Summary
Full Decision
ARBITRAL DECISION
The arbitrators Prof. Doctor Rui Duarte Morais (presiding arbitrator), Prof. Doctor Tomás Cantista Tavares and Prof. Doctor Sérgio Pontes (panel arbitrators), designated respectively by agreement of the parties, by the Claimant and by the Respondent to form the Arbitral Tribunal, hereby agree as follows:
1. Report
A..., SGPS, SA, NIPC..., with registered office at Rua ..., ..., ..., ...-... in Lisbon (hereinafter A... or Claimant), filed a request for constitution of a collective arbitral tribunal, in accordance with the combined provisions of Articles 2, paragraph 1, subparagraph a), and 6, paragraph 2, subparagraph b) of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter RJAT), in which the Tax and Customs Authority (hereinafter TA) is Respondent, with a view to obtaining a declaration of illegality of the assessment relating to the year 2011, of Corporate Income Tax (2015...) in the amount of €68,720.06, assessment of compensatory interest (2015...), in the amount of €2,031.71 and, likewise, demonstration of account settlement 2015... (with compensation 2015...), from which resulted a total amount payable of €68,809.50.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and followed its normal procedure, namely with notification to the TA. All arbitrators communicated their acceptance within the applicable time limit. The parties did not express any intention to refuse the designation of the arbitrators.
The collective arbitral tribunal was constituted on 31/8/2017.
The TA responded, arguing that the request should be dismissed as unfounded.
By Order, with the agreement of the parties, it was decided not to hold the meeting referred to in Article 18 of RJAT. Written submissions were filed. By Order of 26/2/2018, the deadline for rendering the decision was extended by a further 2 months, in accordance with Article 21, paragraph 2, of RJAT.
The arbitral tribunal was regularly constituted and is materially competent, as provided in Article 2, paragraph 1, subparagraph a) and Article 4, both of RJAT.
The parties have legal personality and capacity, are legitimate and are represented (Articles 4 and 10, paragraph 2, of the same statute and Articles 1 to 3 of Ordinance No. 112-A/2011, of 22 March).
The proceedings are not affected by any nullities, the parties are legitimate, are duly represented and there is no obstacle to consideration of the merits of the case.
2. Factual Matters
2.1. Proven Facts
The following facts relevant to the decision are considered proven:
a) The Claimant is a company holding management company that has been engaged, since 2004, in the management of equity interests as an indirect form of conducting economic activities (see Article 1 of Decree-Law No. 495/88, of 30/12).
b) In the conduct of its business, the Claimant acquired, in successive transactions over time, a set of shares in Bank B..., SA (B...), which were disposed of in 2011.
c) On 31/12/2009, the Claimant held 1,516,483 shares of B..., whose total acquisition value was €9,746,679.97.
d) On 1/1/2010, the Accounting Standardization System, approved by Decree-Law No. 158/2009, entered into force.
e) The Claimant exercised the option (with effect from 1/1/2010) contained in Article 4 of Decree-Law No. 158/2009, to begin preparing its accounts in accordance with International Accounting Standards (IAS/IFRS and their interpretations approved by the European Union), instead of doing so in accordance with the national accounting standard (from the Accounting Standardization System).
f) The Claimant, in the transition from the POC to the international accounting system, recorded, in relation to the shares of B... held on 31/12/2009, a variation in fair value (difference between the acquisition value and the share price at the date of the change in accounting regime) of €7,768,698.68, accounted for in an equity capital results account.
g) On 1/10/2010, the Claimant acquired a further 19,442 shares of B..., by conversion of rights acquired over B... shares held by A... for more than 1 year.
h) Thus, on 31/12/2010, the Claimant held 1,535,974 shares of B..., whose acquisition value totaled €9,927,570.92 and the market value (fair value) amounted to €12,177,201.97.
i) In 2010, the Claimant contracted a derivative hedging instrument, as a means of mitigating market fluctuations in the B... security.
j) In 2011, the Claimant disposed of 1,535,876 shares of B..., whose acquisition value totaled €9,926,710.30, for the amount of €13,210,069.49.
l) This sale generated a substantial accounting gain (of €9,016,187.89), which the Claimant did not subject to taxation in its self-assessment for 2011, understanding that it benefited from the exemption described in Article 32, paragraph 2, of the EBF (as drafted and in force in 2011).
