Summary
Full Decision
ARBITRAL DECISION (consult complete version in PDF)
PARTIES
Claimant: A... SGPS, SA, NIPC PT ... with registered office at ..., no. ... ... - ... ...;
Respondent: TAX AND CUSTOMS AUTHORITY (AT)
I. REPORT
On 05 February 2018, the Claimant filed with CAAD a request for arbitral pronouncement (RAP) requesting, under the Legal Regime for Arbitration in Tax Matters (LRATM), the constitution of a singular arbitral tribunal (SAT).
THE REQUEST
The Claimant, regarding Corporate Income Tax (IRC) for the fiscal year 2012, challenges assessment 2017 ... of 27.02.2017, which resulted in an amount due of €48,023.14 (forty-eight thousand twenty-three euros fourteen cents), assessment of compensatory interest in the amount of €10,017.94, included in that IRC assessment and assessment of default interest in the amount of €325.34, also included in that IRC assessment.
Having the RAP as "immediate object – declaration of illegality of the decision dismissing the administrative complaint filed in accordance with articles 68 and following of the Code of Tax Procedure with the request for annulment of the additional IRC assessment, identified above" and as "mediate object – declaration of the illegality and annulment of the tax act of additional assessment of IRC for the fiscal year 2012" and further "condemnation of AT to refund the amount unduly paid in the sum of €48,023.14 plus compensatory interest due in favor of the Claimant, from the date of payment until the date of issuance of the corresponding credit note."
THE CAUSE OF ACTION
The Claimant is a Company Managing Shareholdings (SGPS), subject to the legal regime of Decree-Law no. 495/88 of 30 December (as amended by DL no. 318/94, of 24 September), with the purpose of "management of shareholdings in other companies as an indirect form of exercising economic activities", being a parent company of a group of companies, with registered office in Portugal, taxed in accordance with article 69 of the Corporate Income Tax Code (CIRC), under the Special Tax Regime for Groups of Companies (RETGS).
In its capacity as SGPS, it carried out, in five of the six companies in which it held interests (in 2012), in accordance with the terms provided in their respective bylaws, contributions in the form of accessory prestations, in cash, without interest and without repayment deadline, namely: B... SA, C... SA, D... SA., E... SA and F... SA.
The companies B... SA and D... SA, in 2011, partially or fully refunded to the Claimant the accessory prestations. The AT did not accept for tax purposes the financial expenses borne by the Claimant with bank loans contracted to finance them, during the year 2012, on the grounds of their non-indispensability to the production of income or to the maintenance of the income-generating source (article 23 of CIRC).
As for the companies E... SA and F... SA, which did not refund in whole or in part those prestations, the AT accepted as costs the financial expenses borne with bank loans contracted to finance the accessory prestations carried out.
In the refunds by the participating companies to the Claimant, the principle of integrity of the share capital was respected, whereby the Claimant considers that it was solely the fact that the refund of the accessory prestations occurred (with the regime of supplementary prestations) that prompted the AT to effect this assessment, in nonconformity with the principle of equality (compared to the other two companies) and in violation of article 32-2 of the Tax Benefits Statute (EBF), from whose reading it results that "only the financial expenses associated with the acquisition of shareholdings are covered by the exclusion provided for in no. 2 of article 32 of the EBF. All others should be considered as tax costs in compliance with the provisions of article 3 and article 17 of CIRC, the principle of real profit taxation (article 104, no. 2 of the Constitution) and as a measure of tax capacity. In conclusion and as stated in CAAD Decision no. 39/2013-T, … the financing of a subsidiary arises from the interest of the parent company, in order to, ensuring the financial support of the acquired asset, increase its potential as an income-generating source."
REGARDING THE SINGULAR ARBITRAL TRIBUNAL (SAT)
The request for constitution of the SAT was accepted by the President of CAAD and automatically notified to AT on 05-02-2018.
By the Deontological Council of CAAD, the signatory of this decision was designated as arbitrator, with the parties being notified thereof on 27.03.2018. The parties did not express an intention to challenge the designation, in accordance with article 11, no. 1, paragraphs a) and b) of LRATM and articles 6 and 7 of the Deontological Code.
The Singular Arbitral Tribunal (SAT) has been, since 16.04.2018, duly constituted to hear and decide the subject matter of this dispute (articles 2, no. 1, paragraph a) and 30, no. 1, of LRATM).
All these acts are documented in the records contained in the Case Management System, which are hereby considered reproduced.
On 16-04-2018, AT was notified in accordance with and for the purposes of article 17-1 of LRATM. It responded on 22.05.2018 and attached the PA in computerized files consisting of Part1.pdf - 20 pages; PA 2 (Part 2.pdf) - 17 pages; PA 3 (Part 3.pdf) - 15 pages; PA 4 (Part 4.pdf) - 16 pages; PA 5 (Part 5.pdf) - 14 pages; PA 6 (Part 6.pdf) – 16 pages; PA 7 (Part 7.pdf) – 11 pages.
On 23.05.2018, an order was issued regarding the unnecessary holding of the parties' meeting referred to in article 18 of LRATM, unless both or one of the parties would manifest a different position. In the same order, assuming that the parties would accept the procedural processing proposed by the SAT, they were invited to present written submissions, successively, within a period of 10 days.
Only AT submitted submissions on 18.06.2018.
By order of 30.07.2018, the date for issuance of the final decision was scheduled.
PROCEDURAL REQUIREMENTS
Legitimacy, capacity and representation – The parties are legitimate, possess legal personality and procedural capacity and are represented (articles 4 and 10, no. 2, of LRATM and article 1 of Ordinance no. 112-A/2011, of 22 March).
