CAAD 465/2018-T: Deductibility of Financial Charges Under IRC and Circular 7/2004 for SGPS Companies

ARBITRAL DECISION

The arbitrators Fernanda Maçãs (presiding arbitrator), Raquel Franco and Artur Maria Silva (associate arbitrators), designated by the CAAD Ethics Council to form the Arbitral Tribunal, constituted on 03-12-2018, agree as follows:

I. Report

1. A..., S.A. legal entity no. ..., with registered office at Rua..., no. ..., ...-... Lisbon, with share capital of € 95,542,254.00 (ninety-five million five hundred and forty-two thousand two hundred and fifty-four euros), formerly called B... – SGPS, S.A., hereinafter referred to as "A..." or "Claimant", parent company of the C... Group, subject to the special taxation regime for groups of companies provided for in articles 69 et seq. of the Corporate Income Tax Code, covered by the local peripheral services of the Lisbon Tax Authority, filed, pursuant to articles 2, no. 1, paragraph a), and 10, nos. 1 and 2, of Decree-Law no. 10/2011 of 20 January, and articles 1 and 2 of Ordinance no. 112-A/2011 of 22 March, a request for arbitral ruling in which the Tax and Customs Authority is named as Respondent.

2. The Claimant requests (i) that the illegality be declared and that the decisions dismissing the hierarchical appeals and dismissing the requests for official review and gracious complaint be annulled; (ii) that the illegality of the acts of self-assessment of CIT for the Fiscal Group C... for the fiscal years 2010, 2011, 2012 and 2013 be declared insofar as they improperly disregard the deduction of financial charges in the amounts of € 461,414.30 (2010), € 780,399.55 (2011), € 1,062,530.93 (2012) and € 667,968.41 (2013), with the consequent annulment in these parts, and (iii) that the illegality be declared and the reflexive tax for the year 2013 relating to these excesses of taxable bases be annulled in the amount of € 743,078.30, including in this excess the impact of the deduction of financial charges in previous years through the increase of carry-forward tax losses that transition to 2013, with all legal consequences, namely the reimbursement of this amount of tax, plus compensatory interest at the legal rate calculated, until full reimbursement, from 30.05.2014.

3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 24-09-2018.

4. In accordance with the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the TAA Regulatory Framework, the Ethics Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the assignment within the applicable period.

5. On 12-11-2018 the parties were duly notified of this designation, having not expressed any intention to refuse the designation of the arbitrators, in accordance with articles 11, no. 1, paragraphs a) and b) of the TAA Regulatory Framework and articles 6 and 7 of the Code of Ethics.

6. Thus, in accordance with the provisions of paragraph c) of no. 1 of article 11 of the TAA Regulatory Framework, the arbitral tribunal was constituted on 03-12-2018.

7. To support the request for arbitral ruling, the Claimant alleges, in summary, the following:

a) The excess of the taxable bases of the disputed assessment acts, insofar as they improperly fail to take into account the deduction of financial charges in the amounts of € 461,414.30 (2010), € 780,399.55 (2011), € 1,062,530.93 (2012) and € 667,968.41 (2013), with the consequent determination of excess taxable profit, use of tax losses from previous years in excess (fiscal years 2010, 2011, 2012 and 2013), and likewise with the consequent determination of excess reflexive CIT in the amount of € 743,078.30 (2013).

b) The calculation of the tax reflexively assessed in excess takes into account the legal solidarity provided between fiscal years, which in the concrete situation manifests itself in the increase of carry-forward tax losses for use in subsequent years, and in the increase of carry-forward tax loss allowances for use in the following year (as per doc. no. 20 which it attached), and which contains a summary table of tax losses and carry-forward tax loss allowances for use between the fiscal years 2006 – the year of constitution of the fiscal group subject to the special regime for groups of companies, dominated by the claimant – and 2013 – the last fiscal year covered by the request, taking into account corrections made by the Tax Authority during tax inspection of fiscal years 2010 to 2013, whose reports the Claimant attached as docs. nos. 21, 22, 23 and 24, resulting from the reduction of the taxable base in each of the aforementioned fiscal years due to the said tax deduction of financial charges in the amounts mentioned above.

c) The Claimant argues that it does not constitute acquisition of equity interests nor the carrying out of supplementary or accessory contributions, nor the coverage of losses through the conversion of accessory or supplementary contributions and, as such, the deductibility of financing charges associated with them is not limited by the rule contained in no. 2 of article 32 of the Tax Benefits Statute;

d) When article 35 of the Commercial Companies Code speaks of loss of half the capital, in no way does it include, nor has anyone ever attempted a different interpretation, supplementary contributions in the concept of capital;

e) Commercial law, more specifically the law of commercial companies, understands by equity interests the equity shares or social interests (commonly called quotas and shares), and nothing more;

f) In commercial law, the simple expression "capital" has the unequivocal meaning of "share capital". There are abundant examples of this, including articles 9 (elements of the contract), 14 (expression of capital), 32 (limit on distribution of assets to members), 35 (loss of half the capital), 197 (characteristics of the company), 201 (paid-in share capital), 202 (contributions), 213 (restitution of supplementary contributions), 271 (characteristics), 272 (mandatory content of the contract), 276 (par value of capital and shares), etc., all from the Commercial Companies Code;

g) Given the identification between capital and share capital, the compound expression "equity interests" can only mean, also for this reason, unless legal provisions point to the contrary, "equity interests in share capital", commonly called quotas or shares or, more generically, identify with the expression "social interests";

h) The difference between supplementary (or accessory) contributions and equity interests is sufficiently marked both by Portuguese doctrine and jurisprudence, as taught by António Pereira de Almeida ( ) – "supplementary contributions are other obligations of members to make capital contributions beyond the share capital (…) [made] in those situations where, at the time of constitution, the possibility is foreseen that the capital might become insufficient to carry out the corporate purpose";

i) The Claimant also cites jurisprudence on this matter: decisions relating to cases no. 12/2013-T, of 8 July 2013, no. 39/2013-T, of 14 October 2013, no. 69/2013-T, of 22 October 2013, no. 80/2013-T, of 10 October 2013, no. 113/2013-T, of 3 February 2014, no. 653/2014-T, of 6 February 2015, and, more recently, decisions relating to cases no. 549/2015-T, of 26 January 2016, no. 246/2016-T, of 20 November 2016, no. 581/2016-T, of 26 April 2017, no. 714/2016-T, of 9 June 2017, no. 222/2017-T, of 7 November 2017, and no. 380/2017-T, of 26 January 2018. On the distinction between equity interests and credits for supplementary contributions, it also cites Constitutional Court no. 717/2017, of 15 November 2017;

