IRS Tax on Sale of Shares and General Anti-Abuse Clause – CAAD Arbitration Decision 395/2014-T

CAAD – Tax Arbitration

Case No. 395/2014-T

Subject: IRS. Sale of corporate shares. General Anti-Abuse Clause.

ARBITRAL DECISION

The arbitrators Jorge Lopes de Sousa (presiding arbitrator), Ana Maria Rodrigues and José Coutinho Pires, appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, agree as follows:

I. REPORT

1. On 26 May 2014, A... – SGPS, S. A. (hereinafter A...), Tax ID No. …, with registered office at Praça … Lisbon (hereinafter, Applicant), filed a request for constitution of an arbitral tribunal, under the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Tax Arbitration, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, referred to as RJAT), seeking a declaration of illegality and consequent annulment of the assessment of Personal Income Tax (IRS), with No. 2014…, relating to the year 2010, and the assessments of compensatory interest Nos. 2014…; 2014… and 2014…, all of 24 January 2014, in a total amount of €3,082,666.39, consisting of €2,705,300.00 in tax (IRS) and €377,366.39 in interest, for breach involving violation of law, with the Portuguese Tax and Customs Authority (AT – Autoridade Tributária e Aduaneira) (hereinafter, Respondent or AT) being the respondent. The Applicants attached 21 (twenty-one) documents and did not call any witnesses.

In essence and in brief summary, the Applicant alleged the following:

The Applicant was subject to an external tax audit, carried out by the Tax Inspection Services of the Lisbon Finance Directorate, which aimed, according to the content of the respective Tax Inspection Report, "to ascertain compliance with tax obligations regarding withholding of IRS, in accordance with paragraph b) of Article 13 and paragraph b) of No. 1 of Article 14, both of RCPIT, and concerns the year 2010. The reason for this inspection action is 'to carry out an analysis of business transactions to verify whether they were essentially or primarily directed by artificial means and with abuse of legal forms, to the reduction of taxes that would be due without the use of such means, which constitute grounds for applying the general anti-abuse rule provided in No. 2 of Article 38 of the General Tax Law, regarding the purchase by A..., SGPS, S.A. (now applicant) of all shares of B..., S.A., Tax ID No. …, from its partners, on 14/12/2009'".

In the course of that inspection action, for the year 2010, AT decided to apply the general anti-abuse clause provided in Article 38, No. 2, of the General Tax Law (LGT), with a view to disregarding the purchase of the entire share capital carried out by the applicant from the partners of the commercial company B... – …, S. A., on 14 December 2009. It therefore believes that business transactions were identified as essentially or primarily directed by artificial means and with abuse of legal forms to reduce taxes that would be due without the use of such means, and which constitute grounds for applying the legal anti-abuse rule.

AT believes that the transaction carried out had as its sole objective to allow the transfer to the personal sphere of the partners of B... and of A..., C..., D..., E..., F..., G... and H..., of income generated by company B... of which they were shareholders without being subject to the proper taxation under IRS. Faced with AT's understanding, the payment of the price for acquisition of such shares should assume the nature of dividends and that, as such, the Applicant when making that payment failed to comply with the duty to withhold IRS from profits made available, and is therefore liable as a tax substitute, by virtue of the provision of Article 103 of the IRS Code (CIRS).

The Applicant bases its request for constitution of an arbitral tribunal on the following grounds:

"A) The purchase carried out by the Applicant on 14 December 2009, of the entire share capital of the commercial joint-stock company B...– …, S.A., was determined by criteria of a managerial and economic and financial nature and not for the purpose of obtaining tax advantages for its partners;

B) No artificial or fraudulent means or abuse of legal forms were used, directed to the reduction, elimination or temporal deferral of taxes or to obtaining improper tax advantages;

C) The prerequisites enabling the application of the general anti-abuse rule provided in No. 2 of Article 38 of the LGT are not met;

D) AT commits a defect in substantiation in assessing whether or not these prerequisites are met;

E) The application of this rule constitutes an illegality;

F) Even if the purchase and subsequent merger of B..., S.A. were motivated by exclusively fiscal reasons – which is not the case and only as a mere exercise in reasoning is considered – the activation of the general anti-abuse clause provided in No. 2 of Article 38 of the LGT would continue to suffer from illegality, given the legislative choices in force at the time to which the facts relate, and from which does not result the obligation of A..., SGPS, S.A. to withhold at source upon payment of the price for acquisition of such shares, whereby the Applicant understands that with the performance of that payment it did not fail to comply with the duty to withhold IRS from profits made available, and there is no place for liability of the Applicant as a tax substitute, by virtue of the provision of Article 103 of CIRS;

G) Consequently, the assessments made on the basis of the application of the general anti-abuse clause provided in No. 2 of Article 38 of the LGT are tainted with illegality;

H) The assessments are also tainted with illegality on the basis of the non-opposability to the Applicant of the disregard of fiscal effects resulting from the application of the general anti-abuse clause to the acts in question;

I) AT does not attribute to the applicant any conduct subsumable under the normative provision of Article 38, No. 2, of the LGT, substantiating the IRS assessment now challenged only on the alleged liability for non-withholding at source upon payment of part of the price due for the acquisition of shares of B..., S.A., with AT considering that this withholding should have occurred given the tax ineffectiveness of the acquisition of shares and consideration of the price paid as distribution of dividends.

J) If the interpretation of the rule of Article 38-2 of the LGT sought by AT were to prevail, it would always suffer from unconstitutionality, due to violation, namely, of the constitutional principles, which apply both to citizens and to legal entities, of legal certainty and proportionality, as well as the right to private property, guaranteed by the Additional Protocol to the ECHR.

K) The Applicant states that 'Admitting that a third party could be liable for failure to withhold at source in situations where such obligation does not exist given the concrete legal acts in which the third party was involved, (…), would be equivalent to imposing on the tax substitute a disproportionate and inadmissible burden of monitoring that abuse'.

L) The Applicant understands that if AT found the subsequent existence of abusive conduct, it would be competent to require from the substitute the tax abusively avoided by the taxpayer with the argument that a duty to withhold at source was breached, this would correspond to transferring entirely to the sphere of the substitute two major duties. The first, related to the duty of tax supervision of tax abusive conduct, but also the very burden of the tax, which is ultimately an obligation of the taxpayer, since the abusive conduct verified subsequently would place the substitute in a situation in which it would no longer have at its disposal the sums on which the withholding should have occurred, thus directly supporting in its sphere the tax as a consequence of the application of Article 103 of CIRS.

