CAAD Ruling on IRC Autonomous Taxation, SIFIDE Deductions, and Tax Benefit Credits (428/2017-T)

Arbitration Decision

The arbitrators Counselor Jorge Lopes de Sousa (arbitrator-president, appointed by the CAAD Ethics Council), Dr. João Taborda da Gama (appointed by the Passive Subject) and Dr. Carla Castelo Trindade (appointed by the Tax and Customs Authority) constituting the Arbitral Court, established on 16-06-2017, agree as follows:

1. Report

A… SGPS, S.A., legal entity no. …, with registered office at Avenida …, lot…, …, …-… Lisbon, with capital of € 15,700,697, hereinafter referred to as "A…SGPS" or "Claimant", a company covered by the local peripheral services of the Lisbon Finance Service …, the dominant company responsible for self-assessment of Corporate Income Tax (IRC) of the Group (the B… Group) to which, in the 2011 financial year, the Special Taxation Regime for Groups of Companies ("RETGS") was applicable, filed, under articles 2, no. 1, paragraph a), and 10, nos. 1 and 2, of Decree-Law no. 10/2011 of 20 January (hereinafter "RJAT"), and articles 1 and 2 of Order no. 112-A/2011 of 22 March, a request for the constitution of an Arbitral Court, with a view to declaring the illegality of the rejection of the request for official review which it submitted of the self-assessment of IRC, including autonomous taxation, of the B… group, relating to the 2011 financial year, with regard to the amount of autonomous taxation rates in IRC of € 796,398.35, with its consequent annulment, due to improper exclusion of deductions from the aggregate.

The Claimant further requests reimbursement of said amount, increased by compensatory interest at the legal rate counted, until full reimbursement, from 01-09-2012.

Subsidiarily, should it be understood that article 90 of the IRC Code does not apply to autonomous taxation, then the illegality of the assessment of autonomous taxation (and be consequently annulled) shall be declared due to absence of legal basis for its execution, with the consequent reimbursement of the same amount and payment of compensatory interest counted from the same date.

The respondent is the TAX AND CUSTOMS AUTHORITY.

The Claimant appointed Dr. João Taborda da Gama as Arbitrator, under the provisions of article 6, no. 2, paragraph b), of the RJAT.

The request for the constitution of the Arbitral Court was accepted by the President of the CAAD and automatically notified to the Tax and Customs Authority on 13-07-2017.

Under the provisions of paragraph b) of no. 2 of article 6 and no. 3 of the RJAT, and within the period provided for in no. 1 of article 13 of the RJAT, the highest official of the Tax Administration service appointed Dr. Carla Castelo Trindade as Arbitrator.

The Arbitrators appointed by the Parties submitted to the CAAD Ethics Council a request for the appointment of the President Arbitrator, following which Counselor Jorge Lopes de Sousa was appointed, who accepted the appointment.

On 31-05-2017 the parties were duly notified of this appointment, and manifested no intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Ethics Code.

In accordance with the provisions of paragraph c) of no. 1 of article 11 of the RJAT, the collective arbitral court was constituted on 19-09-2017.

The Tax and Customs Authority submitted its response, in which it raised the exception of absolute incompetence and defended the inadmissibility of the request for arbitral judgment.

By order of 24-10-2017, the meeting provided for in article 18 of the RJAT was dispensed with and it was decided that the proceedings would continue with successive written submissions.

The Parties submitted their submissions.

The Arbitral Court was regularly constituted, the parties have legal personality and capacity, are legitimate and are duly represented (arts. 4 and 10, no. 2, of the same act and art. 1 of Order no. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullities and there is no obstacle to the examination of the merits of the case.

It is necessary to examine first the exception of incompetence (article 13 of the Code of Procedure in Administrative Courts, applicable to tax arbitration proceedings by virtue of the provisions of article 29, no. 1, paragraph c), of the RJAT).

2. Statement of Facts

2.1. Established Facts

The following facts are considered established:

a) In 2011, the Claimant was the dominant company of a group of companies to which the Special Taxation Regime for Groups of Companies RETGS was applicable, and which was composed, in the aforementioned taxation period, by itself and by the companies:

▪ C…, S.A. ("C…"), Tax ID…;

▪ D…, SGPS, S.A. ("D…SGPS") Tax ID…;

▪ E…, S.A. ("E…") Tax ID…;

▪ F…, S.A. ("F…") Tax ID …;

▪ G…, S.A. ("G…") Tax ID…;

▪ H…, S.A. ("H…") Tax ID… (which in 2009 incorporated by merger the following companies: I…, S.A. Tax ID: …; J…, S.A., Tax ID: …; K…, S.A., Tax ID: …; L…, S.A.. Tax ID: …. And which on 28 June 2011, the year of the fiscal year in question, changed its corporate name to M…, S.A.;

▪ N…, Lda. ("N…") Tax ID…;

▪ O…, SGPS, S.A. ("O…") Tax ID …;

▪ P…, S.A. ("P…") Tax ID…;

▪ Q…, S.A. ("Q…") Tax ID …;

▪ R…, S.A. ("R…") Tax ID …;

▪ S…, S.A. (S…") Tax ID …;

b) On 29-05-2012, the now Claimant submitted the IRC Model 22 tax return, with reference to the taxation period of 2011, of the tax group of companies of which it is the dominant company, which appears in document no. 3 attached to the request for arbitral judgment, the contents of which are deemed to be reproduced, having self-assessed autonomous taxation in IRC for that same year 2011, in the amount of € 796,398.35, having also submitted a substitution declaration that changed nothing in this regard (document no. 4 attached to the request for arbitral judgment, the contents of which are deemed to be reproduced);

c) The amount of autonomous taxation referred to relates to the following types of expenses and charges:

(document no. 12 attached to the request for arbitral judgment, the contents of which are deemed to be reproduced);

d) The Claimant indicated in the Model 22 declaration relating to the 2011 financial year that it held SIFIDE tax credits available for use in the amount of € 6,835,337.30 (field 709 of Annex D of the Model 22 declaration relating to the 2012 financial year, which appears in document no. 9 attached to the request for arbitral judgment, the contents of which are deemed to be reproduced);

e) In the 2012 financial year, the Claimant deducted € 970,970.30 of SIFIDE credits (field 711 of Annex D of the Model 22 declaration appearing in document no. 9 attached to the request for arbitral judgment);

f) In the 2013 financial year, the Claimant did not deduct tax benefits (Model 22 declaration appearing in document no. 9 attached to the request for arbitral judgment);

g) In the 2014 financial year, the Claimant deducted € 377,001.00 of credits it held at the end of the 2011 financial year (field 711 of Annex D of the Model 22 declaration relating to the 2014 financial year, which appears in document no. 9 attached to the request for arbitral judgment, the contents of which are deemed to be reproduced, and document no. 8, not contested);

h) In the 2015 financial year, the Claimant deducted € 2,989,277.24 of SIFIDE credits it held at the end of the 2011 financial year (field 711 of Annex D of the Model 22 declaration relating to the 2015 financial year, which appears in document no. 9 attached to the request for arbitral judgment, the contents of which are deemed to be reproduced and document no. 8, not contested);

i) The Claimant understood that the credits referred to could be deducted from the aggregate of autonomous taxation in IRC assessed in that same year, in the amount of € 796,398.35, having submitted on 02-04-2015 a request for official review of the self-assessment on this basis (document no. 5 attached to the request for arbitral judgment, the contents of which are deemed to be reproduced);

j) The request for official review was rejected by order of the Deputy Head of Services of the DSIRC of 24-03-2017, which manifests agreement with the reasons of the information appearing in document no. 6 attached to the request for arbitral judgment, the contents of which are deemed to be reproduced, in which the following is stated, among other matters:

Given the provisions of no. 2, of article 90 of the IRC Code, in particular, in its then paragraph b) - current paragraph c) -, it is provided that deductions relating to tax benefits be made from the assessed aggregate. The now Claimant seeks to have autonomous taxation qualified as IRC for purposes of the mentioned deduction and, proceeding from this premise, that the value of tax benefits (SIFIDE), deductible from the aggregate, which ceased to be deducted due to alleged insufficiency of the latter, be deducted from the portion of the IRC aggregate corresponding to autonomous taxation assessed and paid.