j) The same conclusion also results from the legal regimes of the rights and obligations inherent to the position of member as holder of an equity interest and the figure of creditor of supplementary contributions; if on the one hand, in the first case, it embodies a set of rights (to vote, to the profits of the company) and obligations (such as participation in losses or the duty to perform contributions); in the second case, the performance of the contributions derives from an autonomous obligation of the member, which, by virtue of its concession, only acquires a credit right against the company, without any impact resulting on the legal position as member that it occupies;

k) On the other hand, as results from the CSC, share capital has a fundamental role with respect to the guarantee function for the creditors of the company. This is why article 32 of that statute provides for the principle of the intangibility of share capital and article 95 provides that, in order for a reduction of share capital to be carried out, the net assets of the company must exceed by at least 20% the amount of the new share capital;

l) The regime for supplementary contributions, although containing some constraints, does not provide these difficulties when speaking of their restitution; thus, as requirements for restitution of supplementary contributions, commercial law (article 213 of the CSC) only requires that (i) the net assets of the company do not fall below the sum of capital and legal reserve and (ii) that the member who made the contribution has already released their quota;

m) As to accounting standards, "equity" is an accounting concept that includes various items, with only one of them representing the "equity interests" of the member (the share capital item), with the most symptomatic example being item 596 – Subsidies, which has nothing to do with "equity interests";

n) But if it is true that "equity interests" are part of the concept of "equity", this does not mean that all the realities that appear in the "equity" of a company constitute "equity interests";

o) In the understanding expressed in the arbitral decision relating to Case no. 9/2012-T, of 7 September (Doc. no. 27), equity should be considered as a whole, not constituting a thing or right capable of being the object of transmission insofar as it cannot be qualified as a composite thing or universality of fact under article 206 of the Civil Code. Now, following that understanding, interpreting the expression "interests" as referring to any of the items that make up the account relating to equity would be absurd, since this expression "has the meaning of 'quota share', 'interest' or 'share' and reporting that expression to 'equity' would be something that (…) would translate an inadmissible (…) decomposition of equity";

p) In the CIT Code, the legislator itself assumed that equity interests are one thing (social interests) and credits for supplementary contributions another thing, hence the addition of these latter realities to the former (represented by the expression "equity interests"), made by the State Budget Law for 2006 (Law no. 60-A/2005, of 30 December), through the addition of the expression "other components of equity", including the (credits, or expectations of reimbursement, resulting from the performance of) "supplementary contributions";

q) As was well concluded in the arbitral decision rendered in case no. 69/2013-T, "(…) to clarify the question of whether supplementary contributions are covered in the concept of «equity interests» there is a provision from which it directly follows that they are not included in this concept, which is no. 3 of article 42 of the CIT Code, in the wording introduced by Law no. 60-A/2005, of 30 December (current article 45, no. 3)." (see page 16 of the said arbitral decision in the PDF version published on the CAAD website);

r) It further adds that any attempt to expand the scope of application of that provision of the CIT Code, so that supplementary contributions fall within the scope of no. 2 of article 32 of the Tax Benefits Statute, would be tainted with illegality, by creation of a norm of incidence, subject matter contained in the relative legal reserve of the National Assembly – see no. 4 of article 11 of the General Tax Law, article 10 of the Tax Benefits Statute and article 165 of the Constitution.

s) In light of the Tax Authority's doctrine (Tax Authority Doctrinal Sheet relating to Case no. 2799/2009, issued on 19 November 2011), equity interests received in the constitution of the company or in an increase of capital do not constitute acquisitions for the purposes of article 32, no. 2 of the Tax Benefits Statute, hence it will be improper to exclude the tax deduction of any charges allegedly incurred (in fact only notionally incurred, according to the methodology of Circular no. 7/2004) with (the acquisition of) those interests. Indeed, article 32, no. 2 of the Tax Benefits Statute also expressly refers to "financial charges incurred with their acquisition".

t) Recently, the arbitral decision of 7 November 2017 rendered in case no. 222/2017-T (…), stated as follows: "In light of the Tax Authority's doctrine cited above, equity interests received in the constitution of the company or in an increase of capital do not constitute acquisitions for the purposes of article 32, no. 2 of the Tax Benefits Statute, hence it will be improper to exclude the tax deduction of any charges allegedly incurred. Therefore, in summary, neither is the subscription of capital in an increase of capital or in the constitution of a company an acquisition of equity interests." (see page 17 of the PDF version published on the CAAD website).

u) From the law, which is simultaneously the foundation and limit of the Tax Authority's activity and the procedure for assessing tax, at no point does it result, explicitly or implicitly, that the financial charges to be excluded from the determination of taxable profit in CIT can be other than those incurred with the acquisition of equity interests held for at least one year. In other words, since the law has not adopted any formula, its provisions can only be interpreted as enshrining the natural criterion (in the absence of an express deviation enshrined in a formula) of the actual allocation of financial charges. And the law under analysis also does not authorize treating the equity interests themselves indifferently: only the financial charges incurred with the acquisition of equity interests (and among these only those held for at least one year) can be excluded from the calculation of taxable profit in CIT. Now, the Circular in question, by establishing a notional method using proportions based on the value of assets, for determining the financial charges supposedly (notionally) incurred with the acquisition of equity interests, goes beyond the applicable legal basis and, thereby, infects the tax assessments made in obedience to such generic guidance with the vice of violation of law. The Claimant also cites jurisprudence in support of the position it maintains.

v) Proceeding further, the Claimant argues that the formula contained in the said Circular constitutes a presumption that does not admit contrary proof which violates the provisions of article 73 of the General Tax Law and contradicts the constitutional principle of taxation "fundamentally of actual income" and, with it, the principles of equality, tax capacity and neutrality (articles 2 – as emanations of the democratic rule of law – 13, 103, no. 1, and 104, no. 2, of the Constitution), such that the legal provision interpreted in this manner – no. 2 of article 32 of the Tax Benefits Statute – suffers from material unconstitutionality, unconstitutionality which it also suffers from in light of the doctrine opposing irrebuttable presumptions in the field of taxes, established by Constitutional Court decision no. 348/97, rendered in case no. 63/96.

x) It also invokes, through the evolution of acquisitions of equity interests vis-à-vis the evolution of debt, that the method of allocation of financial charges provided for in Circular no. 7/2004 does not take into account the reality of the concrete case, does not admit proof to the contrary, and distorts the provisions of no. 2 of article 32 of the Tax Benefits Statute (in force at the time of the facts).

y) The Claimant concludes by requesting:

• the declaration of illegality and annulment of the dismissals of the hierarchical appeals, the requests for official review and the gracious complaint, insofar as they refused the annulment of the acts of self-assessment of CIT relating to the fiscal years 2010, 2011, 2012 and 2013 thereby violating the principle of legality;

• the declaration of illegality and annulment of the self-assessments of CIT relating to the fiscal years 2010, 2011, 2012 and 2013, in the excess amount of € 461,414.30 (2010), € 780,399.55 (2011), € 1,062,530.93 (2012), € 667,968.41 (2013) of their taxable bases, and likewise the declaration of illegality and the annulment of the reflexive tax in the amount of € 743,078.30 relating to the excess of the taxable base for the fiscal year 2013, including in this excess the impact of the deduction of financial charges in previous years through the increase of carry-forward tax losses that transition to 2013;

• the payment of compensatory interest pursuant to article 43 of the General Tax Law, calculated on the amount of tax improperly paid, in the amount of € 743,078.30, and calculated from its payment on 30.05.2014, until the full reimbursement of said amount.

