CAAD 385/2018-T: IRC SGPS Financial Charges Deductibility - Supplementary and Accessory Contributions Under Articles 23 CIRC and 32(2) EBF

ARBITRAL DECISION (consult full version in PDF)

The arbitrators Councillor Carlos Fernandes Cadilha (arbitrator president), Dr. Ricardo Rodrigues Pereira and Dr. Sofia Ricardo Borges (arbitrator members), appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, agree as follows:

I. Report

1. On 14 August 2018, the commercial company A... SGPS, S.A., NIPC..., with registered office in ..., Espinho (hereinafter, Claimant), submitted a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2, no. 1, paragraph a), and 10, nos. 1, paragraph a), and 2, of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters (hereinafter, abbreviated as RJAT), as amended by article 228 of Law no. 66-B/2012, of 31 December, with a view to the pronouncement of this tribunal regarding the declaration of illegality and annulment of:

• the decision dismissing the administrative appeal no. ...2018..., which concerned the supplementary corporation income tax assessment no. 2017..., for the year 2013, the respective accrued interest assessment no. 2017... and the corresponding Statement of Account Reconciliation no. 2017..., from which a total amount due of €74,225.10 resulted;

• the supplementary corporation income tax assessment no. 2017..., for the year 2013, the respective accrued interest assessment no. 2017... and the corresponding Statement of Account Reconciliation no. 2017..., from which a total amount due of €74,225.10 resulted.

The Claimant attached 16 (sixteen) documents, having not requested the production of any other evidence.

The Respondent is the AT – Tax and Customs Authority (hereinafter, Respondent or AT).

In essence, the Claimant alleges a defect of legal violation, by erroneous interpretation and application, mainly, of the norms contained in article 23 of the CIRC and article 32, no. 2, of the EBF and the consequent voidability of the decision dismissing the aforementioned administrative appeal and of the referred tax acts.

As results from the request for arbitral pronouncement, the Claimant adduced, essentially, the following factual and legal reasons:

The Claimant is the controlling company of a group of companies, taxed under the Special Tax Regime for Groups of Companies (RETGS), provided for in articles 69 et seq. of the Corporation Income Tax Code, and, as a shareholder, made contributions in some of the companies it held, in the terms provided for in the respective partnership agreements, in the form of supplementary contributions, in cash, without interest and without repayment deadline.

Specifically, the Claimant made to the company it held "B..., S.A.", following resolutions of the General Meeting, throughout the years, supplementary contributions that totalled €7,500,000.00.

In July 2011, that same company, by resolution of the General Meeting, returned to the Claimant the amount of €6,000,000.00, with the supplementary contributions being reduced to the amount of €1,500,000.00 (the return complied with article 213 of the Companies Code and, after the same, the net equity of the company was not less than the sum of capital and legal reserve).

On the other hand, the Claimant made to the companies it held "C..." and "D..., S.A.", following resolutions of the General Meeting, throughout the years, supplementary contributions which, by effect of the merger by absorption that occurred in 2010, reached, in consolidated terms, the total global amount of €12,900,000.00 in the absorbing company, "D..., S.A.".

In July 2011, the company "D..., S.A.", by resolution of the General Meeting, returned to the Claimant the amount of €10,000,000.00, with the supplementary contributions being reduced to the amount of €2,900,000.00 (the return complied with article 213 of the Companies Code and, after the same, the net equity of the company was not less than the sum of capital and legal reserve).

Furthermore, the Claimant made to the company it held "E..., S.A.", following resolutions of the General Meeting, throughout the years, supplementary contributions that reached the total amount of €2,000,000.00.

That same company did not effect the return, total or partial, of the supplementary contributions made by the Claimant.

Furthermore, the Claimant made to the company it held "F..., S.A.", following resolutions of the General Meeting, throughout the years, supplementary contributions that totalled €500,000.00.

The company "F..., S.A." did not effect the return, total or partial, of the supplementary contributions made by the Claimant.

The Claimant was subject to an external tax inspection, with the scope of corporation income tax for the year 2013, as a result of which the AT corrected the fiscal result calculated by the Claimant in its Model 22 declaration and consequently in the consolidated declaration of the Group, disregarding for tax purposes part of the financial charges borne during the year, in the total amount of €265,661.55, being: the amount of €221,108.95, pursuant to article 23 of the CIRC, on the ground of non-essentiality to the production of income or the maintenance of the income-producing source and the amount of €44,552.60 on the ground of no. 2 of article 32 of the EBF.

The financial charges not accepted for tax purposes relate to loans contracted to finance the supplementary contributions made to the companies "B... S.A." and "D..., S.A.", whereas the charges borne with the loans contracted to finance the supplementary contributions made to the companies "F..., S.A." and "E..., S.A." were accepted for tax purposes.

In this way, the Claimant concludes that it was the return of the supplementary contributions that justified the different tax treatment that the AT gave to the financial charges attributed to the non-remunerative financings made by the Claimant to the held companies in the form of supplementary contributions; in effect, if the supplementary contributions made by the Claimant to the held companies follow the legal regime of supplementary contributions and did not generate any inflows, the unequal treatment by the AT was determined by the resolution of the return, by the companies "B... S.A." and "D..., S.A.", of part of the supplementary contributions from which they benefited.

Despite being essentially equal, the regime of the supplementary contributions made by the Claimant to all its held companies, the AT understood to treat unequally the capital supplementary contributions made to the companies "B... S.A." and "D..., S.A."; therefore, according to the Claimant, the AT violated the constitutional principle of equality which constitutes an invalidating defect of the tax act. The Claimant adds that since it is undisputed that supplementary contributions with the regime of supplementary contributions are components of the equity capital of the beneficiary entity and its return, once the conditions on which it depends are met, does not affect its legal-tax qualification and since the resolution of return does not affect the legal qualification of supplementary contributions as parts of equity capital, the unequal treatment applied to supplementary contributions made to the companies "B... S.A." and "D..., S.A." is illegal by violation, inter alia, of the principles of legality, proportionality, good faith and equality.

