CAAD 400/2015-T: IRC Tax Benefits RFAI SIFIDE Deduction Ruling

Process: 400/2015-T

Date: December 10, 2015

Tax Type: IRC

Summary

Process 400/2015-T involves A..., S.A., a holding company, challenging a 2011 IRC (Corporate Income Tax) assessment totaling €4,439,649.45 before the CAAD Arbitral Tribunal. The case concerns the deduction of RFAI and SIFIDE tax benefits from the IRC liability. The Tax Authority raised a preliminary objection regarding the tribunal's subject matter jurisdiction, arguing the tribunal can only declare assessment acts illegal but cannot rule on recognition of rights or quantification of taxes. The tribunal addressed this jurisdictional issue by analyzing the nature of tax arbitration proceedings under the RJAT (Legal Regime for Arbitration in Tax Matters). The tribunal concluded that although arbitration is essentially an annulment process, its competence extends to powers attributed to tax courts in judicial challenge proceedings, including issuing condemnatory judgments for compensatory interest. The tribunal interpreted Article 2 of the RJAT broadly, consistent with legislative intent to make tax arbitration a true alternative to judicial challenge. However, the excerpt does not contain the tribunal's substantive analysis of the RFAI and SIFIDE benefit disputes, the merits arguments, or the final decision on the IRC assessment.

Full Decision

ENGLISH TRANSLATION

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. Marcolino Pisão Pedreiro and Professor Dr. Leonor Fernandes Ferreira, appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 10-09-2015, agree as follows:

1. Report

A..., S.A., (formerly designated as..., S.A), legal entity no..., with registered office at..., P.O. Box..., ..., at the date of the facts (2011) holding company of a Group of Companies subject to the special tax regime for groups of companies, hereinafter referred to as "A." or "Claimant", filed a request for constitution of the arbitral tribunal, in accordance with the combined provisions of Article 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to as RJAT), and Articles 1 and 2 of Ministerial Order no. 112-A/2011, of 22 March.

The AUTHORITY FOR TAX AND CUSTOMS (Autoridade Tributária e Aduaneira) is the respondent.

The Claimant seeks to have declared illegal and annulled the decision of partial dismissal of the administrative appeal (reclamação graciosa) no. ... 2014 ... and to have declared partially illegal and partially annulled the Corporate Income Tax (IRC) assessment relating to the 2011 fiscal year, no. 2014..., and the corresponding compensatory interest assessments, with respect to the total amount of € 4,439,649.45.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Authority for Tax and Customs on 14-07-2015.

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

On 26-08-2015 the parties were duly notified of that appointment and did not manifest any intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of Article 11, paragraph 1, paragraphs a) and b), of the RJAT and Articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provision in paragraph c) of Article 11, paragraph 1, of the RJAT, as amended by Article 228 of Law no. 66-B/2012, the Arbitral Tribunal was constituted on 10-09-2015.

The Authority for Tax and Customs filed a response in which it raised an exception regarding the partial incompetence of this Arbitral Tribunal on grounds of subject matter and defended the lack of merit of the claim.

By order of 15-10-2015, it was decided that the proceedings would continue with written submissions.

The Parties submitted written submissions.

The Arbitral Tribunal was duly constituted.

The Parties are duly represented, enjoy legal personality and capacity and are parties to the proceedings (Articles 4 and 10, paragraph 2, of the same statute and Article 1 of Ministerial Order no. 112-A/2011, of 22 March).

The proceedings are not affected by any irregularities and no exceptions were raised.

2. Exception of Incompetence

The Authority for Tax and Customs considers that the Arbitral Tribunal has competence only to hear claims for declaration of illegality of assessment acts and acts of second or third instance which assess the legality of assessment acts, and that its competence does not extend to "the assessment of the claim for recognition of rights, such as that implicit in the quantification of taxes and interest to be annulled."

Although the process of judicial challenge is essentially a process of mere annulment (Articles 99 and 124 of the Tax Procedural Code - CPPT), it may result in a condemnatory judgment against the tax administration for payment of compensatory interest and compensation for wrongful guarantee.

In fact, despite there being no express rule to that effect, it has been consistently understood in the tax courts, since the entry into force of the tax reform codes of 1958-1965, that a claim for condemnatory judgment for payment of compensatory interest can be joined in judicial challenge proceedings with a claim for annulment or declaration of nullity or non-existence of the act, because in those codes it is stated that the right to compensatory interest arises when, in an administrative appeal or judicial proceedings, the administration is convinced that there was an error of fact attributable to the services. This regime was subsequently generalized in the Tax Procedural Code, which established in paragraph 1 of its Article 24 that "there shall be a right to compensatory interest in favor of the taxpayer when, in an administrative appeal or judicial proceedings, it is determined that there was an error attributable to the services," subsequently in the General Tax Law (LGT), in whose Article 43, paragraph 1, it is established that "compensatory interest shall be due when it is determined, in an administrative appeal or judicial challenge, that there was an error attributable to the services resulting in payment of the tax debt in an amount higher than legally due," and, finally, in the CPPT in which it was established, in paragraph 2 of Article 61 (corresponding to paragraph 4 in the wording given by Law no. 55-A/2010, of 31 December), that "if the decision recognizing the right to compensatory interest is judicial, the payment period begins on the date of the beginning of the period for voluntary compliance."

With regard to arbitral tribunals, in accordance with the provision in paragraph b) of Article 24 of the RJAT, the arbitral decision on the merits of the claim which is not subject to appeal or challenge binds the tax administration from the end of the period provided for appeal or challenge, and the administration must, in the exact terms of the merits of the arbitral decision in favor of the taxpayer and until the end of the period provided for voluntary compliance with the judgments of the tax courts, "restore the situation that would exist if the tax act that was the subject of the arbitral decision had not been carried out, by adopting the acts and operations necessary for that purpose," which is in line with the provision in Article 100 of the LGT [applicable by virtue of the provision in paragraph a) of Article 29, paragraph 1, of the RJAT] which establishes that "the tax administration is obliged, in the event of total or partial acceptance of an administrative appeal, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation that was the subject of the dispute, including payment of compensatory interest, if applicable, from the end of the period for compliance with the decision."

Although Article 2, paragraph 1, paragraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of arbitral tribunals operating in CAAD, without reference to condemnatory decisions, it should be understood that the competence extends to the powers that in judicial challenge proceedings are attributed to tax courts, which is the interpretation that is in harmony with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as the first guideline, that "the tax arbitration process should constitute an alternative procedural means to the judicial challenge process and the action for recognition of a right or legitimate interest in tax matters."

Judicial challenge proceedings, although essentially a process of annulment of tax acts, admit condemnatory judgment against the Tax Administration for payment of compensatory interest, as is apparent from Article 43, paragraph 1, of the LGT, which establishes that "compensatory interest shall be due when it is determined, in an administrative appeal or judicial challenge, that there was an error attributable to the services resulting in payment of the tax debt in an amount higher than legally due," and from Article 61, paragraph 4 of the CPPT (in the wording given by Law no. 55-A/2010, of 31 December, corresponding to paragraph 2 in the original wording), that "if the decision recognizing the right to compensatory interest is judicial, the payment period begins on the date of the beginning of the period for voluntary compliance."

Thus, Article 24, paragraph 5, of the RJAT, when stating that "payment of interest, regardless of its nature, shall be due, in accordance with the terms provided in the general tax law and in the Tax Procedural and Process Code," should be understood as permitting recognition of the right to compensatory interest in arbitration proceedings.

And, obviously, to render a condemnatory judgment for compensatory interest, it is necessary to determine the amount that serves as the basis for its calculation.

Thus, although in the case of acceptance of the claim for arbitral decision, the determination of the amount to be reimbursed and any right to compensatory interest may be effected in enforcement of the judgment, nothing prevents them from being defined in the arbitration proceedings, if the necessary elements are available.

The exception raised is therefore without merit.

