the Tax Administration is obliged, in case of full or partial substantiation of a claim, 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 object of the dispute, understanding the payment of indemnificatory interest, if applicable, from the end of the deadline for execution of the decision".

Although article 2, no. 1, paragraphs a) and b) of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals operating within the CAAD, making no reference to condemnatory decisions, it should be understood that its competences include the powers that in judicial challenge proceedings are attributed to the tax courts, being this the interpretation that is in line with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which it is proclaimed, as the first guiding principle, that "the tax arbitral proceeding should constitute an alternative procedural means to the judicial challenge proceeding and to the action for the recognition of a right or legitimate interest in tax matters".

The judicial challenge proceeding, despite being essentially a proceeding for the annulment of tax acts, admits the condemnation of the Tax Administration to the payment of indemnificatory interest, as can be inferred from article 43, no. 1 of the LGT, in which it is established that "indemnificatory interest is due when it is determined, in a gracious complaint or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount greater than that legally due" and from article 61, no. 4 of the CPPT (as worded by Law No. 55-A/2010, of December 31, which corresponds to no. 2 in the original wording), which provides that "if the decision recognizing the right to indemnificatory interest is judicial, the deadline for payment counts from the beginning of the deadline for its spontaneous execution".

Thus, no. 5 of article 24 of the RJAT in stating 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 Procedure and Tax Procedure" should be understood as allowing the recognition of the right to indemnificatory interest in the arbitral proceeding.

In the case at hand, it is manifest that, as a consequence of the illegality of the assessment acts, there is reimbursement of the tax, by virtue of the aforementioned articles 24, no. 1, paragraph b) of the RJAT and 100 of the LGT, as this is essential to "restore the situation that would exist if the tax act that is the object of the arbitral decision had not been carried out", in the part corresponding to the correction that was considered illegal.

As for indemnificatory interest, it is also clear that the illegality of the act is attributable to the Tax and Customs Authority, which, on its initiative, carried it out, as was seen, without legal support.

One is faced with a defect of violation of substantive law, embodied in error in the legal prerequisites, attributable to the Tax Administration.

Consequently, the Claimant is entitled to indemnificatory interest, in accordance with article 43, no. 1 of the LGT and article 61 of the CPPT, calculated on the amount that it paid unduly (€ 2,274,028.79).

Thus, the Tax and Customs Authority should give execution to the present decision, in accordance with article 24, no. 1 of the RJAT, restituting that amount to the claimant, with indemnificatory interest, at the legal rate applicable to civil debts, in accordance with articles 35, no. 10, and 43, nos. 1 and 5 of the LGT, 61 of the CPPT, 559 of the Civil Code and Ordinance No. 291/2003, of April 8 (or diploma or diplomas that succeed it).

Indemnificatory interest is due from the date of payment (March 13, 2014) to that of the processing of the credit note, in which they are included (article 61, no. 5 of the CPPT).

III DECISION

Accordingly, this Arbitral Tribunal agrees to:

Judge the request for declaration of illegality of the IRS assessments that are the object of the present request for arbitral ruling to be substantiated [assessment of IRS withholding at source 2012 nos. 2014 …, in the amount of € 2,137,025.00 and compensatory interest no. 2014 … in the amount of € 137,003.79, both of January 13, 2014 [total amount: € 2,274,028.79]
Judge the request for payment of indemnificatory interest to be completely substantiated;
Condemn the Tax and Customs Authority in the annulment of the aforementioned assessments and, in consequence, reimburse the claimant the aforementioned amount of € 2,274,028.79, with indemnificatory interest at the legal rate applicable to civil debts, in accordance with articles 35, no. 10, and 43, nos. 1 and 5 of the LGT, 61 of the CPPT, 559 of the Civil Code and Ordinance No. 291/2003, of April 8 (or diploma or diplomas that succeed it), from the date of payment by the claimant on March 13, 2014, to that of the processing of the credit note, in which they are included (article 61, no. 5 of the CPPT);
Judge the assessment of the other questions raised to be prejudiced.

