IRC RETGS: Deduction of Financial Charges in SGPS Under Article 32 EBF – CAAD Ruling 4/2016-T

ARBITRAL DECISION

The arbitrators Counsel Jorge Manuel Lopes de Sousa (President Arbitrator), Dr. João Taborda da Gama and Professor Doctor Jorge Júlio Landeiro Vaz (Arbitrator Members), appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 22-03-2016, agree as follows:

1. Report

A… SGPS, S.A., NIPC…, with registered office at Rua…, No.…, …, …-… …, hereinafter referred to as the Claimant, came, pursuant to the terms and for the purposes of the provisions of Articles 2, No. 1, paragraph a), and 10, No. 1, paragraph a), both of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter only designated as RJAT), to request the constitution of an Arbitral Tribunal with a view to annul the decision of dismissal of the administrative appeal that it filed from the self-assessment of Corporate Income Tax relating to the fiscal year 2012.

The Respondent is the TAX AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 22-01-2016.

Pursuant to the provisions of paragraph a) of No. 2 of Article 6 and paragraph b) of No. 1 of Article 11 of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the undersigned signatories, who communicated acceptance of their appointment within the applicable period.

On 07-03-2016 the parties were duly notified of this appointment, and did not manifest the intention to refuse the appointment of the arbitrators, pursuant to the combined provisions of Article 11, No. 1, paragraphs a) and b) of the RJAT and Articles 6 and 7 of the Deontological Code.

Thus, in conformity with the provision of paragraph c) of No. 1 of Article 11 of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 22-03-2016.

The Tax and Customs Authority responded, raising the exception of incompetence of the Arbitral Tribunal and arguing that the request should be judged unfounded.

By order of 28-04-2016 it was decided to dispense with a hearing and that the proceedings continue with written submissions.

The parties presented written submissions.

The arbitral tribunal was regularly constituted, in accordance with the provisions of Articles 2, No. 1, paragraph a), and 10, No. 1, of Decree-Law No. 10/2011, of 20 January.

The parties are duly represented and enjoy legal personality and capacity, are legitimate and are represented (Articles 4 and 10, No. 2, of the same diploma and Article 1 of Ordinance No. 112-A/2011, of 22 March).

The proceedings do not suffer from any defects and the exception of material incompetence of the Arbitral Tribunal was raised.

2. Facts

2.1. Proven Facts

Based on the elements contained in the file and in the administrative proceedings attached to the records, the following facts are considered proven:

a) On 31-12-2012, the Claimant was the dominant company of a group of entities that were part of the Special Tax Regime for Groups of Companies, with the group composed of the following subsidiary companies:

› B…, S.A., with TIN…;

› C…, S.A., with TIN…;

› D…, S.A., with TIN…;

› E…, S.A., with TIN…;

› F…, S.A., with TIN…;

› G…SGPS, S.A., with TIN…;

› H…, SGPS, S.A., with TIN….

b) On 29-05-2014, the Claimant filed an individual substitute Form 22 return relating to fiscal year 2012, identified with No.…-…-…, a copy of which is attached as document No. 5 with the arbitration request, the content of which is hereby reproduced, in which a tax loss of €11,934,220.63 was determined;

c) On 30-05-2014, the Claimant filed a substitute Form 22 return for the group of companies relating to fiscal year 2012, identified with No.…-…-…, a copy of which is attached as document No. 4 with the arbitration request, the content of which is hereby reproduced, in which a negative consolidated tax result of €-1,038,191.70 was determined;

d) In the individual Form 22 return, the Claimant, by reference to fiscal year 2012, increased financial charges (expenses) in the amount of €3,394,990.84 in field 779 of Table 07 (document No. 5 attached with the arbitration request, the content of which is hereby reproduced);

e) The increase referred to in the previous paragraph was included by the Claimant in accordance with the terms provided in Circular No. 7/2004, of 30 March (Document No. 6 attached with the arbitration request, the content of which is hereby reproduced);

f) On 27-05-2015, the Claimant filed an administrative appeal of the self-assessment in the individual Form 22 return identified with No.…-…-… (document No. 1 attached with the arbitration request, the content of which is hereby reproduced);

g) On 09-10-2015, the Claimant was notified to express its position on the content of the draft dismissal of the administrative appeal and to exercise its right to a hearing, based on an opinion (document No. 9 attached with the arbitration request, the content of which is hereby reproduced) in which the following is stated, among other matters:

Regarding the Claimant's Allegations

From the grounds alleged, which are hereby entirely reproduced, the following results:

• It filed the Form 22 Return for fiscal year 2012 in the capacity of dominant company, as the responsibility for payment of Corporate Income Tax falls upon it, with the other group entities being jointly liable for payment of the tax.

• The substitute Form 22 return for the group was sent on 30 May 2014, in which a negative consolidated tax result was determined in the amount of €1,038,191.70.

• There was an error in the self-assessment, in the context of taxable profit determination, which distorted the consolidated tax result of the group.

• Following the provision of No. 2 of Article 32 of the Tax Benefits Statute, it increased financial charges (expenses) in the amount of €3,394,990.84.

• During the fiscal years in which the tax regime applicable to SGPSs was in force, it increased, in the context of taxable profit determination, the financial charges (expenses) incurred on loans taken out for the purpose of acquiring capital shares, based on an administrative instruction contested in the TCAN Judgment of 15 January, case No. 00946/09.

• It goes on to state that, since 2003, it disregarded for the purpose of determining its taxable profit, gains and losses realized with the onerous transfer of capital shares, as well as the financial charges (expenses) incurred following loans taken out for the purpose of acquiring the same.

• It goes on to frame the legal value of administrative guidelines, namely circulars, and that these bind only the Tax Authority, in so far as they are generic service orders, created to rationalize and simplify the functioning of tax services.

• It considers that the Tax Authority with the said Circular went well beyond the reason underlying the legislator's consecration of the norm.

• It goes on to make considerations regarding the Circular in question. It disagrees with the understanding set forth in the Circular, regarding the cost (expense) of the tax deduction of financial charges that were not considered as expenses in prior fiscal years, since that premise placed in question, clearly, the spirit of the legislator underlying the creation of the tax regime for SGPSs, which was based essentially on the need to strengthen the competitiveness of those companies.

• It does not accept that the increase in financial charges occurs before the onerous transfer of the capital shares to which they relate. It again brings into question point 6 of the Circular and its disagreement.

• It adds that it cannot identify which financing it contracted that was deliberately used in the acquisition of equity interests, and it cannot discern which loans will have had another use, namely the financing of its subsidiaries.

• Accordingly, it chose to resort, alternatively, to the indirect allocation method, resulting from Circular No. 7/2004, of 30 March.

• It is of the opinion that the financial charges (expenses) previously increased, in the context of determining its taxable profit, in the amount of €3,394,990.84, should be accepted and, consequently, the respective adjustment should be made in the individual Declaration, Form 22 of A….

• It understands that its tax loss, which amounted to €11,934,220.63, should be corrected to €15,329,211.47.

• From the change in its individual tax result, there will naturally be an impact on the consolidated tax result of Group I…, changing the algebraic sum of tax results presented to date, moving from a negative consolidated tax result in the amount of €1,038,191.70 to a negative consolidated tax result in the amount of €4,433,182.54.

It therefore requests the correction of the individual declaration, Form 22, as well as that of Group I…, taking into account the alleged illegality of the assessment.

Regarding the Assessment of the Request

The claimant is the dominant company of a group of companies that is classified, for Corporate Income Tax purposes, under the Special Tax Regime for Groups of Companies, hereinafter RETGS.

It is inherent in No. 1 of Article 70 of the IRC Code that the group profit is calculated through the algebraic sum of taxable profits and tax losses determined in the periodic individual declarations of each of the companies belonging to the group.