Recall that the SIFIDE (System of Tax Incentives for Business R&D), approved by Law no. 55-A/2010, of 31 December, allows companies to obtain a tax benefit, in the context of IRC, proportional to the expenditure on research and development investment that they can demonstrate, in the part that has not been subject to financial participation of the State as non-refundable aid.

Consisting essentially in the possibility of deducting from the IRC aggregate assessed in the taxation period the amount of tax credit calculated, and expenses that, due to insufficiency of the aggregate, cannot be deducted in the period in which they were incurred, may be so in subsequent periods.

In what may be relevant here, regarding the regime approved by the aforementioned Law no. 55-A/2010, of 31 December, it is important to recall the following:

"Article 4.

Scope of the Deduction

1 - Corporate income tax taxpayers resident in Portuguese territory who carry on, as their main activity or not, an activity of agricultural, industrial, commercial or services nature and non-residents with a permanent establishment in that territory may deduct from the amount determined in accordance with article 90 of the IRC Code, and up to its extent, the value corresponding to expenses with research and development, in the part that has not been subject to financial participation of the State as non-refundable aid, incurred in the taxation periods from 1 January 2011 to 31 December 2015, at a double percentage:

a) Base rate - 32.5% of expenses incurred in that period;

b) Incremental rate - 50% of the increase in expenses incurred in that period compared to the simple arithmetic mean of the two previous financial years, up to the limit of (euro) 1,500,000.

(...)

3 - The deduction is made, in accordance with article 90 of the IRC Code, in the assessment relating to the taxation period mentioned in the previous number.

4 - Expenses which, due to insufficiency of the aggregate, cannot be deducted in the financial year in which they were incurred may be deducted up to the sixth immediately following financial year".

We have seen that the Claimant argues that the value of tax benefits (SIFIDE) should be deducted from the portion of the IRC aggregate corresponding to autonomous taxation assessed in the individual sphere of each of the companies that originated the payment of those benefits.

Now, it must be recalled that the subjection of certain expenses to autonomous taxation was introduced by Decree-Law no. 192/90, of 2 June, concerning confidential or undocumented expenses incurred by companies. With the 2001 tax reform regarding entertainment expenses and vehicles. And later, to a diverse range of situations. As the Constitutional Court stressed, which we fully endorse, "autonomous taxation, not directly affecting a profit, will contain the idea of discouraging a practice which, in addition to affecting equality in the distribution of public charges, may involve situations of criminal illegality or less fiscal transparency" (Decision of 12 January 2011 ~ Proc. no. 204/2010).

Given the novel wording of article 88, no. 21, of the IRC Code, introduced by Law no. 7-A/2016, of 30 March (which approved the State Budget for 2016), it is observed that the legislator does not allow any deductions to the global amount determined in autonomous taxation. And, in article 135 of the said Law, it is noted that this wording has an interpretative nature.

Without granting, this interpretation was already making its way.

Very recently, the Full Panel of the Constitutional Court ruled that "although the taxation of certain expenses is formally included in the IRC Code and the respective amount is assessed within that tax, such taxation is a tax imposition materially distinct from taxation in IRC. While the former affects, exceptionally, the performance of certain expenses, the latter affects certain income, functioning only as a link between them the circumstance that these expenses are deductible in the determination of this income, aiming with the creation of that tax to reduce the tax advantage resulting from deduction of these costs. But the existence of the tax here in question in no way influences the amount of IRC, acting in a perfectly autonomous manner in relation to it, so its operation should be viewed only according to the elements that characterize it" (Decision of 19 December 2012 Proc. no. 150/12).

As PAULO MARQUES emphasizes, "it is a autonomous payment, that is, independent of the existence or not of taxable material (articles 88 of the IRC Code and 73 of the CIRS), hence its difficult compatibility with the constitutional principle of taxation according to real income (article 104, no. 2, of the Constitution)". Adding opportunely that "However, as erroneously to us, paragraph a), of no. 1, of article 23-A, of the IRC Code refers to "IRC, including autonomous taxation". We understand that autonomous taxation affects a specific expense, not confusing with IRC, a tax that affects the profit of the company".

In the same vein, ANA PAULA DOURADO: "Autonomous taxation in arts. 88 of the IRC Code and 73 of the CIRS creates a tax liability and therefore is not based on direct methods of taxation, that is, is not based on taxation of real income increase or net real income".

Arriving here, we can see that autonomous taxation does not share with IRC a tax incidence on income, nor its periodic nature.

This taxation consists of a single obligation, since it affects instantaneous and autonomous tax facts, which are exhausted in acts of realization of certain realities, nothing more. Facts formed by a single event (expense or charge). At that moment giving rise to the tax, which is not confused with the moment the tax is due. That is, independent of the moment in which the tax fact comes to be revealed in terms of declaration or assessment of the tax.

Thus, the IRC contemplates an element of single obligation, which translates into the autonomous taxation rates of the IRC, as our best doctrine has expounded. And, likewise, our most qualified jurisprudence - see by all, the Decision 85/2013, of 5 February, referring to Proceeding no. 121/2012, of the Full Panel of the Constitutional Court, already cited.

Despite the assessment being made at the end of the period, we have a case-by-case taxation, or sporadic in its facts, not occurring for reasons of substance its aggregation for purposes of assessment but only of mere convenience and ease for taxpayers. We fully accompany the understanding of the Constitutional Court no. 617/2012, of 19 December (Proc. no. 150/12), which in Full Panel ruled that "This assessment operation translates only into the aggregation, for purposes of collection, of the set of operations subject to this autonomous taxation, whose rate is applied to each expense, with no influence of the volume of expenses incurred in determining the rate".

Furthermore and for example, by article 12 of the IRC Code, companies and other entities covered by the tax transparency regime (article 6) are not taxed in IRC, but rather as to autonomous taxation. If the legislator did not understand the two assessments as distinct realities, non-subjection to one would result in the same solution for the other.

Regarding expenses with research and development (SIFIDE), we have seen that the same, when due to insufficiency of the aggregate cannot be deducted in the taxation period in which they were incurred, may still be deducted up to the sixth immediately following period.

Retain that in taxation periods the rule is that of annuality (article 8 of the Code), and each has independence in relation to others for taxation purposes. However, in some cases, exceptionally, this independence yields before a solidarity between successive periods. For example, when the legislator allows losses suffered in the past, in previous periods, to carry forward through their deduction from taxable profits, if they exist. And this is so because the artificial and static segmentation in a period, for tax purposes, does not go hand in hand with the uninterrupted flow of business activity, with the ordinary legislator pursuing taxation by real income, based on the command of article 104, no. 2, of the Constitution.

Now, in the case of deduction of expenses with research and development, it is not apparent how such solidarity between successive periods can hold to autonomous taxation, if in the latter, from the outset, the periodicity is lacking in the characterization of the tax obligation itself. If before it reveals itself as a single, sporadic and isolated or autonomous obligation, there is no artificial and static segmentation in a period, for tax purposes, as any emergence of business continuity and its activity, taken into consideration by the legislator (carry forward), but only, as has been mentioned, an aggregation by mere convenience and ease for taxpayers. And "hence its difficult compatibility with the constitutional principle of taxation according to real income (article 104, no. 2, of the Constitution)".

In an emergence of business continuity and its activity, taken into consideration by the legislator (carry forward). Unrecovered losses in one taxation period are communicable to gains obtained in others in subsequent ones.

Making positive results recorded to offset losses obtained in previous periods.

In view of all the above, we do not see how a deduction from the aggregate - in this case, under article 90, no. 2, in its then paragraph b) – current paragraph c) - can or should be reflected, not only as to IRC (on income of periodic nature) but also as to a nominally aggregated taxation of sporadic expenses among themselves and that run outside the IRC, and which for that reason the legislator wished to denominate as autonomous taxation, endowing it with a dissuasive or anti-abuse character.

In sum, in homage to the provisions of article 11, no. 3, of the LGT, on the interpretation of tax norms, "Where doubt persists about the meaning of the norms of incidence to be applied, account should be taken of the economic substance of the tax facts". Now, it has been expounded, doubts do not exist that the materiality underlying autonomous taxation is distinct from that of IRC. And in our view, the unequal should be treated as unequal, on pain of grave disregard, precisely, of the principle of equality.

Autonomous taxation should not be considered for purposes of the deductions referred to in no. 2, of article 90 of the IRC Code, prejudicing the request for recognition of the right to compensatory interest, filed by the Claimant.