3.1. Established Facts

The following facts are considered established:

a) The Claimant is the holding company of the group of companies named "Grupo A... SA", a group that is subject to the Special Tax Regime for Groups of Companies (RETGS);

b) In accordance with the permanent certificate that constitutes document no. 10 attached with the request for arbitral decision, whose content is hereby reproduced, in the year 2010 the corporate purpose of the Claimant was defined in the following terms:

1 - Production and marketing of pastes ... and of ... and their derivatives and related products. 2 - As a secondary activity, to operate services and carry out civil, commercial, industrial and financial operations, directly or indirectly, in whole or in part, related to its corporate purpose or which might facilitate or promote its achievement. 3 - The company may participate in the capital of other companies, whether constituted or to be constituted, whatever their purpose and even if governed by special laws, as well as associate itself, in any other form, with any natural or legal persons, including to form complementary groups of companies, consortia and joint ventures or other forms of exercise of economic activity.

c) In compliance with service order no. OI2013... of 26-11-2013, a partial-scope internal tax audit was conducted by the Tax Authority (AT), relating to Corporate Income Tax (IRC), for the period 2011;

d) The aforementioned inspection action was carried out for the purpose of verifying compliance with the tax obligations inherent to the application of the RETGS by Group A..., for the 2011 fiscal year, and likewise to reflect in the taxable profit of the group the corrections effected by the Tax Administration, as a result of inspection procedures already concluded, in the IRC Model 22 Declaration of each of the companies that comprise it;

e) At a time prior to the inspection action that gave rise to the present proceedings, and in compliance with Service Order no. OI2013..., of 25-06-2013, an internal inspection procedure was conducted for the period 2011, on company A..., S.A., as an individual company;

f) In the Tax Inspection Report conducted on the Group that appears in document no. 7 attached with the request for arbitral decision, whose content is hereby reproduced, the Authority for Tax and Customs understood, among other things, the following:

1.4.2. TAX IN DEFAULT - SELF-ASSESSMENT OF IRC

1.4.2.1. Corrections to the calculation of the tax resulting from corrections made to the holding company A..., SA

In compliance with Service Order no. OI2013... of 2013-06-25, an external inspection procedure was conducted, for the period 2011, on company A..., SA, from which resulted corrections to the calculation of the tax declared individually in the amount of 668,780.36 Euros. Having in mind the provision in paragraph 6 of Article 90 of the IRC Code (CIRC), the deductions referred to in paragraph 2 of that article are made in the amount determined in relation to the group. Thus, the correction made at the level of the calculation of the tax of the holding company is reflected in the tax to be paid by the group (see section III-2.1).

1.4.2.2 Undue Deduction of Tax Benefits from the IRC Collection

In the determination of the tax to be paid, Group A... unduly deducted the amount of 4,480,834.92 Euros as tax benefits deductible from the collection in accordance with paragraph 6 of Article 90 of the CIRC (see section III.2.2).

The adjustment now considered results from corrections to IRC tax benefits under the RFAI [Investment Support Fiscal Regime] promotion made by inspection of the companies in which it was calculated.

The correction to the deduction of tax benefits from the collection, initially proposed, was reduced following the exercise of the right to be heard, to the amount of 3,350,706.65 Euros as set out in section IX - Right to be Heard - Rationale.

(...)

III- 2.1 CORRECTIONS TO THE CALCULATION OF THE TAX RESULTING FROM CORRECTIONS MADE TO THE HOLDING COMPANY A..., SA: 668,780.36 EUROS

In compliance with Service Order no. OI2013... of 2013-06-25, an internal inspection procedure was conducted, for the period 2011, on company A..., SA, Tax ID: ... . The conclusions of the inspection action were communicated to the company in accordance with the provisions of paragraph 1 of Article 77 of the General Tax Law (LGT) and are set out in the tax inspection report drawn up by this Organizational Unit, communicated to the taxpayer in accordance with our memorandum no. ... of 2013-11-27, a copy of which is attached and which constitutes Annex II.

Following the aforementioned inspection action, corrections were identified in the calculation of Tax Benefits deductible from the collection of IRC individually to the aforementioned company, which were fixed at the total amount of 668,780.36 Euros, relating to:

Fiscal Regime for Investment Support

A... inappropriately considered deductible from the collection of IRC the amount of 668,780.36 Euros, as a tax benefit provided for in the "Fiscal Regime for Investment Support Carried Out in 2009" (RFAI) approved by Article 13 of Law no. 10/2009, of 10 March and which consists of "a specific system of tax incentives for investment in 2009 in certain sectors of activity" and was extended, with the same terms and conditions, to investment carried out in 2011 by Article 134 of Law no. 55-A/2010, of 31 December (2011 State Budget), because in the calculation of the tax benefit it did not consider the exclusion of investment made in the energy production activity in accordance with the binding information provided to it and as required by paragraph 1 of Article 2 of Law no. 10/2009.

Thus, the tax benefit deductible is corrected in accordance with paragraph b) of paragraph 2 of Article 90 of the IRC Code in the group declaration with the rationale set out in section III.1.1 of the Tax Inspection Report attached and which is an integral part of this Report (pages 5 to 9 of the individual report - Annex II).

III 2.2 Undue Deduction of Tax Benefits from the Collection of IRC: 3,350,706.65 Euros

Group A... considered in the final IRC declaration relating to the 2011 period and relating to the RETGS, a deduction from the collection of Tax Benefits in the total amount of 24,921,867.16 Euros (Q 10 C 355) divided as follows:

• Contractual tax benefits...................... 11,799,720.18 Euros

• SIFIDE............................................ 4,847,076.19 Euros

• RFAI............................................. 8,275,070.78 Euros

In accordance with paragraph 6 of Article 90 of the CIRC, the deductions referred to in paragraph 2 of Article 90 are made in the amount determined in relation to the group.

Regarding the deduction of the tax benefit resulting from the RFAI approved by Law no. 10/2009 and whose application was extended to the periods 2010 and 2011 by the respective State Budget laws, it is important to note that:

The Group considered as a benefit generated in prior years and not yet used, Annex 22 - D, Table 05, the amount of 43,622,071.42 Euros.

However, this value should be 34,101,085.87 Euros, the difference being the result of a reduction of 9,520,985.41 Euros of the RFAI determined in the 2010 period in company A... SA (see Tax Inspection Report notified to the group on 2013-05-30).

The Group considered that the benefit generated with the investment made in 2011 amounts to 3,203,012.48 Euros, however this value should be reduced by 668,780.36 Euros corresponding to the correction of the relevant investment of company A... SA referred to in section III.2.1 of this report.

Thus, the tax benefit relating to RFAI deductible by the Group, in the conditions mentioned in Article 3 of the RFAI/2009, from the collection for the 2011 period amounts to 3,794,235.87 Euros.

Carryforward from 2010 considered by the Group.............. 10,780,989.16 Euros

Correction to RFAI for the 2009/2010 period..................... (9,520,985.41) Euros

RFAI generated in 2011................................................. 3,203,012.48 Euros

Correction to RFAI 2011............................................... (668,780.36) Euros

RFAI deductible 2011..................................................... 3,794,235.87 Euros

Considering that the collection of IRC determined by the Group amounts to 39,441,105.51 Euros, the Group could deduct from the collection 3,794,235.87 Euros (less than 25% of the collection) as already mentioned above rather than 8,275,070.79 Euros that it declared.

Given that:

• Due to the specificity of the regime for the use of contractual tax benefits attributed to the participating company B... SA, the tax benefits not yet used cannot be used beyond the collection determined in that company.

• The Group consumed all of the tax benefits resulting from SIFIDE and SIFIDE II.

The undue deduction of RFAI tax benefits cannot be offset by other tax benefits that operate by deduction from the collection of IRC.

In view of the foregoing, it is concluded that the deduction from the collection of IRC of tax benefits in accordance with paragraph b) of paragraph 2 of Article 90 of the CIRC, which is determined in relation to the Group, by application of the provision in paragraph 6 of that article, is reduced by 4,480,834.92 Euros.

(...)

IX. 2 Deduction of Tax Benefits from the Collection of IRC

Regarding the correction proposed in section III.2.2 of this report, in the amount of 4,480,834.92 Euros, Group A... states (points 25 to 27 of the Right to be Heard) that it is peacefully accepted and recognized by the AT that Tax Benefits are equally deductible from the collection resulting from the surcharge "State Levy (Derrama Estadual)", a fact not considered regarding the State Levy produced by B..., SA, in the amount of 1,130,128.27 Euros.

In accordance with the Order of the Legal Substitute of the Director General of 2013-06-05, (... the state levy has an accessory character to IRC and should be treated as such. II) In these terms, the state levy falls within the concept of IRC, being an accessory and non-differentiated tax of this, except in what is specifically regulated.)

In these terms, in accordance with the aforementioned Order, the deduction from the collection of IRC of tax benefits is corrected in accordance with paragraph b) of paragraph 2 of Article 90 of the CIRC, increasing the deduction of contractual tax benefits by the amount of 1,130,128.27 Euros, which is determined in relation to the Group, by application of the provision in paragraph 6 of that article.