m) The TA conducted a tax audit for the year 2011 in which it concluded that the increase in taxable profit for 2011, as a result of the sale of B... shares (in the total amount of €2,801,228.95) should be subject to tax, because the effects of the application of fair value as a result of income were not taken into account, with the following breakdown: €1,247,489.21, corresponding to the sum of €1,033,289.07 and €214,200.14, values of the gains determined with the disposal of B... shares; €1,553,739.74, corresponding to 1/5 of the amount of the transition adjustment from POC to SNC (resulting from measurement of B... shares at fair value).
n) These corrections gave rise to the assessment now being challenged (with absorption of accumulated losses and amount payable).
o) On 28 March 2016, the Claimant filed a request for reconsideration of this assessment, which was expressly rejected in March 2017.
p) Dissatisfied with this rejection, the Claimant then filed the present arbitral action.
q) On 12 November 2015, the Claimant made payment of the challenged assessment, for protective reasons.
2.2. Unproven Facts
The exact date (or dates) of the sale of the securities in 2011 was not proven.
There are no other facts with relevance to the consideration of the merits of the case that have not been proven.
2.3. Justification for the Determination of Factual Matters
The proven facts are based on the documents submitted by the parties (which are essentially documents issued by the Tax Authority and by the Claimant), on the agreement of the parties (also regarding the documents, transaction values, their dates and other operations) and on official information attached to the file.
3. Legal Matters
3.1. Question for Decision
As is accepted by the parties, the question raised in the present proceedings concerns only the tax treatment applicable to gains resulting from fair value variations/transfers associated with equity interests in Bank B...:
According to the TA (Respondent), such gains would be subject to tax in 2011, by application of Article 18, paragraph 9, subparagraph a), of the CIRC, given that there would be shares designated by the company as held for sale (as a result of the derivative contract).
According to the Claimant, such gains have the tax nature of capital gains and fall within Article 46 of CIRC – and are exempt from taxation in accordance with Article 32, paragraph 2, of the EBF – because the equity interests in B... were held for more than 12 months – and the tax treatment of fair value does not apply to them.
It should be noted, in accordance with Article 5 of the Code of Civil Procedure (CPC), that the arbitral tribunal is bound by the facts alleged by the parties, as described therein and in accordance with the specific rules of tax proceedings, but as to law, the tribunal "is not bound by the parties' allegations regarding the investigation, interpretation and application of rules of law" (Article 5, paragraph 3, of CPC).
3.2. The Applicable Laws
Article 18, paragraph 9, of CIRC prescribed:
"9. Adjustments resulting from the application of fair value shall not constitute part of taxable profit, being imputed as income or expenses in the tax period in which the elements or rights that gave rise to them are disposed of, exercised, extinguished or liquidated, except when:
a) They relate to financial instruments recognized at fair value through profit or loss, provided that, in the case of equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a participation in capital exceeding 5% of the respective share capital or
b) It is expressly provided for in this Code.
On the other hand, according to Article 49 of CIRC (under the heading derivative financial instruments): "1. Income or expenses resulting from the application of fair value to derivative financial instruments [...] shall constitute part of taxable profit", which includes, according to paragraph 2, "transactions whose sole purpose is the hedging of fair value, when the hedged element is subject to other valuation models [...] according to a criterion of symmetry between the hedged instrument and the hedging instrument.
Article 46 of CIRC established that the concept of capital gains applied to gains obtained and realized with the onerous transfer, in whatever form, of assets or financial instruments (except those recognized at fair value in accordance with Article 18, paragraph 9, subparagraphs a) and b) of CIRC).
Finally, Article 32, paragraph 2, of the EBF prescribed in 2011: "capital gains and losses realized by SGPS [...] of equity interests of which they are holders, provided they are held for a period of not less than one year [...] shall not constitute part of the taxable profit of these companies."
3.3. The Arguments of the Parties
The justification for the assessments (and the Respondent's response and other statements by the TA during the proceedings, namely in the decision on the request for reconsideration) invokes, in summary:
a) A... despite having opted for International Accounting Standards, would have to treat and tax the B... shares according to the fair value through profit or loss model, from the moment it entered into a derivative contract hedging the price of B... shares in 2010.
b) Article 32, paragraph 2, of the EBF does not apply to the transfer of shares held by an SGPS – which are qualified and taxed by the fair value mechanism.
The Claimant argues, conversely, that:
a) The option it made to apply the rules of IAS/IFRS instead of the national Accounting Standardization System (see Article 4 of Decree-Law No. 158/2009) implies that fair value variations are recognized in equity (and not in profit or loss), both before and after the conclusion of the derivative instrument, by the interpretation it makes of the provisions of IAS 39.
b) And if fair value is recognized in equity – then Article 18, paragraph 9, of CIRC does not apply and the taxpayer has the right and access to the exemption from capital gains in Article 32 of the EBF.