This regime allows the group to be considered as a single taxpayer, for Corporate Income Tax purposes, enabling a saving of that tax through compensation between the profits of some companies and the losses of others.

Law No. 32-B/2002, of 30 December (State Budget Law for 2003) introduced, through its Article 38, a significant change to the tax regime applicable to the activity that constitutes the typical object of SGPSs, through the amendment it inserted in Article 31 of the Tax Benefits Statute (current Article 32).

This amendment consists in that, both the income associated with the holding of capital shares, such as dividends and capital gains, and the costs, such as financial charges incurred with financing obtained in view of the holding of capital shares, do not contribute to the determination of taxable profit. In summary, the activity typified in Article 1 of the SGPS Regime is, as a rule, excluded from taxation.

No. 2 of Article 32 of the Tax Benefits Statute provides for such a framework and establishes that "The capital gains and capital losses realized by SGPSs, (...) from capital shares of which they are holders, provided they are held for a period of no less than one year, and likewise, the financial charges incurred with their acquisition do not contribute to the formation of the taxable profit of these companies".

This regime consists of the attribution of a benefit that, however, was offset by the non-contribution, for the purpose of determining taxable profit, of financial charges incurred, creating an environment of neutrality between income from certain financial assets and expenses associated with the liabilities necessary for the acquisition and maintenance of those assets. Assets that, in the future, generate gains in their entirety excluded from taxation.

Article 32 of the Tax Benefits Statute thus establishes the existence of a connection between the acquisition and holding of capital shares over a given minimum period, in line with the legal framework of the SGPS regime, and the tax relevance of financial charges incurred with their acquisition.

The non-deduction as a cost of financial charges, for the purpose of determining taxable profit, established in No. 2 of Article 32 of the Tax Benefits Statute, embodies the corollary of the general principle of cost indispensability, according to which tax deduction is conditional on its connection with the obtaining of income subject to tax and from which it results that "if certain costs are related to income not subject to tax they are not tax-deductible", a principle established in No. 1 of Article 23 of the Corporate Income Tax Code.

Regarding the method to be used for the non-deduction as a cost of financial charges related to the acquisition of capital shares, in order to identify the sources of capital applied in these acquisitions and, in particular, borrowed capital related to those acquisitions, it must be considered that one of the characteristics of money is its fungibility, which prevents the possibility of determining the specific application of capital obtained through a certain loan.

Thus, the most appropriate solution consists of allocating the remunerated liabilities of SGPSs, first of all to remunerated loans granted by them to invested companies and other investments generating interest, affecting the remainder to other assets, namely capital shares, proportionally to their respective acquisition cost.

In that sense, the Tax Administration, interpreting and applying the law, made public Circular No. 7/2004, of 30 March, from DSIRC, where the understanding is endorsed to be followed for determining financial charges whose deductibility is to be excluded within the scope of Article 32 of the Tax Benefits Statute.

This circular represents an effort of coherent, impartial and objective analysis of the legal norms underlying it, in order to correct, as rigorously as possible, the spirit of the law, linked with the other legal rules objectively applicable.

From the said circular results only a calculation formula that allows the allocation of financial charges, taking into account the already mentioned characteristic of money's fungibility, and given the consequent impossibility of determining the specific application of capital obtained.

Nothing in the letter of No. 2 of Article 32 of the Tax Benefits Statute prevents the application of this calculation method.

Regarding the moment in which financial charges should be disregarded for the purpose of determining taxable profit, it should be noted that the disregard of financial charges should operate immediately, not depending on the alienation of capital shares and the realization of capital gains, which implies not considering, from the outset, the financial costs incurred with the acquisition of equity interests that may benefit from the tax exclusion established in No. 2 of Article 32 of the Tax Benefits Statute, correcting this initial disregard if it is subsequently found that the temporal requirement provided for in that provision was not met.

In accordance with Circular 7/2004, of 30 March, "(...) given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that it would allow, that allocation should be made on the basis of a formula that takes into account the following:

1 - Allocate the remunerated liabilities of SGPSs to remunerated loans granted by them to invested companies and to other investments generating interest:

2 - Affect the remainder to other assets, namely equity interests, proportionally to their respective acquisition cost;

That was the formula used for determining financial charges not accepted as a cost and which are now contested.

The content of Circular No. 7/2004 is consistent with the legal criteria defined for tax facts, in accordance with the provision of No. 1 of Article 81 of the General Tax Law, so there is no indirect assessment of the taxable matter here, contrary to what the claimant contends.

In the request the claimant invokes a violation of the Constitution and the law, since the determination of the amount of non-deductible financial charges was made on the basis of a Circular, which, in developing the content of a tax incidence rule, violates the principle of tax legality.

The Tax Authority may issue generic guidelines, directed at its services, relating to the interpretation and application of tax rules, as prescribed in paragraph b) of No. 3 of Article 59 of the General Tax Law.

Generic guidelines are provided for in Article 55 of the General Code of Tax Procedure, Articles 68 and 68-A of the General Tax Law, aiming at the standardization of the interpretation and application of tax rules.

It is inherent in No. 3 of Article 55 of the General Code of Tax Procedure that generic guidelines must necessarily be contained in administrative circulars and apply exclusively to the Tax Authority.

The binding of the Tax Authority by generic guidelines it issues is a corollary of the principles of equality and good faith, principles that should guide all of its activity.

The conversion of binding information or other type of understanding provided to taxpayers into administrative circulars, when a question of relevant law has been raised and it has been appreciated in the same sense in three information requests, is a manifestation of the principles of equality and collaboration of the Tax Authority with taxpayers.

The Tax Authority is bound by generic guidelines it issues, regardless of its form of communication.

The issuance of Circular No. 7/2004 came to fulfill that objective, with respect to the standardization of the calculation basis for financial charges incurred with the acquisition of equity interests.

Compliance with the calculation method for these charges is, in addition to an obligation to which the services are bound, a guarantee of compliance with the principles of legality and equality, in the sphere of taxation, whereby the binding of the Tax Authority services to its content is unequivocal.

The constant interpretation of Circular No. 7/2004 is in accordance with the letter of the law, in so far as it does nothing more than undertake the discovery of its most precise meaning, in respect, moreover, of the general theory of interpretation of law and the normative framework that shapes it, and therefore, it is considered that, accordingly, it also does not violate that constitutionally established principle.

Conclusion

Therefore, we consider that the assessed amount claimed is correct, and the claimant's claim should be dismissed.

h) The Claimant did not express itself in the exercise of the right to a hearing;

i) By notice of 30-10-2015, the Claimant was notified of the order dismissing the administrative appeal (document No. 2 attached with the arbitration request, the content of which is hereby reproduced)

j) The Claimant added to the net income for the fiscal year the financial charges attributable to capital shares, according to the allocation criterion provided for in Circular No. 7/2004, of DSIRC (agreement of the Parties, through statement of the Claimant accepted by the Tax and Customs Authority in Article 31 of the Response);

k) It was not possible for the Claimant to obtain information on the specific or direct allocation of financial charges to equity interests, which is the reason why it applied the method contained in the said circular (agreement of the Parties, through statement of the Claimant accepted by the Tax and Customs Authority in Article 32 of the Response);

l) The Claimant did not alienate any equity interests in fiscal year 2012 (Article 67 of the arbitration request, the correspondence to reality of which is not disputed);

m) On 05-01-2016, the Claimant filed the request for constitution of the arbitral tribunal that gave rise to the present proceedings.

2.2. Unproven Facts

There are no facts relevant to the decision of the case that have not been proven.

2.3. Reasoning for the Determination of the Facts

The proven facts are based on the documents submitted by the Claimant with the arbitration request and on the administrative proceedings.