Thus, the value of the correction to the deduction of tax benefits is reduced to 3,350,706.65 Euros as shown in the table recorded on page 13 of this report.

(...)

g) In section III.1.1 of the Tax Inspection Report relating to the inspection of the Claimant as an individual company, to which reference is made in section III -1.1 of the Tax Inspection Report transcribed, the following is stated, to the extent relevant here:

III.1. TAX IN DEFAULT - SELF-ASSESSMENT OF IRC

III- 1.1 FISCAL REGIME FOR INVESTMENT SUPPORT: 668,780.37 Euros

The Situation Identified

In the IRC Model 22 income declaration (substitute declaration) for the period 2011 submitted on 2013-10-23, the company entered in field 715, as a provision during the period of the RFAI tax benefit, the amount of 1,071,743.65 Euros.

It thus results that the company considers it has the right to the deduction of a tax benefit regulated by the Investment Tax Support Regime carried out in 2011, approved by Article 13 of Law no. 10/2009 of 10 March and that, under Article 134 of Law no. 55-A/2010 of 31 December, remained in force until 31 December 2011.

Legal Framework

Established by Article 13 of Law no. 10/2009, of 10 March, the fiscal regime for investment support carried out in 2009 (RFAI) consists of "a specific system of tax incentives for investment in 2009 in certain sectors of activity" and was extended, with the same terms and conditions, to investment carried out in 2011 by Article 134 of Law no. 55-A/2010, of 31 December (2011 State Budget).

The RFAI is applicable to Corporate Income Tax taxpayers who exercise the main activity, among others expressly indicated, in the sector of transforming industry (paragraph a) paragraph 1 of Article 2 of the RFAI) defining relevant investments in paragraph 2 of that article, provided that they are assigned to the operation of the company, materialized in investment in tangible fixed asset acquired in new condition (paragraph a)) and in investment in intangible fixed asset consisting of expenses with technology transfer, specifically through the acquisition of patent rights, licenses, "know-how" or technical knowledge not protected by patent (paragraph b)).

For investments made in 2011, it is considered what "corresponds to the additions, verified in that fiscal year, of fixed assets and as well as what, having the nature of tangible asset and not concerning advances, results in additions to fixed assets in progress" (paragraph 5 of Article 2).

By application of Article 6 of the RFAI, investment subject to other fiscal incentives to investment is excluded from the relevant investment defined under Article 2.

The cumulative requirements for taxpayers to benefit from fiscal incentives are listed in paragraph 3 of Article 2 of the RFAI, with emphasis on the maintenance in the company of the assets object of investment for a minimum period of five years, not being debtors to the State and to social security of any contributions, taxes or fees or have payment duly secured and that the relevant investment provides the creation of jobs.

The materialization of the fiscal incentive on investments considered relevant is established in Article 3, which results in deduction from the collection of IRC, and up to 25% of the same (paragraph a)). This deduction is made in the assessment relating to the 2011 taxation period and corresponds to: "i) 20% of relevant investment, with respect to amounts up to 5,000,000 Euros" and "ii) 10% of relevant investment, with respect to amounts exceeding 5,000,000 Euros" see paragraph a) of paragraph 1 of Article 3 of the RFAI.

The exclusivity of tax benefits is imposed in Article 6 of the RFAI by determining that "the fiscal incentives provided in this law are not cumulative, with respect to the same investment, with any other tax benefits of the same nature provided for in other legal instruments."

In accordance with the national map of state aid for regional development purposes for the period from 1 January 2007 to 31 December 2013, the incentive calculated in accordance with Article 3 may be limited by application of Article 7 of the RFAI/2009.

From the analysis developed

(...)

On Relevant Investment in 2011: undue inclusion of investments in secondary activity

The investment that A... SA considered eligible for purposes of the RFAI in the 2011 period amounted to 5,717,436.53 Euros, divided among the facilities of ... and ... as presented above.

Based on the breakdown of investments by business segment (Annex II), A... made investments that it considered eligible for purposes of the RFAI at the paste factory ... and at the biomass thermal power plant, divided as follows:

[...]

A... requested from the Directorate of IRC Services (DSIRC), a request for binding information no. ... regarding any contingencies in the application of RFAI to investment related to the biomass power plant related to energy production in the context of a situation of restructuring of the economic group and the separation of that activity to another company.

The response to the request for binding information requested by A... endorsed by Order of 2011-12-27 of the Director General was sent to the company through memorandum no. ... from DSIRC.

From the conclusions determined in that Binding Information, it is worth highlighting:

"a) Since the first condition for a Corporate Income Tax taxpayer to benefit from the aforementioned incentive is, first and foremost, the exercise, as the main activity, of an activity that falls within one of the sectors listed in paragraphs a) and b) of paragraph 1 of Article 2 of the statute that created the RFAI 2009, it is imperative to conclude that the applicant, not exercising any activity that falls within the energy sector, cannot benefit from the incentive with respect to the investment assigned to the biomass thermal power plant."

In this sense, and given that under paragraph 14 of Article 68 of the General Tax Law (LGT) the "tax administration, in relation to the subject matter of the request, cannot subsequently proceed differently from the information provided, except in compliance with a judicial decision," we consider that the investment related to the energy production activity does not constitute relevant investment under Article 2 of the Fiscal Regime for Investment Support (RFAI) because it corresponds to investment materialized in an activity different from its principal activity and is therefore not eligible under paragraph 1 of that Article 2.

Thus, it is concluded that for purposes of calculating the fiscal benefit in question the investment qualified as relevant is what is presented related to the activity of paste production..., in the total amount of 2,313,321.36 Euros, as results from the aforementioned table.

RECALCULATION OF RFAI DEDUCTIBLE

Considering the value of relevant investment fixed in the previous point and the calculation formula of paragraph a) of paragraph 1 of Article 3 of the RFAI combined with the limits established in Article 7 of that statute, the amount of the attributable benefit is 402,963.29 Euros for the 2011 period, in accordance with the calculations in Table 2 of page 3 of Annex I and which are summarized below:

Regarding eligible investment in 2011

[...]

In determining the fiscal benefit calculated in accordance with paragraph a) of Article 3 of the RFAI for each region in which eligible investment related to paste production activity ..., was carried out, the proportion of the fiscal benefit calculated in those terms was considered in relation to the weight of the investment in that region in the total eligible investment of each year.

In conclusion,

a) Based on the relevant investment declared by the company, the fiscal incentive in IRC on investment made in 2011 cannot exceed the value of 983,637.59 Euros. The difference found of 88,106.06 Euros from the value considered by the company results from its failure to consider the 15% regional limit applicable to incentives on investment made in..., in accordance with Article 7 of the RFAI/2009, as described in 1.

b) Furthermore, it unduly considered as relevant investment the additions of Tangible Fixed Assets related to the secondary activity of energy production when under the RFAI/2009 only investment assigned to the principal activity is subject to incentive as described in 2. Calculating the fiscal incentive for eligible investment, taking into account the regional limit applicable to incentives on investment made in..., the fiscal incentive in IRC for the 2011 period by application of the RFAI is fixed at 402,963.29 Euros.

c) The fiscal incentive on investment made in 2011 by application of the RFAI/2009 in the amount of 1,071,743.65 Euros is corrected by 668,780.36 Euros, broken down as:

i) 88,106.06 Euros, for failure to consider the 15% limit for investment in ... by A... SA;

ii) 580,674.30 Euros, for the impact of the reduction of eligible investment;

Considering the option for the Special Tax Regime for Groups of Companies provided for in Articles 69 to 71 of the CIRC, the use of the tax benefit is only materialized in accordance with paragraph 6 of Article 90 of the CIRC in the determination of the group's tax.

h) Following the inspection, the Authority for Tax and Customs issued assessment no. 2014..., dated 28-05-2014 and the compensatory interest assessments no.s 2014 ... and 2014 ... (document no. 1 attached with the request for arbitral decision, whose content is hereby reproduced);

i) On 04-11-2014, the Claimant filed an administrative appeal (reclamação graciosa) against the assessment;

j) By order of the Director-General of the Authority for Tax and Customs of 31-03-2015, the administrative appeal was partially accepted, expressing agreement with an information in which, among other things, the following is stated:

III - The "Assessment"

Article 69 of the Tax Procedural Code establishes the "fundamental rules of the administrative appeal procedure," specifying that it must be limited, specifically, to the "simplicity of terms and brevity of resolutions" [See paragraph a)] and that "the means of proof are limited to documentary form and to official elements that the services have available, without prejudice to the right of the investigating body to order other complementary proceedings manifestly indispensable to the discovery of material truth" [See paragraph e)], so that, from the outset, the requested "witness testimony" is impaired, given that the R [Requerente = Claimant], in the exercise of the right (guarantee) provided for in Article 68 of the General Tax Law, requested a "binding information" concerning the disputed matter now in question.