3.4. Decision
The question for decision may be formulated as follows: does Article 32 of the EBF apply or not to equity interests to which the fair value regime of Article 18, paragraph 9, of CIRC applies (whether by the effects of its subparagraph a) or b)).
It is true that the Claimant constructed its argumentation essentially "upstream", arguing that the fair value accounting and tax regime of Article 18, paragraph 9, of CIRC and Article 32 of the EBF did not apply to its equity interests in Bank B..., in a particular interpretation and application of these provisions.
However, the tribunal, as to law, is not bound by the allegation of the parties – and may decide the dispute by another "route", based on the facts alleged by the parties and proven in the proceedings and taking into account the proper interpretation of the legal provisions invoked by the parties.
The question for decision has already been decided by another arbitral tribunal in cases 351/2016-T and 353/2016-T. Having analyzed that reasoning – and after its application to the case at hand (in the sense that it applies both in cases of subparagraph a) and in cases of subparagraph b) of paragraph 9 of Article 18 of CIRC), this arbitral tribunal decides in favor of annulment of the challenged assessment, based on that reasoning, to which it adheres and to which it now reproduces, with due deference, the operative part (in case 353/2016-T).
(Beginning of citation from case 353/2016-T)
III.2.1. Application of Article 32, Paragraph 2, of the EBF
In 2011, Article 32, paragraph 2, of the EBF provided as follows: capital gains and losses realized by SGPS, by SCR and by ICR from equity interests of which they are holders, provided they are held for a period of not less than one year, and likewise the financial charges borne in connection with their acquisition shall not constitute part of the taxable profit of these companies.
This legal solution, abandoned with effect from the year 2014, was long-standing.
As is well known, the CIRC, in its original version, established, without exception, the principle of realization, that is, as far as here relevant, income (capital gains) resulting from the transfer of an asset were only tax-relevant at the moment of its transfer.
With respect to capital gains (and also losses), the assertion of the principle of realization was made in a manner that we could consider not only express but also repetitive.
This situation remained essentially unchanged until the entry into force of Decree-Law No. 159/2009, of 13/07, which "adapted the rules for determining taxable profit to International Accounting Standards as adopted by the European Union, as well as to national accounting standards intended to adapt accounting to those standards."
One of these adaptations was paragraph 9 of Article 18 of CIRC, which, as far as here relevant, provides: Adjustments resulting from the application of fair value shall not constitute part of taxable profit, being imputed as income or expenses in the tax period in which the elements or rights that gave rise to them are disposed of, exercised, extinguished or liquidated, except when:
a) They relate to financial instruments recognized at fair value through profit or loss, provided that, in the case of equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a participation in capital exceeding 5% of the respective share capital;
We have, therefore, that, considering only its literal element, Article 32, paragraph 2, of the EBF only exempts realized capital gains obtained by SGPS, whereas Article 18 establishes the tax relevance of potential capital gains (gains accounted for at fair value through profit or loss) for certain situations, namely that provided for in its subparagraph a), to which the Claimant's factual situation is applicable.
The TA bases the assessment on an interpretation in a strictly literal manner of these provisions.
The Claimant advocates for a modernizing interpretation of Article 32, paragraph 2, of the EBF, which would lead to the exemption from taxation of capital gains that may be included in the aforementioned Article 18, paragraph 9, subparagraph a) of CIRC.
Considering:
It is beyond doubt that Article 32, paragraph 2, of the EBF establishes an exemption - a tax benefit - that is, a measure of exceptional character instituted to protect relevant extra-fiscal public interests that are superior to the taxation they prevent (see Article 2, paragraph 1, of the EBF).
That is, the legislator considered that the public interest linked to the development of SGPS justified the non-taxation of capital gains obtained by these companies with the disposal of equity interests, provided that certain requirements were met. Requirements that are met in the concrete case.
The question that we consider should be asked is simple: is the superior public interest that led to the exemption of these capital gains different depending on whether we are dealing with realized capital gains or capital gains accounted for at fair value through profit or loss?
It appears to us to be clear that the relevant criterion will always be the nature of the gain and not the moment of its taxation.
Thus, when the taxpayer opts for accounting according to the principle of realization or according to the principle of fair value, the nature of the income does not change (it always concerns a capital gain), nor does its amount.