Value of the Proceeding

In accordance with the provision of article 306, no. 2 of the CPC and 97-A, no. 1, paragraph a) of the CPPT and 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is fixed at € 2,274,028.79

Costs

In accordance with article 22, no. 4 of the RJAT, the amount of costs is fixed at € 29,376.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, charged to the respondent Tax and Customs Authority.

Let it be notified.

Lisbon, January 30, 2015

The Arbitral Tribunal,

José Poças Falcão
(arbitrator-president)

Diogo Feio
(arbitrator-member)

Marcolino Pisão Pedreiro
(arbitrator-member)

DISSENTING OPINION

Dissenting Opinion of Arbitrator Marcolino Pisão Pedreiro

I understand that an abusive conduct was verified that fulfills the prerequisites for application of the general anti-abuse clause, disagreeing on this point with the position that prevailed.

However, for the reasons that I will set forth below, I understand that the assessments should have as their passive subject the company "B", S.A. and not the Claimant, with the consequent illegality of the assessments that are the object of the present proceeding, on this point following the decision.

I proceed to enumerate the reasons for the disagreement with the position that prevailed regarding the non-verification of the elements of the provision of article 38, no. 2 of the General Tax Law.

Article 38, no. 2 of the General Tax Law establishes a general anti-abuse clause, whereby "the following are ineffective within the tax sphere: acts or legal transactions essentially or mainly aimed, by artificial or fraudulent means and with abuse of legal forms, at the reduction, elimination or temporary deferral of taxes that would be due as a result of facts, acts or legal transactions with identical economic purpose, or at the obtaining of tax advantages that would not be achieved, fully or partially, without the use of such means, with taxation being effected in accordance with the applicable rules in their absence and the said tax advantages not being produced".

In my understanding, there emerges from the evidence a set of consistent facts in the sense that, with the sales of the shares of company "B", S.A., made by the shareholders of that company to the Claimant, and other acts that followed it, the intention was, essentially, to obtain an economic effect identical to the distribution of dividends by "B" S.A. to its shareholders, without the taxation inherent to such patrimonial increase.

The following facts point in this direction:

Company "B", S.A. had free reserves in the amount of € 93,621,066.18 and availability in the amount of € 45,757,083.55;
These values had been accumulating from 2000 to 2009, as in this interval of time, only in 2008 did that company distribute dividends.
These financial availabilities were not necessary for the normal functioning of the company (as is expressly recognized in the resolution of December 27, 2010).
If these availabilities were distributed as dividends to the shareholders they would be subject to withholding at source.
The Claimant did not have the financial means to acquire the shares acquired from the partners in question, since it only had availabilities in the amount of € 794,108.62 on January 1, 2009 and € 863,430.42 on December 31, 2009.
On the other hand, in 2007 and 2008, the Claimant had only positive results of € 434,031.06 and € 489,539.17, respectively.
It further follows that the Claimant's share capital was only € 60,000, clearly inadequate to the dimension of the business, having the assessments in question placed the Claimant in a very strong imbalance in the relationship between own capital/third-party capital.
This imbalance was only eliminated some months after the purchase of the shares through a capital increase and supplementary contributions, which the Claimant/debtor came to "require" of its shareholders/creditors adding to the amounts received from company "B", S.A.
Company "B", S.A., after the sale, distributed the dividends, in a break with the dividend distribution policy followed until then, and the Claimant then channeled these dividends to the shareholders of "B", S.A. (also its shareholders and with the same proportion of capital) as title of payment of the "debts" incurred with the purchase of the shares.
The Claimant and "B", S.A. were family companies with the same elements in the Board of Directors and with identical shareholder structure, with the exception of shareholder of "B" S.A., "D", who was a shareholder of "B" S.A., but not of the Claimant. However, following his death, his daughter and successor "P" came, following the acts carried out, to take part in the shareholder structure of the Claimant, in proportions identical to the other descendants of "C" and "D".
The Claimant alleged as motivation for the transaction that "in 2009, some of the shareholders of company "B", S.A. – those who were also shareholders of the Claimant – demonstrated availability to sell shares to the Claimant as a way to concentrate the management of all textile sector activity of the family …presenting as justifications for that sale, particularly: (i.) the desire to boost the textile activity of Group "B" through the integration of the activity of the various companies that compose it under the direction of the Claimant; and (ii.) the reinforcement of the professional character in the management of "B", S.A., gradually distancing itself from the reductive image of small family business", which it failed to prove, and indeed it was proven that the Claimant has no own or leased facilities nor employees in its service
"B", S.A. had already reached the limit of treasury share purchases (10%), so the occurrence of financial flows to shareholders would have to be effected through the distribution of dividends, subject to taxation.