From which it results that the legal validity of the matter under review (self-assessment) remains intact, and the requested in the Request for Review should not be granted.

FROM THE CONCLUSIONS:

From all of the above exposition the following conclusions result:

· By the wording, with interpretative nature, of article 88, no. 21, of the IRC Code, introduced by Law no. 7-A/2016, of 30 March (which approved the State Budget for 2016), the legislator prevents any deductions to the global amount determined in autonomous taxation;

· Autonomous taxation does not share with IRC a tax incidence on income, nor its periodic nature, from which it should not be considered for purposes of the deduction referred to in its then paragraph b) - current paragraph c) -, of no. 2, of article 90 of the IRC Code;

· Consequently, the request for recognition of the right to compensatory interest, filed by the Claimant, is prejudiced.

FROM THE PROPOSAL:

We are of the understanding that the Request for Review should be rejected.

k) The computer system of the Tax and Customs Authority does not allow deducting the amounts of tax benefits from the aggregate derived from autonomous taxation;

l) On 25-10-2011 and 05-04-2012, the Claimant had its tax situation regularized before the Tax and Customs Authority (document no. 11 attached to the request for arbitral judgment, the contents of which are deemed to be reproduced);

m) On 18-01-2012 and 13-04-2012, the Claimant had its contribution situation regularized before Social Security (document no. 11 attached to the request for arbitral judgment, the contents of which are deemed to be reproduced);

n) The companies ▪ E…, S.A. ("E…") Tax ID…, G…, S.A. ("G…") Tax ID …, H…, S.A. ("H…") Tax ID…, P…, S.A. ("P…") Tax ID … and Q…, S.A. ("Q…") Tax ID … had their tax and contribution situations regularized on the dates to which the respective certificates appearing in document no. 11 attached to the request for arbitral judgment relate, the contents of which are deemed to be reproduced;

o) In the 2011 financial year, tax to be recovered was self-assessed (field 368 of the Model 22 declaration);

p) On 12-07-2017, the Claimant submitted the request for arbitral judgment that gave rise to the present proceedings.

2.2. Unestablished Facts

It was not established whether the Claimant has SIFIDE credits to use that were held at the end of the 2011 financial year.

On one hand, the amount that the Claimant indicates in article 16 of the request for arbitral judgment as available for use is not what is referred to in document no. 8, which it attached as evidence.

On the other hand, the Model 22 declaration relating to the 2016 financial year was not attached to the proceedings (despite the legal deadline for its submission having passed when the request for arbitral judgment was submitted), so it cannot be concluded whether SIFIDE credits were used in that financial year.

2.3. Reasoning for the Establishment of the Statement of Facts

The established facts are based on documents submitted by the Claimant and which also appear in the administrative file.

As for the fact relating to the computer system of the Tax and Customs Authority, this is not contested by it.

3. Exception of Material Incompetence of the Arbitral Court Arising from the Circumstance that the Request for Arbitral Judgment Was Formulated Following Rejection of a Request for Official Review

The Tax and Customs Authority argues, in sum, that article 2, paragraph a) of Order 112-A/2011, of 22 March, by which the Tax and Customs Authority became bound by arbitral jurisdiction excludes claims relating to the declaration of illegality of self-assessment acts that have not been preceded by recourse to the administrative procedure, through gracious reclamation, under article 131 of the Code of Tax Procedure and Process.

The competence of the arbitral courts functioning at the CAAD is, first of all, limited to the matters indicated in art. 2, no. 1, of Decree-Law no. 10/2011, of 20 January (RJAT).

In a second line, the competence of the arbitral courts functioning at the CAAD is also limited by the terms in which the Tax Administration was bound to that jurisdiction by Order no. 112-A/2011, of 22 March, for art. 4 of the RJAT establishes that "the binding of the tax administration to the jurisdiction of the courts constituted under the terms of the present law depends on an order of the members of the Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of disputes covered".

In face of this second limitation of the competence of the arbitral courts functioning at the CAAD, the resolution of the competence question depends essentially on the terms of this binding, for, even if one is faced with a situation framing in that art. 2 of the RJAT, if it is not covered by the binding it will be excluded the possibility of the dispute being jurisdictionally decided by this Arbitral Court.

In paragraph a) of art. 2 of this Order no. 112-A/2011, there are expressly excluded from the scope of the binding of the Tax Administration to the jurisdiction of the arbitral courts functioning at the CAAD the "claims relating to the declaration of illegality of self-assessment acts, withholding at source and payment on account that have not been preceded by recourse to the administrative procedure in accordance with articles 131 to 133 of the Code of Tax Procedure and Process".

The express reference to the prior "recourse to the administrative procedure in accordance with articles 131 to 133 of the Code of Tax Procedure and Process" should be interpreted as referring to cases in which such recourse is mandatory, through gracious reclamation, which is the administrative means indicated in those articles 131 to 133 of the CPPT, to the terms of which it refers. In fact, immediately, it would not be understood that, it not being necessary the prior administrative challenge "when its grounds are exclusively a matter of law and the self-assessment was carried out in accordance with generic guidelines issued by the tax administration" (art. 131, no. 3, of the CPPT, applicable to cases of withholding at source, by force of the provisions of no. 6 of art. 132 of the same Code), it would be to remove the arbitral jurisdiction on account of such administrative challenge, which is understood to be unnecessary, not having been made.

In the case at hand, the declaration of illegality of a self-assessment act is sought, following the rejection of a request to review tax acts made after the expiration of the two-year period provided for in article 132, which was followed by hierarchical appeal.

Thus, it is important, first and foremost, to clarify whether the declaration of illegality of acts of rejection of requests for review of the tax act, provided for in art. 78 of the LGT, is included in the competences attributed to the arbitral courts functioning at the CAAD by art. 2 of the RJAT.

In fact, in this art. 2 there is no express reference to these acts, contrary to what occurs with the legislative authorization on which the Government based itself to approve the RJAT, which refers to "requests for review of tax acts" and "administrative acts that involve the assessment of the legality of assessment acts".

However, the formula "declaration of illegality of assessment acts, self-assessment, withholding at source and payment on account", used in paragraph a) of no. 1 of art. 2 of the RJAT does not restrict, in a mere declarative interpretation, the scope of arbitral jurisdiction to cases in which an act of one of those types is directly challenged. In fact, the illegality of assessment acts can be declared jurisdictionally as a corollary of the illegality of a second-degree act, which confirms an assessment act, incorporating its illegality.

The inclusion in the competences of the arbitral courts functioning at the CAAD of cases in which the declaration of illegality of the acts indicated therein is made through the declaration of illegality of second-degree acts, which are the immediate object of the challenging claim, results with certainty from the reference made in that norm to self-assessment, withholding at source and payment on account acts, which are expressly referred to as included among the competences of the arbitral courts. In fact, regarding these acts it is imposed, as a rule, the necessary gracious reclamation, in articles 131 to 133 of the CPPT, so that, in these cases, the immediate object of the challenging proceedings is, as a rule, the second-degree act that assesses the legality of the assessment act, an act which, if it confirms it, must be annulled to obtain the declaration of illegality of the assessment act. The reference made in paragraph a) of no. 1 of art. 10 of the RJAT to no. 2 of art. 102 of the CPPT, in which the challenge of acts rejecting gracious reclamations is provided, clarifies any doubts that the competences of the arbitral courts functioning at the CAAD cover cases in which the declaration of illegality of the acts referred to in paragraph a) of that art. 2 of the RJAT must be obtained following the declaration of the illegality of second-degree acts.

In fact, it was precisely in this sense that the Government, in Order no. 112-A/2011, of 22 March, interpreted these competences of the arbitral courts functioning at the CAAD, by excluding from the scope of these competences the "claims relating to the declaration of illegality of self-assessment acts, withholding at source and payment on account that have not been preceded by recourse to the administrative procedure in accordance with articles 131 to 133 of the Code of Tax Procedure and Process", which has as its scope the restriction to its binding to cases in which such recourse to the administrative procedure was used.

Obtaining the conclusion that the formula used in paragraph a) of no. 1 of art. 2 of the RJAT does not exclude cases in which the declaration of illegality results from the illegality of a second-degree act, it will also cover cases in which the second-degree act is that of rejection of a request for review of the tax act, for there is no apparent reason to restrict, all the more so that, in cases in which the request for review is made within the period of gracious reclamation, it should be treated as equivalent to a gracious reclamation.