The Applicant further understands that a declaration of illegality and consequent annulment of the IRS assessment should be declared on grounds other than merely the failure to meet the concrete prerequisites for applying the general anti-abuse clause contained in Article 38, No. 2, of the LGT. These are:

a) Failure to fulfill AT's duty to hear in the course of the tax inspection procedure that determined the tax act now in dispute;

b) Due to lack of authorization for application of the general anti-abuse clause or alternatively, in violation of the provision of Article 63 of CPPT:

b.1.) Due to failure to respect the Applicant's right of participation in the referred authorization decision, and;

b.2.) Due to lack of authority of the Deputy Director-General …. to proceed with the authorization for application of the CGAA;

c) Due to lack of higher sanction of the conclusions of the Tax Inspection Report, in violation of Article 62, 6, of RCPIT;

d) Due to lack of authority of the Head of Division, …, for the IRS correction that determined the tax act;

The Applicants further allege that the interpretation that AT makes of the rule contained in Article 38 of the LGT is unconstitutional, due to violation of the principles of legal certainty and security and proportionality and, as well, due to violation of the right to private property guaranteed by the Additional Protocol to the ECHR.

The Applicant proposes the disregard for tax purposes of the transactions we describe, with the consequent taxation under IRS, of the values received by the shareholders as payment of shares as dividends and not as payment of the acquisition of all corporate interests of B..., S.A. from its partners by A..., SGPS, S.A..

Thus annulment was sought of the adjustments that resulted in a total assessment of €3,082,666.39, relating to the year 2010, in the total amount of tax of €2,705,300.00, to which are added €377,366.39 in compensatory interest calculated for the period from 29/05/2010 to 24/01/2014, at the rate of 4%.

The Respondent, AT, in its Tax Inspection Report, understands that the transaction in question concerns (…) "a sale of shares of one company to another, which is then subject to merger by absorption into the acquirer, such that neither the sale nor the merger change the ownership of the capital of the acquiring/absorbing company, A... – SGPS, S.A.".

AT, in its Tax Inspection Report, considers that the sellers of the shares of B..., S. A. obtained income paid by the Applicant, which, had artificial or fraudulent acts not been committed and abuse of legal forms not occurred, would have corresponded to payments of dividends from B..., S. A. With the authorization for the application of the anti-abuse rule referred to in No. 7 of Article 63 of CPPT, the disregard for tax purposes of the sale and payment of shares of B... – …, S.A. results and consequent taxation as payment of dividends, which are subject to withholding at source of IRS, as provided in Article 71, paragraph c) of CIRS.

IRS not withheld and not paid into the State Treasury of €2,705,300.00 for the year 2010 was identified.

AT understands that with regard to the values received by the shareholders, the adjustments were made in the company A... - SGPS, S.A. in accordance with the provision of No. 2, paragraph a), of Article 101, combined with Nos. 3 and 4 of Article 103, both of CIRS, due to failure to deliver the IRS that should have been withheld and was not paid into the State Treasury.

1. The request for constitution of the arbitral tribunal was accepted and automatically notified to AT on 27 May 2014.

2. The Applicants did not proceed to appoint an arbitrator, therefore, under the provision of paragraph a) of No. 2 of Article 6 and paragraph b) of No. 1 of Article 11 of RJAT, the President of the Deontological Council of CAAD appointed as arbitrators of the collective arbitral tribunal Counselor Jorge Lino Alves de Sousa (presiding arbitrator), Prof. Dr. Ana Maria Rodrigues and Dr. José Coutinho Pires (arbitrators members), who communicated acceptance of the appointment within the applicable period.

3. On 14 July 2014, the parties were duly notified of this appointment, and did not manifest willingness to refuse the appointment of the arbitrators, in accordance with the combined provisions of Article 11, No. 1, paragraphs a) and b) of RJAT and Articles 6 and 7 of the Deontological Code of CAAD.

4. Thus, in accordance with the provision of paragraph c) of No. 1 of Article 11 of RJAT, the collective Arbitral Tribunal was constituted on 29 July 2014.

5. On 3 October 2014, the Respondent, duly notified for this purpose, filed its Response in which it specifically contests the arguments put forward by the Applicant and concludes for the dismissal of the present action, with its consequent acquittal of the claim. The Respondent attached four documents, and did not call any witness. On the same occasion, the Respondent attached to the proceedings the respective administrative file (hereinafter, referred to as PA).

In essence and also briefly, the most relevant arguments upon which the Respondent based its contest are important to note:

1. On 14 December 2009 all shareholders of B... proceeded to sell all the shares of this company to A... – SGPS, S.A.. A single contract for purchase and sale of the shares was executed, with all shareholders of B... and the acquiring company, A....

2. There was no reason of an economic or financial nature that could justify the alienation of all shares of B... by its shareholders to the company A..., SGPS and the subsequent merger by absorption of B... into A..., SGPS, S.A held by the partners of the latter company. This transaction had only as sole objective to transfer to the personal sphere of the partners of B..., S.A., the income generated by that entity, without the its partners being subject to the proper taxation under IRS.

3. The operation of acquisition of corporate interests and subsequent merger reveal that these successive acts and business transactions, B..., S.A. and its shareholders implemented the exit of €13,000,000.00 from the legal sphere of company B... to its shareholders completely excluded from taxation under IRS, and which materially assumes the nature of distribution of dividends from B... to its shareholders.

4. The dual operation, of alienation of corporate interests and the merger by absorption, only allowed the partners of the Applicant, C..., D..., E..., F..., G... and H... to carry out the alienation of their interests for the value of €13,000,000.00, with the benefit of exclusion of taxation of the gain obtained by virtue of the provision of Article 10, No. 2, paragraph a), of CIRS, in the wording in force at the date of the practice of the facts; with this operation, the partners of the Applicant obtained, therefore, a tax saving, embodied in the non-taxation of the gain resulting from the alienation of corporate interests, disguising an operation of distribution of dividends from B... to its shareholders. But on this income, because it was given the appearance of payment of debt derived from the purchase of shares, those partners came to receive the full value of the alienation of their shares in B..., with no proper taxation falling on IRS.

5. If the partners of the Applicant had opted for the form that would be customary and normal distribution of dividends, they would have obtained taxable income of €13,000,000.00, subject to IRS at the autonomous tax rate of 20%, under the provision of Article 10, No. 1, paragraph b) and Article 72, No. 4, both of CIRS; thus resulting in tax payable in the amount of €2,705,300.00.

6. Thus, the purchase and sale of the shares was declared by the acquiring company A... – SGPS, S.A. in form 4 declaration, referred to in No. 1 of Article 138 of CIRC, and by the alienating shareholders in form 3 declaration of IRS. Given the qualification that was attributed to the payments made, no withholding at source of IRS was made.

7. In this way, AT understands that the requirements provided for in Article 38, No. 2, of the LGT are entirely met in the case at hand.

8. Furthermore, the decision to apply the general anti-abuse clause fully complies with the provision of Article 63 of CPPT, pointing out concrete matters and specific points of fact in order to demonstrate the existence of acts or business transactions essentially or primarily directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferral of taxes.

9. On the other hand, the constitutional rights in light of the principles of legal certainty and security and proportionality and, as well, the right to private property guaranteed by the Additional Protocol to the ECHR, are not absolute rights and cannot, at any moment, be exercised in an abusive manner, in order to subvert the spirit of taxation rules and the granting of tax benefits, and thereby achieve a result contrary to Law.