In reality, from the perspective of the continuity of business activity, the capital gain that is taxed always corresponds to the realized capital gain, because, in the fiscal year in which the disposal of the equity interest occurs, a gain or loss will be recorded depending on whether the disposal value is less than or greater than the value at which such equity interest was accounted for in light of fair value criteria. The "reference point" for taxation is therefore always the "disposal value."
In these terms, the choice of one or the other accounting criterion only changes the moment in which taxation occurs, which, in the fair value system, instead of occurring only at the time of disposal of the equity interests in question (as occurs in the realization system), occurs over the various fiscal years during which the holding of the equity interests extends, through the consideration of potential increases or decreases (assessed according to fair value - market value) in the value of such equity interests at the end of each fiscal year.
Furthermore, the exemption is an essential element of a tax: it is the result of a choice (which falls to the legislator) valuing the fiscal and extra-fiscal interests contemplated in a given situation, therefore its existence and applicability cannot be the result of an accounting choice. In these terms, it appears to us unsustainable the understanding according to which an exemption "ceases to exist" when one opts for a particular accounting technique (accounting at fair value), and, moreover, this would mean placing the realization of the extra-fiscal interests underlying the exemption in the "hands" of each taxpayer.
It is, on the other hand, clear to the tribunal that there is a manifest and inexplicable disharmony between the provisions of Article 32, paragraph 2 of the EBF and that provided for in Article 18, paragraph 9, subparagraph a) of CIRC, and that the coherence and rationality of the system of taxation of SGPS seem to require that all capital gains obtained by them with the disposal of equity interests be exempt (provided that the other legal requirements are met), since it was the extra-fiscal interest that the legislator wished to give primacy in providing for the exemption contained in the first of the aforementioned rules.
Having reached this point, we must ascertain whether the Claimant is correct in defending the need for a modernizing interpretation of the content of Article 32, paragraph 2, of the EBF, considering what is now provided for in Article 18, paragraph 9, subparagraph a) of CIRC, mediated by the principle of interpretation in accordance with the Constitution.
Let us see.
According to paragraph 1 of Article 9 of the Civil Code, "Interpretation should not be confined to the letter of the law, but should reconstruct from the texts the legislative intention, paying particular attention to the unity of the legal system, the circumstances in which the law was drafted and the specific conditions of the time in which it is applied."
To grasp the meaning of the law, the interpreter resorts, as stated by FRANCESCO FERRARA (Interpretation and Application of laws, translation by Manuel de Andrade, 3rd ed., Coimbra, 1978, pp. 127 et seq. and 138 et seq.), to various means: "First it seeks to reconstruct the legislative intention through the words of the law, in their linguistic and stylistic connection, seeks the literal meaning. But this is the lowest degree, the initial form of interpretive activity. The words may be vague, equivocal or deficient and offer no guarantee of faithfully and completely mirroring the intention: the literal meaning is only the possible content of the law: in order to be able to say that it corresponds to the mens legis, it must be subjected to criticism and control."
And it continues: "Now, in this task of interconnection and appraisal that accompanies the apprehension of literal meaning, logical elements intervene, and the doctrine points to systematic, historical and rational or teleological elements."
It further clarifies the meaning of each of these elements:
"The systematic element comprises the consideration of other provisions that form the complex of norms of the institute in which the interpreted norm is integrated, that is, which regulate the same subject matter (context of the law), as well as the consideration of legal provisions that regulate parallel normative problems or related institutes (parallel places). It also comprises the systematic place that belongs to the interpreted norm in the overall legal order, as well as its harmony with the spirit or intrinsic unity of the entire legal order"; "The historical element comprises all matters related to the history of the substantive provision or the same or identical question, the sources of the law and the preparatory work"; "In turn, the rational or teleological element consists of the reason for being of the norm (ratio legis), the end sought by the legislator in enacting the norm, the solutions it has in mind and which it intends to achieve."
With regard to this criterion, the same Author emphasizes that "It is necessary that the norm be understood in the sense that best responds to the achievement of the result it wishes to obtain. For the law stands in relation to the ratio iuris as the means to the end: he who wishes the end also wishes the means. To determine this practical purpose of the norm, it is necessary to consider the relations of life for whose regulation the norm was created. We must start from the concept that the law wishes to satisfy the economic requirements that flow from relations (nature of things). And therefore there first occurs a careful and thorough study, not only of the technical mechanism of relations, but also of the requirements that derive from those situations, proceeding to an appraisal of the interests at stake" (Idem, p. 141).