The same applies to the decision on hierarchical appeal, expressly indicated in paragraph a) of no. 1 of article 10 of the RJAT as the initial term of the deadline for presentation of a request for constitution of the arbitral court.

The express reference to articles 131 to 133 of the CPPT made in article 2 of Order no. 112-A/2011 cannot have the decisive reach of excluding the possibility of assessment of requests for illegality of acts rejecting official review requests of acts of the types referred to therein.

In fact, the interpretation exclusively based on the literal tenor which the Tax and Customs Authority defends in the present proceedings cannot be accepted, for in the interpretation of tax norms the general rules and principles of interpretation and application of laws are observed (article 11, no. 1, of the LGT) and article 9, no. 1, expressly prohibits exclusively literal-based interpretations by providing that "interpretation should not be confined to the letter of the law", but rather should "reconstruct from the texts the legislative thought, taking especially into account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied".

As regards the correspondence between interpretation and the letter of the law, a "minimum of verbal correspondence, even if imperfectly expressed" suffices (article 9, no. 3, of the Civil Code) which will only prevent the adoption of interpretations that cannot in any way be reconciled with the letter of the law, even recognizing therein imperfection in the expression of legislative intent.

Therefore, the letter of the law is not an obstacle to a declarative interpretation, which makes explicit the scope of the literal tenor, nor even extensive interpretation, when it can be concluded that the legislator said less than what, in coherence, it would intend to say, that is, when it said imperfectly what it intended to say. In extensive interpretation "it is the very valuation of the norm (its "spirit") that leads to the discovery of the need to extend the text of this to the hypothesis that it does not cover", "the expansive force of the very legal valuation is capable of leading the provision of the norm to cover hypotheses of the same type not covered by the text".

Extensive interpretation, thus, is imposed by the evaluative and axiological coherence of the legal system, erected by article 9, no. 1, of the Civil Code as a primordial interpretative criterion through the imposition of observance of the principle of unity of the legal system.

It is manifest that the scope of the requirement of prior gracious reclamation, necessary to open the contentious avenue of challenge of acts of the types referred to in articles 131 to 133 of the CPPT, has as its sole justification the fact that with regard to that type of acts there is no taking of position by the Tax Administration on the legality of the legal situation created by the act, a position which may even prove to be favorable to the taxpayer, avoiding the need for recourse to the contentious avenue.

In fact, beyond not discerning any other justification for this requirement, the fact that necessary gracious reclamation is provided for contentious challenge of withholding at source and payment on account acts (in articles 132, no. 3, and 133, no. 2, of the CPPT), which have in common with self-assessment acts the circumstance that there is also no taking of position by the Tax Administration on the legality of the acts, confirms that this is the reason for being of that necessary gracious reclamation.

Another unequivocal confirmation that this is the reason for being of the requirement of necessary gracious reclamation is found in no. 3 of article 131 of the CPPT, by establishing that "without prejudice to the provisions of the previous numbers, when its grounds are exclusively a matter of law and the self-assessment was carried out in accordance with generic guidelines issued by the tax administration, the deadline for challenge does not depend on prior reclamation, and the challenge must be presented within the deadline of no. 1 of article 102", a regime which is applicable to withholding at source acts by referral of no. 6 of article 132 of the CPPT. In fact, in situations of this type, there was a prior generic pronouncement by the Tax Administration on the legality of the legal situation created by the self-assessment or withholding at source act and it is this fact that explains why necessary gracious reclamation ceases to be required.

Now, in cases in which an official review request is made of a self-assessment or withholding at source act the Tax Administration is provided, with this request, an opportunity to pronounce itself on the merits of the claim of the taxpayer before the latter resorts to the jurisdictional avenue, so that, in coherence with the solutions adopted in nos. 1 and 3 of article 131 and 3 and 6 of article 132 of the CPPT, it cannot be required that, cumulatively with the possibility of administrative assessment within the scope of this official review procedure, a new administrative assessment be required through gracious reclamation.

On the other hand, it is unequivocal that the legislator did not intend to prevent taxpayers from filing official review requests in cases of self-assessment acts, for these were expressly referred to in no. 2 of article 78 of the LGT and in no. 2 of article 54 of the same Law establishes the applicability to self-assessment and withholding at source of taxpayer guarantees provided for in no. 1, which includes official review.

And to self-assessment acts, performed by the taxpayer, acts of withholding at source which are performed by the tax substitute, which is considered a taxpayer (article 18, no. 3, of the LGT), are equivalent, by mere declarative interpretation.

In this context, allowing the law expressly for taxpayers to opt for gracious reclamation or official review of self-assessment and withholding at source acts and the official review request being filed within the period of gracious reclamation being perfectly equivalent to a gracious reclamation, as referred to, there cannot be any reason that can explain that arbitral avenue cannot be accessed by a taxpayer who opted for review of the tax act instead of gracious reclamation.

Therefore, it is to be concluded that the members of the Government who issued Order no. 112-A/2011, in making reference to articles 131 to 133 of the CPPT, said imperfectly what they intended, for, intending to impose prior administrative assessment to contentious challenge of acts of the types referred to, they ended up including reference to articles 131 to 133 which do not exhaust the possibilities of administrative assessment of these acts.

In fact, it should be noted that this interpretation not being confined to the literal tenor is even specially justified in the case of paragraph a) of article 2 of Order no. 112-A/2011, for its defects are evident: one, is to associate the comprehensive formula "recourse to the administrative procedure" (which references, beyond gracious reclamation, hierarchical appeal and review of the tax act) to the "expression in accordance with articles 131 to 133 of the Code of Tax Procedure and Process", which has potential restrictive reach to gracious reclamation; another is to use the formula "preceded" by recourse to the administrative procedure, reporting to "claims relating to the declaration of illegality of acts", which, obviously, would be much better accommodated with the feminine word "preceded".

Therefore, beyond the general prohibition of interpretations limited to the letter of the law that is found in article 9, no. 1, of the Civil Code, in the specific case of paragraph a) of article 2 of Order no. 112-A/2011 there is a special reason not to justify great enthusiasm for a literal interpretation, which is the fact that the wording of that norm is manifestly defective.

Furthermore, assuring the review of the tax act the possibility of assessment of the claim of the taxpayer before access to the contentious avenue that is intended to be achieved with the necessary administrative challenge, the most correct solution, because it is the most coherent with the legislative design of "strengthening the effective and efficient protection of the rights and legally protected interests of taxpayers" manifested in no. 2 of article 124 of Law no. 3-B/2010, of 28 April, is the admissibility of the arbitral avenue to assess the legality of assessment acts previously assessed in review procedure.

And, as it is the most correct solution, it must be presumed to have been normatively adopted (article 9, no. 3, of the Civil Code).

On the other hand, containing that paragraph a) of article 2 of Order no. 112-A/2011 a formula that is imperfect, but which contains a comprehensive expression "recourse to the administrative procedure", which potentially also references the review of the tax act, there is found in the text the minimum of verbal correspondence, even if imperfectly expressed, required by that no. 3 of article 9 for the viability of the adoption of the interpretation that establishes the most correct solution.

It is to be concluded, thus, that article 2 paragraph a) of Order no. 112-A/2011, duly interpreted on the basis of the criteria of interpretation of law provided for in article 9 of the Civil Code and applicable to substantive and adjective tax norms, by force of the provisions of article 11, no. 1, of the LGT, enables the presentation of requests for arbitral judgment with regard to withholding at source acts that have been preceded by a request for official review.

As regards the allegation of the Tax and Customs Authority that if this not "be understood, such interpretation being not only illegal, but manifestly unconstitutional, by violation of the constitutional principles of the rule of law and separation of powers (cf. articles 2 and 111, both of the CRP), as well as of legality (cf. articles 3, no. 2, and 266, no. 2, both of the CRP), as a corollary of the principle of indisposability of tax credits ínsito in article 30, no. 2 of the LGT, which bind the legislator and all activity of the AT".