Principle of contradiction - AT was notified in accordance with paragraph l) of this Report. All procedural documents and all documents attached to the case were made available to the respective counterparty in the Case Management System of CAAD. Both parties were always notified of their attachment.
Dilatory exceptions - The arbitral procedure does not suffer from nullities and the request for arbitral pronouncement is timely since it was filed within the prescribed period in paragraph a) of no. 1 of article 10 of LRATM, as results from the fact that the Claimant filed the request for pronouncement on 05.02.2018 and was notified of the decision dismissing the administrative complaint on 27.11.2017 (as alleged in part D of the RAP and as shown on page 64 of PA 7, part 7).
SUMMARY OF THE CLAIMANT'S POSITION
(in 144 articles comprising the RAP)
The Claimant, based on what was alleged in the RAP and above referred to in c) to g) of this Report, states the following:
Constitutional principle of equality - the Claimant concludes that because "...", the regime of accessory capital prestations made to companies E... and F... is essentially the same as the regime of accessory capital prestations made to companies B... and D..." and because "despite being essentially the same, the regime of accessory prestations made by the claimant to all its participating companies, AT understood to treat unequally the capital prestations made to companies B... and D...", it results that "AT violated the constitutional principle of equality which constitutes a vitiating flaw of the disputed tax act".
Refund of accessory prestations - in addition to this nonconformity with law, the Claimant states that "being as it is peaceful in doctrine and case law that accessory prestations under the regime of supplementary prestations are components of the equity capital of the beneficiary entity, and their refund, where the requirements on which it depends are met, does not affect their legal-tax qualification" it must be concluded that "not affecting the deliberation of refund, the legal qualification of accessory prestations as parts of equity capital, the unequal treatment applied to the accessory prestations made to companies B... and D... SA, is illegal due to violation, among others, of the principles of legality, proportionality, good faith and equality".
Regarding the "concept of 'operational economic activity' of SGPSs and the inclusion, within it, of activities of free financing to companies, as a mode of exercising an economic activity", it argues that "the notion of economic activity or social interest is revealed in the striking, determining trait, in the tax admissibility of expenses, when assessed by article 23 of CIRC", "... question ... clearly addressed in the Decision of the Superior Administrative Court of 07.02.2007, despite, and with all due respect, being erroneously interpreted by AT", since "in that decision it was argued that financial expenses borne with loans contracted to finance the participating company were not costs of the participating company, but they were not, because its corporate purpose was not that of managing shareholdings", concluding that "both at the doctrinal level and in the case-law sphere, the connection to the activity will be the nuclear element of the interpretive key to the concept of indispensability", whereby "... for the case at hand, the analysis of what is understood by 'activity' of the companies, in particular of an SGPS, proves to be essential".
In general, the Claimant states, regarding the activity of the companies, "the financial expenses incurred with capital obtained, and subsequently contributed to the participating company, is done in the interest of the participating company, as a direct consequence of its activity of managing an asset that emerges from a shareholding, which is actually or potentially income-generating".
Specifically, regarding the activity of SGPSs, it states that "the activity of SGPSs – an essential concept to assess the indispensability of expenses incurred by them in the application of article 23 of CIRC – not only concerns the management of shareholdings, as this is its sole contractual purpose". "The management of shareholdings shall involve their acquisition, the administration operations carried out by the parent company necessary for the appreciation of the acquired financial asset, the financing of such asset and the possible subsequent disposal". "All of this can be subsumed and is subsumed in the activity of an SGPS", whereby "therefore, the financing of a subsidiary arises from the interest of the parent company, in order to, ensuring the financial support of the acquired asset, increase its potential as an income-generating source". "In such case, the financial expenses resulting from financings contracted to, subsequently, strengthen the equity capital of a subsidiary, are included, form part of the scope of the activity of an SGPS, given the content of the norm, above mentioned, which regulates its activity". "This is the 'concept of economic activity of SGPSs'"
Whereby it must be concluded that "considering the uniform understanding of doctrine and case law to the effect that SGPSs exercise their economic activity through the management of their shareholdings and that the 'financings' made to them constitute a mode of exercising their own activity, enhancing the value of their financial assets, which alone in accordance with their legal regime they are permitted to have, the financial expenses borne with loans contracted to exercise that activity, cannot fail to be considered as costs indispensable under article 23 of CIRC".
Regarding the activity of SGPSs in the aspect of financing its subsidiaries, it states the following, starting from the analysis of article 32-2 of the EBF: "Only the financial expenses associated with the acquisition of shareholdings are covered by the exclusion provided for in no. 2 of article 32 of the EBF. All others should be considered as tax costs in compliance with the provisions of article 3 and article 17 of CIRC, the principle of real profit taxation (article 104, no. 2 of the Constitution) and as a measure of tax capacity. In conclusion and as stated in CAAD Decision no. 39/2013-T, ... the financing of a subsidiary arises from the interest of the parent company, in order to, ensuring the financial support of the acquired asset, increase its potential as an income-generating source."
Regarding the flaws of the assessment here disputed, the Claimant understands that "in the case at issue, the act suffers from a legal flaw due to omission of essential formalities – absence of substantive reasoning" since "AT, in the course of the said inspection procedure, analyzed the data of the Claimant's accounts and did not challenge their reliability, whereby the tax statements presented with reference to the year 2012 benefit from the presumption of truthfulness and good faith in accordance with article 75 of the General Tax Law (LGT)".