In another order of considerations, the Claimant argues that in this case the financial charges borne with onerous financings used for the realization of non-remunerative supplementary contributions that follow the legal regime of supplementary contributions should be accepted as a tax cost, under article 23 of the CIRC, for purposes of determining taxable profit.

In this regard, the Claimant begins by stating that the costs or losses of the business constitute the negative elements of the income statement, which are tax deductible when, being properly documented, they are essential for the realization of revenues or for the maintenance of the income-producing source of the business in question. Thus, according to the Claimant, the notion of economic activity or social interest reveals itself to be the determining feature in the admissibility of expenses, when assessed by article 23 of the CIRC; and if the AT has reasonable doubt about the insertion in corporate interest of a certain expense, the burden of proof rests on the taxpayer that such operation is within its respective corporate scope.

The Claimant adds that the SGPS in the exercise of its own activity, administers and makes decisions concerning a financial asset that flows from the participation it holds, which confers on its decisions, as a participant, the qualification of its own activity, inherent to its social scope: the management of such participation; such management may involve financing operations that form part of the activity of the holding company, and the held company is not a stranger to the activity and interests of the holder.

Thus, concludes the Claimant, the financial charges incurred with capital obtained and subsequently contributed to the held company are in the interest of the holder, as a direct consequence of its activity of managing an asset that emerges from a participation, which is real or potentially income-producing.

Furthermore, the Claimant advocates that from the wording of no. 2 of article 32 of the EBF it follows that the financial charges borne with financings used for the acquisition of equity interests do not contribute to the formation of taxable profit, so that the financial charges borne with loans contracted for the development of its activity, including to finance other components of equity capital of the held companies and loans made in the form of advances or others, constitute a tax charge that should be considered for the determination of taxable profit for the respective period.

Still regarding this EBF norm, the Claimant alleges that a prerequisite for its application is the proof that the equity interests held by the SGPS were acquired using borrowed capital, which was not the case in this proceeding. In effect, the Claimant states that it did not resort to remunerative financing to acquire equity interests it holds, and therefore did not bear any charges with their acquisition; therefore, there is no place for the application of the provisions of no. 2 of article 32 of the EBF, that is, in 2013, it did not bear financial charges that should not be considered as tax costs.

Furthermore, the application of Circular no. 7/2004, of 30 March, only takes place when the equity interests were acquired using external financing; now, if the financing is through share capital or shareholder credit, there is no place for such application.

1. The request for constitution of an arbitral tribunal was accepted by the President of CAAD and followed its normal procedure with notification to the AT, on 17 August 2018.

The Claimant did not proceed to appoint an arbitrator, so, pursuant to the provisions of article 6, no. 2, paragraph a) and article 11, no. 1, paragraph a) of the RJAT, the President of the Deontological Council of CAAD appointed as arbitrators of the collective Arbitral Tribunal the signatories, who communicated acceptance of the charge within the applicable period.

On 1 October 2018, the Parties were notified of this appointment, having not manifested the will to refuse the appointment of the arbitrators, under the combined provisions of article 11, no. 1, paragraphs b) and c), of the RJAT and articles 6 and 7 of CAAD's Deontological Code.

Thus, in conformity with article 11, no. 1, paragraph c) of the RJAT, the Collective Arbitral Tribunal was constituted on 22 October 2018.

1. On 26 November 2018, the Respondent, duly notified for this purpose, presented its Reply in which it specifically contested the arguments adduced by the Claimant, having concluded for the lack of merits of the present action, with its consequent dismissal of the request.

In essence and also briefly, it is important to extract the more relevant arguments on which the Respondent based its Reply:

According to the AT, the non-remunerative financings made by the Claimant to the held companies, in the form of supplementary contributions, in the year 2013, do not follow the figure of supplementary contributions since in previous periods there was a return of some values, this return in previous years not being a matter of controversy.

Regarding the deductibility of charges with non-remunerative financings (supplementary contributions that do not follow the figure of supplementary contributions), the AT argues that their legal-tax framework, for purposes of the tax deductibility provided in article 23 of the CIRC, cannot ignore that the held companies have their own legal personality and that, independently of the RETGS, the charges in question are not attributable to the holding company for purposes of calculating its taxable profit. Thus, although the Claimant is an SGPS, its interest in financing is always an indirect interest, particularly because its corporate purpose does not include the granting of financing to the held companies, an economic reality that cannot be confused with the activity of managing equity interests.

Furthermore, regarding article 23 of the CIRC, the essentiality between expenses and income is assessed in an economic sense, that is, essential expenses are those incurred in the interest of the business, which are linked to its capacity, by insertion in its profit scope and in the exercise of its concrete activity; alternatively, it is connected with the maintenance of the income-producing source, in the sense of an economic link between the expense and the existence and maintenance of the company and its activity.

Regarding the acquisition of equity interests by the Claimant, the AT states that, in the year 2013, it amounted to €3,000.00, to which must be added the amount of €2,500,000.00, referring to supplementary contributions established with the held companies "E..., S.A." and "F..., S.A.", due to having considered that these contributions assumed the nature of quasi-capital; it was this that motivated the correction made regarding the value of the financial charges not fiscally deductible, under no. 2 of article 32 of the EBF.

The Respondent did not request the production of evidence, having subsequently proceeded to join the administrative file (hereinafter, PA) to the case.

1. On 29 November 2018, an order was issued dispensing with the holding of the meeting referred to in article 18 of the RJAT, fixing the period for the presentation of submissions and determining, as the deadline for rendering the arbitral decision, 22 April 2019.

Both Parties presented written submissions, in which they reiterated the positions previously assumed in their respective pleadings.

II. Dismissal of Preliminary Objections

1. The Arbitral Tribunal was regularly constituted and is competent ratione materiae, given the nature of the object of the proceeding (cf. articles 2, no. 1, paragraph a) and 5 of the RJAT).

The request for arbitral pronouncement is timely, as submitted within the period provided in article 10, no. 1, paragraph a), of the RJAT.

The parties enjoy legal personality and capacity, have legitimacy and are regularly represented (cf. articles 4 and 10, no. 2, of the RJAT and article 1 of Order no. 112-A/2011, of 22 March).