In fact, the Constitution does not impose that the interpretation of normative diplomas must be confined to the literal tenor and, in the case at hand, as explained, duly interpreted the norms of article 2, no. 1, of the RJAT and article 2 of Order no. 112-A/2011, of 22 March, it is concluded that the binding of the Tax and Customs Authority to the arbitral courts functioning at the CAAD covers cases in which self-assessment acts were preceded by official review requests. Therefore, the interpretation which was made did not increase the binding of the Tax and Customs Authority in relation to what is regulated, but rather defined precisely its terms, which result from the regulatory diploma.

On the other hand, in interpreting and applying legal norms, this Arbitral Court is performing the function that is constitutionally assigned to it (articles 202, no. 1, 203 and 209, no. 2, of the CRP), so neither is it apparent how there can be violation of the principles of separation of powers, rule of law and legality, for what is decided by this court evidences, precisely, the perfect concretization of these principles: the Assembly of the Republic authorized the Government to legislate (article 124 of Law no. 3-B/2010, of 28 April); the Government, in the use of legislative powers, issued the RJAT; the Administration, through two members of the Government, issued Order no. 112-A/2011, of 22 March; the Arbitral Court interpreted and applied the normative diplomas referred to.

As regards the principle of legality, it is expressed in the compliance with the law, in the interpretation thereof that is made by the courts, which is imposed on the interpretations of other state bodies (article 205, no. 2, of the CRP). It is precisely the application of legality that is made in recognizing the competence of the arbitral courts for the knowledge of requests for declaration of illegitimacy of self-assessment acts preceded by access to the administrative avenue through a request for official review.

As regards the invocation of the principle of indisposability of tax credits, defined in article 30, no. 2, of the LGT, in which it is stated that "the tax credit is indisposable, being able to set conditions for its reduction or extinction only with respect for the principle of equality and tax legality", it will certainly be, a lapse, since in deciding on its competence the Arbitral Court is not practicing any act of disposition of any credit.

On the other hand, the Tax and Customs Authority does not even identify which is the credit it is a holder of that is being object of disposition by the Arbitral Court.

Furthermore, the principle of indisposability of tax credits applies to the Administration and not to the Courts, as understood by the Constitutional Court, in the wake of the generality of doctrine.

This exception of incompetence on the grounds of non-presentation of gracious reclamation of the self-assessment is therefore without merit.

Essentially in this sense, regarding self-assessment acts, reference can be made to the decision of the Central South Administrative Court of 27-04-2017, decided in proceeding no. 08599/15.

4. Matters of Law

The question which is the object of the proceeding is whether investment expenses benefiting from SIFIDE can be deducted from amounts due for autonomous taxation in IRC relating to the 2011 financial year.

4.1. Applicability of Articles 89 and 90 of the IRC Code to the Calculation of Autonomous Taxation

Articles 89 and 90 of the IRC Code establish the following, in the wording of Law no. 3-B/2010, of 28 April:

Article 89

Competence for Assessment

Assessment of the IRC is made:

a) By the taxpayer itself, in the declarations referred to in articles 120 and 122;

b) By the General Directorate of Taxes, in other cases.

Article 90

Procedure and Form of Assessment

1 - The assessment of the IRC is processed as follows:

a) When the assessment is to be made by the taxpayer in the declarations referred to in articles 120 and 122, it is based on the taxable material contained therein;

b) In the absence of submission of the declaration referred to in article 120, the assessment is made by 30 November of the following year to which it relates or, in the case provided for in no. 2 of the said article, by the end of the 6th month following the end of the deadline for submission of the declaration mentioned there and is based on the annual value of minimum monthly remuneration or, when greater, the entire taxable material of the financial year closest to which is determined;

c) In the absence of assessment under the previous paragraphs, the same is based on the elements which the tax administration has available.

2 – To the amount determined under the previous number the following deductions are made, in the order indicated:

a) That corresponding to international double taxation;

b) That relating to tax benefits;

c) That relating to the special payment on account referred to in article 106;

d) That relating to withholdings at source not susceptible to compensation or reimbursement under the applicable legislation.

3 – (Repealed by Law no. 3-B/2010)

4 – To the amount determined under no. 1, regarding the entities mentioned in no. 4 of article 120, only the deduction relating to withholdings at source when these have the nature of tax on account of the IRC is to be made.

5 – The deductions referred to in no. 2 relating to entities to which the tax transparency regime established in article 6 is applicable are imputed to the respective partners or members in the terms established in no. 3 of that article and deducted from the amount determined on the basis of taxable material that has taken into account the imputation provided for in the same article.

6 – When the special regime for taxation of groups of companies is applicable, the deductions referred to in no. 2 relating to each of the companies are made to the amount determined regarding the group, in the terms of no. 1.

7 – From the deductions made under paragraphs a), b) and c) of no. 2 no negative value can result.

8 – To the amount determined under paragraphs b) and c) of no. 1 only are deductions made of which the tax administration has knowledge and which can be made under nos. 2 to 4.

9 – In cases in which the provision of paragraph b) of no. 2 of article 79 is applicable, assessments are made annually on the basis of taxable material determined on a provisional basis, and, in view of the assessment corresponding to the taxable material relating to the entire assessment period, the difference ascertained is collected or cancelled.

10 – The assessment provided for in no. 1 can be corrected, if necessary, within the period referred to in article 101, collecting or cancelling then the differences ascertained.

The said articles 89 and 90 of the IRC Code, as well as other norms of this Code, such as those relating to the declarations provided for in articles 120 and 122, are applicable to autonomous taxation.

In fact, it is today undisputed, following numerous arbitral jurisprudence and the positions assumed by the Tax and Customs Authority, that the tax collected on the basis of autonomous taxation provided for in the IRC Code has the nature of IRC. Moreover, apart from the jurisprudence, article 23-A no. 1, paragraph a), of the IRC Code, in the wording of Law no. 2/2014, of 16 January, leaves no room today for any reasonable doubt, corroborating what had already previously resulted from the literal tenor of article 12 of the same Code.

Now, article 90 of the IRC Code refers to the forms of assessment of the IRC, by the taxpayer or by the Tax Administration, being applicable to the determination of the tax due in all situations provided for in the Code.

Therefore, that article 90 also applies to the assessment of the amount of autonomous taxation, which is determined by the taxpayer or by the Tax Administration, following the submission or non-submission of declarations, there being no other provision that provides for different terms for its assessment.

Thus, the differences between the determination of the amount resulting from autonomous taxation and that resulting from taxable profit are restricted to the determination of taxable material and the applicable rates, which are those provided for in Chapters III and IV of the IRC Code for the IRC based on taxable profit and in article 88 of the IRC Code for the IRC based on the taxable material of autonomous taxation and their respective rates.

But, the forms of assessment provided for in Chapter V of the same Code are of common application to autonomous taxation and to the remaining taxable material of IRC.

However, the circumstance that a self-assessment of IRC, made under the terms of no. 1 of article 90, can contain several partial calculations based on various rates applicable to certain taxable materials does not imply that there is more than one assessment, as results from the very terms of that norm in referring to "assessment", in the singular, in all cases in which it is "made by the taxpayer in the declarations referred to in articles 120 and 122", having "as its basis the taxable material contained therein" (whether determined on the basis of the rules of articles 17 et seq. or determined on the basis of the various situations provided for in article 88).

In fact, it is not only the assessments provided for in article 88 that can include various calculations of application of rates to certain taxable materials, as the same can occur in the situations provided for in nos. 4 to 6 of article 87.

In any case, whatever the calculations to be made, it is the unitary self-assessment that the taxpayer or the Tax and Customs Authority must make under the terms of articles 89, paragraph a), 90, no. 1, paragraphs a), b) and c), and 120 or 122, and on the basis of it that global IRC is calculated, whatever the taxable materials relating to each of the types of taxation underlying it.

In fact, if this article 90 were not applicable to the assessment of autonomous taxation provided for in the IRC Code, we would have to conclude that there would be no provision providing for its assessment, which would amount to illegality, by violation of article 103, no. 3, of the CRP, which requires that the assessment of taxes be made "in accordance with the law".

Reference should be made to the new norm of no. 21 added to article 88 of the IRC Code by Law no. 7-A/2016, of 30 March, regardless of whether or not it is qualifiable as truly interpretative, in no way alters this conclusion, for there it is established, as concerns the form of assessment of autonomous taxation, that it "is made in accordance with the terms provided for in article 89 and is based on the values and rates that result from the provisions of the above numbers".