It states that "the disputed tax act is illegal due to violation of the principle of equality, due to error regarding factual and legal assumptions and due to nonexistence of the taxable fact" since in accordance with "... no. 1 of article 74 of LGT, the burden of proof of the facts constituting the rights of the tax administration or of taxpayers falls on whoever invokes them", whereby "it was incumbent upon AT to prove that those costs were not legally deductible in light of article 23 of CIRC, a duty that AT did not fulfill".
SUMMARY OF THE RESPONDENT'S POSITION
(in 46 articles comprised in AT's Response)
AT argues for the maintenance in the legal order of the disputed acts, understanding that the same constitute a correct application of law to facts and refers to the tax inspection report regarding the development of the defense presented.
It states that "... despite the corporate purpose of the Claimant including the management of shareholdings, the financings obtained were applied in the economic activity of third parties, in the case participating companies, whereby the expenses borne upstream are not imputable to the Claimant by virtue of the provision of article 23 of CIRC", adding that "... the Special Tax Regime for Groups of Companies presupposes, precisely, that each company in the Group files its individual income tax return" in accordance with no. 1 of article 70 of CIRC.
Starting from the principle that "the Claimant finances its subsidiaries in the form of loans with characteristics of advances (suprimentos) and accessory prestations, with these advances constituting remunerated assets since the Claimant charged interest to all subsidiaries that benefited from them in 2012, and the accessory prestations made with the subsidiaries are non-remunerated assets given that no interest was charged on them", it concludes "... that the financial expenses incurred resulting from recourse to banking and from loans obtained from C... S.A., D..., S.A. and G..., S.A. with the aim of releasing financial resources for its subsidiaries, cannot be considered as directly related to the activity of managing shareholdings of the Claimant", for the reason that
"Notwithstanding in minutes drawn up on 22/10/2010, the non-exigibility of the accessory prestations granted to the participating companies in question was deliberated, it was found that at a later date, on 02/07/2011, the accessory prestations made with B..., S.A. and D..., S.A. were refunded to A... SGPS, with both refunds, in the amounts, respectively, of €6,000,000.00 and €10,000,000.00, having as their counterpart the liquidation of debts in the same amount of A... SGPS towards these its subsidiaries". "Moreover, B..., S.A. and D..., S.A. have been financing A... SGPS and these loans are remunerated",
Whereby "... the nature of 'equity capital' that the Claimant seeks to attribute to the accessory prestations made with B... S.A. and D..., S.A., assimilating them to supplementary capital prestations (and arguing the applicability of their regime to them) is completely deprived of meaning, in that corporate practice clearly evidenced their character as non-remunerated financing, all the more so since their refund occurred by 'set-off', precisely with financings granted by the participating companies in question to A... SGPS".
"For its part, the accessory prestations made with the subsidiary F..., S.A. (in the amount of €500,000.00) were not the subject of any refund (or reinforcement) since the date of their constitution, thus clearly assuming a nature of 'quasi-capital' (similar to what occurred regarding the accessory prestations made to E..., S.A.)".
Additionally, "... even if the financings in question are, indirectly, in the interest of the ... Claimant, in its capacity as participating company, it is undisputed that these expenses are not directly related to its economic activity but rather to the economic activity of the companies in question, B..., S.A. and D..., S.A.", and "since the Claimant did not charge those expenses to those companies, these expenses are not deductible for purposes of determining the taxable profit of those companies, and also cannot be attributed to the legal sphere of the Claimant for not being indispensable to the maintenance of its income-generating source, but rather to the income-generating source of a third party, albeit a company in the Group".
"Notwithstanding SGPSs may, under certain conditions, grant credit to companies in which they participate, when they incur financial expenses, resulting from loans obtained, with the objective of being applied in the economic activity of those companies, in accordance with article 23 of CIRC, those expenses do not contribute to the formation of taxable income, by the simple fact of not generating any direct, measurable and evident inflow in the exercise of its activity", with the result that "... case law has been unanimous in defending the direct attribution of expenses to the company generating the income, rejecting expenses borne to enhance profits of third companies, even if they are a subsidiary/dominated company".
AT concludes by stating the following: "In truth, the financial expenses not accepted for tax purposes relate solely to the loans contracted to support the accessory prestations made to companies B..., S.A. and D..., S.A. and the decision to disregard them resides in the fact that there was a refund".
And it adds: "effectively, in this case, it is observed that the accessory prestations made do not at all follow the regime of supplementary prestations, in that there is a refund to the shareholder by the subsidiaries, the fundamental requirement of permanence not being met". "Thus, contrary to what the taxpayer argues, and without prejudice to it being evident that the accessory prestations in question do not have the nature of supplementary prestations, their qualification as such does not affect the conclusion that the financing expenses incurred by the Claimant did not generate any direct, measurable and evident inflows in the exercise of its activity showing themselves, as such, to be dispensable to the realization of income subject to tax and to the maintenance of the income-generating source (in accordance with paragraph c) of no. 1 of article 23 of CIRC";
For the reason that "the principal activity of the Claimant consists of the mere acquisition and holding of shareholdings, as a secondary activity," and "... may also develop an activity of financing subsidiaries", "however, when such financing involves expenses for the Claimant, the same do not contribute to the formation of taxable income for constituting expenses borne to enhance profits of third companies, even if they are participating companies".
In submissions, AT sustained what it had already expressed in the response, to which it refers for the inspection report.
II - QUESTIONS FOR THE TRIBUNAL TO RESOLVE
The questions raised in this case have already been subject to examination in CAAD, namely through collective decision no. 80/2013-T, in a situation in every way identical, where similar situations were discussed.
As in that arbitral decision, the questions placed here are similar, namely:
Are the financial expenses borne by the Claimant with the making of accessory prestations subject to a regime identical to supplementary prestations, indispensable or not for purposes of deductibility and classification under article 23 of the Corporate Income Tax Code?