For its part, paragraph 14 of that Article 68, in providing that "the tax administration, in relation to the subject matter of the request, cannot subsequently proceed differently from the information provided, except in compliance with a judicial decision," determines that, regardless of the assessment that could be made on this occasion, and by this Unit of Large Taxpayers, the sense thereof would have to be the same as that expressed by the Tax Inspection Services in the Tax Inspection Report, at the time of the correction of the RFAI Tax Benefit, resulting from investment made in the "segment" of energy production, now in question.

Thus, in view of all the above, because there exists the binding information (Request number... ( [1] ), whose content is known to R, and no judicial decision is known to annul it, we are of the opinion, unless otherwise understood, that the decision to be rendered in the present administrative appeal proceedings will be to dismiss in its entirety the claim, maintaining the correction of the Tax Inspection Services, in the terms and rationale inherent in the Tax Inspection Report, notified to A..., here R, by memorandum no..., of 22.04.2014, from this Unit of Large Taxpayers, equally referred to in section "I. From the rationale of the Tax Inspection Services" of the present information.

k) The Binding Information no... referred to in the rationale of the administrative appeal decision was requested by the Claimant on 08-09-2011 and issued on 27-12-2011, stating the following, to the extent relevant here:

The applicant carries out the following activities that can be classified in section C, division..., of the CAE-Rev 3 Classification: • Principal activity: Manufacture of paste - CAE ... • Secondary activity: Manufacture of ... and ... (except corrugated) - CAE ... Now, if the first condition for a Corporate Income Tax taxpayer to benefit from the aforementioned incentive is, first and foremost, the exercise, as the main activity, of an activity that falls within one of the sectors listed in paragraphs a) and b) of paragraph 1 of Article 2 of the statute that created the RFAI 2009, it is imperative to conclude that the applicant, not exercising any activity that falls within the energy sector, cannot benefit from the incentive with respect to the investment assigned to the biomass thermal power plant. Besides, according to what appears in the additional information attached to the request for binding information, "the placement of electricity on the National Electricity Grid is limited to companies specifically licensed to do so, such, the electricity generating units held by A..., SA are being operated by the company of the group C..., SA (the operator), a company to which was granted the license for operating generating units. Therefore, if the operator of the electricity generating units is C..., we cannot even say that the applicant exercises an activity within the energy sector (in this case, the production and distribution of energy). 18. Therefore, only the investment that the taxpayer made in the context of the activity that it exercises as a main activity, that is, in its business segment of paste production..., can benefit from the RFAI (...)which falls within the CAE-Rev 3 ... (section C - Transforming Industries). 19. And that investment was made at the paste factories ... existing in the industrial complex of ... and in that of... 20. Note that no investment was made at the factory for the production of... located in ..., since those assets have been, since December 2009, the property of its subsidiary D... SA. In fact, in the context of the group's restructuring plan, the applicant sold, in December 2009, to its subsidiary the equipment assigned to the production of... in.... However, for reasons related to the industrial licensing process, the applicant continued to use them, by lease, exercising that activity until the end of June 2011.

l) In the use of the principal raw material used in the manufacture of paste ... and ..., namely wood, waste with energy value is generated for the production of the necessary energy (the so-called biomass) (document no. 9 attached with the request for arbitral decision, whose content is hereby reproduced);

m) In 2009, 2010 and 2011, for what is relevant here, the Claimant made investments in energy production units located in its industrial complexes;

n) The production of energy using the waste resulting from the Claimant's activity of paste production.... is carried out by the company in the group C..., SA;

o) On 02-01-2003, the Claimant entered into with C..., SA (hereinafter "C") the contract of temporary cessation of operation that appears in the administrative proceedings, part 11, pages 17 to 19, whose content is hereby reproduced, in which, among other things, the following is stated:

CONTRACT OF TEMPORARY CESSATION OF OPERATION

Between:

A..., S.A., legal entity no..., with registered office at ...- P.O. Box ...-..., registered in the Commercial Registry of ..., under no. ..., with capital of 767,500,000 euros, hereinafter referred to as A.,

and

C..., S.A., legal entity no. ..., with registered office at Rua ..., no..., ...-... Lisbon, registered in the Commercial Registry of Lisbon, under no..., with capital of 50,000 euros, hereinafter referred to as C..., S.A.

The following contract is hereby entered into:

Clause 1

A... is the owner and legitimate possessor of an installation intended for the production of electrical and thermal energy, which is composed of a delimited space located within the Complex of..., which is duly marked on the attached plan and by equipment necessary for the operation of the Paste Factory of..., which is described in the list also attached (Documents no.s 1 and 2 attached, which are an integral part of this contract and are signed by the parties)

Clause 2

By this contract, A... cedes to C... the enjoyment and temporary operation of the installation referred to in Clause 1.
The temporary cessation referred to in paragraph 1 is intended to enable C..., in accordance with its corporate purpose, the production and marketing of electrical and thermal energy.

Clause 3

The operation of the equipment referred to in the preceding clause shall be carried out by C..., generally through the use of the workers of A... currently assigned to the installation.
The workers referred to in the preceding paragraph maintain their employment contracts with A... and will continue to be remunerated by it, maintaining the same disciplinary power over them, and being the same only functionally subject to the orders and guidance of C....

Clause 4

The charges shall be the responsibility of C..., in addition to the charge referred to in Clause 6, all others necessary for the production and marketing of electrical and thermal energy.

Clause 5

All electrical and thermal energy produced in the installation shall be destined primarily to the satisfaction of the needs of the Complex of ... of A... and secondarily to sale to third parties, all in accordance with contracts that may be entered into with said purchasers.

Clause 6

As consideration for the cessation referred to in Clause 2 and for the provision of services referred to in Clause 3, C... shall pay A...:

a) A variable monthly payment corresponding to the costs of labor, general administrative charges, maintenance and insurance of the plant, plus 1/1000.

b) A variable payment, to be paid monthly, corresponding to the cost and charges incurred with the acquisition of black liquor, biomass, boiler feed water and consumables.

Clause 7

C... shall maintain in good condition of preservation the installation and equipment ceded to it under the terms of this contract, immediately informing A... whenever it detects any anomalies or deficiencies in operation and agreeing with it the way to correct them.

Clause 8

This contract shall be in force for one year, tacitly and successively renewable for periods of equal duration, counting from the date on which the necessary authorizations are obtained or from such other date as may be established by mutual agreement.

p) On 28-06-2015, the Claimant filed the request for arbitral decision that gave rise to the present proceedings.

3.2. Facts Not Established

There are no facts relevant to the assessment of the case that have not been established.

3.3. Rationale for the Determination of Factual Matters

The established facts are based on the administrative proceedings and the documents attached by the Claimant, and are not subject to dispute.

4. Legal Issues

Law no. 10/2009, of 10 March, created, in its Article 13, the fiscal regime for investment support carried out in 2009 (RFAI 2009), which was kept in force by Articles 116 of Law no. 3-B/2010, of 28 April, 134 of Law no. 55-A/2010, of 31 December, 162 of Law no. 64-B/2011, of 30 December, and 232 of Law no. 66-B/2012, of 31 December.

The Authority for Tax and Customs understood in the Tax Inspection Report and in the administrative appeal decision, with reference to the rationale of the Binding Information no..., requested by the Claimant, that that regime cannot be applied to investments that the Claimant made in the energy sector (biomass thermal power plant), because it does not exercise, as the main activity, an activity that falls within one of the sectors listed in paragraphs a) and b) of paragraph 1 of Article 2 of the statute that created the RFAI 2009, that activity being exercised by a company in the group.