The proceeding does not suffer from nullities, no exceptions or preliminary issues having been raised that prevent the examination of the merits and of which it is necessary to take cognizance.

III. Grounds

III.1. On the Facts

§1. Proven Facts

1. The following facts are considered proven:

a) The Claimant is a Holding Company for Equity Interests (SGPS), subject to the legal regime of Decree-Law no. 495/88, of 30 December, with the corporate purpose of managing equity interests in other companies, as an indirect form of exercising economic activities. [cf. documents nos. 3 and 10 attached to the request for arbitral pronouncement]

b) The Claimant is the controlling company of a group of companies, taxed under the Special Tax Regime for Groups of Companies (RETGS), under the terms of articles 69 et seq. of the Corporation Income Tax Code, which, in 2013, included as controlled companies the following entities [cf. Tax Inspection Report (RIT) contained in the PA]:

c) The equity interests held by the Claimant on 31.12.2012 and on 31.12.2013 were as follows [cf. RIT contained in the PA]:

d) The equity interests held by the Claimant in the companies "G..., S.A.", "B..., S.A.", "F..., S.A." and "E..., S.A." were partially acquired, in 2000, as consideration for the realization of subscribed capital by shareholders (contributions in kind). [cf. document no. 10 attached to the request for arbitral pronouncement]

e) The purchase of 50% of the share capital of the company "B..., S.A.", made by the Claimant in 2003, was paid in instalments, by means of the cheques indicated in document no. 16 attached to the request for arbitral pronouncement and which is hereby given as fully reproduced.

f) In the period between 2004 and 2009, the Claimant acquired from shareholders other equity interests in the companies "D..., S.A.", "C..., S.A." and "H..., S.A.", with the purchase prices recorded as credit in POC account 255. [cf. documents nos. 11 to 15 attached to the request for arbitral pronouncement]

g) In the pursuit of its activity and within the framework of the shared management of financial resources that prevails in the aforementioned group of companies, the Claimant finances its held companies in the form of loans with characteristics of advances and also in the form of supplementary contributions made according to the regime of supplementary contributions, as follows [cf. RIT contained in the PA]:

• Advances: assets recorded in subaccounts of account 4113 – Loans Granted to Subsidiaries, whose balance amounted to €6,614,493.01 on 01.01.2013 and to €6,385,657.88 on 31.12.2013, and in subaccounts of account 4142 – Loans Granted to Other Companies, whose balance amounted to €4,793,788.18 on 01.01.2013 and to €5,229,238.18 on 31.12.2013;

• Supplementary Contributions: assets recorded in subaccounts of account 41113 – Capital Interests – Supplementary Contributions showing a balance of €6,900,000.00 between 01.01.2013 and 31.12.2013.

h) The aforementioned supplementary contributions made by the Claimant in some of the held companies, in the terms of the respective partnership agreements, constitute non-remunerative assets – since no interest was charged on the same – and without repayment deadline, which, by reference to the year 2013, are summarized as follows [cf. RIT contained in the PA]:

i) The Claimant made to the held company "B..., S.A.", following resolutions of the General Meeting, made in the terms and within the limits provided in the partnership agreement, throughout the years, supplementary contributions that reached the total amount of €7,500,000.00. [cf. RIT contained in the PA and document no. 6 attached to the request for arbitral pronouncement]

j) On 2 July 2011, the Board of Directors of the company "B..., S.A." resolved the return of supplementary contributions to the Claimant, in the amount of €6,000,000.00, with the same being reduced to the amount of €1,500,000.00. [cf. RIT contained in the PA and document no. 6 attached to the request for arbitral pronouncement]

k) In the year 2011, following the aforementioned return of supplementary contributions, the equity capital of the company "B..., S.A." was €5,440,012.20 and the sum of share capital and legal reserve was €780,000.00. [cf. document no. 7 attached to the request for arbitral pronouncement]

l) The Claimant made to the held companies "C..., S.A." and "D..., S.A.", following resolutions of the General Meeting, made in the terms and within the limits provided in the respective partnership agreements, throughout the years, supplementary contributions that reached the total amount of €12,900,000.00, which – by effect of the merger by absorption that took place in 2010 and which was embodied in the absorption of "D..., S.A." into "C..., S.A.", with the latter adopting the corporate name of the company it absorbed, "D..., S.A." – was consolidated in the company "D..., S.A.". [cf. RIT contained in the PA and document no. 8 attached to the request for arbitral pronouncement]

m) On 2 July 2011, the Board of Directors of the company "D..., S.A." resolved the return of supplementary contributions to the Claimant, in the amount of €10,000,000.00, with the same being reduced to the amount of €2,900,000.00. [cf. RIT contained in the PA and document no. 8 attached to the request for arbitral pronouncement]

n) In the year 2011, following the aforementioned return of supplementary contributions, the equity capital of the company "D..., S.A." was €7,047,169.44 and the sum of share capital and legal reserve was €1,115,000.00. [cf. document no. 9 attached to the request for arbitral pronouncement]

o) The Claimant made to the held company "E..., S.A.", following resolutions of the General Meeting, made in the terms and within the limits provided in the partnership agreement, throughout the years, supplementary contributions that reached the total amount of €2,000,000.00. [cf. RIT contained in the PA]

p) The company "E..., S.A." did not effect the return, in whole or in part, of the aforementioned supplementary contributions made by the Claimant, and in the General Meeting of that company, held on 22 December 2010, the legal representative of the Claimant present there declared "formally the will of A..., SGPS, S.A. not to require the repayment of the referred Supplementary Contributions while the Company maintains its operations in a logic of continuity of business". [cf. RIT contained in the PA]

q) The Claimant made to the held company "F..., S.A.", following resolutions of the General Meeting, made in the terms and within the limits provided in the partnership agreement, throughout the years, supplementary contributions that reached the total amount of €500,000.00. [cf. RIT contained in the PA]

r) The company "F..., S.A." did not effect the return, in whole or in part, of the aforementioned supplementary contributions made by the Claimant, and in the General Meeting of that company, held on 22 December 2010, the legal representative of the Claimant present there declared "formally the will of A..., SGPS, S.A. not to require the repayment of the referred Supplementary Contributions while the Company maintains its operations in a logic of continuity of business". [cf. RIT contained in the PA]

s) The returns of supplementary contributions by the Claimant's held companies, "B..., S.A." and "D..., S.A.", above referred to in proven facts j) and m), were effected by account settlement with remunerative financing provided by those held companies to the Claimant (through the account of financing provided by the Claimant to the held companies), having had as counterpart the settlement of debts in the same amounts of the Claimant to those held companies. [cf. RIT contained in the PA]

t) Regarding the year 2013, the Claimant timely presented the Model 22 corporation income tax return declarations, relating to itself and, as controlling company, to the aforementioned group of companies, which are contained in documents nos. 4 and 5 attached to the request for arbitral pronouncement and which are hereby given as fully reproduced.