Are the financial expenses borne by the Claimant with the making of accessory prestations subject to the regime of supplementary prestations, deductible or not in tax terms in accordance with article 32, no. 2 of the Tax Benefits Statute?
Is the equivalence made by the Respondent between accessory prestations subject to a regime identical to supplementary prestations and parts of capital admissible?
Does the Claimant have the right to compensatory interest?
Were the tax acts of assessment (IRC and interest) properly reasoned?
In the RAP, the Claimant presents for discussion the following nonconformities of the disputed assessments (IRC + Compensatory interest + default interest):
Lack of substantive reasoning;
Illegality due to violation of the principle of equality, due to error regarding factual and legal assumptions and due to nonexistence of the taxable fact.
III. PROVEN AND UNPROVEN FACTUAL MATTER.
REASONING
Regarding the factual matter, the Tribunal need not pronounce on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and distinguish between proven and unproven matters (in accordance with article 123, no. 2, of the Code of Tax Procedure and article 607, no. 3 of the Code of Civil Procedure, applicable by virtue of article 29, no. 1, paragraphs a) and e), of LRATM).
Thus, the facts pertinent to the judgment of the case are chosen and defined based on their legal relevance, which is established in light of the various plausible solutions of the question(s) of law (in accordance with the former article 511, no. 1, of the Code of Civil Procedure, corresponding to the current article 596, applicable by virtue of article 29, no. 1, paragraph e), of LRATM).
Thus, taking into account the positions assumed by the parties and the documentary evidence attached, the following facts were considered proven, with relevance for the decision, with each point brought to the factual matter showing the evidence means considered relevant as reasoning.
Proven Facts
The Claimant is a Company Managing Shareholdings (SGPS), subject to the legal regime of Decree-Law no. 495/88 of 30 December (as amended by DL no. 318/94, of 24 September) and has as its corporate purpose the "management of shareholdings in other companies as an indirect form of exercising economic activities" - as per articles 1 and 2 of the RAP and document no. 4 attached to the RAP;
The Claimant is the parent company of a group of companies, with registered office in Portugal, taxed in accordance with article 69 of CIRC, under the Special Tax Regime for Groups of Companies (RETGS) and held, in the fiscal year 2012, the following shareholdings:
- In accordance with articles 6 and 9 of the RAP, assessed in accordance with nos. 6 and 7 of article 110 of the Code of Tax Procedure.
On 29 May 2013, with reference to the fiscal year 2012, it filed the model 22 declaration, individually, and determined, in the individual annual income tax return, a tax loss of €662.28.67. As the parent company, for purposes of IRC for fiscal year 2012, it filed the model 22 declaration of the Group, in which it determined the consolidated taxable matter in the amount of €1,333,078.10 – in accordance with articles 4, 5 and 7 of the RAP and documents nos. 5 and 6 attached to the RAP, assessed in accordance with nos. 6 and 7 of article 110 of the Code of Tax Procedure.
The Claimant, as to the following companies in which it held interests:
B..., SA, - following the General Assembly deliberations, taken in accordance with and within the limits provided in the bylaws, over the years, the Claimant's accessory prestations to this company reached a total amount of €7,500,000.00. On 02-07-2011, by General Assembly deliberation, this company refunded to the Claimant the sum of €6,000,000.00, the accessory prestations being reduced to the amount of €1,500,000.00, with the result that after the refund, the company's net position did not fall below the sum of capital and legal reserve - in accordance with articles 12 to 15 of the RAP and documents nos. 7 and 8 attached to the RAP, assessed in accordance with nos. 6 and 7 of article 110 of the Code of Tax Procedure;
H... and D..., SA - following the General Assembly deliberations, taken in accordance with and within the limits provided in their respective bylaws, over the years, the Claimant's accessory prestations to this company, due to the effect of the merger by incorporation occurring in 2010, reached, in consolidated terms, a total global amount of €12,900,000.00 in the incorporating company, D... SA. On 22-07-2011, by General Assembly deliberation, this company refunded to the Claimant the sum of €10,000,000.00, the accessory prestations being reduced to the amount of €2,900,000.00, with the result that after the refund, the company's net position did not fall below the sum of capital and legal reserve – in accordance with articles 16 to 19 of the RAP and documents nos. 9 and 10 attached to the RAP, assessed in accordance with nos. 6 and 7 of article 110 of the Code of Tax Procedure;
E... SA – following the General Assembly deliberations, taken in accordance with and within the limits provided in the bylaws, over the years, the Claimant's accessory prestations to this company reached a total amount of €2,000,000.00. Until the end of 2012, this company did not effect the refund, in whole or in part, of the accessory prestations made by the Claimant – in accordance with articles 20 and 21 of the RAP and content of the PA submitted by AT with the response, facts assessed in accordance with nos. 6 and 7 of article 110 of the Code of Tax Procedure;
F..., SA – following the General Assembly deliberations taken in accordance with and within the limits provided in the bylaws, over the years, the Claimant's accessory prestations to this company reached a total amount of €500,000.00. Until the end of 2012, this company did not effect the refund, in whole or in part, of the accessory prestations made by the Claimant - in accordance with articles 22 and 23 of the RAP and content of the PA submitted by AT with the response, facts assessed in accordance with nos. 6 and 7 of article 110 of the Code of Tax Procedure.