1. The Respondent submitted a response arguing for dismissal of the claim filed by the Claimant, alleging briefly that:

a) The exception of the Arbitral Tribunal's incompetence to annul the tax in the amount determined of € 743,078.30 for the fiscal year 2013 and to condemn the respondent to its reimbursement.

b) For the Respondent, it does not fall within the scope of the competence of the Arbitral Tribunal to recognize the right claimed by the Claimant, to the extent that it determines and petitions for the return of any tax (paid by the Group) corresponding to excesses of taxable bases, a quantification that includes the deduction of financial charges in previous years through the increase of carry-forward tax losses (plus corresponding compensatory interest).

c) Given the recognition of the inseparability of social interests and supplementary contributions and accessory contributions, the tax legislator (by Law no. 60-A/2005, of 30 December) felt the need to expressly establish, in no. 3 of article 45 of the CIT Code, uniform treatment for losses or losses on realization from the alienation of equity interests and "other components of equity, namely supplementary contributions", because it would make no sense for the legislator to leave a door open to options dictated solely by tax reasons, since the recourse to supplementary and accessory contributions functions, frequently, as a substitute for the increase of share capital, and as social interests and contributions are transmitted jointly, the sale price could be shifted to the component that would provide a more favorable tax treatment.

d) The solution of conferring identical tax treatment to equity capital instruments was reflected in article 51-C (added to the CIT Code by law no. 2/2014, of 16 January) which establishes in no. 2 that the regime set out in no. 1 for gains and losses realized through onerous transmission of social interests "is equally applicable to gains and losses realized with the transmission of other equity capital instruments associated with the social interests referred to therein, namely supplementary contributions."

e) From the perspective of members who make supplementary or accessory contributions and, as reflected in the accounting, the amounts delivered in that regard correspond to increases in the value of the interest held.

f) Thus, in the context of the Tax Benefits Statute, the provisions that grant exemptions on gains obtained from the alienation of social interests – namely articles 27 and 32 – would not allow for any interpretation other than that they encompass the totality of gains (and losses) realized by the members, on pain of, in the distribution of the sale price, assigning the largest part to the more tax-favored component. Consequently, if the gains or losses realized by the SGPS in the alienation of social interests and the associated equity capital instruments transmitted jointly, held for at least one year, are covered by no. 2 of article 32 of the Tax Benefits Statute, it must be concluded that the financial charges incurred with financing used both for the acquisition of social interests and for the performance of those contributions are also subject to the same limitation of deductibility for the purposes of determining taxable profit. The Claimant's thesis that the inclusion within the scope of no. 2 of article 32 of the Tax Benefits Statute of gains or losses obtained from the alienation of social interests and the equity capital instruments associated with them constitutes an affront to the principle of legality and article 10 of the Tax Benefits Statute does not proceed.

g) Both in the accounting and tax domain, the deliveries of members for the performance of interests in the capital of companies, whether at the beginning, at the time of incorporation, or during the life of companies, has the same treatment, that is, they integrate the acquisition value, which will be countered with the realization value to determine the gains and losses, under the terms defined in no. 2 of article 46 of the CIT Code. That is, the "acquisition value" for the purposes of this provision is formed by the addition of the initial investment and the subsequent disbursements made with identical purpose, namely to increase or strengthen the share capital. The legislator provided no special formula to use in calculating the gains and losses covered by no. 2 of article 32 of the Tax Benefits Statute, specifically as regards the "acquisition value" of equity interests, therefore, only by ignoring this provision is it possible to conclude that the deliveries made by members for the performance of capital increases do not integrate the acquisition value.

h) The command that emanates from no. 2 of article 32 of the Tax Benefits Statute is clear: only the financial charges incurred with the acquisition of equity interests, and among these only those incurred with the acquisition of equity interests held for at least one year, are those whose tax deduction is excluded. To comply with this legal requirement, SGPS that resort to debt to finance both investments in the acquisition of equity interests whose gains could benefit from exemption, and for other purposes, were obliged, by force of the obligation of paragraph b) of no. 3 of article 17 of the CIT Code, to organize the accounting so that the results of operations and patrimony variations subject to the general regime of CIT can clearly be distinguished from those of the rest. Therefore, to argue that no. 2 of article 32 of the Tax Benefits Statute only admits the application of the direct method or specific identification of those financial charges and that it is incumbent upon the Tax Authority, in the first instance, to bear the burden of proving the calculations to be carried out for this purpose, is nothing more than to ignore the mandatory character of the obligation established by paragraph b) of no. 3 of article 17 of the CIT Code or, at the very least, not to qualify the regime provided for in the Tax Benefits Statute as a special regime applicable to gains and losses obtained by SGPS. The methodology suggested by Circular no. 7/2004 aims at nothing more than overcoming any difficulties that some SGPS might face, by not centering their activity on the holding and management of qualified social interests, offering them a formula for quantifying non-deductible financial charges, without prejudice to a case-by-case analysis when it proves feasible.

i) The Claimant comes to argue that "contrary to law, more specifically to no. 2 of article 32 of the Tax Benefits Statute, are the acts of self-assessment of CIT here in question, relating to the fiscal years 2010, 2011, 2012 and 2013, insofar as they exclude the deductibility of financial charges in the application of the generic guidance contained in the formula prescribed in Circular no. 7/2004" without, however, proving that the application of the so-called direct method or specific identification would lead to different results. In summary, what the Claimant is arguing for is the application of no. 2 of article 32 of the Tax Benefits Statute with a scope and contours different from those delineated by the legislator which aimed to establish a tax benefit based on a regime of tax neutrality of income and expenses (financial charges) associated with equity interests held for at least one year.

j) The Claimant did not attempt to conduct a test on the application of the direct method or specific identification so as to rigorously quantify the financial charges associated with the acquisition of equity interests, it merely refined the values obtained with the application of the Circular's methodology, purging a part, based on presumptions of financing of social interests constructed on a mere comparison between annual variations of financing and annual increases of social interests, excluding accessory contributions and other realities.