10. Thus, neither being, nor being able to be in question the principles of legal certainty and security and proportionality, and not being in question the right to private property, what is only limited is the possibility of the taxpayer's will being relevant as to the degree of their tax burden, therefore the interpretation of the rule contained in Article 38, No. 2, of the LGT, carried out by AT, is in conformity with the Constitution.

The Respondent concludes to the effect that the assessment acts impugned do not suffer from any illegality.

On 6 May 2013, the Applicant was notified, in the context of the external audit action, to exercise, within 30 days, prior hearing in relation to the draft application of the general anti-abuse clause, under which AT considered that the Applicant, when acquiring B..., S. A. in December 2009, was involved in "business transactions essentially or primarily directed by artificial means and with abuse of legal forms, to the reduction of taxes that would be due without the use of such means". (Article 12 of the PI and document 12).

1. The Applicant understands that the merger project between B..., S.A. and A..., SGPS, S.A. has the purpose of "reducing the dispersion of existing corporate structures, with redundant logistical costs. Other endogenous factors are added that recommend and motivate the proposed transaction, namely the depletion of the activity of the incorporated company. In this sense, it is important to overcome the aforementioned overlap of corporate structures, giving rise to the generation of synergies and economies of scale. The proposed merger will allow the concentration of technical and financial resources to create a cohesive and competitive structure. With regard to structural and operating costs, concentration will allow, with reasonable certainty, optimization and rationalization of costs".

2. As there were no matters susceptible of discussion at the meeting referred to in Article 18 of RJAT, the Arbitral Tribunal, by order issued by its President, on 3 October 2014, dispensed with the holding of that same meeting. The Tribunal considered that the proceedings already contained all the factual elements for the legal solution.

3. The Arbitral Tribunal dispensed with the presentation of any submissions by the parties.

4. However, A..., SGPS, S.A. chose to pronounce itself through written submissions on certain specific points raised by AT, namely, regarding the lack of authorization for the application of the general anti-abuse clause in the context of the inspection procedure at the origin of the assessment impugned; regarding the failure to respect the Applicant's right of participation in the decision to authorize the application of the general anti-abuse clause; and also, regarding the defect of lack of authority in the decision to authorize the application of the general anti-abuse clause, on the grounds that it understands that AT despite not having formally raised exceptions to be assessed and decided before the final decision, invoked facts and arguments presented as impeditive, modifying or extinctive of the legal claim expressed by the Applicant in its initial application.

5. Although written submissions were made, the parties maintained the positions assumed in the written documents (PI and defense).

6. By order of the President of the Deontological Council of CAAD, issued on 4 February 2015, the replacement of the presiding arbitrator of this collective Arbitral Tribunal, Counselor Jorge Lino Alves de Sousa, by Counselor Jorge Lopes de Sousa, was determined, because the former was temporarily unable, due to health reasons, to properly exercise his functions.

II. PRELIMINARY MATTERS

The Arbitral Tribunal was duly constituted and is materially competent.

The proceedings do not suffer from nullities.

The parties have legal personality and capacity, are duly represented and are legitimate.

III. REASONING

III.1. FINDINGS OF FACT

With respect to the factual matters, it is important, first of all, to note that the Tribunal does not have to pronounce on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and to distinguish proven facts from unproven facts (see Article 123, No. 2, of CPPT and Article 607, Nos. 3 and 4, of CPC, applicable ex vi Article 29, No. 1, paragraphs a) and e), of RJAT). In this way, the facts relevant to the judgment of the case are chosen and defined according to their legal relevance, which is established in view of the various plausible solutions to the question(s) of Law.

In this framework, taking into account, in particular, the positions assumed by the parties, the documentary evidence produced and the PA attached to the proceedings, the following facts with relevance to the decision are considered proven:

1. The Applicant was incorporated on 27 August 2008, with the object of management of corporate interests in other companies as an indirect form of exercise of economic activities (Article 3 and document No. 2 of the PI).

2. In the course of exercise of this activity the Applicant held various interests:

a) On 10/12/2008, it acquired a quota with a nominal value of €7,500.00, corresponding to 30% of the share capital of the private limited liability commercial company, I... – …, Lda.. This interest continues to be held by the company until the date of the PI (see Articles 4 and 5 of the PI, document 3);

b) In the course of its business activity, on 14/12/2009, the Applicant acquired 100% of the share capital of B..., S.A. with a nominal value of €50,000.00 (see Article 6 of the PI, documents 4 and 5);

1. This latter company, "B... – …, Lda. was incorporated as a private limited liability commercial company on 12/06/2000, with Tax ID No. …, with the business purpose of "carrying out consulting work for public or private entities, as well as the management of investment projects, as well as the acquisition and/or subscription of shares or quotas of share capital in companies established or to be established with identical or different business purpose, as well as the exercise of corporate positions therein", with share capital of €15,000.00, corresponding to the sum of 2 quotas [Article 7 of PI, see doc. No. 5 and 17 of PI], with one quota of €7,500 each, C… and F…. They were partners and managers of this company.

2. B... was transformed into a joint-stock company on 3 June 2009, with the following share capital distribution:

[Table with shareholder information - columns: Tax ID, Shareholders, No. of shares held, Nominal value (€), Share Capital (%)]

C… held 24,800 shares with nominal value €24,800 (49.60%)
F… held 24,800 shares with nominal value €24,800 (49.60%)
D… held 100 shares with nominal value €100 (0.20%)
E… held 100 shares with nominal value €100 (0.20%)
G… held 100 shares with nominal value €100 (0.20%)
H… held 100 shares with nominal value €100 (0.20%)
Total: 50,000 shares, €50,000 nominal value (100.0%)

1. Until 2008, the main client of B... is J... – …, S.A., to whom B... provided consulting services related to the glass area (Article 7 and documents 5 and 17 attached to the PI).

2. J... was held by B... with 29.59% of capital, and by C… and F..., with 70.4% of capital (Article 7 and documents 5 and 17 attached to the PI).

3. B... sold 295,913 shares of J... to the Spanish company K…, S.A., becoming part of the respective business group. From that alienation onwards, the services provided by B... to J... were provided by the group it joined.

4. B... was transformed into a joint-stock company in March 2008, and proceeded to carry out the necessary increase in share capital from €15,000.00 to €50,000.00, which was mostly carried out by incorporation of reserves, in the amount of €34,600.00, reinforcing, in equal parts, the quotas already held by the managing partners, C... and F…. The remaining €400.00 to make up the €50,000.00 were through cash contributions, each of the new partners making said contribution in the amount of €100.00. All four new partners belong to the family unit of the two existing managing partners.

5. B... had no operational activity since 2008.

6. On 14 December 2009 all shareholders of B... proceeded to sell all the shares of this company to A... – SGPS, S.A.. A single contract for purchase and sale of the shares was executed, with all shareholders of B... and the acquiring company, A....