The Claimant's accessory prestations to the participating companies were recorded in the accounts as assets, in sub-accounts of account 41113 – Shareholding Capital – Accessory Prestations and evidence a balance of 6,900,000.00 from 01.01.2012 to 31.12.2012, constitute non-remunerated assets, since the Claimant did not charge any interest, in accordance with the following table:
- In accordance with PA (part 2), point III.1.1.1 beginning of page 15 and beginning of page 16, submitted by AT with the Response;
In order to finance its subsidiaries, the Claimant obtained financings, which were intended for the making of accessory prestations under the regime of supplementary prestations, in favor of those entities and began to bear the respective financial expenses, recording them, notably in fiscal year 2012, as tax-relevant expenses of the fiscal year, understanding that the same were intended for the indispensable financing of its subsidiaries, whilst (sole) assets generating taxable income of the Claimant – global position of the Claimant in the RAP and of the Respondent in the Response and likewise in the Inspection Report attached to the Response of AT;
The financial expenses borne by Claimant A... SGPS, associated with financing obtained in the year 2012 amount to €2,075,534.60, and include interest borne with bank financing and with financing effected by subsidiaries - in the amount of €2,010,806.76 (recorded in account 691) - and Stamp Tax paid in the amount of €64,727.84 (recorded in account 6812), as demonstrated below:
- In accordance with PA3 submitted by AT with the Response (end of page 25);
Under OI 2016... an inspection procedure of external nature, of general scope, regarding fiscal year 2012, was carried out by AT regarding the Claimant and the "Group I...", with the respective draft final report being prepared and notified to the Claimant on 30.01.2017 for exercise of prior hearing, which it opposed to the proposed corrections, on 15.02.2017, having been notified the respective final report on an undetermined date – in accordance with article 27 of the RAP, article 1 of AT's Response and content of the PA submitted by AT with the response as a whole;
As a consequence of that inspection procedure, AT corrected the tax result determined by the Claimant in its model 22 declaration and consequently in the consolidated declaration, altering the taxable result declared by €155,782.83, corresponding to the following corrections: (1) negative correction regarding financial expenses disregarded related to non-remunerated financing, €252,178.64 (2) positive correction regarding financial expenses deducted in excess affected by the acquisition of shareholdings (article 31, no. 2 of the EBF) €96,395.81 – in accordance with articles 1 and 2 of AT's Response; article 28 of the RAP and content of the PA submitted by AT with the response;
The correction – non-acceptance as an expense of the fiscal year of financial expenses borne with the acquisition of capital shares – in accordance with what is referred to in point IX.2.2. (last two paragraphs) of the Inspection Report, is summarized as follows: "however, in the case of A... SGPS, it is observed that the accessory prestations made by it do not at all follow the regime of supplementary prestations, in that there is a refund by the subsidiaries to whom those accessory prestations were made, the requirement of permanence not being met. And, in this sense, it should be withdrawn from the quantum of the value of acquisition of capital shares the value corresponding to the prestations for purposes of calculating the financial expenses related to the acquisition of capital shares and as such, consider them as 'Other Assets'". "It should be noted finally that, in light of the reformulation of the calculations regarding financial expenses not accepted fiscally in accordance with article 23 of CIRC ..., also the financial expenses associated with the acquisition of capital shares to be disregarded by virtue of what is stipulated in no. 2 of article 32 of the EBF are altered, concretely, in this case, reduced by €96,395.81, in light of the importance added by the taxpayer" – in accordance with page 31 of PA Part 5 submitted by AT with the Response.
On an undetermined date, the Claimant was notified of the IRC assessment 2017 ... of 27.02.2017, from which resulted an amount due of €48,023.14 (forty-eight thousand twenty-three euros fourteen cents), assessment of compensatory interest in the amount of €10,017.94, included in that IRC assessment and assessment of default interest in the amount of €325.34, also included in that IRC assessment – in accordance with document no. 1 attached to the RAP;
On 28.04.2017, the Claimant proceeded to pay the amount referred to in the previous point – in accordance with the initial part of the RAP and document no. 2, page 1/1 attached to the RAP;
On 31.07.2017, the Claimant filed an administrative complaint against the assessment referred to in no. 11 above, having there exercised the right of prior hearing (on 15.11.2017), in light of the draft dismissal decision that was previously notified to it (on 25.10.2017) and having been notified the final dismissal decision on 27.11.2017 – in accordance with the introductory part of the RAP and pages 60 to 64 of PA Part 7 submitted by AT with the Response;
On 05 February 2018, the Claimant filed with CAAD the present request for arbitral pronouncement (RAP) – in accordance with the entry record in the Case Management System of CAAD of the request for arbitral pronouncement.
Unproven Facts
There is no other alleged factual matter that has not been considered proven and that is relevant for the composition of the procedural dispute.
The facts brought to the agreed matter are configured as being accepted, expressly or tacitly, by both parties.
IV. EXAMINATION OF QUESTIONS FOR THE SINGULAR ARBITRAL TRIBUNAL (SAT) TO RESOLVE
Supplementary prestations, accessory prestations, advances (suprimentos) and loans or mutuals.
First, it will be necessary to address four distinct legal realities of Commercial Company Law that are addressed in this case: supplementary prestations, accessory prestations, advances (suprimentos) and loans or mutuals.
On the website of the Institute of Certified Accountants (https://www.occ.pt/pt/noticias/as-prestacoes-suplementares-prestacoes-acessorias-e-os-suprimentos) the following can be read, which for its clarity, precision and conciseness, is here reproduced:
"At a certain stage in their course, companies need capitalization either because they are going through a phase of expansion and growth or because they find themselves in recession and run the risk, for example, of losing more than half of their share capital, violating the rule of article 35 of the Commercial Companies Code. Hence arises the necessity, sometimes imperious, of capitalizing themselves and the figure of supplementary prestations.