k) Therefore, it failed to prove that the results achieved would be more favorable from a tax perspective, in terms of financial charges associated with the acquisition of equity interests covered by no. 2 of article 32 of the Tax Benefits Statute, with the use of the method of specific identification of financial charges incurred in the fiscal years 2010, 2011, 2012 and 2013, insofar as it did not carry out an analytical and discriminate application of its resources - third-party capital and own funds - duly defined, documented and justified.

l) The Tax Authority demonstrated, therefore, the lack of foundation of the argument wielded by the Claimant, and the legality of the self-assessments should be declared for the reasons of fact and law invoked in the Response.

m) As regards the right to compensatory interest, the Respondent argued in the Response that, being in question the correction of error in the self-assessment of the taxpayer which promotes its review, article 43, no. 1 of the General Tax Law is not applicable, but rather the special provision contained in paragraph c) of no. 3 of that same article 43, an understanding that has been adopted by the plenary of the Supreme Administrative Court, as results, for example, from the Decision, dated 23-05-2018, rendered in the context of case no. 01201/17) where it is stated «Article 43, no. 3 c) of the General Tax Law establishes a special regime, as regards compensatory interest, applicable only in situations of review of the tax act where such interest is due after one year following the request for review». The addition, by Law no. 9/2019, of paragraph d) to no. 3 of article 43 of the General Tax Law did not alter or revoke the remaining legal provisions contained in the article, which establishes specific regimes, namely as regards the moment from which compensatory interest is due.

1. By order of 27-01-2019, the Claimant was notified to respond, if it so wished, to the matter of the exception raised by the Respondent in the Response, as well as to indicate the facts on which it intended to produce testimonial evidence.

2. Through a request submitted on 01-02-2019, the Claimant waived testimonial evidence.

3. By order of 08.02.2019, the parties were notified of the waiver of the hearing referred to in article 18 of the TAA Regulatory Framework, as well as of the deadline for submission of written submissions. The date of 02-06-2019 was also set as the deadline for rendering the arbitral decision, with the Claimant being advised to proceed with payment of the subsequent arbitral fee. This deadline was extended by order of 30 May 2019 by a further two months.

4. Both parties submitted written submissions reiterating, in essence, their respective legal positions.

In its submissions, and in response to the Tax Authority's Response, the Claimant refocused the essential question of the proceedings on determining the burden of proof of the relevance of applying the criteria fixed in Circular no. 7/2004 ("it is already settled jurisprudence of the Supreme Administrative Court that even in the case of a self-assessment that has applied Circular no. 7/2004, the burden of demonstrating, and of demonstrating always by reference to the circumstances of the concrete case, that there is no alternative to the formulaic-presumptive method of the Circular, falls on the Tax Authority.").

For its part, the Tax Authority reiterated the difference between the context of application of the Circular and its legal conformity, and confirmed the centrality of the question of determining the burden of proof by arguing that the Claimant "failed to prove that the results achieved would be more favorable from a tax perspective, in terms of financial charges associated with the acquisition of equity interests covered by no. 2 of article 32 of the Tax Benefits Statute, with the use of the method of specific identification of financial charges incurred in the fiscal years 2010, 2011, 2012 and 2013, insofar as it did not carry out an analytical and discriminate application of its resources - third-party capital and own funds - duly defined, documented and justified."

II. Preliminary Matters

1. The arbitral tribunal was regularly constituted and is competent.

2. The parties are duly represented, enjoy legal capacity and standing (articles 4 and 10, no. 2 of the Tax Procedure Code and article 1 of Ordinance no. 112-A/2011, of 22 March).

3. The proceedings do not suffer from any nullities.

4. The Claimant argues the admissibility of the cumulation of claims it made, which is not contested by the Tax Authority on that point. Pursuant to article 3 of Decree-Law no. 10/2011, of 20 January, the cumulation of claims is admitted provided that their success essentially depends on the assessment of the same circumstances of fact and the interpretation and application of the same principles or rules of law, which, in fact, occurs in this proceeding. […].

5. The Respondent invoked the exception of incompetence of the Arbitral Tribunal to condemn the Respondent to reimbursement of the tax paid. It states, in this regard, that, even if such a claim could result from the execution of arbitral decisions to be made in case the arbitral decision rendered is successful on the merits, it cannot be decided in this proceeding, since such claim (in the identified part) goes beyond the competence that was established in law for tax arbitral tribunals.

Thus, the Respondent understands that it does not fall within the scope of the competencies of this tribunal to assess the claim for recognition of the right filed by the Claimant, to the extent that it determines and petitions for the return of any tax (paid by the Group) corresponding to excesses of taxable bases, a quantification that includes the deduction of financial charges in previous years through the increase of carry-forward tax losses (plus corresponding compensatory interest). It argues that article 24 of the TAA Regulatory Framework establishes that the definition of the acts in which the execution of arbitral decisions must be concretized falls, in the first instance, to the Tax Authority, with the possibility of resort to tax courts to coercively request execution, within the scope of the process for execution of arbitral decisions, provided for in article 146 of the Tax Procedure Code and articles 173 et seq. of the Code of Procedure in Administrative Courts.

The Claimant, called upon to make a statement on the exception raised, argues that the interpretation defended by the Tax Authority, to the effect that the Arbitral Tribunal is prevented from annulling a specific amount of tax and condemning the Tax Authority to its reimbursement, is unconstitutional, due to violation of the principles of the democratic rule of law and the principle of effective judicial protection (articles 2, 20, nos. 1, 4 and 5, and 268, no. 4, of the Constitution).

On this matter, given the overall understanding of the claim and the cause of action and the Respondent's response, this Tribunal understands that what the Tax Authority invoked as an exception of incompetence was not properly the incompetence of the Arbitral Tribunal to annul the tax in the amount determined of €743,078.30 for fiscal year 2013. Rather, it was that its possible dismissal could not imply a condemnation to reimbursement of what was improperly paid in the terms petitioned by the Claimant.

Beyond it not being evident how the definition of the manner of compliance with arbitral decisions, recognized evidently to the Tax Authority, contends with the obligation imposed in such decisions to reimburse the amounts improperly collected, the following was written in the recent Arbitral Decision rendered in Proc. 552/2018-T:

"4.1. Reimbursement of sums paid

In accordance with the provisions of paragraph b) of article 24 of the TAA Regulatory Framework, the arbitral decision on the merits of the claim of which no appeal or challenge is available binds the Tax Administration from the end of the period provided for appeal or challenge, and the latter must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for spontaneous compliance with judgments of the judicial tax courts, «restore the situation that would exist if the tax act that is the subject of the arbitral decision had not been made, adopting the necessary acts and operations for that purpose», which is in harmony with the provision of article 100 of the General Tax Law [applicable by force of the provision of paragraph a) of no. 1 of article 29 of the TAA Regulatory Framework] which establishes that «the tax administration is obliged, in case of partial or total success of a complaint, judicial challenge or appeal in favor of the taxpayer, to immediately and fully restore the legality of the act or situation that is the subject of the litigation, including the payment of compensatory interest, if applicable, from the end of the period of compliance of the decision».