u) Under Service Order no. OI2016..., the Claimant was subject to an external tax inspection, of general scope, with reference to the taxation period of 2013, with such inspection procedure being opened as a result of a proposal for external analysis of the administrative appeal of the self-assessment of corporation income tax for the year 2013, submitted by the Claimant, alleging that, for purposes of determining the taxable result of that year, it increased in box 07 of its respective Model 22 return declaration, the amount of financial charges not accepted fiscally, as provided in no. 2 of article 32 of the EBF, which it calculated in accordance with Circular 7/2004, in the wrong amount of €842,613.80. [cf. RIT contained in the PA]

v) Following this, the respective Draft Tax Inspection Report was drawn up, which is hereby given as fully reproduced, in which the following corrections were proposed for corporation income tax purposes, with the grounds set out therein, in particular those contained in the respective chapters III.1.2 (Financial charges disregarded, related to non-remunerative loans to held companies), III.1.3 (Taxation of financial charges in SGPSs) and III.1.4 (Non-deductible financial charges, related to the acquisition of equity interests) [cf. PA]:

w) The Claimant was notified, through office no. ... of 19.04.2017, sent by registered mail (CTT registration RD ... PT), of the aforementioned Draft Tax Inspection Report and to, if it so wished, exercise the right to prior hearing, which it did in accordance with the terms contained in Annex 19 to the RIT and which is hereby given as fully reproduced. [cf. RIT contained in the PA]

x) The Claimant was notified, through office no. ... of 23.05.2017, sent by registered mail (CTT registration RD ... PT) with acknowledgment of receipt, of the Tax Inspection Report, which is hereby given as fully reproduced, from which the corrections for corporation income tax purposes, relating to the year 2013, were made as stated in proven fact v), with the following grounds which we reproduce in the most significant parts [cf. RIT contained in the PA]:

"III.1.2 FINANCIAL CHARGES DISREGARDED, RELATED TO NON-REMUNERATIVE LOANS TO HELD COMPANIES

As described in chapter III.1.1 of this Report, A... SGPS finances several companies in which it holds interests, without charging them any costs associated with such financings (in particular, interest).

In the table that follows are identified the non-remunerative financings made to the held companies, in the form of supplementary contributions, in the year 2013, which do not follow the figure of supplementary contributions (since in previous periods there was a return of some values). It should be noted that the balances of these accounts 41113 remained unchanged during this economic year:

In turn, the loans obtained, whether from banks or from some of the held companies, are remunerative, since they generated financing costs. (...)

TAX DEDUCTIBILITY OF FINANCIAL CHARGES BORNE WITH NON-REMUNERATIVE FINANCINGS TO HELD COMPANIES

After examining the accounts, as well as the respective supporting documents, it was concluded that A... SGPS, by granting loans, in the form of supplementary contributions, to the companies identified in the tables above, without charging any interest or charges, incurs financial charges which are not related to its activity, but rather to the activity of the held companies in question.

In fact, as a result of this practice, A... SGPS sees its results reduced, by virtue of assuming financial charges, which should be borne by its held companies and not by A... SGPS.

By the above, under no. 1 of article 23.0 of the CIRC, it is concluded that part of the financial charges borne by A... SGPS are demonstrably dispensable for obtaining the income subject to tax, as well as for maintaining its income-producing source.

It should also be mentioned that, although the corporate purpose of A... SGPS includes the management of equity interests, the fact is that part of the financial charges relating to loans obtained from the held companies, as well as from the Banks, were applied to the economic activity of other companies, where the effects of that application of capital will be verified (the gains resulting from the application of supplementary contributions received without any charge will be recognized in those companies and not in A... SGPS).

Now, from the above it appears that part of the financing costs incurred by A... SGPS constitute a charge dispensable to the maintenance of its income-producing source, since they did not generate any direct, measurable and evident inflow in the exercise of the activity of A... SGPS. (...)

This requires the study of the concept of 'essentiality of costs' referred to in article 23.0 of the CIRC: the fundamental question will be whether the financial charges whose tax deductibility is contested have the potential to positively influence the obtaining of revenues or the maintenance of the income-producing source of A... SGPS, and it has been concluded that part of the financial charges borne by A... SGPS are dispensable for obtaining the income subject to tax, as well as for maintaining its income-producing source: by granting loans (in the form of supplementary contributions) to its held companies without charging any interest or charges, it incurs financial charges which are not related to its activity but rather to the activity of the held companies in question.

Although the corporate purpose of A... SGPS includes the management of equity interests, the fact is that part of the financial charges relating to loans obtained were applied to the economic activity of other companies, in which the gains resulting from the application of supplementary contributions received without any charge will be recognized.

It should also be mentioned that SGPSs are constituted with the objective of intervening in the management and control of their held companies, thus exercising the social rights inherent to their respective equity interests, so as to receive their respective profits or dividends, as well as the income resulting from any alienation of those equity interests.

It is also true that paragraph c) of no. 1 of article 5.0 of Decree-Law no. 495/88, of 30 December, sets out as a general principle the prohibition of SGPSs from granting credit, establishing, however, exceptions to this rule under certain conditions, allowing those entities to grant credit to controlled companies.

Notwithstanding that SGPSs are given the faculty of being able to grant credit to companies in which they hold interests, when they incur financial charges, arising from loans obtained, with the objective of being applied to the economic activity of those companies, under no.0 1 of article 23.0 of the CIRC, those charges do not contribute to the formation of the taxable result, by the simple fact that they did not generate any direct, measurable and evident inflow in the exercise of its activity.