7. The shareholder structure of B..., S.A. at the date of alienation of the shares by its partners was as follows:

[Table with detailed shareholder information including voting rights]

C… held 24,800 shares (49.60% capital, 49.60% voting rights)
F… held 24,800 shares (49.60% capital, 49.60% voting rights)
D… held 100 shares (0.20% capital, 0.20% voting rights)
E… held 100 shares (0.20% capital, 0.20% voting rights)
G… held 100 shares (0.20% capital, 0.20% voting rights)
H… held 100 shares (0.20% capital, 0.20% voting rights)
Total: 50,000 shares, €50,000 nominal value (100.0% capital and voting rights)

1. The acquisition of the entire capital of B..., S.A. by the partners by A... was carried out at a price fixed per share of €260.00/share.

[Table showing sale details:
C…: 24,800 shares × €260.00 = €6,448,000.00
F…: 24,800 shares × €260.00 = €6,448,000.00
D…: 100 shares × €260.00 = €26,000.00
E…: 100 shares × €260.00 = €26,000.00
G…: 100 shares × €260.00 = €26,000.00
H…: 100 shares × €260.00 = €26,000.00
Total: 50,000 shares = €13,000,000.00]

1. The shareholder structure and management of B... and A... is similar, at the date of the alienation transaction, with the same external auditor and the same audit firm.

2. The value of acquisition of the 50,000 shares of B..., S.A., representing the respective share capital, reached the value of €13,000,000.00, the payment of which was contractually staggered in two tranches, of €5,980,000.00 and €7,020,000.00, to be satisfied by 31 March and 30 June 2010, respectively.

3. For this purpose, A… obtained from Bank ..., S.A, a bank loan of €4,000,000.00, which was used for partial payment of the first tranche to the partners of B... on 31 March 2010. (Article 18 and document 10). The remaining payment of that tranche was paid on 13 May with recourse to new financing from the same banking entity.

4. On 9 and 20 July 2010 payment of the second tranche of the price due for the acquisition of B..., S.A, took place in the total amount of €7,020,000.00, with the Applicant using for this purpose the net financial means integrated into its assets by effects of the integration of B...'s assets into A..., as a result of the merger by absorption of the latter company into A..., SGPS, S. A.

5. On 6 July 2010 the absorption of B..., S.A. into the applicant was realized, by merger by absorption, with the global transfer of assets to A..., SGPS, S.A.

6. A..., SGPS, S.A., post-merger, continues to develop its activity, having acquired on 25/03/2008, 100% of the share capital of the private limited liability commercial company, L... – …, Lda., legal entity No. …, which it maintains until the date under analysis.

7. On 6 May 2013, through Official Letter No. ..., of 03.05.2013, from the Lisbon Finance Directorate, the Applicant was notified, in the context of the external inspection action opened under Service Order No. OI2012…, for exercise, within 30 days, of prior hearing regarding the "Draft Application of the General Anti-Abuse Clause".

8. On 5 June 2013 the applicant exercised by written its right to hearing, rejecting the understanding manifested by AT.

9. On 2 December 2013, through official letter No. …, of 29.11.2013, the Applicant was notified to exercise the right to hearing regarding the draft inspection report (Article 38 and document 15 of the PI).

10. On 20 January 2014, through official letter No. …, of 15.01.2014, from the Finance Directorate of …, the Applicant was notified of the Tax Inspection Report, under which the previously notified project was converted into final form (Article 42 and document 17 of the PI).

11. The inspection action commenced on 21/03/2013 (date of signature of the Service Order by C..., in the capacity of attorney of A...), concluding the inspection acts on 27/11/2013 (with the signature of the same) [see pages 3 of the Tax Inspection Report and pages 18 to 22 of Annex 3 to the Tax Inspection Report].

12. The inspection procedure OI2010… had as its objective to carry out an analysis of business transactions to verify whether they were essentially or primarily directed by artificial means and with abuse of legal forms, to the reduction of taxes that would be due without the use of such means, which constitute grounds for applying the legal anti-abuse rule provided in No. 2 of Article 38 of the LGT, with a proposal for application of the anti-abuse rule procedure, referred to in Article 63 of CPPT. The said inspection procedure intended to verify compliance with tax obligations in the IRS sphere, regarding the transaction for acquisition of B..., S.A., in December 2009, and in particular, the duty of the Applicant to withhold IRS, resulting from the making available of resources to the partners of B..., S.A., not as title of alienation of corporate interests, but of dividends, which led to the application of the general anti-abuse rule provided in No. 2 of Article 38 of the LGT. [see pages 4 of the Tax Inspection Report].

13. The shareholders of the companies involved were notified through official letter number ... of 03/05/2013 from the Finance Directorate of …, as recorded in the postal registry No. RC …PT, of the following [see pages 30 of the Tax Inspection Report): "In accordance with and for the purposes of the provision of Nos. 4 and 5 of Article 63 of the Code of Tax Procedure and Process, you have a period of 30 days to, if you wish, pronounce yourself, in writing or orally, on the content of the Draft Application of the General Anti-Abuse Clause, provided for in No. 2 of Article 38 of the General Tax Law, (…)". Likewise, all shareholders involved in the transaction of sale of B... shares to A... on 14.12.2009 were notified through official letters 3135 and 31638, dated 03/05/2013, from the Finance Directorate of ….

14. The Applicant exercised that right to hearing, in writing, as per response delivered at the Finance Directorate of …, on 06/06/2013, which corresponds to entry No. 54054 of 06/06/2013 of the Finance Directorate of … [see pages 30 of the Tax Inspection Report]. The shareholders also exercised their respective rights to hearing through entries Nos. … to …, all of 06/06/2013.

15. Having analyzed the substantiation of the right to hearing, AT understood that no new facts were presented, however, they proceeded to assess the submissions presented by A... –SGPS, S.A. and the shareholders who sold their shares of B..., S.A..

16. From said inspection action resulted adjustments, in the IRS sphere not withheld and not paid into the State Treasury by the Applicant, relating to the taxation period of 2010, embodied in the following chart [see pages 22 of the Tax Inspection Report]. Thus, the disregard of the purchase and sale of shares in A... – SGPS, S.A., implies the obligation of withholding set out in the following chart:

[Detailed table showing shareholders, dates, amounts paid, tax rates and non-withheld IRS by shareholder and payment date from 31.03.2010 through 09.07.2010]

a) Increase in income of category E – Distribution of dividends, relating to IRS not withheld and not paid into the State Treasury by the Applicant, determined by application of the general anti-abuse clause provided in Articles 38 of the LGT and 63 of CPPT, in the amount of €2,705,300.00;

1. The values of the transaction under analysis were declared by the Applicant in form 4 declaration, and by the shareholders in the income statement Form 3 – IRS for the year 2010.