3. Exception of Material Incompetence of the Arbitral Tribunal

The Claimant formulates its request in the following terms:

"In these terms and to the best of the Law, with the learned supplementation of Your Excellencies, the present Request for Arbitration should be considered well-founded by proof, the annulment of the decision dismissing the Administrative Appeal in question should be determined and consequently the deductibility of the financial charges (expenses) increased in the context of determining the tax result of the Claimant for fiscal year 2012 should be recognized, in the amount of Euro 3,394,990.84 (three million, three hundred and ninety-four thousand, nine hundred and ninety euros and eighty-four cents), and, as a consequence, the individual tax result of the Claimant as declared, of a tax loss of Euro 11,934,220.63 (eleven million, nine hundred and thirty-four thousand, two hundred and twenty euros and sixty-three cents) should be changed to a tax loss of Euro 15,329,211.47 (fifteen million, three hundred and twenty-nine thousand, two hundred and eleven euros and forty-seven cents), all with the due and legal consequences within the scope of the consolidated tax result for the same fiscal year which should change from a tax loss of Euro 1,038,191.70 (one million, thirty-eight thousand, one hundred and ninety-one euros and seventy cents) to a negative consolidated tax result in the amount of Euro 4,433,182.54 (four million, four hundred and thirty-three thousand, one hundred and eighty-two euros and fifty-four cents)."

The Tax and Customs Authority argues that the Arbitral Tribunal is materially incompetent to assess the Claimant's claims because, "in light of Article 2 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Tax Arbitration (RJAT), the competence of arbitral tribunals comprises, among others, the assessment of claims relating to the "declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account" and the legislator has "chosen not to contemplate (in the RJAT) the possibility of assessing requests aimed at the recognition of rights in tax matters".

The Claimant responded in the written submissions, saying the following, in summary:

– what is at issue in the present arbitration is the assessment of the (il)legality of the decision dismissing the Administrative Appeal filed, which naturally has underlying the assessment of the (il)legality of the tax act of self-assessment of Corporate Income Tax for 2012;

– as a consequence of such annulments (decision of dismissal and tax self-assessment act), naturally, the correction of the Claimant's tax result will occur;

– the Tax Authority itself admits this situation, in so far as it states that "Basically and as can be understood from the arbitration request presented by the claimant, it comes to question the self-assessment of Corporate Income Tax for 2012 by having applied with respect to financial charges the provision of Circular No. 7/2004, of 30 March;

– there will be, at least, an implicit request for annulment of the self-assessment;

– the principle pro actione applies in the arbitral process;

The legislative authorization on which the Government based itself for approving the RJAT was granted by Article 124 of Law No. 3-B/2010, of 28 April, providing in its No. 2 and in paragraph a) of No. 4 the possibility of tax arbitration covering what in the judicial tax process is the field of application of the action for recognition of a right or legitimate interest.

However, Decree-Law No. 10/2011, of 20 January (RJAT) only included in the scope of tax arbitration competences to assess the legality of acts of the types referred to in Article 2, No. 1, inherent to judicial challenge processes, relating to challenge of acts of self-assessment, fixing of taxable matter, fixing of collectible matter and fixing of patrimony values, in addition to challenge of acts that assess the legality of acts of these types.

For this reason, the arbitral tribunals functioning in CAAD have powers of cognition limited to those that tax tribunals may exercise in the judicial challenge process (which has been understood to comprise, in addition to the declaration of illegality and annulment of acts of those types, also the condemnation to payment of compensatory interest and reimbursement of amounts incorrectly paid that serve as its calculation basis and indemnities for improper warranty), but do not include competences that in tax tribunals may only be exercised in proceedings for execution of judgments and in actions for recognition of right or legitimate interest.

Thus, this Arbitral Tribunal does not have competence to rule on the requests to "recognize the deductibility of the financial charges (expenses) increased in the context of determining the Claimant's tax result for fiscal year 2012", "consider that the Claimant's individual tax result as declared, of a tax loss of Euro 11,934,220.63 (eleven million, nine hundred and thirty-four thousand, two hundred and twenty euros and sixty-three cents) should be changed to a tax loss of Euro 15,329,211.47" and define the consequences within the scope of the consolidated tax result for the same fiscal year at the level of losses.

For this reason, the exception raised proceeds, with respect to the stated requests.

However, the Claimant also requests the "annulment of the decision dismissing the Administrative Appeal" and it can be understood that it seeks that the illegality of the self-assessment carried out for fiscal year 2012 be declared, whereby we are faced with matters included in the competences of the arbitral tribunals functioning in CAAD, in light of Articles 2, No. 1, paragraph a), and 10, No. 1, paragraph a), of the RJAT.

Although the requests for declaration of illegality and annulment of the self-assessment are not explicitly formulated, they are implicit in the arbitration request and the Tax and Customs Authority interpreted them in these terms, as can be seen from Article 21 of its Response in which it states that "as can be understood from the arbitration request presented by the claimant, it comes to question the self-assessment of Corporate Income Tax for 2012 by having applied with respect to financial charges the provision of Circular No. 7/2004, of 30 March, which embodies the interpretation of the Tax Authority of the provision of Article 32, No. 2 of the Tax Benefits Statute".

Thus, the competence of this Arbitral Tribunal is restricted to knowing of this question of the illegality of the self-assessment and of the decision of the administrative appeal that did not annul it.

4. Law

4.1. The Claimant increased, in the individual Form 22 return that it filed, by reference to fiscal year 2012, in the context of determining its taxable profit, financial charges (expenses) in the amount of €3,394,990.84 incurred on loans taken out for the purpose of acquiring capital shares (document No. 5 attached with the arbitration request, field 779 of Table 07).

In the administrative appeal that it filed, the Claimant argued that that amount was determined in accordance with points 6 and 7 of Circular No. 7/2004, of 30 March, and that that increase constitutes an error in the self-assessment (Articles 8, 10 and 11 of the administrative appeal).

The Tax and Customs Authority dismissed the administrative appeal on the grounds that, in summary, it may issue circulars, which bind it, having issued Circular No. 7/2004, for standardization of the calculation basis for financial charges incurred with the acquisition of equity interests by SGPSs and that the interpretation made in that Circular is in accordance with the law.

4.2. Positions of the Parties

The Claimant argued in the administrative appeal and in the present proceedings the following, in summary:

– the Claimant proceeded with the application of Circular 7/2004, namely the calculation formula reflected in point 7 thereof, starting to disregard (from 2003 inclusive), for the purpose of determining its taxable profit, capital gains and losses realized with the onerous transfer of capital shares, as well as financial charges (expenses) calculated in accordance with the said Circular, despite the impossibility of actual and direct allocation of the financial charges (expenses) associated with loans taken out for a certain purpose, namely the acquisition of capital shares;

– administrative guidelines, namely circulars, bind only the Tax Authority, in so far as they are generic service orders, created to rationalize and simplify the functioning of tax services;

– the interpretation of Circular No. 7/2004, of 30 March, was never settled, not only due to the controversy associated with the subject matter, but also due to the technical complexity resulting from the mechanism developed by the Tax Authority to determine which financial charges (expenses) were previously mentioned;

– Article 32 of the Tax Benefits Statute, the only rule where such a regime was provided, did not provide, either formally or materially, any mechanism or formula that would allow the allocation of financial charges (expenses) incurred to the end for which the financing obtained was intended (not thus making it possible to determine which charges are tax-accepted and which charges would not contribute to the formation of the taxable profit of SGPSs), taking into account the multiple uses of money received following loans taken out;

– that Circular embodied, to a certain extent, the determination of the Tax Authority to provide Article 32, No. 2 of the Tax Benefits Statute with a calculation method, perpetrating an interpretation that went well beyond the reason underlying the legislator's consecration of that rule;