4.1. Positions of the Parties

The Claimant defends, in summary, the following:

– In the use of the principal raw material used in the manufacture of paste... and ..., namely wood, waste with energy value is generated for the production of the necessary energy (the so-called biomass);

– It is an unavoidable requirement of the paste production process to have abundant thermal energy produced at the same location;

– It is artificial to attempt to separate investments (as did the Tax Authority) in the unit that directly manufactures the paste of the ... or the ... from the unit that supplies on-site energy, particularly thermal energy, or that simply extends the use of raw material by giving energy value to the enormous waste generated in the extraction of ... for the manufacture of the paste... (and, ultimately, manufacture of...);

– One of the characteristics of forest-based industries is that they operate with renewable energy using residual biomass from their raw material;

– From the legal text is not derived the requirement used by the Tax Authority to deny the classification of the investment made by the claimant under the RFAI, rather it is found in the reference to the transforming industry that appears in paragraph a) of paragraph 1 of Article 2 of the RFAI;

– The Claimant exercises its principal activity in the area of paste manufacturing, so it is a "Corporate Income Tax taxpayer that exercises, as the main activity, an activity (...) in the sectors (...) of transforming (...) industry";

– The purpose of the RFAI was and is admittedly a core measure in the purpose of more than one government and parliamentary representation, to stimulate productive investment and, with it, the creation of wealth in the country, at a time when its main problem is precisely negative or, at best, anemic economic growth;

– In the years of investment in question here – 2009, 2010 and 2011 – the energy area is itself one of the areas covered by the RFAI and the imperative nature of the physically adjacent production of thermal energy in the form of steam, to the production of paste..., for integration into the very productive process of paste... (imperative for the principal activity of the claimant), to which is added the economic and environmental inevitability of the paste ... and ... industry making the production of energy based on surplus biomass an extension of its activity;

– The addition by the Tax Authority to the legal requirement is not found in the legal formulation;

– The delimiting criterion of the personal scope of application of the RFAI is directed at the entity (it is required that it exercise as a main activity an activity in one of the named sectors) and not at the activity among those pursued;

– Given the artificiality, in the specific case of the paste industry..., of the separation of energy generation from paste production, it would be more correct to say that, given the subjective requirement analyzed above, the exact function of the equipment that was acquired/in which investment was made (in this case, energy equipment) is irrelevant;

– The interpretation made by the Authority for Tax and Customs leads to arbitrary results, discriminating against similar investments, offends the constitutional principles of private property, private initiative and freedom of business management enshrined in Articles 62, paragraphs 1 and 2 (private property), 80, paragraph c) (freedom of initiative and business organization), 81, paragraph 1, paragraph f), of the Constitution of the Portuguese Republic - CRP (freedom of management has as its counterpoint the obligation on the part of the State to promote tax neutrality), 82, paragraphs 1 and 3 (guarantee of the existence of the private sector) and 86, paragraph 2 (prohibition of state intervention in the management of private companies), and of the principle of proportionality which finds qualified expression in Articles 18, paragraphs 2 and 3, of the CRP, and is an emanation of the principle of the democratic state governed by the rule of law (Article 2 of the CRP);

– The interpretation made by the Claimant does not offend the principle that "the generic formulation of tax benefits should obey the principle of equality, so as not to distort or threaten to distort competition";

– The entity that in fact exercises the energy production activity in the installations (investment) of which it is the owner is the A..., and its subsidiary held at 100%, the C..., is an agent used by A... in relations with the outside of the Group, particularly for the marketing of energy, an agent which A... can discontinue at any time without factual or legal restrictions, specifically contractual restrictions of any kind;

– In strict terms, the energy activity of A... does not even have autonomy in the calculation of what is the activity carried out by it of paste production and...: the energy use of waste wood after extraction of ... which, in addition to being an inevitability in the context of the paste production process (need for steam) is also an economic and environmental inevitability in the ... industry;

The Authority for Tax and Customs, in the present proceedings, defends the position assumed in that binding information, emphasizing, specifically, the following:

– paragraphs 1 and 2 of Article 2 of the RFAI point in the direction that the regime is applicable to Corporate Income Tax taxpayers who exercise, as the main activity, an activity of the types indicated there, and to investments assigned to the operation of the company;

– In 2011, energy production was not the principal activity of the Claimant and only in 2012 was its corporate purpose amended;

– The placement of energy on the National Electricity Grid is limited to companies specifically licensed to do so, so that, at the date of the facts, the electricity generating units held by A... were being operated by C..., the company that held the license for operating generating units;

– Decree-Law no. 583/99, of 13 December, the statute establishing provisions relating to cogeneration activity, requires authorization and operating license for its exercise;

– The operating license was granted to C..., the entity that operated the electricity generating units, while the Claimant, at the date of the facts, not only did not foresee in its corporate purpose the activity of energy production, but also did not meet the prerequisites;

– In accordance with the temporary operation cessation contract, the temporary enjoyment and operation of the installation intended for the production of electrical and thermal energy, of which the Claimant is the owner, was ceded to C..., and, under paragraph 2 of Clause 2, the aforementioned cessation was intended to enable C..., in accordance with its corporate purpose, the production and marketing of electrical and thermal energy, so that the assets were assigned to the operation of company C..., not to that of the Claimant;

– It was not the legislator's objective to permit the application of the RFAI to entities legally unable to exercise a particular activity;

– If the benefit is granted in order to encourage the carrying out of investments, and if it is expressly established that the investment assets must be assigned to the operation of the company, naturally it is intended that they be assigned to the operation of the company that comes to invoke the right to the benefit;

– Notwithstanding the tax benefit being deducted from the collective taxable income of the group, the verification of the prerequisites of the tax benefit and the compliance with obligations imposed on the holder of the right to that benefit should be carried out with respect to the company making the investment and not to the group, under pain of distorting the legislator's intention in establishing the requirements to be observed in the granting of the benefit;

– The rules of interpretation, specifically the literal element, point in the direction of the thesis adopted by the Authority for Tax and Customs and it must be presumed that the legislator knew how to express its thought in adequate terms;

– This concerns the interpretation of rules concerning the attribution of tax benefits, it being the case that the concept of tax benefits was defined by the legislator in Article 2 of the Statute of Tax Benefits as "exceptional measures instituted for the protection of relevant extrabudgetary public interests that are superior to those of taxation itself that prevent";

– The thesis defended by the Claimant offends the principles of tax legality and tax equality;

– It lacks any axiologically acceptable basis, the Claimant's contention to satisfy the subjective prerequisite based on the exercise as the main activity of an activity that is not the activity benefiting from the investments that it seeks to have recognized for purposes of attribution of tax credit, moreover, in that it does not itself exercise the activity benefiting from the investments, particularly in that it is legally prohibited from exercising such activity.

4.2. Rationale of the Act that is the Subject of the Proceedings

In the submissions, the Claimant raises the question of whether the Authority for Tax and Customs is invoking a ground not invoked in the challenged act, specifically that the investment "was not assigned to the operation of the company."

Tax arbitration proceedings, as an alternative means to judicial challenge proceedings (paragraph 2 of Article 124 of Law no. 3-B/2010, of 28 April), are, like these, a procedural means of legality only, in which the objective is to declare the illegality of acts of the types indicated in Article 2 of the RJAT and to eliminate the legal effects produced by them, by annulling them or declaring their nullity or non-existence [Articles 99 and 124 of the CPPT, applicable by virtue of the provision in Article 29, paragraph 1, paragraph a), of that statute].

For this reason, since the subject of appraisal by the Arbitral Tribunal is the act carried out, its legality must be appraised in the light of its contents, as it was carried out, the tribunal not being able, in the face of the finding of the invocation of an illegal ground as support for the administrative decision, to appraise whether its action could be based on other grounds. ( [2] )

Thus, subsequent rationale is irrelevant.

The Authority for Tax and Customs defends that the Claimant's allegation that it invoked subsequent rationale has no basis, having synthesized "that the contested correction is based, essentially, on the facts that i) the investment was made in a secondary activity of the Claimant (not even contained in its corporate purpose and even prohibited by law to the Claimant), and ii) was not assigned to the operation of the company, and is therefore not eligible for purposes of the benefit provided for in the Regime" and states that the imputation of subsequent rationale is "absolutely lacking in credibility when the terms used by the Claimant in its initial petition permit one to conclude with complete certainty that the grounds for the contested correction were perfectly understood by the recipient." (Articles 23 and 26 of the submissions of the Authority for Tax and Customs).

Obviously, the question of subsequent rationale has nothing to do with the understanding of the grounds of the act by its recipient, but rather with whether or not it was invoked in the act, so it is relevant to determine precisely what grounds are relevant for purposes of ascertaining the legality of the assessment act.