Another factor pointing to essentially tax motivation and to the artificiality of the transactions carried out consists, within the scope of the Claimant's capital increase of December 20, 2010, in the difference between the acquisition value of the shares from "P", at the unit value of € 10.13, and the unit acquisition price from the other shareholders which had been € 215 (value determined based on the company's book value), about twenty-one times more.

On the other hand, on the same date as this capital increase, this new shareholder of the Claimant received by gift credits of which her grandfather "C" held against the Claimant and also credits against the same company relating to supplementary contributions.

With these operations this shareholder ended up with precisely the same shareholder and creditor position in the Claimant as her uncles, "E", "G" and "F".

According to the inferences that can be drawn from the proven factual matter, it is legitimate to conclude, based on the rules of experience, that the set of acts in question was intended to take advantage of the absence of taxation of capital gains held for a period exceeding one year, a situation that existed in 2009, in light of no. 2 of article 10, of the CIRS, then in force, but no longer at the date when the shares of "P" were acquired by the Claimant, by virtue of article 1 of Law No. 15/2010 of July 26 and hence the fact that the same shares were alienated by it at the unit value of € 10.13, while the unit price of the shares acquired from the other shareholders had been € 215.
The means used are, in my view, artificial.

This artificiality results, first of all, from the fact that it is anomalous for a company that has share capital of € 60,000 and financial availabilities of € 794,108.62 at the beginning of 2009 and € 863,430.42 at the end of the same to purchase shares in the value of € 91,892,075.00, remaining owing the respective price.

Then, it is the debtor who comes to "require" of its creditors supplementary contributions of capital, thus compensating for part of the debt.

Next, there were the capital increases.

Instead of the strengthening of own capital occurring before a transaction of gigantic financial dimension for the level of the Claimant's share capital and for its financial availabilities, as would be normal, the inverse route was taken. First the Claimant makes share purchase investments, without any effective financial flow. Then the shareholders increase capital and make supplementary contributions, also without any effective financial flow.

In reality, the only effective financial flows were from company "B", S.A. to its shareholders, with the Claimant serving only as a vehicle for these payments, as clearly results from the dates of the financial transfers between the parties involved.

In my view, the set of acts in question embodies artificial means and with abuse of legal forms that had as a consequence a result identical to that of the distribution of dividends by "B", S.A. to its shareholders, but without the payment of tax, in this case by withholding at source, which should have been carried out by "B" S.A. (and not by the Claimant).

Gustavo Lopes Courinha, referring to the so-called "elements" of the General Anti-Abuse Clause in Tax Law, notes that they "although they must be treated autonomously, at least from the doctrinal point of view, will frequently not cease to "assist" each other. The fixing of one element can, in practice, depend on another".

Thus, for example, the proof of the means element can often lead to the substantiation of the intellectual element, or vice versa (…)"

In the case sub judicio, there emerges from what was said, the demonstration of the "means element".

From the other elements in the proceedings, according to the rules of experience, results the demonstration that the acts or transactions in question were essentially or mainly aimed at the elimination of the tax that would be due as a result of the distribution of dividends (the so-called "intellectual element").