We adopt an objectivist orientation in the interpretation of legal norms, for "it favors more the correctness and fairness of law, since it makes it possible to extract from the texts the most reasonable meaning they bear and at the same time (in the modernizing aspect) gives the law greater flexibility, for, in addition to facilitating its direct application to situations the legislator did not foresee, it takes advantage of the potential contained in the text of constant adaptation to the criteria of justice and appropriateness of each era in which the law is applied" (BAPTISTA MACHADO, Introduction to Law and to Legitimizing Discourse, 1982, reprint, 2016, p. 179 et seq).
In the sense of "objective modernism," JOSÉ DE OLIVEIRA ASCENSÃO (Law - Introduction and General Theory, 10th ed., Revised, Almedina, Coimbra, 1997, p. 397) considers: "Given the orientation we defend, modernism appears to us to be necessary. If we assert the primacy of the social order, if we indicate that law only makes sense when integrated into that order, we make a modernist assertion." Interpretation which, according to the Author, finds in the text of Article 9, paragraph 1, of the Portuguese Civil Code its consecration.
Indeed, he states that "Among the elements to which attention must be paid in interpreting the law are the specific conditions of the time in which it is applied. This reference is entirely incomprehensible outside of a modernist understanding. A modernist can explain that among the auxiliary elements of interpretation are historical elements (…). But for a historicist it is entirely aberrant that the meaning of a source could vary as a result of subsequent circumstances: it would be immutably fixed from the beginning."
"The justification we give is permanent, and not valid only at the moment the law was formed. The law, once created, is situated in a social order, which is necessarily alive, open to all the stimuli that the historical changes it undergoes produce in it. The formula in which the law is embodied is fixed: but the meaning of that formula can vary, depending on the incidences of circumstantialism from which its significance springs."
Also FRANCESCO FERRARA (op. cit., p. 137) considers: "Given the objective character of the meaning of the law, it follows that it may have a value different from what was thought by its authors, that it may produce unforeseeable or, at least, unexpected consequences and results at the moment it was made, and finally that with the passage of time the principle gains a broader horizon of application, extending to relations different from those originally contemplated, but which, being of equal structure, fall within its domain (phenomenon of projection)."
In the case law, relevance is placed, notably for the matter at hand, on the Decision of the Supreme Court of Justice, of 4 October 2007, in case No. 07B1710, as it is a decision that, breaking with a strictly literal interpretation of Article 505 of the Civil Code (which established as an exonerating circumstance of liability the exclusive fault of the injured party, defended by traditional doctrine), gave prevalence to a "progressive or modernist interpretation" of the aforementioned provision, so as to embrace the rule of concurrent liability of the injured party with the inherent risk of the vehicle.
In the summary of that decision it can be read, inter alia, that:
"2. In accordance with traditional case law and doctrine, inspired by the teaching of Antunes Varela, in the matter of motor vehicle accidents, the occurrence of any of the circumstances referred to in Article 505 of the CC- especially the accident being attributable to a culpable or non-culpable act of the injured party - excludes the objective liability of the vehicle owner, concurrent liability of the danger inherent in the vehicle with the act of the victim not being admitted, so as to lead to an apportionment of liability: liability for risk is precluded by the act of the injured party.
-
This doctrinal and case law current, bringing together in the exonerating dimension of Article 505 and treating in the same manner highly disparate situations - which encompass mechanical behaviors of the injured parties dictated by fear or instinctive reaction, acts of children and those without capacity, behaviors of haste or momentary distraction, etc. - and standardizing the absences of conduct, non-culpable conduct, slightly culpable and highly culpable conduct of the injured parties, often leads to shocking results.
-
(…)
-
The text of Article 505 of the CC should be interpreted in the sense that it embraces the rule of concurrent liability of the injured party with the inherent risk of the vehicle, that is, that the objective liability of the vehicle owner is only excluded when the accident is due solely to the injured party itself or a third party, or when it results exclusively from an act of force majeure unrelated to the functioning of the vehicle.
6.(…)
- This result is produced by a progressive or modernist interpretation of Article 505, which takes into account the unity of the legal system and the conditions of the time in which such norm is applied, in which liability for risk is viewed in a new light, illuminated by new conceptions of solidarity and justice."
Applying the interpretive vision set out to the case under analysis, it is important to consider that the balance found by the legislator in the taxation of SGPS, under Article 32, paragraph 2 EBF, translated into not giving tax relevance to capital gains and losses, not taxing, in exchange, the financial charges. The teleological rationality underlying this regime was based on the principle of realization, in accordance and harmony with the principles of contributory capacity, equality and justice.