– however, despite the Claimant praising the effort undertaken by the Tax Authority, the approach set forth there was based on a proportional, indirect and presumptive calculation method which, in the opinion of the former, distorted in a serious manner, at least in most cases, the tax treatment of the taxpayer, exceeding, in a substantial manner, the scope of the said Article;

– in the opinion of the Claimant, the Tax Authority should only make use of such methods (indirect assessment), in the cases expressly enumerated in Article 87 of the General Tax Law and only as a subsidiary mechanism to assessment by real and direct allocation methods;

– the Claimant understands that Circular No. 7/2004, of 30 March, cannot be equated with Law, nor can it bind the taxpayer to something that the law itself does not define;

– despite the regime established in Article 32, No. 2 of the Tax Benefits Statute not establishing any criterion that would allow distinction between financial charges allocated (or not) to the acquisition of capital shares, the Claimant understands that the Tax Authority could only, within the scope of its competences, move in the direction of developing a method that respected direct and real allocation, because only that would be compatible with the principle of legality constitutionally established;

– any increase in the tax result should be disregarded if it is based on indirect and presumptive methods, which is the case for the Claimant in so far as, as explained, it is not possible to make real and direct allocation between the financial charges (expenses) incurred and any equity interests acquired;

– in accordance with the understanding set forth in Circular No. 7/2004, of 30 March, the said charges should be increased in the fiscal year in which they materialized, despite the applicability of the tax regime of those companies, established in Article 32, No. 2, of the Tax Benefits Statute, being only validated a posteriori (i.e., at the moment of alienation of the respective equity interests);

– that imposition represented a clear obstacle to increasing the competitiveness of holding companies, given that the non-acceptance of the tax deductibility of those charges prejudiced, in a significant manner, their tax treatment, by anticipating a tax adjustment that would only prove valid or invalid in future fiscal years (namely, at the moment of onerous transfer of the said equity interests), limiting, therefore, in a substantial manner, the range of investment options of those responsible for those companies;

– for the Claimant, the legal obligation to increase the said charges may be accepted as a legitimate option of the legislator, as a trade-off for the exemption granted in the taxation of capital gains realized with capital shares (in accordance with the tax regime of SGPSs), ensuring, in that way, material equality in our tax-legal order;

– it cannot, in any way, accept that the increase in the aforementioned financial charges (provided they are properly determined and incurred) occurs before the onerous transfer of the capital shares to which they relate (since, in accordance with that administrative instruction, that was the moment in which the application, or not, of the regime applicable to SGPSs should be assessed);

– an SGPS should tax-wise accept those charges in the fiscal year in which it incurred them, assessing their potential increase, for the purpose of determining its taxable profit, only at the moment of the onerous transfer of the equity interests held and provided that the requirements underlying the application of that regime were met;

– a holding company could cease to meet the requirements required for the non-consideration of capital gains and losses, under Corporate Income Tax law, (for example, in the case it integrated, within the scope of a restructuring process, any operational activity that would jeopardize its status as an SGPS or if the regime itself were revoked), whereby, until the moment (i.e., fiscal year) in which a possible onerous transfer of the capital shares held by that company took place, the financial charges incurred with financing obtained for the purpose of their acquisition necessarily contributed to the formation of the taxable profit of the SGPS (even because, the holding company could not foresee, with certainty, a future alienation of its equity interests);

– the tax regime applicable to SGPSs itself established, as a sine qua non condition for the increase of those charges (to the net income of holding companies), the prior non-consideration, in the context of determining the taxable profit of those companies, of any capital gains or losses realized with the onerous transfer of capital shares held by them;

– the legislator intended to limit this differentiated tax treatment to a single fiscal year, disregarding, simultaneously, from the determination of the taxable profit of SGPSs, the capital gain (or loss) possibly realized with the onerous transfer of equity interests and, likewise, any financial charges (expenses) incurred with financing obtained for the purpose of acquiring the same, if that were the case;

– in so far as no equity interests were alienated in fiscal year 2012, there should also be, for this reason, no place for the consideration of any increase, for the purpose of determining taxable profit, even if it were possible to make real and direct allocation between the financial charges (expenses) incurred and the acquisition of capital shares, it not being, even possible, to assess whether there were financial charges (expenses) actually incurred for the purpose of acquiring capital shares;

– given that there is no provision in the Law, in the terms previously referred to, allowing the operationalization of the tax regime applicable to SGPSs, and likewise, the indirect allocation method contained in Circular No. 7/2004, of 30 March, is affected by illegality, the only way to guarantee the applicability of the regime in question was based on the attempt to realize that allocation in a direct manner (i.e., demonstrating, explicitly, the correspondence between financing obtained and capital shares acquired);

– however, the diligence to realize that correspondence proved futile, given the multiplicity of applications of the financing obtained by the Claimant and likewise, money's own fungible character;

– to the same extent that the Claimant does not envision a way to identify which financing it obtained that were deliberately used in the acquisition of equity interests, it also cannot, naturally, discern which loans will have had another use, namely the financing of its subsidiaries;

– following jurisprudence in the sense of the illegality of Circular No. 7/2004, the Claimant understands that the financial charges (expenses) previously increased, in the context of determining its taxable profit, in the amount of €3,394,990.84 by reference to fiscal year 2012, should be accepted and, consequently, the respective adjustment should be made in the individual Form 22 of A… for that year;

– any other solution will jeopardize the principle of equality.

The Tax and Customs Authority argues, in summary, the following:

– the method referred to in point 7 of Circular No. 7/2004 ensures uniformity in the taxation applicable to all SGPSs that do not carry out or are not capable of making such specific allocation;

– the issue only assumes relevance when it is not possible to make that specific or direct allocation;

– in the case at hand, as the Claimant itself recognizes, it was not possible to make a specific allocation of the charges at issue to the acquisition of the capital shares in question;

– not determining No. 2 of Article 32 of the Tax Benefits Statute which method for the allocation of financial charges, and in order to interpret and enforce the law - whose purpose is to penalize interest related to the acquisition of capital shares (and not other loan interest, which could even be generators of taxable income, such as those related to loans granted, but that, absent the indispensability relationship, would not be tax-deductible - which aims to safeguard the validity of a regime of neutrality of expenses and income, it must be concluded that any method, whether direct or indirect, that allows achieving the purpose and objective of the rule has to be accepted as valid;

– if the thesis proposed by the claimant were followed, there would be a risk of giving tax relevance to financial charges while exempting the capital gains that resulted from the alienation of the shares, which would violate the principle of tax neutrality and would lead to a solution against the law;

– the solution advocated by the claimant would violate the principle of equality by implementing two different treatments applicable to SGPSs and within an already exceptional measure that is the fiscal benefit that applies to them in relation to all other Corporate Income Tax subjects as to capital gains obtained;

– it is not Circular No. 7/2004 that creates tax incidence rules, but the law itself, interpreted in accordance with the foregoing, that excludes the deductibility of financial charges (incurred with financing linked to the acquisition of alienated equity interests that realize, even if potentially, capital gains excluded from taxation), for the purpose of determining the taxable profit of the fiscal year in which they are incurred;

– circulars are important in the activity developed by the Tax Authority, for the adequate pursuit of the public interest, in respect for the rights and interests of taxpayers – cfr. Articles 266 of the Constitution and Article 55 of the General Tax Law;

– the Tax Authority did not proceed to create any tax incidence rule, but sought to clarify emerging doubts regarding the tax regime applicable to SGPSs;

– there is no violation of the principle that the taxation of companies is fundamentally based on their actual income;

– it cannot be accepted, as the claimant intends, an understanding of the rule that allows the consideration of costs with financial charges, despite the non-consideration of the income associated with capital gains realized;