In fact, if it is true that this new norm comes to make explicit how the amounts of autonomous taxation are calculated (which already resulted from the text itself of the various provisions of article 88) and that competence belongs to the taxpayer or the Tax Administration, under the terms of article 89, it is also clear that it does not remove the necessity of using the procedure provided for in no. 1 of article 90, particularly in cases provided for in its paragraph c) in which assessment is the responsibility of the Tax and Customs Authority and based on "elements which the tax administration has available", which will cover the possibility of assessing on the basis of autonomous taxation, if the Tax and Customs Authority has elements which prove its assumptions.

Therefore, whether before or after Law no. 7-A/2016, of 30 March, article 90, no. 1, of the IRC Code is applicable to the assessment of autonomous taxation.

Thus, the handling of the subsidiary request which the Claimant subordinates to the condition of understanding that article 90 of the IRC Code does not apply to autonomous taxation is prejudiced.

4.2. Deductibility of Research and Development Investment Expenses Provided for in SIFIDE from the IRC Aggregate Resulting from Autonomous Taxation

In 2011, the System of Tax Incentives for Business Research and Development II (SIFIDE II) was in force, which was approved by article 133 of Law no. 55-A/2010, of 31 December (later amended by article 163 of Law no. 64-B/2011, of 30 December).

This diploma establishes the following, in its articles 4 and 5, in the wording of 2010:

Article 4

Scope of the Deduction

1 - Corporate income tax taxpayers resident in Portuguese territory who carry on, as their main activity or not, an activity of agricultural, industrial, commercial or services nature and non-residents with a permanent establishment in that territory may deduct from the amount determined in accordance with article 90 of the IRC Code, and up to its extent, the value corresponding to expenses with research and development, in the part that has not been subject to financial participation of the State as non-refundable aid, incurred in the taxation periods from 1 January 2011 to 31 December 2015, at a double percentage:

a) Base rate - 32.5% of expenses incurred in that period;

b) Incremental rate - 50% of the increase in expenses incurred in that period compared to the simple arithmetic mean of the two previous financial years, up to the limit of (euro) 1,500,000.

2 - For corporate income tax taxpayers that are SMEs in accordance with the definition contained in article 2 of Decree-Law no. 372/2007, of 6 November, which have not yet completed two financial years and have not benefited from the incremental rate set out in paragraph b) of the previous number, an increase of 10% is applied to the base rate set out in paragraph a) of the previous number.

3 - The deduction is made, in accordance with article 90 of the IRC Code, in the assessment relating to the taxation period mentioned in the previous number.

4 - Expenses which, due to insufficiency of the aggregate, cannot be deducted in the financial year in which they were incurred may be deducted up to the sixth immediately following financial year.

5 - For purposes of the provisions of the previous numbers, when in the year of commencement of enjoyment of the benefit a change in the taxation period occurs, the annual period beginning in that year should be considered.

6 - The incremental rate provided for in paragraph b) of no. 1 is increased by 20 percentage points for expenses relating to the hiring of doctorate holders by companies for research and development activities, with the limit provided for in the same paragraph becoming (euro) 1,800,000.

7 - To taxpayers who reorganize, as a result of concentration acts as defined in article 73 of the IRC Code, the provisions of no. 3 of article 15 of the Statute of Tax Benefits apply.

Article 5

Conditions

Only the following taxpayers may benefit from the deduction referred to in article 4:

a) Those whose taxable profit is not determined by indirect methods;

b) Those who are not debtors to the State and to social security of any taxes or contributions, or have their payment duly secured.

In the case at hand, the Tax and Customs Authority does not question that the Claimant meets the subjective and objective requirements to be able to benefit from SIFIDE, having rejected the request for official review on the understanding that the expenses in question cannot be deducted from the amounts it paid for autonomous taxation, because deduction can only be made to the IRC aggregate resulting from the application of the IRC rate to taxable profit.

As stated, article 90 of the IRC Code also refers to the assessment of autonomous taxation.

And, as has also been stated, there is no legal support to affirm that, in the event that several calculations have to be made in a declaration to determine the IRC, more than one self-assessment is made.

The diploma that approved SIFIDE does not state that credits arising from it are deductible from all and any IRC aggregate, but rather defines the scope of deduction by alluding, in its no. 1 of article 4, "to the amount determined in accordance with article 90 of the IRC Code, and up to its extent".

No. 3 of the same article 4 confirms that it is to the amount determined under article 90 of the IRC Code that is relevant to implement the deduction by stating that "the deduction is made, in accordance with article 90 of the IRC Code, in the assessment relating to the taxation period mentioned in the previous number".

Thus, by mere declarative interpretation, it is concluded that article 4, no. 1, of SIFIDE II, by establishing the deduction "to the amount determined in accordance with article 90 of the IRC Code, and up to its extent", implies the deduction from the amount of autonomous taxation which is determined under that article 90.

The fact that article 5 of SIFIDE II excludes the benefit when taxable profit is determined by indirect methods and autonomous taxation includes situations in which it aims indirectly to tax profits (in particular, not giving relevance or discouraging facts susceptible to reducing them) has no relevance for this purpose, for the concept of "indirect methods" has a precise scope in tax law, which is concretized in article 90 of the LGT (in addition to special norms), relating to means of determining taxable profit, whose use is not provided for in the calculation of taxable material of autonomous taxation provided for in article 88 of the IRC Code.

On the other hand, if it is the necessity to make use of indirect methods that excludes the possibility of enjoying the benefit, one cannot justify this exclusion in relation to the aggregate of autonomous taxation, which is determined by direct methods.

Furthermore, it cannot be seen, in the possible anti-abuse nature that some autonomous taxation assumes, an explanation for its exclusion from its respective aggregate from the scope of deductibility of the SIFIDE II benefit, for there is no legal support to exclude the deductibility from the aggregate provided by corrections based on norms of an undoubtedly anti-abuse nature, such as, for example, those relating to transfer pricing or undercapitalization.

On the other hand, the fact that the deductibility of the SIFIDE II tax benefit is limited to the aggregate of article 90 of the IRC Code, up to its extent, does not allow concluding that the tax credit is only deductible if there is taxable profit, for what that fact requires is that there be an IRC aggregate, which can exist even without taxable profit, specifically by virtue of autonomous taxation.

Thus, as the literal tenor of article 4 of SIFIDE II points to the fact that the deduction also applies to the IRC aggregate derived from autonomous taxation assessed under article 90 of the IRC Code, only by way of a restrictive interpretation can the application of the tax benefit to the IRC aggregate provided by autonomous taxation be excluded.

The viability of a restrictive interpretation encounters, from the start, an obstacle of a general nature, which is that norms creating tax benefits have the nature of exceptional norms, as results from the express tenor of article 2, no. 1, of the EBF, so that, in the absence of a special rule, they should be interpreted in their precise terms, as is established jurisprudence.

In the case of tax benefits, extensive interpretation is explicitly provided for (article 10 of the EBF), but not restrictive interpretation, so that, as a rule, the tax benefit should not be interpreted with less amplitude than that which, in a declarative interpretation, results from the tenor of the norm providing for it.

In any case, a restrictive interpretation is only justified when "the interpreter reaches the conclusion that the legislator adopted a text that betrays its thought, to the extent that it says more than what it intended to say. Also here the ratio legis will have a decisive word. The interpreter should not let himself be dragged by the apparent scope of the text, but should restrict it so as to make it compatible with legislative thought, that is, with that ratio. The argument on which this type of interpretation is based is usually thus expressed: cessante ratione legis cessat eius dispositio (where the reason for the law ends its scope ends)".

As a basis for a restrictive interpretation one might venture that some autonomous taxation aims to discourage certain taxpayer behaviors susceptible to affecting taxable profit, and, consequently, reducing tax revenues, and its dissuasive force will be attenuated with the possibility that its respective aggregate can be the object of deductions.

But, the discouragement of these behaviors is justified only by concerns about protection of tax revenues and tax benefits granted are, by definition, "measures of exceptional character instituted for the protection of relevant extrafiscal public interests that are superior to those of the taxation itself that prevent them" (article 2, no. 1, of the EBF).