Supplementary capital prestations have a dual function: the capitalization of the company, that is, to adapt equity capital to social needs or they can also function as a guarantee to creditors, because they cannot be refunded if Equity Capital becomes less than the sum of capital and legal reserve, that is, it is a guarantee to creditors and this is one of the functions of Equity Capital of a company.
Supplementary prestations, unlike advances (suprimentos), represent a reinforcement of the company's Equity Capital and contribute to the capitalization of the company and to the protection of creditors. Equity Capital and Share Capital should increasingly be seen with greater credibility and not merely as a legal obligation, arising from compliance with Company Law.
Supplementary prestations, although they can be considered additional capital, do not imply an increase in capital or a reduction, if there is a refund. Indeed, share capital represents a fixed amount, while supplementary prestations can be considered a movable part of Equity Capital.
An interesting question that raises many doubts is the distinction between accessory prestations and supplementary prestations. Accessory prestations are recorded as a liability, if they are remunerated or refundable, or in other appropriate headings. Supplementary prestations, as we have seen, are always recorded as Equity Capital. Supplementary prestations always depend on a deliberation, through authorization in the original bylaws or through their amendment, whereas for accessory prestations, their inclusion in the bylaws is sufficient for them to be directly exigible from the partners.
Supplementary prestations are not remunerated and accessory prestations may accrue interest. Non-compliance with supplementary prestations may result in the exclusion of the partner, whereas with accessory prestations, it does not affect the position of the partner, except as provided otherwise in the bylaws.
As for the requirements for reimbursement, there are also substantial differences, as the refund of supplementary prestations depends on the integrity of share capital, as we have also seen, this limitation not existing for accessory prestations.
A different situation is the need for financing, arising from financial difficulties, more or less occasional, financial bottlenecks, insufficient working capital and hence the very frequent recourse to loans or to the advance (suprimento) contract. Indeed, the Commercial Companies Code establishes a legal type of contract for companies with limited liability within Company Law: the advance (suprimento) contract. Advances (suprimentos) are loans from partners to the company forming part of and influencing its liabilities, with the company being obliged to refund them and not being limited to mere lending of funds. For the loan to be considered an advance credit (suprimento), it must have a character of permanence and it should also be noted that, as a general rule, they are remunerated, unlike what happens with supplementary prestations. If it does not have such character of permanence of at least one year, it is merely a regular credit, not being identified as an advance situation. As is known, the figure of the advance contract is only provided for companies with limited liability. However, some authors argue that, as for advances resulting from the bylaws, their application to joint stock companies is possible (final part of article 287 C.S.C.), being considered an accessory obligation.
An interesting question is to know if advances (suprimentos) can be transformed into capital. Advances (suprimentos) aim, above all, to address economic and/or treasury difficulties, whereby they are not geared to be transformed into capital. Certain authors consider advances a substitute for capital, but one that avoids its formal and legal increase. However, where there is express waiver of its reimbursement and the advances are properly proven and endorsed by a statutory auditor, it seems to us legal to increase share capital by this means (Bibliography: Sofia Gouveia Pereira, Supplementary Capital Prestations; Aveiro Pereira, The Advance Contract)".
Resorting, for ease of consultation, to texts that are easily accessible (and solely for this reason), the following can be read at http://www.newco.pro/pt/prestacoes-suplementares-e-acessorias:
"Accessory Prestations
The bylaws of the company may impose on all or some partners the obligation to make prestations beyond their contributions. These may be created through amendment to the bylaws, but, in this case, the increase in prestations imposed is only effective for partners who have consented to it.
Normally, accessory prestations, which may be gratuitous or remunerated (if there is consideration for the partner or not), may consist of:
Cash contributions (e.g.: loan of a certain amount);
Providing the company with the enjoyment of a certain asset (e.g.: motor vehicle or an office);
Performance of certain functions (e.g.: exercise of management).
Accessory prestations are extinguished with the dissolution of the company and, except as otherwise provided in the bylaws, non-compliance with accessory obligations does not affect the status of the partner as such.
Supplementary Prestations
In order to increase the equity capital of a company with limited liability without resorting to an increase in share capital, which can be a costly, bureaucratic and time-consuming process, supplementary prestations are often used.
The main differences between supplementary prestations and an increase in capital are as follows:
Supplementary prestations do not confer voting rights or participation in dividends;
Supplementary prestations are always made in cash;
The refund of contributions is deliberated by the partners, only being possible if the company's net position does not become less than the sum of capital and legal reserve, and if the partner in question has released their share.
Other characteristics of supplementary prestations:
Supplementary prestations are made by simple deliberation of the partners, fixing the amount required and deadline for the prestation;
Supplementary prestations may only be required if the bylaws permit it (the bylaws must define the global amount, the partners who are obliged and the distribution criterion for supplementary prestations);
They do not accrue interest;
They cannot be refunded after the company has been declared bankrupt;
The refund must respect equality between partners who made them;
If the partner does not make the prestation, they are subject to exclusion and total or partial loss of their share."
This distinction (accessory prestations versus supplementary prestations, given their different purposes) does not assume relevance in this case, since it is AT itself that recognizes, as is written in collective decision CAAD 80/2013-T: "Supplementary prestations and likewise accessory prestations subject to an identical regime, granted by the taxpayer and recorded monthly in its balance sheet, are considered capital shares inasmuch as between them there are, in several respects, similarities that for purposes of articles 31 and 32 of the Commercial Companies Code, lead to their integration within the scope of article 32, no. 2 of the Tax Benefits Statute". "Indeed, both constitute cash contributions that satisfy functions analogous to those of share capital, a reason that justifies the non-exigibility of the credit and likewise the 'non-existence of any remuneration of its own, beyond that resulting from the development of the corporate activity itself bearing the same risk as share capital' (Opinion no. 107/04, of 30 November, of the Centre for Tax Studies)".