– SGPSs are not in equal circumstances with other corporate realities, since the non-deduction of financial charges is counterbalanced with the applicability of the exclusion from taxation provided for in No. 2 of Article 32 of the Tax Benefits Statute, whereby it cannot claim that the principle of taxpaying capacity and taxation according to actual income be applicable to them as it is for other legal entities that do not enjoy the same exemption;

– it makes no sense to speak of an irrebuttable presumption in the present case since we are not faced with any type of presumption that the claimant could not dispel, since provided that the specific allocation was made by it or the necessary elements for so were provided to the Tax Authority, such allocation would be applied;

– in the context of application/control of a fiscal benefit it does not, in fact, make sense to speak of the application of an indirect method as it is provided for in Articles 85 et seq. of the General Tax Law, since the application of an indirect method aims at the determination of the taxable matter of any tax, and, in the case of financial charges, it is obvious that we are not dealing with the determination of the total taxable matter but only and exclusively the calculation of a certain cost which is intended to be purged from the determination of the taxable matter taking into account the purpose of neutrality between income and costs aimed at by the fiscal benefit;

– the solution adopted by Circular No. 7/2004, in the part regarding the fiscal year in which corrections of the financial charges now in discussion should be made reflects the legislator's concern in not influencing the taxable profit of the fiscal year in which financial charges are incurred for the acquisition of shares capable of benefiting from No. 2 of Article 32 of the Tax Benefits Statute, without first knowing whether they can or cannot contribute to the formation of the taxable profit of the company;

– if it is concluded, "at the moment of alienation of the shares, that all requirements for application of that regime are not met, the consideration as a tax cost of the financial charges that were not considered as a cost" in the fiscal year in which they were incurred will be made in that fiscal year;

– the charges that may be found to contribute to the formation of taxable profit will, at most, be recognized in the period immediately following that in which they were incurred, and those that cannot be recognized in that immediately following period simply do not meet the requirements to contribute to the formation of taxable profit.

4.3. Powers of Cognition of the Arbitral Tribunal

The Claimant raises in its submissions the question of whether the Tax and Customs Authority invokes in the present proceedings a posteriori reasoning regarding the lack of elements allowing a specific allocation of any of the loans obtained.

The relevant reasoning in situations of self-assessment in which an administrative appeal was filed that was dismissed is that which appears in the dismissal decision (directly or by referral).

In fact, in situations of self-assessment followed by an administrative appeal in which an express decision is issued, what remains in the legal order is the position of the Tax and Customs Authority before the taxpayer which is defined by the decision on the administrative appeal, in the part in which the legality of the self-assessment was submitted to the assessment of the Tax and Customs Authority.

Consequently, the question posed to the Tribunal is whether the illegality of the self-assessment should be declared or whether it should be upheld in the legal order for the grounds invoked in the administrative appeal and only those, since, as settled jurisprudence establishes, a posteriori reasoning is irrelevant.

In fact, in a case of mere legality, the legality of the challenged act must be assessed as it occurred, with the reasoning used therein, with other possible reasoning that could serve to support other acts of totally or partially coinciding decision content with the act carried out being irrelevant.

Thus, the Tribunal cannot, in face of the finding of the invocation of an illegal ground as support for the decision dismissing the appeal, assess whether it should be dismissed for other reasons.

For this reason, it is in light of the reasoning of the decision on the appeal that the question of the legality or otherwise of the self-assessment must be assessed.

A different question from this is whether, in the event of concluding the illegality of the self-assessment in light of the grounds invoked in the decision dismissing the administrative appeal, but other possible grounds are detected, which were not invoked in it, but may be invoked in a new viable act in the execution of judgment, the tribunal should or should not set the substantive consequences of the illegality as if those new grounds did not exist or should refrain from deciding on such matter, leaving for the execution of judgment the definition of the reconstitution of the legal situation in question.

4.4. Issue of the Compatibility of Point 7 of Circular No. 7/2004 with Article 32, No. 2, of the Tax Benefits Statute

Article 32, No. 2, of the Tax Benefits Statute (EBF) establishes the following:

"The capital gains and capital losses realized by SGPSs from capital shares of which they are holders, provided they are held for a period of no less than one year, and likewise, the financial charges incurred with their acquisition do not contribute to the formation of the taxable profit of these companies."

Circular No. 7/2004, of 30 March, from DSIRC establishes in its No. 7 the following:

Method to be Used for the Purpose of Allocating Financial Charges to Equity Interests

"7. Regarding the method to be used for the purpose of allocating the financial charges incurred in the acquisition of equity interests, given the extreme difficulty of using in this matter a method of direct or specific allocation and the possibility of manipulation that it would allow, that allocation should be made on the basis of a formula taking into account the following: the remunerated liabilities of SGPSs and SCRs should be allocated, first of all, to remunerated loans granted by them to invested companies and to other investments generating interest, affecting the remainder to other assets, namely equity interests, proportionally to their respective acquisition cost."

In No. 2 of Article 32 of the Tax Benefits Statute it is established that the "financial charges incurred with their acquisition" do not contribute to the formation of taxable profit, referring to capital shares, whereby it must be concluded that its literal content indicates that only the financial charges that are connected with the acquisition of equity interests are covered by the non-deductibility established therein.

In addition to this being the interpretation resulting from the literal content, it is corroborated by the explanation for its introduction in the Tax Benefits Statute given in the Report of the State Budget for 2003 (Law No. 32-B/2002, of 30 December).

In fact, as referred to in Circular No. 7/2004, the regime of this rule was introduced in the Tax Benefits Statute by Law No. 32-B/2002, of 30 December, which approved the State Budget for 2003, giving new wording to Article 31, whose regime came to be provided in Article 32 after the renumbering carried out by Decree-Law No. 108/2008, of 26 June.

In Legislative Proposal No. 28-IX, which came to give rise to the State Budget Law for 2003, the text of that Article 31, No. 2 appeared with wording identical to that in force in 2012 (in Article 32, No. 2), the only difference being the addition of the reference to "ICRs" (abbreviation of "venture capital investors"), which is irrelevant for the interpretation of the rule.

In the said Report of the State Budget for 2003, after noting a shortfall in the execution of the 2002 budget regarding Corporate Income Tax, several measures are announced, with a view to "broadening the taxable base and moralization and neutrality measures", among which that of the non-deductibility of financial charges of nature directly associated with the acquisition of equity by SGPSs, announced in the following terms:

"The non-deductibility, for the purpose of determining taxable profit, of financial charges of nature directly associated with the acquisition of equity interests by SGPSs is established";

It is therefore unequivocal that it was intended that only financial charges directly associated with the acquisition of equity interests would be covered by the non-deductibility.

On the other hand, as seen from this explanation of the scope of this final part of No. 2, this is an independent legislative measure in relation to the part establishing that capital gains and capital losses realized do not contribute to the formation of taxable profit, since it is obvious that the non-contribution of capital gains to the formation of taxable profit does not broaden the taxable base, but rather diminishes it and, for this reason, that reason does not hold.

By that express reference in the Report to the need for financial charges to be directly associated with the acquisition of equity interests (which is also express in the text of the rule through the reference to "financial charges incurred with their acquisition"), it is concluded that, to determine the non-deductibility of financial charges, the finding that the SGPS is a holder of equity interests and incurred financial charges is not sufficient, it being necessary to demonstrate that there is a direct relationship between certain financial charges and the acquisition of certain equity interests.

It is a corollary of this interpretation, imposed by the literal content of Article 32, No. 2, that, if certain equity interests were not acquired with liabilities generating financial charges, they are irrelevant for the purpose of applying that rule, in the part concerning the non-deductibility of financial charges.