Regarding the values received by the different shareholders, the adjustments were made in company A… – SGPS, S.A., in accordance with the provision of No. 2, paragraph a) and No. 3 of Article 101, combined with Nos. 3 and 4 of Article 103, both of CIRS, setting forth in the following chart the values per shareholder, relating to IRS not withheld and not paid into the State Treasury. Thus, the determination of the tax advantage/missing tax per shareholder is as follows (page 30 of the Inspection Report):

[Table showing tax liability per shareholder:
C… and D…: €1,347,239.40
F… and G…: €1,347,239.40
E…: €5,410.60
H…: €5,410.60
Total: €2,705,300.00]

1. On 24 January 2014, AT issued the assessments impugned, with the voluntary payment deadline of 24.03.2014 (see document No. 1 attached to the PI).

2. The Applicant paid on 24-03-2014 the sum of €3,082,666.39, consisting of the IRS and compensatory interest assessments whose declaration of illegality is requested (document No. 19 attached to the request for arbitral pronunciation, the content of which is given as reproduced).

3. On 26 May 2014, the Applicants filed the request for arbitral pronunciation that gave rise to the present proceedings (see the information management system of CAAD).

III.1.2. UNPROVEN FACTS

The following facts were not proven:

1. The breakdown of commercial relations of B... with its main client until 2008 was seen by the Applicant as a business opportunity, and it appeared possible to boost the activity of B..., S.A. with former and new clients, thereby making profitable the know-how accumulated by the company.

2. The decision of the Applicant to acquire B..., S.A. was integrated into the legitimate pursuit of its business purpose.

3. The prospect of boosting B..., beyond the valid economic reasons underlying the acquisition decision in reference, is not compatible with the efforts of the administrators of B..., S.A, to actively seek new business opportunities and initiate various commercial contacts, in a consistent and lasting manner.

4. The grounds invoked for the fixing of the sale price of the shares of B... at €260.00.

5. The merger of the company "B..." into the joint-stock company, A..., SGPS, S.A. aimed to equip it with more effective instruments for the realization of investments and correlative financing, at the level of fixed assets and working capital needs, enhancing its development and sustainability.

6. The decision to merge "B..." into company A..., SGPS was determined by criteria of a managerial and economic and financial nature.

7. The shareholders of B... sell all of their share capital for a value close to retained earnings.

III.1.3. REASONING REGARDING THE FACTUAL MATTERS

With respect to the proven factual matters, the conviction of the Tribunal was based on the assertions made in the pleadings, in the points indicated, in which the correspondence to reality was not put in question and in the documents attached to the proceedings, referenced in relation to each of the points, whose correspondence to reality was not questioned.

Regarding the unproven factuality, this was thus considered as a result of the absence of any evidentiary elements capable of unequivocally proving it.

III.2. ON THE LAW

As results from the factual matters established, a tax inspection was carried out, following Service Order No. OI2012…, with the aim of monitoring business transactions essentially or primarily directed by artificial means and with abuse of legal forms, to the reduction of taxes that would be due without the use of such means, which constitute grounds for applying the legal anti-abuse rule provided in No. 2 of Article 38 of the LGT. The items declared by the Applicant in Form 4 declaration and by the shareholders in the income statement Form 3 – IRS for the year 2010.

From this inspection action, corrections to the withholding at source values declared by the Applicants were proposed, relating to the year 2010, in the total amount of €3,082,666.39, corresponding to a tax amount of €2,705,300.00, as per the IRS assessment note No. 2014…, to which are added compensatory interest in the amount of €377,366.39.

This global amount of corrections resulting from the inspection action resulted from corrections by application of the general anti-abuse clause provided in Articles 38 of the LGT and 63 of CPPT, and which the applicant challenged, in the amount of €2,705,300.00 and respective compensatory interest in the amount of €377,366.39.

The amount of €3,082,666.39 resulted from the Applicant failing to comply with the duty to withhold at source of IRS from profits made available to the shareholders of B..., S.A., and therefore place to liability as a tax substitute, by virtue of the provision of Article 103 of CIRS. This simulated transaction resulted in a tax payable in the total amount of €2,705,300.00, to which the respective compensatory interest is added, as referred to above.

In accordance with the provision of Article 124 of CPPT, subsidiarily applicable by virtue of the provision of Article 29, No. 1, of RJAT, since defects are not attributed to the IRS declaration that lead to the declaration of non-existence or nullity, nor is a relationship of subsidiarity indicated, the order of assessment of the defects should be that which, according to the prudent discretion of the judge, provides more stable or effective protection of the violated interests.

In the case at hand, the defects imputed by the Applicant to the impugned acts that provide more stable and effective protection of its interests are those referred to in points iv) and v) of the final part of the request for arbitral pronunciation, relating to the non-verification of the objective and subjective requirements for application of the general anti-abuse clause.

Among these, since a question of unconstitutionality is raised regarding the imposition of the obligation to withhold at source by means of the application of the general anti-abuse clause and since this defect is susceptible of being verified only in relation to the Applicant (and not to other participants in the facts of the proceedings), it is preferable that its assessment be commenced. This defect, if verified, will definitively remove the possibility of imposing on the Applicant any taxation at the IRS level in the capacity of tax substitute, the only possibility relating to a legal entity, regardless of whether or not the prerequisites for application of the general anti-abuse clause are met, as it was applied to the situation at hand or in any other.

Then, the assessment will proceed, to the extent necessary, of the other defects, following what is referred to in point iv) (failure to meet the prerequisites of the general anti-abuse clause) and then the formal and procedural defects referred to in points i), ii) and iii).

III.2.1. Question of violation of the prerequisites for application of the general anti-abuse clause (CGAA) in relation to the Applicant.

The Applicant argues that the prerequisites, factual and legal, upon which the application of the CGAA depends are not met, with the Tax and Customs Authority violating, through erroneous interpretation and application, Article 38, No. 2, of the LGT, and Articles 71, Nos. 1, paragraph c) of CIRS.

Article 38, No. 2, of the General Tax Law establishes a general anti-abuse clause, under which "acts or business transactions essentially or primarily directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or business transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, in whole or in part, without use of such means, are ineffective within the tax sphere, taxation then being effected in accordance with the applicable rules in their absence and the aforementioned tax advantages not being produced".

In the case at hand, the Tax Administration decided the application of the general anti-abuse clause considering that the business transactions of sale of shares of one company to another, which is then subject to merger by absorption into the acquirer, such that neither the sale nor the merger change the ownership of the capital of the acquiring/absorbing company, A..., SGPS, S.A. The carrying out of successive acts and business transactions culminated in the transformation of dividends into payment of shares with the obtaining of significant advantages in the legal sphere of the shareholders involved, therefore in view of the provision of No. 2 of Article 38 of the LGT, led AT to propose the disregard of the financial flows made as payment for shares, to distribution of dividends, which are subject to withholding at source with the rate provided in paragraph c) of No. 1 of Article 71 of CIRS.

III.2.2. Elements of the general anti-abuse clause

Under the heading "Ineffectiveness of acts and business transactions," Article 38, No. 2 of the LGT provides in relation to the so-called general anti-abuse clause (CGAA) in tax law.