(...)

Without seeking to call into question free initiative and private autonomy or to question the management options taken by the shareholder/administration structure of the companies that make up the A... Group, account must be taken of the correct tax framework that should accompany the economic interest in this type of integrated management of intra-group financial flows.

In other words, it is not this business practice that is at issue but only its correct tax treatment in order to ensure the direct and connected allocation of expenses with the generation of the respective income subject to corporation income tax or maintenance of the income-producing source, rejecting expenses borne to enhance the gains of third parties, although indirectly repercussible in the sphere of the taxpayer, in this particular case, via the held equity interests.

Note that, even within the framework of the RETGS applicable, by option, to groups of companies constituted on the basis of participation relationships and other requirements set out in article 69 of the CIRC, the taxable profit of the group is calculated by the algebraic sum of the taxable profits and fiscal losses determined in accordance with the general rules, for each of the companies that comprise it (cf. article 70.0).

That is, although the CIRC provides for a special taxation regime designed for the multi-company phenomenon (groups of companies which, although maintaining legal individuality, are subject to a common unitary direction), the integrated taxation of the respective result is based on the separate calculation of the result relating to each company individually considered, in accordance with the general rules that apply to any entity.

From which it follows that this economic reality is also recognized at the fiscal level, namely at the corporation income tax level, however, without conceding as regards the individualization of results relating to each entity and the specificities of intra-group relationships with the inherent distortions caused by the frequent overlapping of the interests of the Group or its shareholders in relation to the individual positions of the companies that comprise it, and which presided over the insertion of a set of norms designed to neutralize such effects.

There is, therefore, no group tax regime in the sense of considering the Group as a fiscal unit, nor even a private one for merely controlled companies, applying, as a general rule, common law.

It is important to note that article 23 of the CIRC has perfect correspondence with the base elements or those on which the determination of taxable result under this tax depends, given its consistency with the constitutionally established principles and with the model of partial dependence on the current accounting normative. In the first place, as the Constitution provides, in its article 104, no. 2, that the taxation of companies shall be based fundamentally on real income. Article 4, no. 1 of the General Tax Code, which complements this constitutional imperative, provides that 'taxes are based essentially on taxpaying capacity, revealed, under the terms of the law, through income or its use and through patrimony'

(...)

Within the scope of corporation income tax, article 17, no. 1, establishes as income the taxable profit, regarded as 'the algebraic sum of the net result of the period and of the positive and negative equity variations verified in the same period (...) determined on the basis of accounts and (...) corrected in accordance with this Code' Although it is at the level of expenses that fiscal corrections are most imposed, with article 23 being the concretization of the concept of expenses and the requirements for the deductibility of those, in the situation here in question identical arguments are found in the aforementioned normatives to prevent that a company (A... SGPS) concentrates in its result as a negative item the financial charges arising from the use of borrowed capital by other juridically distinct entities, by the simple fact of being wholly or partially held by this SGPS and having a common administration that so determined.

The accounts as support to the preparation of financial statements present itself as a fundamental pillar from which all information relating to the real economic situation and financial performance of the entity is obtained.

Financial statements are of interest to a significant number of users for the purpose of making decisions, from investors, the State or any other user who relates to or has interests in the entity.

For this reason, their preparation must comply with the applicable accounting standard, in this case the provisions of Decree-Law no. 158/2009, of 13 July, in particular the general regime of the Accounting Standardization System encompassing, in the first place, the Conceptual Framework and the set of NCRF, as disclosed in the IES. Only compliance with these rules and principles allows guiding how accounting records are entered, so as to be considered reliable, trustworthy, rigorous and real. For these reasons, the law establishes the obligation for entities to have organized accounts (cfr. article 123 of the CIRC).

(...)

Also in the accounting context, expenses are recognized in the income statement based on a direct association between the costs incurred and the obtaining of specific income. This process, generally referred to as the matching of expenses with revenues, involves the simultaneous or combined recognition of revenues and expenses that result directly and jointly from the same transactions or other events.

Fiscally, expenses are only accepted if properly documented and essential to the obtaining of income and maintenance of the income-producing source (article 23 of the CIRC), and income (broad concept listed in article 20 as an example) must be recognized on the basis of the realization principle (article 18 of the CIRC). Concrete situations that are objectively verifiable or rationally foreseeable within each individual entity are always at issue and not concepts obviously intrinsic but incapable of representation such as the optimization of the value chain or the need to maximize synergies and economies of scale arising from belonging to a particular economic group or derived from any other factor inherent to the context. It should be noted that accounts must express concrete, documented facts that are capable of being proved, being not permitted to offset income and expenses which must be expressed and reported separately.

These are in fact entities juridically distinct, not being able to be selectively considered as such in some cases, and in others as a whole in a logic of a single enterprise.

(...)

As far as the determination of corporation income tax is concerned, it is absolutely essential that the factors that influence it are directly relevant to the entity in question: being clear that any factor that does not concern it or that concerns the operational activity of companies held by the SGPS in question should be disregarded in the determination of corporation income tax.

Article 23 of the CIRC, seeking to clarify, as regards expenses, the substantive prerequisites of the incidence of corporation income tax, allows disregarding the financial charges borne with financing obtained and not applied in its own operation, without needing to recharacterize the operations carried out with such related entities, in particular as regards price adjustment or others that ensure the deductibility of charges in the strict measure of their use for the benefit of the holders of the borrowed capital.

And in this way the material distortion of the taxable result declared by A... SGPS associated with transactions with related parties is immediately eliminated, without need to resort to official correction norms such as that contained in article 63 of the CIRC — Transfer Pricing.

In reality, what matters to note is that A... SGPS became indebted over several years to Banks and subsidiaries at a higher level than it would need if it were not simultaneously itself financing some of its held companies without remuneration. Thus, it seems pertinent to pose the following question: why did not the held companies themselves finance themselves directly from the Banks, in which case the financial charges arising would naturally be fully deductible for tax purposes, in their individual sphere? Note that the argument of having greater bargaining capacity with the Banks to obtain more favorable financing conditions is valid for both situations — to benefit from this prerogative, A... SGPS would not need to contract the loan itself directly, it would suffice for example to provide its guarantee or to assume itself as a guarantor of the same.