It is also a corollary of this interpretation that, with respect to equity interests acquired with financing generating charges, only the charges derived from financing related to their acquisition are non-deductible.

There is thus no legal support for setting aside the rule of deductibility of financial charges, contained in paragraph c) of No. 1 of Article 23 of the Corporate Income Tax Code, with respect to charges that are not directly associated with the acquisition of equity interests.

For this reason, it is clear, in light of the letter of the final part of No. 1 of Article 32 and the explanation given in the Report of the State Budget for 2003, that the non-deductibility of charges only applies to those directly derived from financing used for acquisition of equity interests.

Since this is the regime provided for in the law, it cannot be altered by regulatory means, since rules created by acts of a legislative nature cannot be, with external effect, interpreted, supplemented, modified, suspended or revoked by acts of another nature (Article 112, No. 5, of the Constitution).

Moreover, the definition of the assumptions of taxation is a matter subject to the principle of legality, first and foremost by virtue of the provision of Article 103, No. 2, of the Constitution which establishes that "taxes are created by law, which determines the incidence, the rate, fiscal benefits and the guarantees of taxpayers".

This principle of legality is reaffirmed and expanded by the General Tax Law, in its Article 8.

It is therefore clear that the rules relating to the assessment of taxes, in particular those defining incidence and fiscal benefits, are subject to the principle of legality, the possibility of, by administrative means, creating rules resulting in an actual burden for taxpayers being consequently ruled out.

Point 7 of Circular No. 7/2004, if applied by the Tax Administration, with external effect, in a way to rule out the deductibility of charges proven not to be connected with the acquisition of equity interests, would embody a rule of an innovative nature regarding the determination of the taxable matter of Corporate Income Tax, creating situations of non-deductibility of financial charges not provided for in the law (those in which there is no relationship between charges of that type and the acquisition of equity interests), and therefore would be invalid due to violation of the principle of legality.

However, nothing prevents the Tax and Customs Authority from issuing a circular containing its understanding of the application of Article 32, No. 2, of the Tax Benefits Statute, to be applicable in cases in which a direct determination of charges derived from financing used in the acquisition of equity interests is not viable, since such possibility of issuing binding generic guidance is provided for in Article 68-A of the General Tax Law.

As results from No. 1 of Article 68-A of the General Tax Law and has been peacefully understood, circulars only have binding effect for the Tax and Customs Authority, having external effects only of an informative nature for taxpayers, who may know in advance what understanding will be adopted by it.

In this line, the judgment of the Constitutional Court No. 42/2014, of 09-01-2014, delivered in case No. 564/12, following Casalta Nabais, Tax Law, 5th edition, page 201, can be seen, in which it is stated:

These are "internal regulations that, because their sole recipient is the tax administration, only it must obey them, being thus obligatory only for bodies situated hierarchically below the body authoring them.

For this reason they are not binding either on individuals or on tribunals. And this whether they are organizational regulations, which define rules applicable to the internal functioning of the tax administration, creating methods of work or modes of action, or whether they are interpretative regulations, which proceed to the interpretation of legal (or regulatory) provisions.

It is true that they thicken, clarify or develop legal provisions, previously defining the content of the acts to be carried out by the tax administration in its application. But this does not convert them into a validity standard for the acts they support. In fact, the assessment of the legality of the acts of the tax administration should be made through direct confrontation with the corresponding legal rule and not with the internal regulation, which intervened between the rule and the act".

These acts, in which "circulars" stand out, emanate from the power of self-organization and the hierarchical power of the Administration. They contain generic service orders and it is for this reason and only within the respective subjective scope (of the hierarchical relationship) that compliance is assured. They incorporate action directives for the future, transmitted in writing to all subordinates of the administrative authority that issued them. They are modes of standardized decision, assumed to rationalize and simplify the functioning of services. Although they may indirectly protect the legal security of taxpayers and ensure equal treatment through uniform application of the law, they do not regulate the matter on which they bear in confrontation with them, nor do they constitute a decision rule for the tribunals.

Not being illegal the issuance of circulars interpreting legislative documents with internal effect, the illegality of acts in tax matters applying the understandings contained therein cannot derive from its application, in itself, but only from the illegality of that understanding, in light of the legal regime applicable, provided for in the legislative document interpreted.

That is, the illegality of acts in tax matters that concretize the application of the understanding adopted in circulars can only be based on the illegality of the application of the regime provided therein to a determined concrete situation and not on the mere invocation of the circular.

And, for this reason, due to the fact that there are judicial decisions that, in concrete cases in which the method of point 7 of Circular 7/2004 was applied and it was demonstrated that it led to results incompatible with Article 32, No. 2, of the Tax Benefits Statute, one cannot conclude that all cases in which that method was applied are illegal. In fact, one cannot assert the abstract illegality of the method provided for in point 7 of the said Circular, if understood as only being applicable subsidiarily, as an indirect method, in cases in which a direct determination of the amount of charges connected with financing used in the acquisition of equity interests is not viable, as allowed by Articles 85, No. 1, and 87, No. 1, paragraph b), of the General Tax Law (position which the Tax and Customs Authority asserts in the present proceedings).

It is true that, if a situation is verified in which it is legally permitted to challenge rules in tax matters (which depends on the verification of the requirements provided for in Article 73 of the Code of Procedure in Administrative Courts, subsidiarily applicable), the illegality of rules contained in circulars may be assessed, in abstract terms, through the appropriate process, by the competent judicial body, which, regarding rules in tax matters of national scope are the Central Administrative Courts [Article 38, paragraph c), of the ETAF].

But, in the context of concrete assessment of legality, which is that which the arbitral tribunals functioning in CAAD can carry out, in light of the provision of Article 2 of the RJAT, the illegality of acts applying the understanding conveyed through circular can only derive from the illegality of that concrete application in light of the legal regime provided in the legislative documents that regulate the matter in question.

Thus, it must be assessed whether it is demonstrated that the application of the method provided for in point 7 of Circular No. 7/2004 is illegal, in the concrete situation in which the Claimant applied it, when filling in field 779 of Table 07 of the Form 22 declaration.

4.5. Assessment of Incompatibility with Article 32, No. 2, of the Tax Benefits Statute of the Increase in Financial Charges in the Amount of €3,394,990.84 in Field 779 of Table 07

The Claimant states that the amount of charges it entered in field 779 of Table 07 of the Form 22 declaration was determined in accordance with the rule of point 7 of the said Circular No. 7/2004, which must be considered established, since the statement is not disputed by the Tax and Customs Authority, which even argues that it is that understanding that should be applied.

However, in the case at hand, it was not demonstrated that that amount exceeds what should be declared by directly applying the criterion resulting from Article 32, No. 2, of the Tax Benefits Statute, since the Claimant itself recognizes, repeatedly, that it has no way to determine what that amount is, stating "it proved not possible to make real and direct allocation of the financial charges (expenses) associated with loans obtained for a certain purpose, namely the acquisition of capital shares" (Articles 34, 52 and 70 of the arbitration request), that the "Claimant does not envision a way to identify which financing it obtained that were deliberately used in the acquisition of equity interests, it also cannot, naturally, discern which loans will have had another use, namely the financing of its subsidiaries" (Article 71 of the arbitration request) and that "it was not (nor is) possible, during the period in which that regime was in force, to directly determine which financial charges (expenses) correspond to loans obtained for the purpose of acquiring capital shares (or even whether there were financial charges (expenses) allocated for that purpose)" (Article 82 of the arbitration request).

Thus, the situation described by the Claimant is precisely one of the types of situations in which the law provides for the possibility of using indirect methods to determine the values relevant for taxation, namely that provided for in paragraph b) of No. 1 of Article 87 of the General Tax Law, in which such use is permitted in cases of "impossibility of proof and direct and exact quantification of elements indispensable to the correct determination of the taxable matter of any tax".