It should be noted, however, that, meanwhile, with the evolution of accounting technique the theory of fair value was instituted, beginning to give relevance also to latent gains, as results from the provision of Article 18, paragraph 9, subparagraph c) of CIRC.
A paradigm shift thus occurred that requires that these changes be given consideration within the scope of the interpretation to be conducted taking into account the unity of the legal-fiscal system and the direction in which it has evolved.
In these terms, the interpreter must, in the concrete case, find a solution so as to apply the same benefit both to realized gains and to latent gains, under penalty of identical realities being taxed differently.
In fact, the strictly literal interpretation of paragraph 2 of Article 32 of the EFB, sustained by the TA, would result in an unjustified differentiated treatment of companies that find themselves in materially identical situations, by demonstrating equal contributory capacity. Contributory capacity that is not altered by the different moment in which taxation of it is to occur. It would be a frontal violation of the principle of equality, whose greatest dimension is precisely that of "taxation according to contributory capacity" (in this sense, CASALTA NABAIS, Tax Law, 2016, p. 151 et seq), to treat equally realities differently simply because the moment in which they are to be taxed is different.
In fact, as we have already pointed out, the contributory capacity (the taxable income) resulting from the obtaining of a capital gain is the same, whether its accounting is done according to the principle of realization or at fair value. What is different – as we have also already noted - is only the periodization, for tax purposes, of such income (the fiscal years in which gains or losses are to be tax-relevant).
We have, on one hand, a strictly literal interpretation and one centered on the historical element that restricts the application of Article 32, paragraph 2 of the EBF to realized capital gains, leading to a result of manifest systemic incoherence and to the violation of constitutional principles of taxation of actual income and equality.
However, an interpretation that considers, beyond the literal (current) meaning of the provision, also the systematic and teleological elements and the requirements of the constitutional principles mentioned, permits the application of Article 32, paragraph 2 of the EBF to latent (potential) capital gains and losses.
It thus proves indispensable to broaden the field of application of the norm as defined by the text, based also on its immanent teleology, to cases not formally covered by that text, which "implies the abandonment of a purely hermeneutical (hermeneutic-exegetical) sense and the assumption of a truly normative (practical-normative) sense in legal interpretation, so as to avoid antinomies or incongruities in the system, with the consequent legal insecurity." (CASTANHEIRA NEVES, Legal Methodology, Studia Iuridica, Bulletin of the Faculty of Law of Coimbra, Coimbra Editora p. 108).
The routes of modernist interpretation and teleological extension, which are invoked here, make it possible, as follows from the foregoing, to ensure that identical realities are treated equally, thus harmonizing the legal solutions.
This is indeed the methodological criterion that appears to be appropriate in the context at hand.
In these terms, having the system evolved in the direction of giving tax relevance also to potential or latent capital gains and losses, the interpretation of Article 32, paragraph 2 of the EBF, in accordance with the parameters set out, leads to the conclusion that in the corresponding regime should be reflected this evolution, considering such types of capital gains and losses also included in the provision at issue.
If, as stated by KARL ENGISH, "the boundary line between interpretation (especially extensive interpretation) on the one hand, and analogy on the other, is fluid" (op. cit., p. 239), the case at hand falls still within the scope of interpretation, being covered by the "capacity for logical and teleological expansion of the law" (op. cit., p. 243).
Indeed, gaps only appear "when neither the law nor the customary law give an immediate answer to a legal question," and "the law provides an answer when this is drawn from it by interpretation, even when it is an extensive interpretation." Insofar as interpretation suffices to respond to legal questions, the Law will therefore not be lacunose. On the contrary, "analogy" already has an integrating function" (KARL ENGISCH, Introduction to Legal Thought, Translation and preface by J. BAPTISTA MACHADO, 5th ed., Calouste Gulbenkian Foundation, Lisbon, p. 226).
It is therefore incumbent, in the present case, to consider the innovative elements, of an accounting nature that have meanwhile been absorbed by the legal-fiscal system, not yielding to the temptation of immobilism and crystallization of the literal meaning of the provisions.
As stated by JOÃO DE CASTRO MENDES (Introduction to the Study of Law, Lisbon, 1994, p. 221) historical interpretation contrasts with modernist interpretation. "The former has as its purpose to reconstruct the meaning the law had at the moment of its drafting and entry into force; the latter, to determine the meaning the law has at the moment of its interpretation. By alteration of circumstances and even of the meanings of words, the two meanings can be different." The importance of modernist interpretation lies therefore essentially in the fact that the law assumes "value as a social instrument, not as a piece of tradition."