(...)

LEGAL FRAMEWORK

Taking into account the provisions of article 23.0 of the Corporation Income Tax Code, the proposed corrections will follow the following legal framework: article 23.0 no. 1 tells us that 'expenses are those that are demonstrably essential for the realization of income subject to tax or for the maintenance of the income-producing source.'

Within this framework, it is easily inferred that the financings contracted by A... SGPS and used by its held companies at zero cost (in a group cash management logic), generated, in the year 2013, expenses in A... SGPS that did not contribute to the realization of the income of this company.

CALCULATION OF THE VALUE TO BE DISREGARDED AS EXPENSE

In this way, it is proposed that the financial charges accounted for in A... SGPS be corrected in order to reflect, only and solely, the effective cost of the capital used by it. Thus, part of the financial charges borne by it shall be disregarded, which relate only to the non-remunerative financing granted to its held companies.

For this purpose, the proposed methodology is as follows:

1. Calculate the average balance of borrowed financing monthly of the company (from Banks and from held companies) during the year 2013;

2. Determine the financing costs borne monthly in the taxation period in question;

3. Determine the effective monthly cost rate of borrowed capital of A... SGPS;

4. Calculate the average balance of non-remunerative monthly financing to held companies;

5. Apply the effective monthly cost rate of borrowed capital to the value of the average balance of non-remunerative monthly financing made to such companies;

6. Disregard as a tax expense the monthly values thus determined.

(...)

By the above, the amount of €221,108.95 should be added to the Taxable Result declared by the taxpayer for the taxation period of 2013, concerning financial charges not accepted for tax purposes under no. 1 of article 23 of the CIRC.

III.1.3 TAXATION OF FINANCIAL CHARGES IN SGPS

Law no.0 32-B/2002, of 30 December (State Budget for 2003), amended the tax regime applicable to capital gains and losses realized by SGPSs and SCRs established in article 32.0 of the EBF, providing in no.0 2 of this provision that 'the capital gains and losses realized by SGPSs and SCRs by the onerous transmission, by any title, of equity interests they hold, provided they are held for a period not less than one year, and likewise, the financial charges borne with their acquisition, do not contribute to the formation of taxable profit of these companies'

From a perspective of strengthening the competitiveness of these companies, this amendment followed the common trend in most European Union member countries, excluding from taxation capital gains resulting from the alienation of equity interests held for more than one year, and not considering deductible for tax purposes either the losses suffered by virtue of the alienation of equity interests under identical conditions, nor the financial charges borne for the acquisition of assets of the same nature (no.02 of article 32.0 of the EBF),

The disregard as expenses of financial charges for purposes of determining taxable profit, established in no.0 2 of article 32.0 of the EBF, embodies the general principle of the essentiality of expenses, according to which the tax deduction of expenses is conditioned to their connection with the obtaining of income subject to tax. From this principle it follows that 'if certain costs are related to income not subject to tax, they are not fiscally deductible'.

Also, in article 23.0 of the Corporation Income Tax Code, this principle is embodied, establishing that 'expenses are considered those that are demonstrably essential for the realization of income subject to tax or for the maintenance of the income-producing source'. Consequently, the legislator established in article 32.0 of the EBF a solution in which only financial charges related to the acquisition of equity interests that benefit, as regards capital gains or losses, from the special regime established in its no.0 2, are fiscally disregarded as expenses.

This solution makes it possible to establish the correlation between the charges borne and the income or gains with which they are associated, and is, therefore, the one that best accords with the basic rule, in terms of the temporal allocation of expenses, that for the determination of profit there must be deducted from the revenues realized in a period the costs that became necessary to support to obtain them

(...)

In light of the doubts raised about the application of that tax regime applicable to SGPSs and, given the extreme difficulty of using a method of direct or specific allocation and the possibility of manipulation that the same could generate, the AT proposed the use of an allocation method which came to be transmitted through Circular no.0 7/2004, of 30/03, from the Directorate of Services of the Corporation Income Tax, the understanding of the Tax Administration on this matter, as well as the method to be used for purposes of allocating financial charges to equity interests.

This Circular 7/2004 came to define a methodology for proceeding with the adjustment of taxable profit, in the part relating to financial charges borne with the acquisition of equity interests that are likely to come to benefit from the special regime established in no.0 2 of article 32 of the EBF, recommending the use of a 'formula that takes into account the following: the remunerative liabilities of SGPSs and SCRs should be allocated in the first place, to the remunerative loans granted by them to the held companies and to other interest-generating investments, with the remainder being allocated to the remaining assets, namely equity interests, proportionally to their respective acquisition cost'

As regards the method of allocating financial charges associated with each of the equity interests, one could choose a direct allocation of charges with debt inherent to the acquisition of equity interests or else the proportional allocation method stipulated in Circular 7 of 2004, of 30 March.

Now, if the choice of a method of direct or specific allocation appears, apparently as the solution most consistent with the identification of financial charges effectively borne with the acquisition of equity shares, its practical implementation is likely to present insuperable difficulties.

For if direct allocation is accepted, the SGPS would have to have the ability to identify the funds it channeled for the purpose of acquiring the equity interests, in a given past year, when, in that same year, it simultaneously received dividends from its held companies, received payments for services rendered to them, paid its current expenses, sold assets and received the corresponding realization value (to list just some of the possible financial flows).

Therefore, any allocation of debt will thus necessarily be random.

In fact, one of the characteristics of money is precisely that of fungibility. Now, this characteristic makes it extremely difficult to implement any method of direct or specific allocation, in the measure in which it may be very difficult to determine, for example, the specific application of the capital obtained through a given loan.

That Circular 7/2004 of the DSIRC thus comes to clarify the following:

• The period in which financial charges should be disregarded as expenses, for tax purposes, 'should proceed, in the year to which the same refer, to the fiscal correction of those that were borne with the acquisition of equity interests that are likely to come to benefit from the special regime established in no.0 2 of article 31. 0 of the EBF independently of whether all conditions for application of the special taxation regime of capital gains have already been met ...' (point 6).