The Authority for Tax and Customs concludes in Articles 40 to 42 of its submission that, in the present proceedings, the Arbitral Tribunal should

– determine whether the benefit will have applicability in the case of investments made within an activity not admittedly exercised as the principal activity;

– decide whether the Claimant can benefit from the tax credits, even having contracted the cessation of operation of the investments to another company, even if, as it argues, dominated by it;

– and further, know whether, even in that it is legally prohibited from exercising such activity, for which it was not licensed, it could still be legitimate and legal to benefit from that tax benefit.

Examining the rationale that appears in the Tax Inspection Report conducted on the group of companies, it is found that the correction is justified "because in the calculation of the tax benefit it did not consider the exclusion of investment made in the energy production activity in accordance with the binding information provided to it and as required by paragraph 1 of Article 2 of Law no. 10/2009" and it makes reference to the rationale of section III.1.1 of the Tax Inspection Report attached, which relates to the Claimant, as an individual company [paragraph e) of the factual matter established and section III- 2.1 of the Tax Inspection Report relating to the group].

In section III.1.1 of the Tax Inspection Report relating to the inspection of the Claimant as an individual company, reference is made to the grounds of the Binding Information no..., requested by the Claimant, from which stands out:

a) Since the first condition for a Corporate Income Tax taxpayer to benefit from the aforementioned incentive is, first and foremost, the exercise, as the main activity, of an activity that falls within one of the sectors listed in paragraphs a) and b) of paragraph 1 of Article 2 of the statute that created the RFAI 2009, it is imperative to conclude that the applicant, not exercising any activity that falls within the energy sector, cannot benefit from the incentive with respect to the investment assigned to the biomass thermal power plant."

Subsequently, it is stated in the Tax Inspection Report that, "given that under paragraph 14 of Article 68 of the General Tax Law (LGT) the "tax administration, in relation to the subject matter of the request, cannot subsequently proceed differently from the information provided, except in compliance with a judicial decision," we consider that the investment related to the energy production activity does not constitute relevant investment under Article 2 of the Fiscal Regime for Investment Support (RFAI) because it corresponds to investment materialized in an activity different from its principal activity and is therefore not eligible under paragraph 1 of that Article 2" (emphasis in bold).

It is thus found that, in the Tax Inspection Report, there is no reference to paragraph 2 of Article 2 of the RFAI, the correction being justified only on the basis of paragraph 1 of that article and the fact that the investment related to energy production was materialized in an activity different from the principal one, which it deemed sufficient to consider it not eligible.

There is here no reference to lack of assignment of the investment to the operation of the company, to which paragraph 2 of that article alludes, but only to the fact that the investment was materialized in an activity that is not the principal activity of the company.

However, it appears from the text of the Tax Inspection Report that it is not due to lack of classification of the Claimant under paragraph 1 of Article 2 of the RFAI that it is understood that it cannot benefit from the tax benefit, but rather because of a "deficiency" of the investment, embodied in its not having been materialized in the principal activity of the Claimant.

Being thus, it is to be noted here an incomplete legal rationale (at least), because in the structure of Article 2 of the RFAI, paragraphs 1 and 3 define who the taxpayers are who can benefit from the RFAI and paragraph 2 is what indicates what investments are eligible.

And, in the case under review, it is not explained how from paragraph 1, which makes no reference to investments, a conclusion is extracted about the connection of the investment to the principal activity of the company. However, the generic reference made to Article 2 ("...the investment related to the energy production activity does not constitute relevant investment under Article 2 of the Fiscal Regime for Investment Support (RFAI)..."), before the final reference to its paragraph 1 (..."is not eligible under paragraph 1 of that Article 2"...), if it is certain that it does not rule out the error of this reference to paragraph 1, it also does not allow the conclusion that within the scope of the generic reference to Article 2 paragraph 2 thereof, which defines eligible investments, was not considered as a ground for the conclusion reached.

In the administrative appeal decision, there is no reference to the rationale of the binding information, its existence being invoked as the reason for dismissal of the administrative appeal, saying that "the claim will be dismissed in its entirety, maintaining the correction of the Tax Inspection Services, in the terms and rationale inherent in the Tax Inspection Report."

Thus, one must conclude that the sole ground invoked was that the "investment was materialized in an activity different from its principal activity."

For this reason, one must conclude that:

– It was not because the investment was not assigned to the operation of the Claimant that the Authority for Tax and Customs understood that it should make the correction it made;

– It was also not due to the Claimant's non-classification under the provision of paragraph 1 of Article 2 of the RFAI that the Authority for Tax and Customs understood that it could not benefit from the tax benefit.

It was only the non-coincidence between the principal activity of the Claimant and the activity to which the investment is devoted that led the Authority for Tax and Customs to understand that there is no right of the Claimant to the tax benefit.

It is, moreover, essentially, the position assumed in the Binding Information, in which it was considered that the Claimant cannot benefit from the tax benefit because "it corresponds to investment materialized in an activity different from its principal activity and is therefore not eligible under paragraph 1 of that Article 2."

For this reason, of the points that the Authority for Tax and Customs refers to in Articles 40 to 42 of its submission as being in issue in the present proceedings, only the first ("determine whether the benefit will have applicability in the case of investments made within an activity not admittedly exercised as the principal activity") does not correspond to subsequent rationale.

In fact, regarding "decide whether the Claimant can benefit from the tax credits, even having contracted the cessation of operation of the investments to another company, even if, as it argues, dominated by it," there is no evidence in the rationale that the cessation of operation of the investments, to which no reference is made, was understood to be an obstacle to the benefit.

On the other hand, regarding "know whether, even in that it is legally prohibited from exercising such activity, for which it was not licensed, it could still be legitimate and legal to benefit from that tax benefit," nor is any reference found in the Tax Inspection Report that the prohibition of exercise of an activity or the lack of licensing were obstacles to the benefit.

For this reason, in view of the contemporary rationale of the act, only at issue in the present proceedings is whether the thesis underlying the contested assessment, that only companies that have as their principal activity the activity to which a particular investment is devoted can benefit from the benefit with respect to that investment, has legal support.

4.3. Question of Interpretation of Article 2, Paragraph 1, of the RFAI

Article 2 of the RFAI establishes the following:

Article 2

Scope of Application and Definitions

1 - The RFAI 2009 is applicable to Corporate Income Tax taxpayers who exercise, as a main activity, an activity:

a) In the agricultural, forestry, agro-industrial, energy and tourism sectors and also in extractive or transforming industry, with the exception of the steel, shipbuilding and synthetic fibers sectors, as defined in Article 2 of Commission Regulation (EC) no. 800/2008, of 6 August;

b) In the context of new generation broadband networks.

2 - For purposes of this regime, the following are considered as relevant investments provided that they are assigned to the operation of the company:

a) Investment in tangible fixed asset, acquired in new condition, with the exception of:

i) Land, except where intended for the exploitation of concessions for mining, natural and spring waters, quarries, clay pits and sand pits in mining extraction projects;

ii) Construction, acquisition, repair and enlargement of any buildings, except where they are manufacturing facilities or assigned to administrative activities;

iii) Light passenger or multipurpose vehicles;

iv) Furniture and articles of comfort or decoration, except hotel equipment assigned to tourism operation;

v) Social facilities, except those that the company is obliged to have by legal determination;

vi) Other investment assets that are not directly and essentially associated with the productive activity carried out by the company;

b) Investment in intangible fixed asset, consisting of expenses with technology transfer, specifically through the acquisition of patent rights, licenses, "know-how" or technical knowledge not protected by patent.

3 - Can benefit from the fiscal incentives provided for in this regime Corporate Income Tax taxpayers who cumulatively meet the following conditions:

a) Have accounts properly organized, in accordance with the accounting standards and other legal provisions in force for the respective sector of activity;

b) Their taxable profit is not determined by indirect methods;

c) Keep in the company and in the region for a minimum period of five years the assets which are the object of the investment;

d) Not be debtors to the State and to social security of any contributions, taxes or fees or have payment of their debts properly secured;

e) Not be considered enterprises in difficulty within the terms of the Commission communication - Community guidelines on state aid for emergency aid and restructuring of enterprises in difficulty, published in the Official Journal of the European Union, no. C 244, of 1 October 2004;

f) Make relevant investment that provides for the creation of jobs and their maintenance until the end of the deduction period provided for in paragraphs 2 and 3 of Article 3.