And, in the case of SIFIDE II tax benefits, the reasons of an extrafiscal nature that justify their superposition over tax revenues are, in the legislative perspective, of enormous importance, as inferred from the reasoning in the Report of the State Budget for 2011:

II.2.2.4.4. System of Tax Incentives for Business Research and Development II (SIFIDE)

Given that one of the assets of competitiveness in Portugal passes through the commitment to technological capacity, scientific employment and conditions for assertion in the European space, the Proposal of the State Budget for 2011 proposes to renew the SIFIDE (System of Tax Incentives for Business Research and Development), now in the SIFIDE II version, to be in force in the periods of 2011 to 2015, enabling the deduction from the IRC aggregate for companies that invest in R&D (research and development capacity).

Given the positive balance of tax incentives to business R&D, and also considering the evolution of the support system of other countries, it was decided to revise and reintroduce for five more taxation periods this system of support. Business R&D is a decisive factor not only of its own assertion while competitive structures, but of productivity and long-term economic growth, fact, moreover, expressly recognized in the Program of the XVIII Government, as well as in various recent international reports.

It is in this context that, in the international panorama, the OECD has considered since 2001 Portugal as one of three countries with the most significant advance in business R&D. Being the national system in force, compared to other systems using deduction from the aggregate and the distinction between base rate and incremental rate, one of the most attractive and competitive.

Being research and development of companies "a decisive factor not only of its own assertion while competitive structures, but of productivity and long-term economic growth", it is understood that preference was given to encouraging investment in technological capacity, scientific employment and conditions for assertion in the European space, which, in the medium term lead to obtaining greater tax revenues.

The importance which, in the legislative perspective, was recognized to this tax benefit provided for in SIFIDE II, is decisively confirmed by the fact that it is indicated as being specially excluded from the general limit to the relevance of tax benefits in IRC, which is indicated in article 92 of the IRC Code.

Therefore, it is certain that we are dealing with tax benefits whose justification is legislatively considered more relevant than the obtaining of tax revenues, inferring from that article 92 that the legislative intention to encourage investments in research and development provided for in SIFIDE II is so firm that it goes to the point of not even establishing any limit to the deductibility of the IRC aggregate, despite this tax regime having been created and applied in a period of notorious difficulties of public finances.

Thus, there is no legal basis, in particular in view of the legislative intention that is possible to detect, to, on the basis of a restrictive interpretation, exclude the deductibility of the SIFIDE II tax benefit from the aggregate of autonomous taxation that results directly from the letter of article 4, no. 1, of the respective diploma, combined with article 90 of the IRC Code.

On the other hand, the possible limitation of the application of the tax benefit to companies that presented taxable profit in 2011 would amount to a very strong restriction of its field of application, since, as is public fact, the great majority of companies, in that year and in the previous ones, presented tax losses, although it paid IRC through other means.

In fact, according to statistics published by the Tax and Customs Authority, in the year 2011, more than half of the IRC declarations presented negative net value and in the taxation period of 2011 only 26% of taxpayers presented IRC Assessed (Table 7), and about 71% of taxpayers made IRC payments (Table 8), through Special Payment on Account, or other positive components of the tax (Autonomous Taxation, Municipal Surcharge, State Surcharge, IRC from previous taxation periods, etc.).

Therefore, it is manifest that the applicability of the tax benefit to companies that, although presenting tax losses, paid IRC, including by virtue of autonomous taxation, greatly expanded the number of potentially beneficiary companies and, consequently, is better in line with the legislative intention underlying SIFIDE II than that defended by the Tax and Customs Authority.

On the other hand, as stated, it cannot be overlooked that autonomous taxation aims to protect or increase tax revenues and that tax benefits granted are, by definition, "measures of exceptional character instituted for the protection of relevant extrafiscal public interests that are superior to those of the taxation itself that prevent them" (article 2, no. 1, of the EBF).

That is, in the case at hand, by establishing a tax benefit by deduction from the IRC aggregate, the legislator opted to forego the tax revenue that this tax could provide, to the extent of the granting of the tax benefit. For this consideration relative to the interests at stake (tax revenue versus strong stimulus to investment) it is indifferent whether this revenue comes from calculations made on the basis of article 87 or article 88 of the IRC Code. In fact, whatever the form of calculation of this tax revenue, we are dealing with money whose collection the legislator considered to be less important than the pursuit of the economic purpose referred to. Of the two alternatives which presented themselves to the legislator regarding the encouragement of investments provided for in SIFIDE II, which were, on one hand, maintaining intact revenues from IRC (including those from autonomous taxation) and not seeing investment encouraged and, on the other hand, implementing this encouragement with loss of IRC revenues, the consideration which is necessarily underlying SIFIDE II is that of opting for the creation of the encouragement with prejudice to revenues. And, naturally, being the creation of encouragement to investment better, in the legislative perspective, than the collection of revenues, it is not apparent how it can be relevant that the IRC revenues which are lost to implement the encouragement come from the general taxation of IRC provided for in no. 1 of article 87 or from special rate taxation provided for in nos. 4 to 6 of the same article, or from autonomous taxation provided for in article 88: in all cases, the alternative is the same between creation of encouragement and collection of IRC revenues and the relative consideration which can be made of the conflicting interests is identical, whatever the forms of determining the amount of IRC which is foregone to create the encouragement.

And, in the case of the SIFIDE II tax benefit, the reasons of an extrafiscal nature that justify the encouragement with loss of revenue are very strong, for it is considered that the encouraged investments are a decisive factor in the future competitiveness of the country, which is fundamental for the very increase in tax revenues.

Therefore, it is certain that we are dealing with tax benefit whose justification is legislatively considered more relevant than the obtaining of tax revenues from IRC, whatever the basis of its calculation, for what is at stake is always whether or not to forego a certain amount of money to create an encouragement to investment.

In this context, the nature of autonomous taxation and the solutions legislatively adopted, in general, regarding them, have no relevance to the assessment of this question, for it must be assessed in the face of the specific interests which in its consideration clash.

In fact, what is at stake is, exclusively, to determine the scope of SIFIDE II, which establishes a regime of exceptional nature, which aimed to pursue certain public interests, and not to contribute to the decision of any conceptual question about the nature of autonomous taxation, a matter on which there is apparent neither in the text of the law, nor in the Report of the Budget for 2011, the slightest legislative concern.

For the same reason that what is at stake is to interpret the scope of the diploma of special nature which is SIFIDE II, no relevance can be attributed, for this purpose, to the norm of no. 21 of article 88 of the IRC Code, added by Law no. 7-A/2016, of 30 March, to the extent that it refers to the fact that no "deductions are made to the global amount determined", despite the alleged interpretative nature attributed to it (which implies its unconstitutionality, by retroactivity, as understood by the Constitutional Court in decision no. 267/2017, of 31-05-2017).

In fact, there is no sign, neither in Law no. 7-A/2016, nor in the Report of the Budget for 2016, nor in its discussion, that with the addition to article 88 of the IRC Code of a general norm prohibiting deductions to the global amount determined of autonomous taxation, it was intended to restrictively interpret the expression "deduct from the amount determined in accordance with article 90 of the IRC Code" which is contained in a special norm of a separate diploma, such as SIFIDE II.

And, in the absence of an unequivocal intention in the opposite sense, the rule applies that general law does not alter special law (article 7, no. 3, of the Civil Code), which has its justification in the fact that "the general regime does not include the consideration of the particular conditions which justified precisely the issuance of the special law".

Furthermore, the said rules of SIFIDE II are aimed at encouraging corporate income tax taxpayers to make investments in the period between 01-01-2011 and 31-12-2015, so that, being the tax benefit a quid pro quo for the adoption of the legislatively desired and encouraged behavior, it would be incompatible with the constitutional principle of trust, inherent in the principle of democratic rule of law (article 2 of the CRP), not to recognize these behaviors the favorable tax effects provided for in the law in force at the moment in which they occurred.

In fact, the interpretation of the law made here was something with which taxpayers had reasons to reasonably expect, as evidenced by the already abundant and majority arbitral jurisprudence that adopts this interpretation, with the recognition of constitutionality given to it by the Constitutional Court in decision no. 267/2017, of 31-05-2017.

Therefore, if hypothetically Law no. 7-A/2016 intended to eliminate, totally or partially, the favorable tax effects that SIFIDE II promised to taxpayers who, with justified trust, adopted the behavior provided for therein, it would be materially unconstitutional, by violation of that principle.