• As regards the method to be used for purposes of allocating financial charges to equity interests, point 7 provides that 'given the extreme difficulty of using ... a method of direct or specific allocation and the possibility of manipulation that the same would permit, such allocation should be effected on the basis of a formula, that takes into account the following: the remunerative liabilities of SGPSs and SCRs should be allocated, in the first place, to the remunerative loans granted by them to the held companies and to other interest-generating investments, with the remainder being allocated to the remaining assets, namely, equity interests, proportionally to their respective acquisition cost'

The general principle of the essentiality of expenses, provided in article 23.0 of the CIRC, establishes that 'Expenses are considered those that are demonstrably essential for the realization of income subject to tax or for the maintenance of the income-producing source' and then, financial charges that were borne with the acquisition of equity interests do not contribute to the formation of taxable profit, being a matter of the allocation of the charge to the tax regime applicable to the result of the operation for which it was incurred (shares of capital held for a period not less than 1 year).

It is the responsibility of the taxpayer, with reference to each taxation period, to determine the taxable profit, following for this purpose the methodology described by the tax legislator, seeking the taxation of effective actual income, and should the taxpayer effect the increase, seeking to disregard, as the law mandates, the charges borne with the acquisition of equity interests.

III.1.4 NON-DEDUCTIBLE FINANCIAL CHARGES, RELATED TO THE ACQUISITION OF EQUITY INTERESTS

In the taxation period of 2013, A... SGPS incurred financial charges, which were considered as a tax expense in its respective return declaration. As explained in the previous chapter of this Report, the tax regime of SGPSs in force in the year 2013 excludes from taxation the financial charges borne for the acquisition of equity interests (no.0 2 of article 32.0 of the EBF).

It is the responsibility of the taxpayer, with reference to each taxation period, to determine the taxable profit, following for this purpose the methodology described by the tax legislator, seeking the taxation of effective actual income, and should effect the increase, seeking to disregard, as the law mandates, the charges borne with the acquisition of equity interests. Thus, A... SGPS increased, in field 752 (blank field) of box 07 of the return declaration presented for the year 2013, the amount of €842,613.90 concerning financial charges which it considered not fiscally accepted, under no. 2 of article 32.0 of the EBF (...).

(...)

After analyzing the Map of Calculation of Financial Charges Attributable to the Acquisition of Capital Shares prepared by A... SGPS, the following divergences were verified in relation to the values considered by the taxpayer:

• the taxpayer considered as Remunerative Liabilities the credit balances of account 241 — State and Other Public Entities — Corporation Income Tax, which is incorrect, since Remunerative Liabilities are only the bank financings recorded in account 25112 and the loans obtained from the held companies, recorded in account 2541, as explained in chapter 111.1.1.2 of this Report;

• the taxpayer considered as Remunerative Assets the assets recorded in account 14212 — Other Financial Instruments — Bonds and Equity Securities; however, as was demonstrated in chapter III.1.1.1 of this Report, Remunerative Assets are only the loans granted to held companies accounted for in accounts 4113 and 4142;

• the taxpayer considered as Capital Shares the acquisition value of the financial instruments shown in account 14, when, in reality, this item should only integrate the acquisition value of Capital Shares recorded by the MEP (those assets are shown at fair value) in account 41111, and also investments in other companies recorded in account 4141;

• it should be noted that, in calculating the acquisition value of Capital Shares, we included the amount of supplementary contributions established with the held companies E..., SA and F..., SA — totalling €2,500,000.00 — due to having determined that these assumed a nature of 'quasi-capital', as described in chapter III.1.1.1 of this Report;

• in turn, the amount of supplementary contributions considered in the Other Assets item was deducted from that value, having been considered, in our calculation, only those that constitute non-remunerative assets, totalling €4,400,000.00.

As regards the Financial Charges considered for purposes of calculating financial charges related to equity interests, under Circular 7/2004, it is important to stress that only the Corrected Financial Charges were taken into account as described in chapter III.1.2 of this Report, that is, the Financial Charges declared by A... SGPS less those that were determined should be disregarded for tax purposes as they are found to be associated with loans granted to its held companies without any remuneration, totalling €1,688,387.25 (...)

(...)

We then have that, of the €1,688,387.25 of Corrected Financial Charges, €887,166.50 are not fiscally deductible in virtue of being considered related to equity interests. Since A... SGPS had already increased in box 07 of the Model 22 declaration relating to 2013 the amount of €842,613.90, this was deducted from our calculation, as follows:

Thus, the amount of €44,552.60 should be added to the Taxable Result for the year 2013, under no. 2 of article 32.0 of the EBF, concerning financial charges not fiscally deductible.

It is concluded, therefore, that the total of Non-deductible Financial Charges for tax purposes in the year 2013 will be €1,108,275.45, by virtue of the provisions of no. 1 of article 23.0 of the CIRC and no. 2 of article 32.0 of the EBF.

In summary, of the Financial Charges declared by the taxpayer in the year 2013 - €1,909,496.20 those fiscally accepted are considered to be €801,220.75, as follows:

The disregard as costs of financial charges for purposes of determining taxable profit established in no.0 2 of article 32.0 of the EBF embodies a corollary of the general principle of the essentiality of expenses according to which the tax deduction of those is conditioned to their connection with the obtaining of income subject to tax and from which it results that if certain expenses are related to income not subject to tax, they are not fiscally deductible, principle that informs the provisions of article 23.0 of the Corporation Income Tax Code.

As such, the legislator established in article 32.O of the EBF a solution under the terms of which only financial charges related to the acquisition of equity shares that benefit, as regards capital gains or losses, from the tax benefit provided in no.0 2 of article 32.O of the EBF, are fiscally disregarded as expenses.

(...)

The use of the allocation method of Circular 7/2004 is designed precisely, in accordance with the provisions of article 32, no. 2 of the EBF, to achieve taxation as close as possible to the real profit, of financial charges attributable to the equity shares it holds.

(...)