Although article 2, no. 1, paragraphs a) and b), of the TAA Regulatory Framework uses the expression «declaration of illegality» to define the competence of the arbitral tribunals functioning in CAAD, making no reference to condemnatory decisions, it should be understood that there are included in its competencies the powers that, in a process of judicial challenge, are attributed to tax courts, being this the interpretation that is in harmony with the sense of the legislative authorization on which the Government based itself to approve the TAA Regulatory Framework, in which it proclaims, as the first guideline, that «the tax arbitral process must constitute an alternative procedural means to the process of judicial challenge and to the action for recognition of a right or legitimate interest in tax matters».

The process of judicial challenge, although it is essentially a process of annulment of tax acts, admits condemnation of the Tax Administration to the payment of compensatory interest, as is apparent from article 43, no. 1, of the General Tax Law, which establishes that «compensatory interest is due when it is determined, in a gracious complaint or judicial challenge, that there was error imputable to the services from which resulted payment of the tax debt in an amount higher than legally due» and article 61, no. 4, of the Tax Procedure Code (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original wording), which «if the decision recognizing the right to compensatory interest is judicial, the deadline for payment is counted from the beginning of the period for its spontaneous compliance».

Thus, no. 5 of article 24 of the TAA Regulatory Framework, by stating that «payment of interest, regardless of its nature, is due under the terms provided in the general tax law and in the Tax Procedure Code and Process», should be understood as allowing recognition of the right to compensatory interest in the arbitral process.

On the other hand, as the right to compensatory interest depends on the existence of a right to reimbursement of a sum, from that competence to decide on the right to compensatory interest it follows that it extends to the assessment of the right to reimbursement.

Since the assessment must be annulled, the Fund represented by the Claimant has the right to be reimbursed of the sum of € 75,000.00, improperly paid."

Moreover, a search of recent CAAD decisions identified multiple condemnations to return improperly paid amounts; the point is that these are situations in which such return is properly identified through clear elements that permit condemnation with certainty to the payment of a specific sum.

However, this is not the situation in the case at hand, taking into account that in paragraph b) of the claim the Claimant requests that the "illegality be declared and the reflexive tax in the amount of € 743,078.30 relating to the excess of the taxable base for fiscal year 2013, including in this excess the impact of the deduction of financial charges in previous years through the increase of carry-forward tax losses that transition to 2013, be annulled",

It appears clear that, in this situation, the Tribunal does not have elements that allow it to condemn the Respondent in the amount petitioned. As configured by the Claimant, the determination of the amount to be reimbursed is not evident, but rather presupposes knowledge of the overall evolution of the Claimant's situation, possible analysis of new documentation and performance of possible corrections, in order to determine the impact of the possible annulment of the self-assessments on the determination of taxable profit in subsequent fiscal years, all the more so as the Claimant itself admitted, in the subsidiary requests it filed before the Tax Authority, that part of the amounts of the financing contracted by it could be allocated to the acquisition of social interests.

Therefore, in the Tribunal's view, the Tax Authority objects that the obligation to reimburse be concretized in the specific manner petitioned by the Claimant, because it would imply, in the case, the recognition of a right or a condemnation of the Respondent to certain behaviors.

If this is the case, nothing prevents recognizing that the Tax Authority is correct, since the definition of the acts in which the execution of arbitral decisions must be concretized falls to it, in the first instance (article 24 of the TAA Regulatory Framework).

On the other hand, what has just been stated is not, contrary to the Claimant, unconstitutional by virtue of violation of the principles of the democratic rule of law and the principle of effective judicial protection (articles 2, 20, nos. 1, 4 and 5, and 268, no. 4, of the Constitution).

In fact, the orientation supported, beyond resulting from the characteristics of annulment contention and the distribution inherent therein of powers between the Courts and the Administration, does not put into question the Court's power of annulment and consequent condemnation to reimbursement to be determined in the course of execution of sentence, as will be analyzed below.

III. On the Merits

III.1. Matter of Fact

III.1. Proven Facts

The following facts are considered proven:

a) The claimant proceeded, on 31 May 2011, to submit Form 22 with reference to the taxation period of 2010 of the group of companies subject to the special taxation regime for groups of companies of which it was the parent company (cf. doc. no. 2 attached with the request for arbitral ruling);

b) On 4 July 2011, the Claimant submitted a substitute income statement (cf. doc. no. 3 attached with the request for arbitral ruling), in which a positive aggregate fiscal result of € 858,461.07 was determined;

c) For that taxable profit, the tax loss individually determined by the claimant contributed, in the amount of € 5,823,879.36 (cf. doc. no. 4 attached with the request for arbitral ruling), which was reduced by the positive increase to the taxable base of the amount of € 461,414.30 (cf. field 752 of the said doc. no. 4, and doc. no. 5 attached with the request for arbitral ruling) relating to financial charges relating to the acquisition of equity interests;

d) On 31 May 2012, the claimant proceeded to submit the Form 22 income statement with reference to the fiscal year 2011 of the group of companies subject to the special taxation regime for groups of companies of which it was the parent company, in which a positive aggregate fiscal result of € 6,661,566.22 was determined (Doc. no. 6 attached with the request for arbitral ruling);

e) Regarding the same fiscal year 2011, the Claimant determined a tax loss in the amount of € 7,199,405.25 (doc. no. 7 attached with the request for arbitral ruling), which was reduced by the positive increase to the taxable base of the amount of € 780,399.55 (cf. field 779 of doc. no. 7, and doc. no. 5, both attached with the request for arbitral ruling), relating to financial charges relating to the acquisition of equity interests;

f) The claimant proceeded, on 31 May 2013, to submit the Form 22 income statement with reference to the taxation period of 2012 of the group of companies subject to the special taxation regime for groups of companies of which it was the parent company (doc. no. 8 attached with the request for arbitral ruling), in which a positive aggregate fiscal result was determined in the amount of € 2,334,061.66;

g) The Claimant determined, with reference to the fiscal year 2012, a tax loss in the amount of € 1,445,133.90 (doc. no. 9 attached with the request for arbitral ruling), which was reduced by the positive increase to the taxable base of the amount of € 1,062,530.93 (cf. field 779 of doc. no. 9 and doc. no. 5, both attached with the request for arbitral ruling) relating to financial charges relating to the acquisition of equity interests;

h) On 30 May 2014, the Claimant proceeded to submit the Form 22 income statement with reference to the taxation period of 2013 of the group of companies subject to the special taxation regime for groups of companies of which it was the parent company (doc. no. 10 attached with the request for arbitral ruling), in which a positive aggregate fiscal result was determined in the amount of € 19,095,185.65.