The interpretation that admits the application of Article 32, paragraph 2, to latent (potential) capital gains or losses is, on the other hand, the one that presents itself as more conformable to the constitutional principles of taxation of actual income (provided for in Article 104, paragraph 2, of the Constitution) and of equality.
Now, one of the general principles of the interpretation of legal norms and "criterion of interpretation" is that of interpretation in accordance with the Constitution (see KARL LARENZ, Methodology of the Science of Law, 3rd ed., Calouste Gulbenkian Foundation, Lisbon, p. 480). According to this criterion, if the interpreter, through the application of the interpretive elements, arrives at more than one possible meaning to be attributed to a normative provision, he should prefer the one that best accords with the Constitution.
In the concrete case, such hermeneutic rule, mediated by a modernist interpretation, points decisively to the interpretation of paragraph 2 of Article 32 of the EBF that we have endorsed.
Thus, from a current perspective, in light of the evolution of technical accounting concepts, only an interpretation based on a teleological-objective criterion and in accordance with the Constitution avoids an irremediable contradiction of valuation, which finds no reasonable foundation and is contrary to the unity of the legal system.
All of this, having direct application in the concrete case, necessarily leads to a modernist interpretation of Article 32, paragraph 2 of the EBF, from which results that the provision should be understood in the interpretive sense that it embraces the exemption of capital gains obtained by SGPS, in the conditions provided therein, regardless of whether their tax relevance occurs only at the moment of their transfer (principle of realization) or over the various fiscal years during which their holding extends (fair value).
We make our own the understanding of GOMES CANOTILHO in an opinion attached to the present file, according to which when in the text of Article 32/2 of the EBF the legislator refers to realized capital gains and losses, this derives from the fact that only those contribute to the formation of taxable profit in corporate income tax.
"From the moment when the CIRC undergoes an alteration that translates into the possibility of taxation of potential capital gains and losses, the provision of Article 32/2 must be subject to a modernist interpretation.
"The reasons that led the legislator to create the special taxation regime for SGPS, reflected in Article 32/2 of the EBF, and which are invoked in the aforementioned Decision of the Superior Administrative Court cited supra" [Case No. 0314/12, of 05/09/2012], are valid both for realized capital gains and losses and for potential capital gains and losses."
"It would not be understood why the legislator, concerned with the importance of SGPS for the national economy and recognizing their specificity, would provide a special regime determining that realized capital gains and losses do not contribute to the formation of taxable profit and, simultaneously, would subject them to a general regime that admits, in certain cases (those of Article 18, paragraph 9, subparagraph a) of CIRC) the taxation of potential capital gains by way of fair value adjustments."
In the same sense, which the Tribunal equally endorses, conclude PAULO DA MOTA PINTO and ANTÓNIO MARTINS, in an opinion attached to the file (p. 35), when they state: "It will be said that the answer is evident, taking into account the reason for being and the purpose of the provision of Article 32, paragraph 2 of the EBF, the context in which it was issued and its alteration, all of which require a modernist interpretation: it would not make sense for the legislator to have wished to grant a tax benefit to SGPS as a means of promoting their activity for the benefit of the economy, when they realize capital gains by transforming them into monetary means, and that, differently, it intended the taxation of merely potential capital gains obtained by the same SGPS, in a context in which these have become fiscally relevant. It will be said, therefore, that it appears clear that, by its reason for being, the tax benefit provided for in Article 32, paragraph 2 of the EBF must, by equality or even by a greater reason, also include the fair value adjustments (potential capital gains) that have come to contribute, from 2010 onward, to the formation of taxable profit."
We also share what, in this regard, is emphasized by GUSTAVO COURINHA, also in an opinion attached to the file: (i) "the tax benefit contained in Article 32, paragraph 2 of the EBF is an undisputedly subject-based tax regime [underlined in original], structured by reference to the corporate form (SGPS)" (p. 60); (ii) "Article 32/paragraph 2 of the EBF cannot be interpreted as a norm that decides in favor of or against a particular method of periodization – realization or Fair Value. Instead, this article requires interpretation in neutral terms. It is this neutral interpretation that proves more adequate to its own nature, as merely a norm for the determination of tax events (in this case, by exemption). Article 32/paragraph 2 could not have intended to promote the use of one method of periodization (realization) to the detriment of another (Fair Value). That is not its function, nor is it clear what extra-fiscal interest would justify such treatment. Indeed, it is impossible to imagine what interest could explain a tax benefit that translates into the preference for the realization of capital gains, when it is precisely the opposite purpose that is pursued by SGPS in corporate groups (…)" (pp. 65 and 66).