It results from the proven facts that the accessory prestations provided by the Claimant to its subsidiaries, considering the balance for the year 2012, followed the regime of supplementary prestations, even those that were made to companies B... SA and D... SA (those which are at issue here). The same occurred regarding their refund, since the principle of integrity of capital was respected.
Now, it is AT itself, through Opinion 107/04 of 30.11.2004 of the Centre for Tax Studies, that considers that accessory prestations functioning in this manner are equivalent to supplementary prestations.
Another aspect that AT raises as being prohibitive of the recognition of accessory prestations (under the regime of supplementary prestations) as an instrument for generating financial costs (bank loans) deductible in accordance with article 23 of the Corporate Income Tax Code, for not meeting the indispensability criterion of costs, is the manner in which, in fact, the refund to the Claimant was processed (points 14.7 and 14.8 of AT's Response), that is, by set-off.
It is understood that this factuality should not be given this reading. First, as is written in the Inspection Report, there exists, in the Group at issue, a "shared management of financial resources", characterized by the existence of "advances (suprimentos)" and "accessory prestations" (page 16 of PA2). Each instrument, with a different purpose (advances, loans or accessory prestations) follows its own regime, at the accounting and tax level. Second, it will be normal that there are various debits/credits between companies, even in a relationship of dominance (principle of full concurrency), whereby, when the General Assemblies of the commercial companies B... SA and D... SA, decided the return to the Claimant of the accessory prestations "as a counterpart that the shareholder liquidate the same amount of its debts to the company", it seems to configure a possible way to speed up the return, since it is not questioned that these "debts" existed, were properly recorded and corresponded to transactions effectively carried out between the companies.
The SAT will first address, whichever defect it determines to be procedurally proper, according to the prudent criterion of the judge, that which determines more stable or effective protection of the injured interests, as prescribed by article 124, no. 2 of the Code of Tax Procedure, that is, in the case, the alleged "error of law".
The questions placed here are identical to those placed in collective arbitral decision CAAD 80/2013-T, namely:
"The fundamental question to be resolved in the present case, peacefully accepted as such by the parties, is of simple formulation, being able to be summarized as knowing whether the financial expenses borne by a company managing shareholdings for the making of supplementary prestations (here accessory prestations in the regime of supplementary prestations) in favor of companies of which it holds interests, contribute or not to the determination of taxable profit, taking into account the content of article 32, no. 2 of the EBF.
According to AT, and the disputed assessment, the answer should be negative, since, not only should the making of supplementary prestations (here accessory prestations in the regime of supplementary prestations) be considered covered by the expression 'acquisition' of capital shares, used by article 32 of the EBF, but also those expenses would not meet the indispensability criterion of costs, required generically by article 23 of CIRC.
The Claimant, on the other hand, understands that AT is not correct, sustaining that, on the one hand, the making of supplementary prestations does not correspond to the acquisition of any capital share, and that, on the other hand, it should be understood that the deductibility of the respective expenses is not precluded by the aforesaid article 23 of CIRC".
It is referred to in collective arbitral decision CAAD 80/2013-T, to which we adhere, the following:
"The questions at issue have already been the subject of judicial treatment, both in administrative and tax courts and in arbitral courts, and reference may be made, in this respect, to the Decision of the Superior Administrative Court rendered in case 107/11 of 30/11/2011 available at www.dgsi.pt, which addresses the question of indispensability of financial expenses borne for the making of supplementary prestations (here accessory prestations in the regime of supplementary prestations), as well, at the arbitral level, covering already both aspects of the question formulated, the decisions of cases 9/2012-T; 69/2012-T; 12/2013-T, available at www.caad.org.pt/content/show/id/35/s/3.
It would be tedious and futile to reproduce ipsis verbis here the arguments contained in the arbitral decisions indicated, which decided a question in every way analogous to the one before us in the present case.
In sum, from the in-depth analysis of the question carried out in those decisions, it results, above all, that, in the wake of the decision of the Superior Administrative Court cited above, it cannot be affirmed that the financial costs borne with the making of supplementary prestations (here accessory prestations in the regime of supplementary prestations) are dispensable to the maintenance of the income-generating source.
In this respect, only the (much and well said) in the cited arbitral decisions will be reinforced, noting that it seems clear that, where a company managing shareholdings is concerned, whose activity, by its very nature consists of the appreciation of the shareholdings it holds, the provision of a participating company with equity capital, by allowing it to better and more efficiently exercise its respective activity, with the consequent increase in profit, is an act suited to the maintenance and appreciation of the income-generating source of the managing company.
Moreover, in a situation in which the managing company, in light of its position in the market regarding credit, is capable of obtaining credit on more advantageous terms than the participating company, the use of credit obtained by the former for the benefit of the latter will, manifestly, be an economically well-founded decision, in that the total costs of the operation will be diminished.
Also regarding the non-exclusion from the calculation of taxable profit of financial expenses with the making of supplementary prestations (here accessory prestations under the regime of supplementary prestations), the above-referred arbitral decisions are subscribed to, citing, by way of summary, the decision of case 12-2013T, where it can be read that:
'in general, the regime of capital gains aims to grant a favorable special regime to tangible assets and financial assets (shares and quotas) of companies, as a way of combating the lock-in effect – a phenomenon in the realization-based tax system that conditions the rational economic flow of assets (buying and selling) for reasons related to tax constraints (payment of tax). Fundamentally, avoiding the scenario of a subject who does not sell an asset (share or quota) of which he is a holder – and all economic reasons would advise him to do so – solely because he will pay a high tax at that moment (because taxation is only discharged upon the sale of the asset and not on the cadence of its annual appreciation). It is this reason that justifies the under-taxation of tangible and financial assets (shares and quotas), incorporated in a special tax regime for taxation of capital gains.