i) The Claimant determined, with reference to the taxation period of 2013, a tax loss in the amount of € 1,143,643.43 (doc. no. 11 attached with the request for arbitral ruling), which was reduced by the positive increase to the taxable base of the amount of € 667,968.41 (cf. field 779 of doc. no. 11, and doc. no. 5, both attached with the request for arbitral ruling), relating to financial charges relating to the acquisition of equity interests.

j) The determination of the said amounts of € 461,414.30 (2010), € 780,399.55 (2011), € 1,062,530.93 (2012) and € 667,968.41 (2013), relating to the positive increases to the taxable bases of financial charges relating to the acquisition of equity interests was based on the methodology provided for in Circular no. 7/2004, of 30 March, of the CIT Management Services.

k) By disagreeing with the content of the said Circular and in light of the jurisprudence then known on the subject, the Claimant contested the said self-assessments of CIT, having submitted requests for official review regarding the acts of self-assessment relating to the fiscal years 2010, 2011 and 2012, and having submitted a gracious complaint against the act of self-assessment relating to the fiscal year 2013.

l) The requests for official review of the acts of self-assessment relating to the fiscal years 2010, 2011 and 2012 were subject to a decision of dismissal (docs. nos. 12, 14 and 16 attached with the request for arbitral ruling);

m) The Tax Authority dismissed the Claimant's request with reference to fiscal year 2010 through an order of the Deputy Director-General of the CIT Management Services dated 07/06/2017, with the following grounds (cf. pp. 5 et seq. of document 12 attached with the request for arbitral ruling):

"(…) in order to clarify doubts in interpretation and application arising as to the tax treatment of Societies Managing Social Interests Circular no. 7/2004, of 03.03 was published by the CIT Management Services.

1. In interpreting and applying the law, the said Circular came to recommend the use of an apportionment method, in perfect harmony with the legislator's thinking, although imperfectly expressed in law. And, in obedience to the provisions of no. 1 of article 12 of the General Tax Law, it applies only to tax facts that are to be concretized after 01.01.2003, as results from no. 5 of article 38 of Law no. 32-B, of 30.12.

2. The method provided for in Circular no. 7/2004, of 30.03, allows for determination of which amounts of the financial charges of SGPS are not deductible:

3. No. 7 of the said Circular establishes the method to be used for purposes of allocation of financial charges to social interests in the following terms: "(…) given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that it would allow, such allocation should be carried out based on a formula that takes into account the following: remunerated liabilities of SGPS and SCR must be allocated, first and foremost, to remunerated loans granted by these to the participated companies and to other investments generating interest, with the remaining being allocated to other acts, namely social interests, proportionally to their respective acquisition cost."

4. This reveals that the Circular establishes a method that allows allocation of liabilities to the different assets of SGPS. First, remunerated liabilities of SGPS are allocated to interest-generating investments. Then, the remaining remunerated liabilities are allocated to the other assets, proportionally to their respective acquisition cost.

5. It being certain that the amendment introduced by no. 1 of article 38 of Law no. 32-B/2002 of 30.12, in no. 2 of the current article 32 of the Tax Benefits Statute, provides only for the future and has no retroactive effect, from the conjunction of this provision with article 23 of the CIT Code, it follows that the financial charges allegedly incurred by the appellant in the period of 2010 must be added to the net results relating to the same period, because they cannot contribute to the formation of taxable profit insofar as the income related to them, the gains also will not be taxed in that period.

6. And this is so insofar as, the legislator not providing for any transitional regimes, neither as to the moment of acquisition of the interests from whose alienation result the gains and losses that ceased to affect fiscal results, nor saying anything as to the moment of conclusion of the contracts from which result the financial charges that likewise ceased to be considered in the determination and determination of those same fiscal results, then, to guarantee the principle of neutrality that it was intended to achieve with the introduction of the new regime, article 32 of the Tax Benefits Statute, must be applied to all tax facts that occur from 01.01.2003 onwards, whether they are the gains and losses benefiting from the new regime of exclusion from taxation, or the financial charges incurred, regardless of whether the financing for the acquisition of social interests was contracted before or after that date.

7. In the same measure that for the disregard of the gains and losses for tax purposes the date of acquisition of the social interests does not matter but the date of concretization of the tax fact, that is, the date on which those gains and losses are obtained, also the non-consideration of financial charges occurs at the moment when they are effectively incurred/supported, regardless of the date of conclusion of the contracts underlying them, because it is at that moment that they potentially will affect fiscal results. If it were not so, the principle of neutrality that the legislator intended to introduce with this new regime would be openly violated.

8. That is, the said Circular limited itself to interpreting the new legal rules introduced by nos. 1 and 5 of article 38 of Law no. 32-B/2002, of 30.12, in the then article 31, current article 32 of the Tax Benefits Statute, and from its analysis it follows that it translates a coherent, impartial and objective effort of analysis of the legal norms underlying it.

9. In accordance with what has been stated, no flaws emerging from its instructions are apparent in the drafting of the said Circular. For there is no apparent intention on the part of the CIT Management Services legislator, particularly by way of instituting any norms of incidence, determination of rate and assessment, the only ones susceptible to violation of the principle of fiscal legality provided for in no. 1 of article 8 of the General Tax Law, as a result of nos. 2 and 3 of article 103 of the Constitution, nor is it apparent from the instructions contained in that generic guidance any intentions susceptible to altering or violating the legal norms that are at their genesis.

10. Regarding the alleged violation of the principle of taxation according to actual income by the disregard of financial charges, it is important to note that this does not result from the instructions emanating from the Circular, but rather from the interpretation that must be given to article 32 of the Tax Benefits Statute, as a result of the legal normative framework that regulates the neutrality regime applicable to SGPS.

11. It is also important to note that by force of the provisions of article 68-A of the General Tax Law, «the tax administration is bound by the generic guidance contained in circulars». In such terms, the tax inspection services acted in strict compliance with the guidance emanated by the CIT Management Services."

12. The Claimant further alleges violation of the principles of equality, neutrality, tax capacity and the principle of proportionality.

13. For its part, and as referred to in Decision no. 42/2014, of 09.01 of the Constitutional Court, the principle of equality could never be violated, insofar as we could not treat equally a reality that is unequal. Where on the one hand would benefit from the exemption of gains, which would be taxed at 50% in normal CIT situations and on the other, would benefit from the deduction of financial charges for the acquisition of equity interests.

14. What would be manifestly disproportionate and there would be discrimination compared with normal tax regimes.

15. In fact, the umbilical connection of the gain obtained to the charges held in function of its realization or the potentiality of being realized, comes to embody a logic of neutrality, which is elementary in the sense of any imputations to non-deductibility of interest correlated with the acquisition of equity interests or any increases in the value of the realization of the gain as a function of the integration or conversion of contributions to equity interests.