We therefore conclude that the income (capital gain) obtained by the Claimant benefits from the exemption provided for in Article 32, paragraph 2 of the EBF, and the Claimant's request should be granted.
In deciding to the contrary, the TA incurred illegality and the assessment must accordingly be annulled, with the legal consequences resulting therefrom.
(End of citation from case 353/2016-T).
It should be noted, finally, that the exemption of Article 32 of the EBF presupposed that the B... shares were held uninterruptedly by the Claimant (which is an SGPS), for a period of time exceeding one year (or more than 3 years in exceptional cases).
The TA – in the justification of the act and various statements during the proceedings (response, submissions) – never invoked that the 3-year holding period would apply. And never indicated that the Claimant held the B... shares for more than 12 months (that is not the argument sustaining the tax act), despite the fact that, as was proven, 19,442 shares disposed of in 2011 were acquired in 2010 (they resulted from conversion of rights acquired over shares that the company held for more than 12 months).
On our part, to those shares the exemption of Article 32, paragraph 2 of the EBF also applies: either because more than 12 months elapsed between the date of acquisition in 2010 and the date of sale in 2011 (and for this reason the TA did not introduce such data which could have been relevant for the tax act, or then let it be imputed to itself); but above all – and it was for this reason that both parties understood the 12-month holding requirement to have been exceeded, because such acquisition "results from conversion of rights acquired over shares held for more than 1 year." And facing this, the TA itself understood (and rightly so) that the date of acquisition, for calculation and treatment of subsequent capital gains and losses, did not occur in 2010, but as of the date of acquisition of the shares from which such rights sprung – which occurred before 2010 (more than one year). That is to say: the TA did not invoke this "argument" out of forgetfulness, but because it understood that the 2010 shares were acquired for purposes of the application of Article 32, paragraph 2 of the EBF, as of the date of acquisition of the upstream securities from which the aforementioned rights subsequently resulted.
4. Payment of Tax, Reimbursement and Interest
The Claimant also requested that, in addition to the annulment of the challenged assessment, the TA be ordered to return the tax paid plus statutory compensatory interest.
Article 43, paragraph 1, of the General Tax Law (LGT) provides that compensatory interest is owed in favor of the taxpayer when it is determined in judicial impugnation (and arbitral action is included in this legal formula, by coherence and unity of the legal system) that there was error attributable to the services resulting in payment of a tax debt higher than owed.
This is precisely what occurs in the present case. The TA, by introducing additional corporate income tax assessments – now annulled – resulted in payment of tax by the taxpayer which was ultimately undue and exacted only because of error attributable to the TA's services (which required assessment of illegal taxes).
Therefore, the requirements of Article 43 of the LGT being met, the TA must pay compensatory interest at the statutory rate, from the moment of payment by the taxpayer until full reimbursement to the taxpayer of the tax paid by it.
5. Decision
In light of the foregoing, this Arbitral Tribunal agrees to:
Dismiss entirely the Claimant's request for a declaration of illegality of the challenged assessment of Corporate Income Tax relating to the year 2011: tax (2015...) in the amount of €68,720.06, compensatory interest (2015...), in the amount of €2,031.71 and demonstration of account settlement 2015... (with compensation 2015...), with a total amount payable of €68,809.50.
And in consequence:
Order the reimbursement to the Claimant of the Corporate Income Tax and compensatory interest paid by it;
Condemn the TA to pay compensatory interest to the Claimant on the amounts paid, from the date of payment (12 November 2015) until full reimbursement.
It shall fall to the TA, in accordance with the legal provisions, to draw the consequences from what is hereby decided, namely as regards the existence and losses reportable to subsequent fiscal years.
6. Value of the Proceedings
In accordance with the provisions of Article 97-A, paragraph 1, subparagraph a) of the Code of Tax Procedure (CPPT) and Article 3, paragraph 2, of the Regulations for Costs in Tax Arbitration Proceedings, the value of the proceedings is set at €68,809.50.
Notify accordingly.
Lisbon, 21 March 2018
The Arbitrators
Rui Duarte Morais (Presiding Arbitrator)
Tomás Cantista Tavares (Panel Arbitrator)
Sérgio Pontes (Panel Arbitrator)
(Text prepared by computer, in accordance with Article 131, paragraph 5 of the Code of Civil Procedure, applicable by reference from Article 29, paragraph 1, subparagraph e) of the Legal Regime for Arbitration in Tax Matters)
Frequently Asked Questions
Automatically Created