Recall that it is the responsibility of the taxpayer, with reference to each taxation period, to determine the taxable profit, following for this purpose the methodology described by the tax legislator, seeking the taxation of effective actual income, and should effect the increase, seeking to disregard, as the law mandates, the charges borne with the acquisition of equity interests - now, A... SGPS disregarded, in the year 2013, financial charges borne with the acquisition of equity interests in the amount of €842,613.90, in compliance with the provisions of no.0 2 of article 32.0 of the EBF.

The taxpayer presented us with the Map of Calculation of Financial Charges Attributable to the Acquisition of Capital Shares prepared by itself (...) which served as the basis for the calculation of that amount increased in box 07 of its Model 22 return declaration, as non-deductible financial charges under no. 2 of article 32.0 of the EBF.

It now alleges A... SGPS (...) that such increase would have been improper, by virtue of the acquisition of the equity interests held in 2013 having been made without recourse to any financing, arguing that it has attached proof of their acquisition by displaying the certificates of constitution and reports of contributions in kind for the realization of capital (...).

Now, such argument cannot prevail, since, in addition to the equity shares acquired in the year 2000 through contributions in kind (which are summarized in the table below):

A... SGPS subsequently acquired (until 2012) the equity interests listed below, for which it did not justify the sources of financing used:

As for the possibility of applying the direct method of allocating charges with debt inherent to the acquisition of equity interests, it appears that its practical implementation presents insuperable difficulties that A... SGPS itself acknowledges being unable to overcome: A... SGPS would have to have the ability to identify the funds it channeled for the acquisition of equity interests in a given past year, when, in that same year, it simultaneously received dividends from its held companies, received payments for services rendered to them, paid its current expenses, sold assets and received the corresponding realization value (to list just some of the possible financial flows).

That is what the taxpayer did not do, making it therefore not possible to resort to such method, nor to the exclusion of the application of Circular 7/2004; it should be mentioned that there is no illegality in the application of article 32, no. 2 of the EBF in the formula contained in the Circular, given that any method is good, provided the ratio legis of the norm is respected.

Otherwise, there would be a risk of accepting financial charges at the same time that capital gains resulting from the alienation of equity interests were exempted, which would violate the principle of fiscal neutrality and would lead, that itself, to a solution contra legem.

(...)

Moreover, A... SGPS itself made use of Circular 7/2004 to determine the financial charges related to equity shares held for more than one year, having for that purpose proceeded in determining taxable profit, to the increase of €842,613.90 in box 07, line 779, of the Model 22 return declaration.

(...)

Despite not confusing the concepts — share capital and supplementary contributions (supplementary contributions assimilated to supplementary contributions), what is at issue is the substance with which those realities are clothed — share capital and supplementary contributions.

Given that supplementary contributions throughout their permanence in the company fulfill a function of strengthening permanent capital (i.e., the company's share capital), and their reimbursement complies with certain typical conditions, it is in fact legitimate to conclude that, in substance, they are equity shares.

The same treatment must be conferred on supplementary contributions and equity shares, within the scope of the various tax norms, in as much as the former are shown to be indissociable from the latter. Therefore, in the value of 'equity shares' (to which no.0 2 of article 32.0 of the EBF alludes), supplementary contributions are included, or, put differently, the patrimonial content rights arising from supplementary contributions are, without it being necessary to provide for the transfer of such rights, equally transmitted with the alienation of the equity interests since these derive from the very holding of those equity interests

(...)

However, in the case of A... SGPS, it appears that the supplementary contributions made by it do not follow the regime of supplementary contributions at all, in as much as there is a return of the same by the held companies to which those supplementary contributions were made, the requirement of permanence not being met. And, in this sense, the amount corresponding to the supplementary contributions should be removed from the amount of the acquisition value of the equity shares for purposes of calculating financial charges related to the acquisition of equity shares and as such, consider them as 'Other Assets'

(...)"

y) Sequentially, the Claimant was notified of the supplementary corporation income tax assessment no. 2017..., relating to the year 2013, the respective accrued interest assessment no. 2017 ... and the corresponding Statement of Account Reconciliation no. 2017..., from which resulted a total amount due of €74,225.10, with payment deadline of 29.09.2017. [cf. document no. 1 attached to the request for arbitral pronouncement]

z) On 17 January 2018, the Claimant filed an administrative appeal against the tax acts mentioned in the previous proven fact – whose initial request is hereby given as fully reproduced –, which was registered under no. ...2018..., in the Financial Service of Espinho, having thereupon fallen an opinion on the dismissal decision, which is hereby given as fully reproduced, with the grounds set out therein, in particular those contained in the respective chapter 2.3 (Opinion). [cf. administrative appeal proceeding contained in the PA]

aa) The Claimant was notified, through office dated 11.04.2018, sent via CTT, from the Tax Justice Division of the Financial Directorate of..., of that opinion on dismissal and to, if it so wished, exercise the right of hearing, which the Claimant did not do. [cf. administrative appeal proceeding contained in the PA]

bb) The Claimant was notified, through office dated 23.05.2018, sent via CTT, from the Tax Justice Division of the Financial Directorate of..., of the decision dismissing the administrative appeal, which is hereby given as fully reproduced, which referred to the grounds of the opinion, whose substance is given as reproduced and in which it states, among other things, the following [cf. administrative appeal proceeding contained in the PA and document no. 2 attached to the request for arbitral pronouncement]:

"2.3. OPINION

(...)

Matter of Law

1. Taxation of Financial Charges in the SGPS

The disregard as expenses of financial charges for purposes of determining taxable profit, established in no. 2 of article 32 of the EBF as amended by Law no. 32-8/2002, of 30 December (State Budget/2013), embodies the general principle of the essentiality of expenses according to which the tax deduction of expenses is conditioned to their connection with the obtaining of income subject to tax. The said article (no. 2 of article 32 EBF) provides that financial charges borne in each year relating to the acquisition of equity shares do not contribute to the formation of taxable profit.

The appellant argues that the prerequisite for the application of no. 2 of article 32 of the EBF is that the equity shares held by the SGPS were acquired using borrowed capital, which was not the case sub judice, so there is no place for the application of the provisions of the said article.

In