The Claimant's thesis, which amounts to Article 32, No. 2, of the Tax Benefits Statute ceasing, in absolute terms, to be applied when it was unviable to directly determine the allocation of charges incurred with financing to the acquisition of equity interests, is not reconcilable with the principle of equality in the distribution of public burdens, which it is intended to safeguard with the determination by indirect methods of facts relevant for taxation, on a subsidiary basis, when it is not viable to use direct methods.

That is, the possibility of using an indirect method to determine the facts on which taxation depends is only ruled out when it is not possible to apply a direct method, a situation which the Claimant states to be the case.

For this reason, the recognition by the Claimant that it was unviable to make a direct determination provides support for the application of an indirect method, such as that provided for in point 7 of Circular No. 7/2004.

On the other hand, if it is certain that the application by the Tax and Customs Authority of indirect methods to quantify the "elements indispensable to the correct determination of the taxable matter of any tax" depends on compliance with the procedural rules provided for in Articles 90 and 91 of the General Tax Law, it is also true that, in the case at hand, it was not the Tax and Customs Authority, but the taxpayer itself, that chose to apply the indirect method, whereby the question of the application of those procedural rules nor their hypothetical violation is not raised.

Thus, as the Claimant states that it was not and is not possible to demonstrate that financial charges are related to financing respecting the acquisition of equity interests, it cannot be concluded that the decision on the administrative appeal is illegal in assuming, through the dismissal, that the application to this concrete situation of the method provided for in point 7 of Circular No. 7/2004, which the Claimant states to have used, is correct.

For this reason, on this point, it is not demonstrated that there is a defect in the quantification that the Claimant made nor that the decision on the administrative appeal is illegal.

4.6. Issue of the Fiscal Year in Which the Non-Deductibility of Financial Charges Provided for in Article 32, No. 2, of the Tax Benefits Statute Should be Removed

Point 6 of Circular No. 7/2004 has the following content:

Fiscal Year in Which Corrections of Financial Charges Should be Made

"6. Regarding the fiscal year in which financial charges should be disregarded as costs, for tax purposes, the correction of the financial charges, to the fiscal year to which they relate, of those that have been incurred with the acquisition of equity interests that are capable of benefiting from the special regime established in No. 2 of Article 31 of the Tax Benefits Statute should be made, independently of whether all conditions for the application of the special regime of taxation of capital gains have already been met. Should it be concluded, at the moment of alienation of the equity interests, that all requirements for application of that regime are not met, in that fiscal year the consideration as a tax cost of the financial charges that were not considered as a cost in prior fiscal years shall be made."

The Tax and Customs Authority argues that the interpretation adopted in that point 6 reflects "the legislator's concern in not influencing the taxable profit of the fiscal year in which financial charges for the acquisition of equity interests capable of benefiting from No. 2 of Article 32 of the Tax Benefits Statute are incurred, without first knowing whether they can or cannot contribute to the formation of the taxable profit of the company" and that "the solution advocated in the said circular addresses the concerns of the legislator in regard to the periodization of taxable profit, especially when combined with the provision of Article 23 of the Corporate Income Tax Code, preventing its recognition in the fiscal year in which, although incurred, it is still not possible to assess its indispensability for the formation of taxable profit".

The Claimant argues that the non-deduction of financial charges for the formation of taxable profit of SGPSs should not occur before the onerous transfer of the capital shares to which they relate, whereby "an SGPS should tax-wise accept those charges in the fiscal year in which it incurred them, assessing their potential increase, for the purpose of determining its taxable profit, only at the moment of the onerous transfer of the equity interests held and provided that the requirements underlying the application of that regime were met" (Article 60 of the arbitration request).

As already referred to, in the Report of the State Budget for 2003, the legislative measure that came to be introduced in Article 31, No. 2, of the Tax Benefits Statute (which corresponds to Article 32, No. 2, in the wording of Decree-Law No. 108/2008, of 26 June) is justified, with a shortfall in the execution of the 2002 budget regarding Corporate Income Tax and the predictability of that trend worsening in 2003.

Among several measures to mitigate or prevent that shortfall in revenue, the regime here at issue relating to the taxation of SGPSs was introduced, in the context of the implementation of "broadening of the taxable base and moralization and neutrality measures".

The part of that rule relating to the non-deductibility of financial charges is announced in these terms:

"The non-deductibility, for the purpose of determining taxable profit, of financial charges of nature directly associated with the acquisition of equity interests by SGPSs is established."

This explanation of the scope of this final part of No. 2 suggests that this is an independent legislative measure in relation to that contained in the part establishing that capital gains and capital losses realized do not contribute to the formation of taxable profit.

In fact, if it is true that the irrelevance of capital gains for the formation of taxable profit constitutes a fiscal benefit and, therefore, the non-deductibility of financial charges can be seen in as a compensation or mitigation of that privileged regime enjoyed by SGPSs, it is obvious that this does not occur with the non-contribution of capital losses to the formation of taxable profit, since, rather than constituting a benefit, it is a regime more penalizing for SGPSs than that provided for in No. 3 of Article 45 of the Corporate Income Tax Code, in the wording of Decree-Law No. 159/2009, of 13 July.

That is, in the case of capital losses being realized with the alienation of capital shares held for more than one year, of which they are holders, SGPSs, in addition to being burdened with their irrelevance for the formation of taxable profit, are still penalized with the non-deductibility of financial charges incurred with their acquisition, unlike what happens with the general regime of taxation of income of legal entities, provided for in paragraph c) of No. 1 of Article 23 of the Corporate Income Tax Code, in the wording of Decree-Law No. 159/2009, of 13 July.

Thus, if the non-deductibility of financial charges cannot be justified as a compensation or mitigation of the irrelevance of capital gains and capital losses for the formation of taxable profit, it will be an independent measure to the first part of the rule, being justified as compensation or mitigation of the more favorable general regime enjoyed by SGPSs and with the mentioned need to improve Corporate Income Tax revenue.

On the other hand, in the said announcement of the measure contained in the Report of the State Budget for 2003, there is no allusion to the rule of non-deductibility relating only to financial charges related to capital shares that are to be held for more than one year, stating, without any element of restrictive scope, that "the non-deductibility, for the purpose of determining taxable profit, of financial charges of nature directly associated with the acquisition of equity interests by SGPSs is established". In fact, the reference to "their acquisition" made in the text of Article 32, No. 2, of the Tax Benefits Statute certainly refers to "capital shares", but not necessarily to "those held for a period of no less than one year".

Thus, the text of Article 32, No. 2, of the Tax Benefits Statute is compatible with the interpretation suggested by the announcement of the measure of non-deductibility of financial charges, which is the complete "non-deductibility, for the purpose of determining taxable profit, of financial charges of nature directly associated with the acquisition of equity interests by SGPSs", and not only those acquired more than one year before.

On the other hand, by applying that rule of non-deductibility of financial charges both in the case of capital gains being realized and in the case of capital losses arising from the alienation of capital shares, it is applied with complete indifference to the positive or negative income that holding capital shares may produce and independently of the existence of benefit for SGPSs, whereby no acceptable justification is found for the non-deductibility only occurring as to charges related to capital shares to be held for more than one year.

In any case, if the final part of No. 2 of Article 32 of the Tax Benefits Statute is interpreted with the unlimited scope that results from the announcement of the measure, it is to be concluded that the financial charges incurred by the Claimant with the acquisition of equity interests would always be irrelevant for the formation of taxable profit, whereby from the application of the regime of point 6 of Circular No. 7/2004, which limits the non-deductibility (favoring taxpayers) could not result in the perpetration of an illegality detrimental to the Claimant, namely the entering in field 779 of Table 07 of a value higher than what should be entered.