4 - In the case of Corporate Income Tax taxpayers who do not fall within the category of micro, small and medium-sized enterprises, as defined in Annex I of Commission Regulation (EC) no. 800/2008, of 6 August, the investment expenses referred to in paragraph b) of paragraph 2 cannot exceed 50% of relevant investments.

5 - It is considered investment made in 2009 what corresponds to additions, verified in that fiscal year, of fixed assets and also what, having the nature of tangible asset and not concerning advances, results in additions to fixed assets in progress.

6 - For purposes of the preceding paragraph, additions of tangible fixed assets that result from transfers of fixed assets in progress carried forward from prior fiscal years are not considered, except if they are advances.

First of all, it should be noted that the Claimant clearly falls within the textual provision of paragraph 1 of this Article 2, being a Corporate Income Tax taxpayer that exercises, as a main activity, an activity in the transforming industry.

On the other hand, in paragraph 2, which defines eligible investments, no restriction is made to those that are connected to the principal activity of the eligible companies, so that, by this route, legal textual support cannot be found either to conclude that only investments connected to the principal activity of the companies indicated in paragraph 1 are eligible.

Rules that create tax benefits have the nature of exceptional rules, as results from the express wording of Article 2, paragraph 1, of the Statute of Tax Benefits (EBF), so they should be interpreted in their precise terms, without extensions or restrictions, so as to encompass all cases literally provided for in them and only those, as is settled case law. ( [3] )

The need for consistent textual support for the interpretation of exceptional rules is emphasized in the case of rules included in the legislative competence reserve of the Assembly of the Republic, as is the case of those that provide for tax benefits [Articles 103, paragraph 2, and 165, paragraph 1, paragraph i), of the CRP]. This boils down to what would be incompatible with the Constitution, by violation of the principles of reserve of law and reserve of law, the addition by the Administration of requirements for the granting of tax benefits not explicitly required by the rules that provide for them and that cannot be determined with the certainty required by the principle of confidence that they are there implicit.

In the case at hand, in addition to there being no textual support for the exclusion of the tax benefit in cases where a company is classifiable under the provision of paragraph 1 of Article 2 of the RFAI, there is no reason to detect an additional implicit requirement, at least in cases where the economic sector in which investment is made in a secondary activity, because the application of the tax benefit in this area is in line with the legislative intention to "promote productive business investment" and, in this case, to promote energy independence and efficiency, as well as environmental sustainability, revealed in the Report of the Bill no. 247/X that gave rise to Law no. 10/2009. ( [4] )

Thus, it is to be concluded that companies classifiable under the provision of paragraph 1 of Article 2 of the RFAI that make investments in activities that are not their principal activity can benefit from the tax benefit, at least when they are made in a secondary activity that is also provided for in this rule.

What leads to the conclusion that it lacks legal support and is affected by a breach of law the conclusion, on which the Authority for Tax and Customs based the contested assessment, that the investment is not eligible because it was materialized in an activity different from the principal activity of the Claimant.

It is true, however, that it is inherent in the regime of Article 2 of the RFAI that investments be used in an activity of the eligible company itself, even if it is not the principal one.

In the case at hand, there can be no doubt that the production of forest biomass and its use for electrical energy production is directly connected to the wood and paste industry..., because that connection is expressly assumed in Resolution of the Council of Ministers no. 169/2005, of 24 October, when enumerating, among the measures to be adopted for "the production of electrical energy and the expansion of other direct uses in the form of heat or light from renewable energy sources," "the valuation of forest biomass, in a regime to be compatible with the wood and paste industries....."

Moreover, electrical energy production, under the terms of the contract entered into with C..., SA, cannot be considered an activity alien to the Claimant, because:

– The Claimant retained ownership of the installation intended for energy production;

– The installation is located within the Complex of ... of which the Claimant is the owner (Clause 1 of the Contract);

– The operation of the energy production equipment is carried out, generally, by workers of the Claimant, who were already assigned to the installation at the time the contract was entered into (Clause 3, paragraph 1, of the Contract);

– The workers of the Claimant assigned to energy production continued to be remunerated by it, the Claimant maintaining disciplinary power over them, and being the same only functionally subject to the orders and guidance of C... (Clause 3, paragraph 2, of the Contract);

– "all electrical and thermal energy produced in the installation shall be destined primarily to the satisfaction of the needs of the Complex of ... of A... and secondarily to sale to third parties, all in accordance with contracts that may be entered into with said purchasers" (Clause 5 of the Contract);

– as consideration for the cessation and the provision of services, C... makes payments to the Claimant;

– it was the Claimant that supplied the black liquor, biomass, boiler feed water and consumables, as appears from Clause 6, paragraph 1, paragraph b);

– the entity that nominally carries out the operation of the investments is held 100% by the Claimant.

In this context, it is unequivocal that there is an activity of energy production using biomass produced by the Claimant, which is carried out by workers of the Claimant, in its facilities, using equipment acquired with the investments in question, with the Claimant obtaining economic benefit from such activity, through the payments provided for in the contract, which are consideration not only for the cessation but also for the provision of services.

Thus, one is faced with an activity that, at least as regards the provision of remunerative services, is carried out directly by the Claimant, based on the investments made, a reality that is not prejudiced by the fact that C... develops its own economic activity, operating the same investments, through the provision of services that it acquires from the Claimant and, possibly, also with other means of its own.

On the other hand, provision of services connected to energy production through biomass constitutes an ancillary activity classifiable within the corporate purpose of the Claimant, which comprised, in 2010, "as a secondary activity, to operate services and carry out civil, commercial, industrial and financial operations, directly or indirectly, in whole or in part, related to its corporate purpose or which might facilitate or promote its achievement" [paragraph b) of the established factual matter]. In this case, it is evident that provision of services tending toward electrical energy production using biomass cannot but be considered as being related "directly or indirectly, in whole or in part" to the principal corporate purpose of the Claimant, as is generally recognized in the aforementioned Resolution of the Council of Ministers no. 169/2005 and results from documents no.s 9 and 11 attached with the request for arbitral decision.

Being thus, we see no way to conclude, in economic terms, that the Claimant does not operate the investments, by using them with its own workers, in its facilities, to produce electrical energy primarily for itself, obtaining economic benefits from the exercise of such activity.

In addition to this reality being the "economic substance" to which attention should be paid in cases of doubt about the interpretation of an incidence rule (Article 11, paragraph 3, of the LGT) ( [5] ), in the case at hand the entity that legally assumes responsibility for the operation is held 100% by the Claimant and is in issue a tax benefit that applies to the collection, in the context of taxation carried out under the special tax regime for groups of companies, so it does not appear that the legal reality resulting from nominal operation by C... can deserve treatment different from what is justified in view of economic substance.

On the other hand, regardless of whether the activity of provision of services to C... carried out by the Claimant lacks some license or authorization that was not obtained (which was not determined), it is certain that the hypothetical unlawfulness of such provision of services did not constitute a ground for the position assumed by the Authority for Tax and Customs in carrying out the challenged act, so that relevance cannot be given to this hypothetical ground invoked subsequently.

Moreover, nor is it clear why the legislator, visibly concerned with encouraging energy production from renewable sources and encouraging investment, would intend to prevent a company from carrying out investments in equipment and facilities with the aim of operating them through the provision of services to other energy marketing companies.

For this reason, in addition to the situation of the Claimant literally falling within paragraph a) of paragraph 1 of Article 2 of the RFAI, the sole rule that the Authority for Tax and Customs invoked as establishing legal obstacle to the Claimant's claim, we see no reasons that justify a restrictive interpretation, specifically the inclusion of an additional requirement with the scope that the tax benefit cannot be benefited by companies that, while having a principal activity of the types provided for there, have made investments in sectors provided for there in the context of a compatible secondary activity with their corporate purpose.

On the other hand, we do not see that the interpretation that results from the literal wording of that Article 2, paragraph 1, of the RFAI is incompatible with the constitutional principles of equality or legality.

In fact, first of all, regarding the principle of legality, what would offend it would be the addition, by administrative means, of a requirement not explicitly provided for nor detectable as implicit.

As for the principle of equality, the interpretation resulting from the literal wording is applicable to the generality of companies that find themselves in the situation described in that rule, and tax benefits, favoring those who benefit from them, have justification in the pursuit of the extrabudgetary purposes pursued by them, which, in the case at hand, are evident and detailed in the report of Bill no. 247/X, which came to give rise to the RFAI.