For its part, the demonstration of the verification of these two elements, reinforces, in both directions, the conviction of the verification of each of them.

As regards the "intellectual element", in the impossibility of effecting direct and unequivocal proof of the subjective intentions of persons (in principle, only possible by confession), the demonstration of the same cannot fail to result from the inferences to be drawn from the proven facts, according to the rules of life experience. And, viewing things from this perspective, all the proven facts are consistent in the sense of the verification of the intellectual element, whether this is viewed in light of an objective conception, which seems to be enshrined in article 38, no. 2 of the LGT, or even from the perspective of a subjective conception. In reality, according to the set of proven facts, the acts carried out are only explainable, according to normal occurrence in light of the purpose of eliminating the tax to be paid.

As Pires de Lima and Antunes Varela wrote examining judicial presumptions "(…) inspire themselves in the maxims of experience, in the current judgments of probability, in the principles of logic or in the very data of human intuition. (…)

Presumptions are (…) by their nature fallible, precarious, whose persuasive force can, therefore, be eliminated by simple counter-proof."

In the case sub judicio, for the reasons set forth, there emerge from the file facts consistent, according to the rules of experience, in the sense of the verification of the "intellectual element" (and simultaneously confirmatory of the occurrence of the "means element") the Claimant not having eliminated its persuasive force, as not even any counter-proof was made.

On the other hand, from articles 5, no. 1, and 2, paragraph h) and 71, no. 1, paragraph c) of the CIRS it can be clearly inferred, in my view, the intentionality of the system in the sense of taxing this type of income. There emerges, in fact, a clear legislative will to taxation of these patrimonial increases when obtained by natural persons, with teleology of full coverage, and thus, in my understanding, the so-called "normative element" is fulfilled.

In this sense appears to go, moreover, the arbitral decision rendered in case 258/2013-T, in which it was written:

"As for the normative element, this tribunal fully accompanies the reasoning by the Respondent contained in articles 311 to 377 in the Response (…)

In fact, as the Respondent mentions, article 2 of article 38 of the LGT must be read in conjunction with paragraph h) of no. 2 of article 5 of the CIRS and verify whether the structure created through the establishment of the SGPS in the manner described did not aim only at a tax advantage that was translated in the non-application of paragraph h) of no. 2 of article 5 of the CIRS

Still regarding the normative element (…), it is not a question of the regime of exclusion of taxation for purposes of IRS on the capital gain determined by B (…)".

As for the "result element", it seems to me unnecessary to discuss the same given its evidence and the fact that its occurrence was not put in question in the decision with which, on this point, we disagree.

For the reasons set forth, I understand that all the prerequisites would be verified for the application of the general anti-abuse clause by the Respondent. However, the statutory provision of article 38, no. 2 of the General Tax Law consists of taxation in accordance with the applicable rules in the absence of the abusive transaction.

Now, in the absence of the abusive transactions, the withholding at source should have been carried out by company "B", S.A. and not by the Claimant. [18]

In the absence of the transactions referred to, no tax duty fell on the Claimant. The general anti-abuse clause renders abusive transactions ineffective in the tax sphere but, in my understanding, is not susceptible to giving rise to tax obligations that would not occur without the abusive action.

For this reason, I understand that the assessments sub judice are illegal, on this point following the decision that prevailed.

Lisbon, January 30, 2015

The arbitrator

(Marcolino Pisão Pedreiro)

CAAD Case 381/2014-T: IRS Anti-Abuse Clause (CGAA) on Share Acquisition and Capital Increase

Table of Contents

Summary

Full Decision

Tags

FRESH Legal Group

Table of Contents

CAAD Case 381/2014-T: IRS Anti-Abuse Clause (CGAA) on Share Acquisition and Capital Increase

Table of Contents

Summary

Full Decision

Tags

FRESH Legal Group

Related Articles

Table of Contents