The wording set forth by Law No. 30-G/2000, of 29 December, was as follows:

"Acts or business transactions essentially or primarily directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or business transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, in whole or in part, without use of such means, are ineffective within the tax sphere, taxation then being effected in accordance with the applicable rules in their absence and the aforementioned tax advantages not being produced".

This rule is complemented by Article 63 of CPPT, which contains a set of provisions that implement the parameters governing the procedure for application of the anti-abuse provisions.

Doctrine and case law have been densifying the wording of the rule pointing out five elements present therein. Corresponding one of the elements to the statutory provision, the remaining four appear to be cumulative requirements that allow – as if it were a test – to verify whether an activity is characterizable as abusive tax planning.

These elements, around which both parties moreover construct their arguments, consist of:

The element of means, which concerns the path freely chosen – act or business transaction, isolated or part of a structure of sequential, logical and planned acts or business transactions, organized in a unitary manner – by the taxpayer to obtain the desired gain or tax advantage;

The element of result, which has to do with the obtaining of a tax advantage, by virtue of the choice of that means, when compared with the tax burden that would result from the performance of "normal" acts or business transactions and of equivalent economic effect;

The intellectual element, which requires that the choice of that means be "essentially or primarily directed [...] to the reduction, elimination or temporal deferral of taxes" (Article 38, No. 2 of the LGT), that is, which requires not merely the verification of a tax advantage, but rather that it be ascertained, objectively, whether the taxpayer "intends an act, a transaction or a given structure, only or essentially, on account of the prevailing tax advantages that provide it";

The normative element, which "has as its primary function to distinguish cases of tax avoidance from cases of legitimate tax savings, in consideration of the principles of Tax Law, being that only in cases where an intention of law contrary or non-legitimizing of the result obtained is demonstrated can one speak of that";

And, finally, the sanctionary element, which, presupposing the cumulative verification of the remaining elements, leads to the sanction of ineffectiveness, in the exclusive tax sphere, of the acts or business transactions deemed abusive, "taxation then being effected in accordance with the applicable rules in their absence and the aforementioned tax advantages not being produced" (final part of Article 38, No. 2, of the LGT).

In summary, whether or not any and all of the prerequisites (intellectual, means, result, normative and sanctionary elements) for application of the general anti-abuse clause may be satisfied, we understand that through the application of the general anti-abuse clause the Tax Administration may only attack the partners of B..., requiring of them the principal tax obligation that they may have abusively avoided, invoking for this purpose the ineffectiveness of the acts and business transactions carried out by them and which materialized that abuse. However, we understand that the application of the general anti-abuse clause cannot alter the effects and legal characterization of such acts in respect to third parties, as is the case of the Applicant, since the application of the general anti-abuse clause to those acts and business transactions admits their maintenance in the legal sphere of their holders, with their ineffectiveness restricted to their tax effects. Thus, the applicant did not make any payment of dividends, but merely proceeded to payment of the price of the shares acquired by it from the partners of B..., who are simultaneously partners of the Applicant. This fact does not change even with the hypothetical application of the general anti-abuse clause.

In the following point the question of the non-opposability to the tax substitute of the disregard of tax effects resulting from the application of the general anti-abuse clause is assessed, a reason which we understand as valid for a proper decision of the case.

III.2.3. Assessment of the question of non-opposability to the tax substitute of the disregard of tax effects resulting from the application of the general anti-abuse clause

The questions of unconstitutionality of Article 38, No. 2, of the LGT and of its incompatibility with the European Convention on Human Rights and Additional Protocol depend on the interpretation made of this rule, as to its applicability to tax substitutes.

In the case at hand, the Applicant argues that the very wording of Article 38, No. 2, of the LGT imposes that the tax advantage obtained be eliminated, which will only occur naturally if the effects of its application have a direct impact on the sphere of the taxpayer who abusively exempted himself from the tax obligation. The Applicant further argues that the material prerequisites for application of the general anti-abuse clause are not met, and also, by the unsuitability of the said rule to determine the birth of accessory tax obligations of third parties, particularly withholding at source, in the face of the ineffectiveness of the acts or business transactions deemed abusive which constitutes its statutory provision.

In the interpretation of legal rules, in the absence of other elements that lead to the choice of the less immediate sense of the text, the interpreter should in principle opt for that sense which best and most immediately corresponds to the natural meaning of the verbal expressions used, and particularly to their technical-legal meaning, in the assumption (not always accurate) that the legislator knew how to correctly express his thought[1].

Article 38, No. 2, of the LGT was introduced by Law No. 100/99, of 26 July, reproducing the rule contained in Article 32-A of the Code of Tax Procedure of 1991, added by Law No. 87-B/98, of 31 December, with the following wording:

1. Acts or business transactions are ineffective when it is demonstrated that they were carried out with the sole or principal objective of reduction or elimination of the taxes that would be due by virtue of acts or business transactions of equivalent economic result, in which case taxation falls on the latter.

Law No. 30-G/2000, of 29 December, gave this Article 38, No. 2, the following wording:

1. Acts or business transactions essentially or primarily directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or business transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, in whole or in part, without use of such means, are ineffective within the tax sphere, taxation then being effected in accordance with the applicable rules in their absence and the aforementioned tax advantages not being produced.

It is highlighted in bold in this latter wording, a reference to an addition of text in relation to the initial version which has particular relevance to the interpretation of the rule, at the point which is here in question of knowing whether, following abusive tax planning, a company which has the role of substitute in the tax relationship for IRS may be responsible for payment of the sums that are understood to be due, because the withholding at source of the tax was omitted.

In fact, the final part of Article 38, No. 2, of the LGT (wording of Law No. 30-G/2000, of 29 December), by establishing the consequences of the application of the general anti-abuse clause "taxation then being effected in accordance with the applicable rules in their absence and the aforementioned tax advantages not being produced," points decisively to the effect that the application must be made in such a way as to prevent the production of the tax advantages.

Indeed, although the first part of this Article 38, No. 2, contains an apparent distinction between the objectives sought by the taxpayer between "reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or business transactions of identical economic purpose" and "obtaining of tax advantages," it is manifest that what is at issue in the reduction, elimination or temporal deferral of taxes is always the obtaining of tax advantages, with the express and generic reference to tax advantages having only the objective of extending the scope of the rule to any tax advantages, beyond those specifically indicated, which are clearly the most frequent cases of realization of the tax advantages, which are the reduction, elimination or temporal deferral of taxes.

That is, with the wording given by Law No. 30-G/2000, of 29 December, the general anti-abuse clause came to be applicable to all situations of obtaining tax advantages and not only to situations of reduction or elimination of taxes, already provided for in the initial wording, and to that of temporal deferral, which was also expressly added in the new wording.

In this light, the reference made in the final part of Article 38, No. 2, to the non-production of the "aforementioned tax advantages" refers to all of the aforementioned, whether the most common which are specifically referred to (reduction, elimination or temporal deferral of taxes) or those generically referred to, through the allusion to "tax advantages that would not be achieved".