16. As to the argument of uncertainty of the realization of the gain, and consequently of the exemption from contribution to the formation of taxable profit, this does not involve, in this field of valuation, the result that the Claimant attributes to it. It is stated in this regard in Decision no. 42/2014, of 09.01 of the Constitutional Court that: "That susceptibility... in itself bearing value and based on a perspective of implicit continuity of SGPS activity... persists, unlike what occurs with other taxpayers, in terms of balancing - neutralizing - the financial charges in which the taxpayer incurred, falling within its margin of economic determination, in the context of the regular activity of its management of social interests, the choice as to the advisability and opportunity of alienation of equity interests and realization of gains."

(…)

In that measure, the regime that considers and enforces the non-deductibility of financial charges, in each taxation period in which they are incurred, by reference to the measure that balances, taking into account the preservation of the possibility of effective and future realization of gains, is not deemed excessive and intolerable.

1. All the more so because the provision in question does not exclude the possibility of correction of non-deducted costs in previous taxation periods, in case the alienation of capital does not meet the requirements for application of the special regime for exemption of gains.

(…)

1. With regard to the references made to unconstitutionality of the provision, it should be stated that under article 266 of the Constitution of the Portuguese Republic, administrative bodies and officials are subordinate to the Constitution and the law and must act, in the exercise of their functions, with respect for the principles of equality, proportionality, justice, impartiality and good faith.

2. Given the foregoing, it will not be incumbent upon the Tax Administration to pronounce on the constitutionality or not of a given provision, since, under article 202 of the Constitution, "the courts are the sovereign bodies with competence to administer justice in the name of the people", being the Constitutional Court, under article 221 of the Constitution, "the court which is specifically competent to administer justice in matters of constitutional legal nature" and, under article 223 of the Constitution, "it is incumbent on the Constitutional Court to assess unconstitutionality and illegality, in accordance with articles 277 et seq."

n) The Claimant filed a hierarchical appeal of the decision issued on the request for official review relating to fiscal year 2010;

o) The Tax Authority dismissed the hierarchical appeal relating to fiscal year 2010 through an order of 27-06-2018 of the Director-General of the Tax and Customs Authority, pursuant to Delegation of powers, considering that "the decision to dismiss the petition for official review made is not deserving of any censure." (cf. document 13 attached with the request for arbitral ruling);

p) The Tax Authority dismissed the Claimant's request for official review relating to fiscal year 2011 through an order of the Deputy Director-General of the Tax Authority, dated 2017-06-08, on the basis of the following conclusions (cf. pp. 17-18 of document 14 attached with the request for arbitral ruling):

"Under article 55 of the Tax Procedure Code, it is incumbent upon the Tax Authority to issue generic guidance aimed at standardizing the interpretation and application of tax norms by the services;

The Circular in question does nothing more than, in generic terms and in the face of doubts that arose, interpret the new legal rules introduced by nos. 1 and 5 of article 38, of Law no. 32-B/2002, of 30/12, in the then article 31, current article 32, of the Tax Benefits Statute and, as the provision does not expressly provide the calculation methods to achieve its objective in addition to the extreme difficulty of carrying out a safe real/direct allocation of financial charges to the respective social interests, advocate the use of an apportionment method of financial costs to be disregarded for tax purposes, in perfect harmony with the legislator's thinking;

Moreover, under article 68-A of the General Tax Law, the Tax Administration is bound by generic guidance contained in Circulars, which constitute generic guidance on the interpretation and application of tax norms, in accordance with paragraph b) of no. 3 of article 59 of the General Tax Law, from which the Tax Authority cannot proceed in any other way than to promote its application.

Without conceding,

It should also be noted that the values presented in the tables contained in the petition are not supported by documents evidencing the same, particularly accounting documents (records and respective documentary support, with the exception of copies of the minutes attached to the petition as documents 7 and 8);

As regards in particular the alleged accessory contributions, it is not proven, namely, when they were made, how they were accounted for or whether the member resorted, or not, to financing to make them, from which financial charges would result in its sphere."

q) The Claimant filed a hierarchical appeal of the dismissal of the request for official review submitted with reference to fiscal year 2011;

r) The hierarchical appeal relating to fiscal year 2011 was subject to dismissal by the Tax Authority, through an order issued by its respective Director-General on 28-06-2018, pursuant to Delegation of powers, which considered that "no illegality being apparent in the order appealed from, the decision to dismiss the official review must be maintained, terms in which the present petition does not merit approval, it being proposed, thus, the dismissal of the present hierarchical appeal." (cf. p. 15 of document 15 attached with the request for arbitral ruling).

s) The Tax Authority dismissed the Claimant's request for official review with reference to fiscal year 2012 through an order of the Director of Services of the CIT Management Services of 08-06-2017, on the basis of the following grounds (cf. pp. 19 et seq. of document 16 attached with the request for arbitral ruling):

"Under article 55 of the Tax Procedure Code, it is incumbent upon the Tax Authority to issue generic guidance aimed at standardizing the interpretation and application of tax norms by the services;

The Circular in question does nothing more than, in generic terms and in the face of doubts that arose, interpret the new legal rules introduced by nos. 1 and 5 of article 38, of Law no. 32-B/2002, of 30/12, in the then article 31, current article 32, of the Tax Benefits Statute and, as the provision does not expressly provide the calculation methods to achieve its objective in addition to the extreme difficulty of carrying out a safe real/direct allocation of financial charges to the respective social interests, advocate the use of an apportionment method of financial costs to be disregarded for tax purposes, in perfect harmony with the legislator's thinking;

Moreover, under article 68-A of the General Tax Law, the Tax Administration is bound by generic guidance contained in Circulars, which constitute generic guidance on the interpretation and application of tax norms, in accordance with paragraph b) of no. 3 of article 59 of the General Tax Law, from which the Tax Authority cannot proceed in any other way than to promote its application.

Without conceding,

It should also be noted that the values presented in the tables contained in the petition are not supported by documents evidencing the same, particularly accounting documents (records and respective documentary support, with the exception of copies of the minutes attached to the petition as documents 7 and 8);

As regards in particular the alleged accessory contributions, it is not proven, namely, when they were made, how they were accounted for or whether the member resorted, or not, to financing to make them, from which financial charges would result in its sphere."