By the above, converging the literal and rational elements of the interpretation of article 4 of SIFIDE II to the fact that the investment expenses provided for therein are deductible "to the amount determined in accordance with article 90 of the IRC Code, and up to its extent", it is to be concluded that they are deductible from the totality of that aggregate, which encompasses, in addition to that derived from the taxation of profits in each fiscal period, that resulting from the special payment on account and other positive components of the tax, in particular autonomous taxation, state surcharge and IRC from previous taxation periods.

Thus, the request for arbitral judgment proceeds on this issue, for the self-assessment and the decision on the request for official review which confirmed it are illegal.

These illegalities justify the annulment of the self-assessment, in the part concerned, and of the decision of the gracious reclamation, under the terms of article 163, no. 1, of the Code of Administrative Procedure, subsidiarily applicable under the terms of article 2, paragraph c), of the LGT.

4.3. Questions of Unconstitutionality Raised by the Tax and Customs Authority

The Tax and Customs Authority states in articles 203 and 204 of its Response the following:

"(...) any interpretation that does not apply the norm contained in the State Budget Law for 2016, set out in article 133, which added no. 21 to article 88 of the IRC Code, with the effects provided for in article 135, both contained in the State Budget Law for 2016, published on 30.03.2016, entering into force the next day, in which it is recommended, with an interpretative character, that

"The assessment of autonomous taxation in IRC is made in accordance with the terms provided for in article 89 and is based on the values and rates that result from the provisions of the above numbers, with no deductions being made to the global amount determined."

(...)

and which, consequently, permits the deduction to the part of the IRC aggregate produced by autonomous taxation rates of tax benefits made in the context of IRC - in this case, SIFIDE -, that decision is materially unconstitutional, by

a) violation of the principle of legality, inherent in art. 103, no. 2 of the CRP,

b) violation of the principle of separation of powers, embodied in art. 2 of the CRP,

c) violation of the principle of protection of trust provided for in art. 2 of the CRP,

d) violation of the principle of equality, in its positive formulation of capacity to contribute, arising from art. 13, no. 2 and 103, no. 2 both of the CRP".

It is noted that the Tax and Customs Authority does not explain which reason or reasons it understands justify the violation of these principles, limiting itself to alluding to them, so that it did not fulfill, as to these hypothetical issues, the burden of allegation indispensable for the assurance of the right of contradiction.

In any case, with the brevity which the insufficiency of allegation justifies, it can be said that there is no apparent reason why the principle of legality could be violated, for legality has precisely the scope referred to above and, in particular, the general norm of no. 21 of article 88 of the IRC Code, even applied to situations prior to it has no potentiality to revoke special norms, such as those of SIFIDE II, which provide for deduction from the IRC aggregate, which includes that arising from autonomous taxation. Being this the appropriate interpretation of the said norms, what would be incompatible with the principle of legality would be to apply them with different scope than that resulting from the appropriate interpretative rules.

As for the principle of separation of powers, the present decision is handed down by a Court, so it has a jurisdictional character, and, in the exercise of judicial power, it is for the Courts to interpret and apply the laws. In the case, this Court interpreted all the norms in question, including no. 21 of article 88 of the IRC Code, with the sense it stated and not with another. Therefore, this arbitral decision is a concretization of the principle of separation of powers.

As concerns the principle of protection of trust, even if it is understood that its scope of protection extends to State Administration, it certainly does not cover trust that courts will adopt a certain interpretation, when jurisprudence is not settled, all the more so when it is majority in the opposite sense to the position of the Tax and Customs Authority (in the specific case of tax benefits).

As regards the principle of equality, no comparable situation is identified to which different treatment has been given. Furthermore, autonomous taxation is not based on the capacity to contribute of companies, for its tax autonomy is concretized, precisely, in the imposition of taxation with indifference to the existence of income, being exceptions to the principle of taxation of companies with incidence "fundamentally on its real income" (article 104, no. 2, of the CRP). Therefore, it is not apparent how the principle of equality is violated, and much less article 103, no. 2, of the CRP, which relates to the formal requirements of tax laws.

By the above, there is no violation of the principles invoked.

5. Reimbursement of Amounts Paid and Compensatory Interest

The Claimant requests reimbursement of the amount of € 796,398.35 referring to the amount of autonomous taxation unduly paid, increased by compensatory interest at the legal rate counted, until full reimbursement, from 01-09-2012.

The payment of that amount occurred through compensation, operated in field 368 of the Model 22 declaration, which resulted in tax to be recovered.

In accordance with the provisions of paragraph b) of article 24 of the RJAT, the arbitral decision on the merits of the claim for which there is no appeal or challenge binds the Tax Administration from the end of the period provided for appeal or challenge, and this must, in the exact terms of the arbitral decision in favor of the taxpayer and until the end of the period provided for the execution of sentences of tax courts, "restore the situation that would exist if the tax act which is the object of the arbitral decision had not been practiced, adopting the acts and operations necessary for this purpose", which is in harmony with the provisions of article 100 of the LGT [applicable by virtue of the provisions of paragraph a) of no. 1 of article 29 of the RJAT] which establishes, that "the tax administration is obliged, in case of total or partial proceeding of reclamation, judicial challenge or appeal in favor of the taxpayer, to immediate and full restoration of the legality of the act or situation which is the object of the dispute, including the payment of compensatory interest, if appropriate, from the end of the deadline for execution of the decision".

Although article 2, no. 1, paragraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral courts functioning at the CAAD, not making reference to condemning decisions, it should be understood that its competences include the powers which, in judicial challenge proceedings, are attributed to tax courts, being this the interpretation which harmonizes with the sense of the legislative authorization on which the Government based itself to approve the RJAT, and results very naturally from the fact that the said article 2, no. 1 refers to "the declaration of illegality of acts of assessment, self-assessment, withholding at source and payment on account" and that the consequences of such declaration, when the claim is granted, are precisely those indicated in the alínea b) of the said article 24, that is, the obligation of the Tax Administration to restore the situation that would exist if the tax act had not been practiced.

For this reason, and in accordance with the established jurisprudence of the arbitral courts of the CAAD, the declared illegality of the self-assessment of IRC relating to autonomous taxation implies the annulment of said self-assessment, and consequently the obligation to reimbur the said amount to the Claimant.

The Claimant is entitled to compensatory interest, to be calculated from 01-09-2012.

In fact, when the self-assessment was made on 29-05-2012, the amount was not yet due, for the due date only occurred with the filing of the declaration on that date. However, looking at the facts, the Claimant presented on 02-04-2015 a request for official review, which was rejected on 24-03-2017, it being possible to establish that the Claimant could not reasonably expect that the amount would be definitively retained beyond 01-09-2012, a date which corresponds to the first date on which the IRC becomes overdue when a self-assessment is made in May of the same year.

Therefore, on 01-09-2012, the conditions for the beginning of the counting of compensatory interest are met, and the Claimant is entitled to this interest as of that date.

6. Operative Part

For the above reasons, the Arbitral Court decides:

1) To GRANT the request for arbitral judgment filed by A…SGPS, S.A., regarding the declaration of illegality of the self-assessment of IRC, including autonomous taxation, of the fiscal group of which it is the dominant company, relating to the 2011 financial year, in the part referring to autonomous taxation in the amount of € 796,398.35 in the aggregate.

2) To declare the ILLEGALITY of the self-assessment of the said amount of autonomous taxation and of the decision of the request for official review which confirmed it.

3) To ANNUL the said self-assessment regarding autonomous taxation in the amount of € 796,398.35, and consequently to annul the decision rejecting the request for official review filed by the Claimant.

4) To order the TAX AND CUSTOMS AUTHORITY to RESTORE the situation that would exist if the said self-assessment had not been made, including the reimbursement to A…SGPS, S.A. of the amount of € 796,398.35, plus compensatory interest at the legal rate from 01-09-2012 until the complete reimbursement.

5) To REJECT the subsidiary request for arbitral judgment, as prejudiced.

6) To REJECT the exception of incompetence raised by the Tax and Customs Authority.

Costs: The costs of the proceedings shall be borne by the Tax and Customs Authority, pursuant to article 25, alínea a), of the RJAT.

The arbitral decision is final and not subject to appeal, in accordance with article 24, alínea a), of the RJAT.

Done in Lisbon, on 12-07-2018.

The Arbitrators:

(Counsel Jorge Lopes de Sousa)

(Dr. João Taborda da Gama)

(Dr. Carla Castelo Trindade)