Moreover, no other interpretation would be constitutionally admissible, since, given that in all cases it is a matter of obtaining abusive tax advantages, it would be arbitrary and violative of the constitutional principle of equality (Article 13 of the CRP) a hypothetical distinction of treatment between the situations specifically referred to and those generically referred to.

This was not identical, in this respect, to the initial wording of this rule, in which it was stated that, as a consequence of the application of the general anti-abuse clause, taxation would fall on acts or business transactions of equivalent economic result, without any allusion to the elimination of the tax advantages, but the express reference made in the new wording to the non-production of these advantages as an effect of the application of the general anti-abuse clause came to make indispensable that the consequences of its application reach those who obtained them.

On the other hand, since this elimination of tax advantages is the express objective of the general anti-abuse clause, the recipient of the application of this clause, the one in whose assets the effects of the application will be produced, cannot but be the one who enjoyed these tax advantages.

In the case at hand, the tax advantages referred to by the Tax and Customs Authority consist in "the values already paid to the shareholders by company A... SGPS, S.A. whose values and payment dates are contained in charts 14 of the Tax Inspection Report, which are proposed to be characterized with the true nature of distribution of dividends, given that they provided the availability of money to the partners without any taxation under IRS" (page 22 of the Inspection Report).

It is thus established that if unjustified tax advantages exist in the situation at hand, particularly regarding part of the sums received by the shareholders of the Applicant as payment of said corporate interests, when those sums should be taxed as dividends, as the Tax and Customs Authority argues, it is manifest that, as is referred to in the Inspection Report, those who obtained them were the shareholders, who obtained patrimonial increases without any tax payment, and not the Applicant, which was merely a vehicle for those increases to be realized.

Since the shareholders are the beneficiaries of the aforementioned advantages, the application of the general anti-abuse clause as carried out does not allow for disregarding those advantages, since, imposing on the Applicant the payment of sums equivalent to those advantages, it is only the Applicant that is imposed with these burdens, with the shareholders remaining in intact ownership of the sums received.

It is true that it can be ventured that, sooner or later, the patrimonial loss with the taxation imposed on the company will be reflected on the shareholders, but it is also evident that this may not happen in relation to the shareholders who benefited from the improper advantages, since they may cease to be shareholders before the loss imposed on the company has an actual impact on the value of their shares. Although, in the case at hand, we are dealing with a company with a shareholder structure that has maintained considerable stability, changes did occur, reported in the factual matters established, and there is no certainty that this may not be repeated.

However, the interpretation of the final part of Article 38, No. 2, of the LGT, as a tax law rule resulting in the imposition of taxation, cannot fail to take into account the characteristic of generality, indispensable in taxation rules by virtue of the provision of Article 5, No. 2, of the LGT, which is a corollary of the principle of equality in the distribution of public burdens. Therefore, the correct interpretation of Article 38, No. 2, will have to apply generally, in relation to any type of joint-stock company, including those listed on stock exchanges in which the shareholder structure changes constantly, regarding which it is evident that the imposition of taxation on the company by means of its intermediation the shareholders created for themselves improper tax advantages will have no effect on those who enjoyed such advantages and later ceased to be shareholders.

Now, in this light, it is evident that the scope of that Article 38, No. 2, by establishing as a necessary effect of the application of the general anti-abuse clause the non-production of tax advantages, presupposes the legislative understanding that the "taxation in accordance with the applicable rules" falls on those who obtained the advantages and not on those who merely had participation in the acts from which they result without benefiting from them, since only thus is it possible to guarantee the intended effect of the aforementioned tax advantages not being produced.

In fact, it is concluded from the final part of No. 2 of Article 38 of the LGT, in the wording of Law No. 30-G/2000, that the general anti-abuse clause does not aim merely to provide the Tax Administration with compensation for acts that caused it a loss of tax revenue, but rather aims, concomitantly, to eliminate the illegitimate tax advantages that someone obtained, which reveals that underlying it are concerns of equality and tax justice, which can only be satisfied with the imposition of the omitted taxation on those who obtained those advantages.

Indeed, this is the only interpretation that is compatible with the principle of taxation according to taxpaying capacity (Article 104, No. 2, of the CRP) and the principle of taxation with respect for material justice (Article 5, No. 2, of the LGT).

Indeed, these principles impose that it be taxed in income taxes whoever obtained the income and not whoever did not obtain it, and the value of material justice is clearly demonstrated when, in a situation in which improper tax advantages exist, the corresponding sum will be required from those who did not benefit from those advantages, leaving untouched those who improperly benefited from them. Thus it is proven that the financial flow realized between A..., SGPS, S.A. and the shareholders of B... did not generate tax advantages in the legal sphere of A.... The obtaining of significant advantages in the legal sphere of the shareholders involved occurred at the time of the business transaction – transaction of sale of shares of the partners of B... to A..., S.A., and not at the time of the performance of the monetary flow corresponding to payment of the consideration for that economic transaction (the sale of the interests), albeit only at this moment would the withholding at source with the rate provided in paragraph c) of No. 1 of Article 71 of CIRS be required.

Keeping these principles in mind, it is certain that the wording of No. 2 of Article 38 of the LGT, introduced by Law No. 30-G/2000, requires that the application of the general anti-abuse clause have as its effect the non-production of improper tax advantages, therefore it is presupposed in this rule that, at least in cases where the tax advantages have already been produced, the recipient of the application be those who enjoy them.

Therefore, in the case at hand, since the Applicant did not enjoy any tax advantage, the possibility of it being liable for payment of the sums corresponding to the improper tax advantages that the Tax and Customs Authority invokes is removed.

In fact, there is no legal provision that ensures the Applicant the possibility of recovering the sum assessed by demanding its payment from those who benefited from the improper tax advantages, since the responsibility of the shareholders, in the case of withholding at source which does not have the nature of payment on account, is merely subsidiary, by virtue of the provision of No. 3 of Article 103 of CIRS, and there is no legal provision that ensures the right of recourse of the original responsible party in relation to the subsidiary.

On the other hand, it is not even possible to venture the possibility of, on the basis of civil law, the Applicant recovering what it paid to the extent of the enrichment of the shareholders, on the grounds of unjustified enrichment, since the application of the general anti-abuse clause only allows considering ineffective the business transactions or acts "within the tax law sphere," as results from the text of No. 2 of Article 38 of the LGT, therefore the transactions entered into maintain their full effectiveness for civil purposes and, in terms of civil law, the full reception of the sums received by the shareholders has legal cause, since it is the consideration for the transmission of their shares to the Applicant, in the context of the purchase and sale.

To this is added, in line with what the Applicant argues, that the rule of Article 38, No. 2, of the LGT, if interpreted as admitting the opposability of the effects of the application of the general anti-abuse clause to the tax substitute, particularly the imposition of the effects of the non-fulfillment of a duty to withhold at source that did not exist in the face of the transaction actually entered into, associated with the impossibility of recovering the non-withheld sums, is materially unconstitutional, in light of the principles of proportionality and the right to property (Articles 18, No. 2, and 62, No. 1, of the CRP).