We therefore conclude that the assessment act challenged, in the part that is challenged in the present proceedings, is affected by a breach of law, specifically of Article 2, paragraph 1, of the RFAI, which justifies its annulment (Article 135, paragraph 1, of the Administrative Procedure Code of 1991).

The decision of partial dismissal of the administrative appeal, in the part in which it maintained the assessment act, in the part challenged, is affected by the same breach of law.

The compensatory interest assessments have as their basis the challenged assessment, so they are also affected by the same breach of law, in the part in which they are based on the part here annulled.

5. Decision

In accordance with the above, the members of this Arbitral Tribunal agree to:

a) Uphold the claims for declaration of partial illegality of the Corporate Income Tax assessment no. 2014... and the compensatory interest assessments no.s 2014 ... and 2014 ..., relating to the 2011 fiscal year, in the parts corresponding to the correction relating to the RFAI;

b) Uphold the claim for declaration of illegality of the decision of partial dismissal of the administrative appeal no. ... 2014..., in the part in which it maintained the said Corporate Income Tax and compensatory interest assessments;

c) Annul the assessments and decision referred to.

6. Value of the Proceedings

In accordance with the provision in Article 306, paragraph 2, of the Code of Civil Procedure and 97-A, paragraph 1, paragraph a), of the CPPT and 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the proceedings are assigned the value of € 4,439,649.45.

7. Costs

Under the terms of Article 22, paragraph 4, of the RJAT, the amount of costs is fixed at € 55,998.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Authority for Tax and Customs.

Lisbon, 10-12-2015

The Arbitrators

(Jorge Lopes de Sousa)

(Leonor Fernandes Ferreira)

(Marcolino Pisão Pedreiro)

(dissenting as per attached declaration)

Declaration of Dissenting Vote of Arbitrator Marcolino Pisão Pedreiro

I do not concur with the decision reached by majority and, consequently, I dissent, for the reasons I shall now set forth.

The rule applicable to the case, with respect to the requirements necessary for the taxpayer to have the right to the fiscal benefit in question, is contained in the various paragraphs of Article 2 of the Fiscal Regime for Investment Support (RFAI), only the fulfillment of the conditions provided for in paragraphs 1 and 2 being in issue in the present proceedings, according to the positions of the parties.
The RFAI is applicable to taxpayers who exercise, as a main activity, one of the activities provided for in paragraphs a) and b) of paragraph 1 of Article 2, who make an investment in tangible fixed asset (not excepted by paragraph 2 of that article) or in some intangible fixed asset of those referred to in paragraph b) of that paragraph 2, and that such investment is assigned to the operation of the company.[6]

The normative sense that results from the combination of paragraphs 1 and 2 of that article points in the direction that eligible investments are made in one of the activities mentioned in paragraph 1 of Article 2, provided that exercised by the taxpayer.

However, in my view, the rule does not expressly require, nor does the ratio legis impose, that the principal activity of the taxpayer and the activity in which the investment is materialized be the same. It is sufficient that the taxpayer exercises both activities and that both are mentioned in paragraph 1 of Article 2 of the RFAI.

In the case at hand, the taxpayer exercises, as a main activity, one of the activities provided for in Article 2, paragraph 1, and the investment was made in another activity provided for there.

It thus becomes necessary to know whether the taxpayer exercises the activity in which the investment was materialized and whether the investment was assigned to the operation, questions that are strictly interlinked.

Starting with the second question, it results from the established factual matter that the investment in question was assigned to the operation of company C..., SA and not to the operation of the Claimant.

This results from the following established facts:

"m) In 2009, 2010 and 2011, for what is relevant here, the Claimant made investments in energy production units located in its industrial complexes;

n) The production of energy using the waste resulting from the Claimant's activity of paste production ... is carried out by the company in the group C..., SA;

o) The Claimant entered into with C..., SA (hereinafter "C") the contract of temporary cessation of operation that appears in the administrative proceedings, part 11, pages 17 to 19, whose content is hereby reproduced (…)."

It is true that company C..., SA is held 100% by the Claimant but, as Pedro Pais de Vasconcelos tells us, writing about the disregard of the legal personality of commercial companies "Legal persons are legally autonomous in relation to the persons of their founders or members. They are different subjects of law. Thus, the acts and legal situations attributed to legal persons cannot be attributed to their founders or members and, vice-versa, the acts and legal situations attributed to their founders and members of legal persons cannot be attributed to these. This is the principle of separation (Trennungsprinzip) always preserved by legal personality."[8]

The disregard of the legal personality of commercial companies is a problem that has arisen, fundamentally, in situations where there is abusive conduct by the shareholders and not to confer on them advantages that could result from the absence of legal personality.

As the same author tells us "The personal and patrimonial autonomy of legal persons is capable of being abused. Misuse of legal personality for unlawful purposes has given rise to a jurisprudential and doctrinal movement, with repercussion already in the very letter of the law, in the direction of the disregard of legal personality"[9] and "The 'disregard of legal personality' occurs when, despite the separation between the legal spheres of the legal person and the respective shareholders, inherent in legal personality, the Law imputes to the shareholder authorship or responsibility for acts of the legal person, or vice-versa, as if, in the specific case, legal personality did not exist, without thereby, the existence and personality of the legal person in question being denied".[10] [11]

In the case at hand, in my view, there is no legal basis for the disregard of the legal personality of C..., S.A. and one cannot consider that the Claimant assigned to its operation the investments in question, but rather that they were assigned to the operation of C... S.A.

Similarly, it is not sustainable to consider that the [text truncated]

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What tax benefits (RFAI and SIFIDE) were disputed in CAAD arbitration process 400/2015-T?

The text excerpt does not specify which RFAI (Tax Benefits for Investment) and SIFIDE (Tax Incentive System for Business R&D) benefits were disputed. The document only mentions these were at issue in the 2011 IRC assessment totaling €4,439,649.45.

Does the CAAD Arbitral Tribunal have jurisdiction to rule on IRC tax benefit deductions?

The tribunal affirmed its jurisdiction to rule on IRC tax benefit deductions. While the Tax Authority argued the tribunal could only declare acts illegal but not recognize rights or quantify taxes, the tribunal held that its competence extends to all powers attributed to tax courts in judicial challenge proceedings under the RJAT framework.

Can the Tax Authority use a posteriori reasoning to justify IRC assessment decisions?

The text excerpt does not contain the tribunal's analysis on whether the Tax Authority can use a posteriori (after-the-fact) reasoning to justify IRC assessment decisions. This issue is mentioned in the case title but not addressed in the provided excerpt.

How are RFAI and SIFIDE fiscal incentives deducted from the IRC corporate tax liability?

The text excerpt does not explain the technical mechanism for deducting RFAI and SIFIDE fiscal incentives from IRC corporate tax liability. The substantive analysis of these tax benefits is not included in the partial document provided.

What was the outcome of the gracious complaint against the 2011 IRC tax assessment in process 400/2015-T?

The text indicates there was a partial dismissal of gracious complaint no. ...2014... which the claimant sought to have declared illegal and annulled. However, the specific grounds for dismissal and detailed outcome are not provided in this incomplete excerpt.

CAAD Decision 400/2015-T: IRC Tax Benefits RFAI and SIFIDE Deduction from Corporate Tax

Table of Contents

Summary

Full Decision

ENGLISH TRANSLATION

1. Report

2. Exception of Incompetence

3.1. Established Facts

3.2. Facts Not Established

3.3. Rationale for the Determination of Factual Matters

4. Legal Issues

4.1. Positions of the Parties

4.2. Rationale of the Act that is the Subject of the Proceedings

4.3. Question of Interpretation of Article 2, Paragraph 1, of the RFAI

5. Decision

6. Value of the Proceedings

7. Costs

Declaration of Dissenting Vote of Arbitrator Marcolino Pisão Pedreiro

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Table of Contents

CAAD Decision 400/2015-T: IRC Tax Benefits RFAI and SIFIDE Deduction from Corporate Tax

Table of Contents

Summary

Full Decision

ENGLISH TRANSLATION

1. Report

2. Exception of Incompetence

3.1. Established Facts

3.2. Facts Not Established

3.3. Rationale for the Determination of Factual Matters

4. Legal Issues

4.1. Positions of the Parties

4.2. Rationale of the Act that is the Subject of the Proceedings

4.3. Question of Interpretation of Article 2, Paragraph 1, of the RFAI

5. Decision

6. Value of the Proceedings

7. Costs

Declaration of Dissenting Vote of Arbitrator Marcolino Pisão Pedreiro

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