And none of this is verified in supplementary prestations (here accessory prestations under the regime of supplementary prestations). They are returned, at par, according to the rules of commercial law. There does not exist, nor should one even try to create the existence of, a (secondary) market of voluminous transactions of supplementary prestations (here accessory prestations under the regime of supplementary prestations). And it is not credible that the few holders of supplementary prestations (here accessory prestations under the regime of supplementary prestations) below par do not wish to receive their nominal value, for fear or concern about the payment of tax associated with it; or that this is an economic obstacle such that it would justify creating or inserting them in the special regime of capital gains.'
It is thus understood, adopting here the arguments made in the arbitral decisions cited, that the reference in article 32, no. 2 of the EBF to 'capital shares', refers to shares of the share capital.
Reinforcing those arguments, only the following will be noted: that norm speaks of 'capital shares of which they are holders', which strongly suggests that it refers to capital shares that can be held as titled property, which will not be the case regarding the right to refund of supplementary prestations (here accessory prestations under the regime of supplementary prestations).
On the other hand, the same norm of the EBF also refers to 'financial expenses borne with their acquisition' (of capital shares), which, likewise, in an impressive way, inculcates the idea that it concerns capital shares capable of being transacted (acquired and sold), which reinforces the previous reference to titling as property.
Now, the only titlings of capital of companies existing in Portuguese law would be quotas and shares. And even if it is said that the right to reimbursement of advances (suprimentos) can be transacted, the fact is that such right is not titled as property, and, even if it were, it would be a credit instrument (to a credit – to reimbursement) and not a capital instrument.
Thus, also by the means exposed, and in the sense of the arbitral jurisprudence indicated, it must be concluded that article 32, no. 2 of the EBF refers to share capital shares."
It will thus be concluded, as was concluded in collective arbitral decision CAAD 80/2013-T, to which we adhere, the following:
"In these terms, and insofar as it makes a non-conforming application of articles 32, no. 2 of the EBF and 23 of CIRC, the disputed assessment must be annulled, with the proceedings of... the request being proper.
The establishment of the invalidity in question, conferring sure and effective protection of the interests of the Claimant, precludes knowledge of the remaining questions raised by it, and above listed, reason for which knowledge of the same will not be proceeded with."
Refund of Amounts Paid
As a consequence of the aforesaid non-conformity of the assessment act, there is a right to refund of the tax paid illegally and likewise of compensatory and default interest, by virtue of articles 24, no. 1, paragraph b), of LRATM and 100 of the General Tax Law, as this is essential to «restore the situation that would have existed if the tax act subject to the arbitral decision had not been performed».
By the above, the request for refund of the sum of €48,023.14 is proper.
Regarding the Request for Compensatory Interest
As results from the above referred to, the illegality arises from an interpretation of article 32-2 of the EBF, combined with article 23 of the Corporate Income Tax Code.
The Claimant paid the amount assessed and is entitled to a refund of the amount paid on 28.04.2017, in the amount of €48,023.14.
By what has been said, the illegality of the assessment act is attributable to the Tax and Customs Authority, as it issued the assessment on its own initiative, with an interpretation of the law that here failed to prevail.
Consequently, the Claimant is entitled to compensatory interest, in accordance with articles 43, no. 1, of the General Tax Law and 61 of the Code of Tax Procedure, regarding the amount to be refunded.
The compensatory interest will be paid from the date on which the Claimant made payment of the total amount assessed, until the full payment of the amount that should be refunded, at the statutory default rate, in accordance with articles 43, no. 4, and 35, no. 10, of the General Tax Law, article 61 of the Code of Tax Procedure, article 559 of the Civil Code and Ordinance no. 291/2003, of 8 April.
V - OPERATIVE PART
In the terms and with the grounds set forth above:
The request for declaration of illegality of the decision dismissing the administrative complaint referred to in point 13 of the agreed facts is deemed proper, and is annulled, for being in non-conformity with the rule contained in article 32-2 of the EBF, combined with that of article 23 of the Corporate Income Tax Code, in the reading above advocated;
The request for declaration of illegality of the assessment referred to in point 11 of the agreed facts is deemed proper, and is annulled, for being in non-conformity with the rule contained in article 32-2 of the EBF, combined with that of article 23 of the Corporate Income Tax Code, in the reading above advocated;
The request for refund of the amount of €48,023.14 referred to in points 11 and 12 of the agreed facts is deemed proper;
The request for compensatory interest is deemed proper and the Tax and Customs Authority is condemned to pay such interest to the Claimant, calculated on the sum of €48,023.14, from the date of payment until the date of issuance of the credit note.
Value of the case: in accordance with the provision of article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings (and paragraph a) of no. 1 of article 97A of the Code of Tax Procedure), the value assigned to the case is €48,023.14.
Costs: in accordance with the provision of article 22, no. 4, of LRATM, the amount of costs is fixed at €2,142.00 according to Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, at the expense of the Respondent.
Notify.
Lisbon, 31 July 2018
Singular Arbitral Tribunal (SAT),
Augusto Vieira
Text prepared by computer in accordance with the provision of article 131, no. 5, of the Code of Civil Procedure, applicable by reference from article 29 of LRATM.
The writing of this decision is governed by the spelling prior to the Orthographic Agreement of 1990.
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