Indeed, since the existence of a duty to withhold at source is dependent on the legal nature of the payments made and it is only possible to consider ineffective for tax purposes the transaction entered into after a case-by-case authorization of the highest ranking official of the service or of the official to whom he has delegated that authority (Article 63, No. 7, of CPPT), the potential tax substitute would be legally unable to prevent a decrease in assets caused by the tax debts of another, since, at the moment it made the payments, it had no legal basis for making the withholding at source and that duty would only arise, with retroactive effect, following the application of the general anti-abuse clause which would allow considering the transaction entered into fiscally ineffective, without the possibility of recovering what would have to pay.

In the taxation of income by means of withholding at source of tax with a liberatory nature, it is important to distinguish between the accessory tax obligation that falls on a tax substitute, to withhold part of the sum of which it is indebted to the taxpayer at the time of performance of payment, to deliver it to the Tax Administration and not to its original creditor, the holder of the income. However, if the taxpayer receives the full amount of income, the principal tax obligation must be his, since he is ultimately the one who must bear the burden of the tax, which can only and should fall on him, as the ultimate beneficiary of the income. Indeed, the accessory obligation arises, in the case under analysis, subsequently to the moment in which the tax substitute had the obligation to withhold the tax, by application of the general anti-abuse clause, and disregard of the transaction previously executed, promoted subsequently by AT, as a result of the application of Article No. 38, No. 2, of the LGT.

Thus the Applicant cannot be reconducted to the condition of tax-obligated party in this case, impugning the assessment with illegality, since the application of the general anti-abuse clause cannot operate to give rise to accessory fiscal obligations, that is, to impose on third parties obligations to withhold and deliver tax.

The Applicant in the concrete case cannot be considered a taxable person for the tax, despite assuming the quality of the entity paying the price, the consideration for the transaction of purchase and sale of corporate interests. If the transaction of transmission of corporate interests is to be disregarded, this must be carried out in the legal sphere of the partners. The subsequent disregard of the transaction after the legal duty of withholding cannot lead to a retroactive obligation in the legal-tax sphere of A..., with this obligation having to arise in the legal sphere of the partners who appropriated themselves, whether properly or improperly, of the income generated by the said transaction considered simulated by AT, albeit the Applicant understands that there is no simulation. There is no reasonableness in the request presented by AT regarding the disregard of the financial flows made as payment for shares; for this disregard to be considered, it had to be made in the legal sphere of the partners, proving that the transaction carried out is not a transaction of sale of interests, but a distribution of dividends. In that case the financial responsibility for payment fell to B..., and if truly, the merger of A... and B... occurred, A... could also be responsible for paying that financial responsibility if the moment of making available the dividends occurred only after the merger and only in that case could the responsibility for the withholding of IRS be attributed to the new legal entity A..., SGPS, resulting from the merger of A...-B....

Even if the prerequisites for application of Article 38, No. 2, of the LGT were satisfied, it is understood that this provision does not have the capacity, in relation to third parties, to trigger the birth of accessory fiscal obligations, namely the obligation to withhold at source, existing only after the legal-tax reconfiguration operated in the context of the application of the general anti-abuse clause, under penalty of unconstitutionality of the rule in light of the principles of legal certainty and security, inherent in the democratic rule of law established in Article 2 of the CRP.

In these terms, the conclusion must be that the impugned acts are illegal by violation of Article 38, No. 2, of the LGT, by breach of violation of law, by error regarding the legal prerequisites, which justifies its annulment, under Article 135 of the Administrative Procedure Code, applicable by virtue of the provision of Article 2, paragraph c), of the LGT.

III.2.4. Defects whose examination is rendered moot

Since the impugned assessments are to be annulled due to breach of violation of law, which prevents renewal of the acts in relation to the Applicant, the examination of the remaining defects attributed to it is rendered moot, as it is futile (Article 130 of the CPC).

III.2.5. Assessments of compensatory interest

Since the IRS assessments are illegal, the assessments of compensatory interest which had them as prerequisites are also illegal, for the same reasons, and are included in the tax debt (Article 35, No. 8, of the LGT).

III.2.6. Request for indemnifying interest

The Applicant further requests that payment of indemnifying interest be determined, regarding the sum paid improperly.

Article 43, Nos. 1 and 2, of the LGT establishes that "indemnifying interest is due when it is determined, in gracious reclamation or judicial impugnation, that there was error attributable to the services resulting in payment of the tax debt in an amount greater than legally due."

In the case at hand, it was the Tax and Customs Authority that made the adjustment to the taxable matter of the Applicant, on its own initiative, therefore the error that affects it is attributable to the services for the purposes of No. 1 of Article 43 of the LGT.

Thus, the request for indemnifying interest formulated by the Applicant is warranted, with indemnifying interest being due from 24-03-2014 until full payment of the sum of €3,082,666.39, of IRS and compensatory interest, under the terms of that rule and of Article 61 of CPPT.

IV. DECISION

In the terms set out above, this collective Arbitral Tribunal decides:

a) To uphold the request for arbitral pronunciation;

b) To annul, on the grounds of violation of Article 38, No. 2, of the LGT:

– the additional IRS assessment No. 2014 …, of 24-01-2014, relating to the year 2010, in the amount of €2,705,300.00 (two million seven hundred and five thousand and three hundred euros);

– the assessments of compensatory interest Nos. 2014 …; 2014 … and 2014 …; all of 24-01-2014, in the total amount of €377,366.39 (three hundred and seventy-seven thousand three hundred and sixty-six euros and thirty-nine cents);

c) To consider the examination of the defects not assessed as rendered moot;

d) To uphold the request for indemnifying interest and to order the Tax and Customs Authority to pay it to the Applicant, at the legal default rate for civil debts, under the terms of Articles 35, No. 10, and 43, Nos. 1 and 5, of the LGT, 61 of CPPT, 559 of the Civil Code and Ordinance No. 291/2003, of 8 April (or legislation that succeeds it), calculated on the basis of the sum of €3,082,666.39, from the date of payment (24-03-2014), until the date of processing of the credit note in which they are included.

V - VALUE OF THE PROCEEDINGS

In accordance with the provision of Articles 306, No. 2, of the CPC, 97-A, No. 1, paragraph a), of CPPT and 3, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at €3,082,666.39 (three million, eighty-two thousand six hundred and sixty-six euros and thirty-nine cents).

VI - COSTS

Under Article 22, No. 4, of RJAT, the amount of costs is fixed at €39,474.00, under the terms of Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, at the expense of the Tax and Customs Authority.

Lisbon, 2 March 2015.

The arbitrators,

(Jorge Lopes de Sousa)

(Ana Maria Rodrigues)

(José Coutinho Pires)

[1] BAPTISTA MACHADO, Introduction to Law and Legitimizing Discourse, page 182.