"As for the request for compensatory interest, understanding that there is no error in the self-assessment resulting from compliance with the provisions of Circular no. 7/2004, of 30 March, the analysis of the same is thus prejudiced."

t) The Claimant filed a hierarchical appeal of the decision to dismiss the request for official review relating to fiscal year 2012;

u) The decision on the hierarchical appeal relating to fiscal year 2012 was rendered on 20-06-2018 by the Deputy Director-General of the Tax Authority, pursuant to Delegation of powers, considering that "no illegality being apparent in the order appealed from, the decision to dismiss the official review must be maintained, terms in which the present petition does not merit approval, it being proposed, thus, the dismissal of the present hierarchical appeal." (cf. p. 16 of document 17 attached with the request for arbitral ruling).

v) The gracious complaint against the act of self-assessment relating to fiscal year 2013 was subject to an order of dismissal rendered on 25-09-2017 by the Deputy Director of Direction of Finance, pursuant to Delegation of powers (doc. no. 18 attached with the request for arbitral ruling) on the basis of the following grounds:

"(…) the disregard of financial charges provided for in article 32, no. 2 of the Tax Benefits Statute was aimed at counterbalancing the tax benefit embodied in the privileged treatment of gains obtained from the alienation of social interests by SGPS.

In order to clarify this matter, an understanding was sanctioned in Circular no. 7/2004, of 30 March, of the CIT Management Services.

The said Circular determines, now contested by the Claimant in its application to the case in question, that in the fiscal year in which the financial charges are incurred, the tax correction of those that were incurred with the acquisition of social interests, capable of benefiting from the regime of article 32 of the Tax Benefits Statute, must be carried out.

(…)

As to the assessment of the constitutionality of laws, this does not fall within the scope of a gracious complaint, being incumbent upon the Constitutional Court in accordance with its Organic Law.

Wherefore, it is concluded that the assessment no. 2014..., now complained of, appears to be correct.

It is further added that, as the prerequisites of no. 1 of article 43 of the General Tax Law are not met in this case, the complainant does not have the right to compensatory interest."

w) The dismissal of the gracious complaint relating to fiscal year 2013 was subject to a hierarchical appeal submitted by the Claimant;

x) The hierarchical appeal was also subject to dismissal through a decision of 25-06-2018 by the Director of Central Service, pursuant to Delegation of powers, with the following grounds (cf. pp. 27 et seq. of document 19 attached with the request for arbitral ruling)

"Under article 55 of the Tax Procedure Code, it is incumbent upon the Tax Authority to issue generic guidance aimed at standardizing the interpretation and application of tax norms by the services.

The Circular in question does nothing more than, in generic terms and in the face of doubts that arose, interpret the new legal rules introduced by nos. 1 and 5 of article 38, of Law no. 32-B/2002, of 30/12, in the then article 31, current article 32, of the Tax Benefits Statute and, as the provision does not expressly provide the calculation methods to achieve its objective in addition to the extreme difficulty of carrying out a safe real/direct allocation of financial charges to the respective social interests, advocate the use of an apportionment method of financial costs to be disregarded for tax purposes, in perfect harmony with the legislator's thinking;

Moreover, under article 68-A of the General Tax Law, the Tax Administration is bound by generic guidance contained in Circulars, which constitute generic guidance on the interpretation and application of tax norms, in accordance with paragraph b) of no. 3 of article 59 of the General Tax Law, from which the Tax Authority cannot proceed in any other way than to promote its application.

Without conceding, and as regards the subsidiary request submitted by the Appellant,

Having regard to the legal regime that regulates the Appellant's activity as a Society Managing Social Interests (which almost limits the obtaining of income to dividends received from participated companies and income from any alienations of interests held) and the elements contained in the Financial Statements presented with reference to 2013, namely the absence of significant tangible assets, the existence of financing obtained in a substantial amount, the existence of interest and similar expenses incurred relating to bank loans, the absence of interest and similar income obtained,

It is concluded that the applicability of Circular no. 7/2004, of 30 March, defended by the Appellant, is not demonstrated, rather it appears that we are faced with a case in which the contingency of a manipulation of results stemming from the extreme difficulty in determining with rigor the specific application of the capital obtained, due to the characteristic fungibility proper to currency, is present.

A situation that the Circular in question intends to avoid.

It is further added that the methodology adopted by the appellant to determine non-deductible financial charges does not explain the reason why the Appellant presents over the years substantial balances of bank loans contracted (…);

Finally, the elements contained in the tables presented in the petition that justify the Appellant's subsidiary request are not fully supported by documents evidencing the same;

Being that, in particular as regards the alleged accessory contributions, the documents attached do not manage to prove the alleged, namely because they do not cover the totality of the accounting records concerning (and likewise their maintenance in the annual closing accounting documents), to which is added the fact that they are confined exclusively to internal documents, no external documentation having been attached that imparts effective probative force to the former, in particular external documents evidencing the financial flow underlying the performance of the alleged accessory contributions.

A situation that results in non-compliance with the provisions of article 74 of the General Tax Law which provides that the burden of proof of the facts constituting impends on whoever invokes them; in the case, the Claimant.

Finally, as regards the request for compensatory interest, understanding that there is no error in the self-assessment resulting from compliance with the provisions of Circular no. 7/2004, of 30 March, the analysis of the same is thus prejudiced".

y) The self-assessments of CIT for the periods 2010, 2011, 2012 and 2013 were paid in full (cf. docs. nos. 2, 3, 6, 8 and 10 and docs. nos. 45 to 48 attached with the request for arbitral ruling).

III.1.1. Unproven Facts

No other facts with relevance to the arbitral decision were proven.

III.1.2. Justification of the Matter of Fact

The Tribunal does not have to pronounce on all the details of the matter of fact that was alleged by the parties, the duty falling to it to select the facts that matter to the decision and to discriminate the matter that it considers proven and to declare that which it considers unproven (cf. article 123, no. 2, of the Tax Procedure Code and article 607, no. 3 of the Civil Procedure Code, applicable ex vi article 29, no. 1, paragraphs a) and e), of the TAA Regulatory Framework).

Thus, the relevant facts for judging the case are selected and shaped according to their legal relevance, which is established with regard to the various solutions to the subject matter of the litigation in applicable law (article 596, no. 1 of the Civil Procedure Code, applicable ex vi article 29, no. 1, paragraph e), of the TAA Regulatory Framework).

Thus, considering the positions adopted by the parties, in light of article 110, no. 7 of the Tax Procedure Code, the documentary evidence that moreover is in the administrative proceedings themselves, the facts listed above were considered proven as having relevance to the decision.

The Tribunal does not make a probative judgment on the manner of acquisition of the social interests held by the Respondent and financial charges it may have incurred with their acquisition, since, as will be better analyzed hereinafter, having regard to the grounds that presided over the decisions to dismiss the hierarchical appeals, dismissal of the request for official review and the gracious complaint, the question posed is essentially one of law and derives from the improper application by the Respondent of Circular no. 7/2004, according to Supreme Administrative Court jurisprudence, in particular as regards the burden of proof.

III.2. On the Law

III.2.1. The Matters to be Decided

The priority question posed by the Appellant to the Tribunal is that of determining the legality of the application of the indirect methods established in Circular no. 7/2004, by violation of article 32 of the Tax Benefits Statute – in the Claimant's words in its Request for Arbitral Ruling (articles 38 and 39): "the claimant understands that resort to