In any case, given that the parties are in agreement that, accepting the interpretation whereby the rule of non-deductibility of financial charges is connected with the irrelevance of capital gains and capital losses and, therefore, charges are only non-deductible when capital shares are held for more than one year and that connection exists, it matters to assess whether the decision on the administrative appeal is correct, in not recognizing illegality of the self-assessment.

If the condition of the non-deductibility of financial charges is the holding of capital shares for more than one year, before that period elapses following the acquisition of certain equity interests, the special regime referred to in Article 32, No. 2, of the Tax Benefits Statute cannot be applied, the general regime resulting from Articles 18, No. 1, and 23, No. 1, paragraph c), of the Corporate Income Tax Code being instead applicable, which is that the charges contribute to the formation of taxable profit of the fiscal year in which they are incurred, being therefore deductible.

But, on the other hand, in light of this interpretation and of the principle of specialization of fiscal years, which is concretized in Article 18, No. 1, of the Corporate Income Tax Code, once the condition of holding the capital shares for a period exceeding one year is verified, the financial charges incurred with their acquisition must be, from the outset, non-deductible independently of the alienation of those capital shares.

In fact, once the condition of the non-deductibility of financial charges is met, which is the holding of capital shares for more than one year, it becomes foreseeable, at least, that the charges incurred are non-deductible, independently of whether the alienation of the capital shares will provide for capital gains or capital losses.

And, as the positive or negative components of taxable profit obtained or incurred in a certain period can only be imputed to a later period "when on the date of closing of the accounts of the one to which they should be imputed they were unforeseeable or manifestly unknown" (as results from No. 2 of Article 18 of the Corporate Income Tax Code), it must be concluded that, from the moment it becomes foreseeable, at least, that the charges fall within the assumption of the rule providing for the non-deductibility, they should be immediately disregarded in the fiscal year in which they were incurred.

Being this the applicable regime, it is also concluded on this point that the illegality of the decision on the administrative appeal cannot be considered demonstrated, in applying the regime of No. 6 of Circular No. 7/2004 to the Claimant's situation.

In fact, the Claimant assures that "it was not (nor is) possible, during the period in which that regime was in force, to directly determine which financial charges (expenses) correspond to loans obtained for the purpose of acquiring capital shares (or even whether there were financial charges (expenses) allocated for that purpose)" (Article 82 of the arbitration request).

Regarding what occurred in the year of 2012, regarding the capital shares, it was only determined that the Claimant did not alienate any equity interests in that fiscal year, as referred to in letter k) of the facts established, but the non-deduction of financial charges in that fiscal year does not depend on the alienation of capital shares, but rather on the foreseeability of a situation of non-deductibility of financial charges, which comes to exist as soon as the holding of capital shares for more than one year is verified.

The Claimant does not state nor demonstrate that it did not hold in the year of 2012 capital shares held for more than one year, nor that it did not incur financial charges with their acquisition, whereby it cannot be concluded that the decision on the administrative appeal is illegal, in not considering the self-assessment illegal.

By the foregoing, the request for arbitration does not succeed also on this point.

5. Decision

In accordance with the foregoing, the arbitrators of this Arbitral Tribunal agree:

A) To judge partially founded the exception of incompetence of the Arbitral Tribunal, in the terms defined in point 3 of this judgment;

B) To judge the request for arbitration unfounded and to absolve the Tax and Customs Authority of the claims.

6. Value of the Proceedings

In accordance with the provision of Article 306, No. 2, of the Code of Civil Procedure 2013, Article 97-A, No. 1, paragraph a), of the General Code of Tax Procedure and Article 3, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the proceedings is assigned a value of €763,872.94.

7. Costs

Pursuant to Article 22, No. 4, of the RJAT, the amount of costs is fixed at €11,016.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Claimant.

Lisbon, 13-07-2016

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Jorge Júlio Landeiro Vaz)

(João Taborda da Gama,

with the following dissenting opinion)

Dissenting Opinion

I voted in the minority on the decision regarding point B), in which the request for arbitration is judged unfounded and the Tax and Customs Authority is absolved of the claims defined in point 3 of the judgment.

I am of the view that Article 32, No. 2 of the Tax Benefits Statute, in the wording in force at the time of the facts, in requiring a connection between the financial charges and the acquisition of the equity interests, in those cases in which it is impossible to establish that connection, does not possess the minimal determinability required of a legal rule by the constitutional principles of legality and legal certainty; that is, Article 32, No. 2 of the Tax Benefits Statute lacks, in these cases, the normative determinateness that would allow it to function as a reference of conduct and a decision criterion for the taxpayer, the administration and the tribunals.

This original absolute indeterminacy of the law was not bridged – if it could be – by the Administration, namely through Circular No. 7/2004, and particularly in its point No. 7. In fact, this generic guideline, acknowledging the "extreme difficulty" of adopting a real allocation method, proposes a formula, a formula that, in addition to numerous incongruities, would hardly pass the test of legality in so far as the law gave no criterion that regulatory administrative production could, plausibly, develop and concretize.

Where there is a plausible and justifiable criterion for making the matching between the financial charges and the equity interests in a concrete situation, and where that criterion is provable and derives from the spirit of Article 32 of the Tax Benefits Statute and other rules applicable to the taxation of entities in question, that criterion should be applied by the taxpayer, as well as by the Tax Authority in cases it should proceed to the determination or correction of the taxable matter. However, what to do in situations in which we admittedly face the impossibility of finding a criterion, as happens in this case? In these, the taxpayer is left with three options: deduct the totality of the charges and hope not to be inspected (because if it were, the Tax Authority would have to apply the criterion of the Circular); apply the criterion of the Circular himself; or apply some other criterion. The last two hypotheses would always be arbitrary in a case in which it is impossible to make the allocation. The procedure adopted by the taxpayer in this case, even due to the possibility of intervention of the Administration in the context of an administrative appeal, allowed, in theory, that in that dialogue a search could be made for the existence of any plausible alternative allocation criterion to that of the Circular – a result which, as is admitted by both parties, did not occur. And the impossibility of finding an alternative criterion is not due to any insufficiency of the accounting of the taxpayer taking into account the rules applicable to its accounting, but because the law created, for a set of cases, an impossible to prove connection, an impossible to fulfill requirement, and the Administration replaced that impossibility with a criterion, that contained in point 7 of the Circular, which is illegal, contradictory and arbitrary. In these cases – and given that the legislator has had sufficient time since 2004 to densify the rule of Article 32, No. 2, and the Administration sufficient time to find a more adequate criterion by means of a circular, and has not done so – nothing remains but to admit the deductibility of the charges, which is the default regime taking into account, among others, the principle of taxation according to actual income.

This position is one which, moreover, I have sustained in opinions in the context of judicial proceedings in progress, and which I do not see, for now, and taking into account the characteristics of the concrete case (being a self-assessment appeal), reason to alter. I would therefore have judged the request for arbitration founded and condemned the Tax and Customs Authority in the claims defined in point 3 of the judgment, independently of whether we are faced with a self-assessment or an additional assessment appeal applying the criterion of the Circular.

I also cannot follow the present judgment in its considerations regarding the nature of circulars. In fact, I consider that the dichotomies, it is true still prevalent in our tax doctrine and jurisprudence, of "internal effect" as opposed to "external effect", or "internal regulation" as opposed to "external regulation", should not be followed in Tax Law, and should be overcome similarly to what has already occurred in Administrative Law (for further details, João Taborda da Gama, "Given that doubts have arisen about the value of circulars and other generic guidelines", Studies in Memory of Professor Doctor Saldanha Sanches, III, Coimbra, 2011, 157 et seq). This case, as so many others, illustrates well the consequences and the legal insecurity of the coexistence in our legal order... [truncated]