Summary
This arbitral decision concerns the Portuguese Tax Administration's application of the general anti-abuse clause (Article 38(2) of the General Tax Act) to A… SGPS S.A., resulting in additional IRS withholding tax liquidations totaling over €1 million plus compensatory interest. The case arose from a 2008 corporate transaction where the applicant acquired shares from shareholders of B… S.A., creating debt that was subsequently repaid to those shareholders in 2009-2010. The Tax Administration reclassified these debt repayments as dividends, asserting the applicant failed to withhold income tax and was liable as a tax substitute under Article 103 of the Income Tax Code. The applicant challenged the liquidations, arguing the four cumulative requirements for applying the anti-abuse rule (means, result, intellectual, and normative elements) were not satisfied, that the operation constituted a legitimate business reorganization, and subsidiarily, that the anti-abuse clause cannot be applied to tax substitutes. The arbitral tribunal was constituted in October 2015 to assess the legality of these tax assessments.
Full Decision
ARBITRAL DECISION[1]
The arbitrators José Baeta de Queiroz (Presiding Arbitrator), Alexandra Gonçalves Marques and Nuno Maldonado Sousa, designated by the Deontological Council of the Center for Administrative Arbitration to form the present Arbitral Court, hereby agree to the following
I – REPORT
1. On 24 July 2015, A… SGPS S.A., collective entity no.…, with registered office at … no.…, …, …, …-… … (hereinafter "Applicant"), requested the constitution of an Arbitral Court and submitted a request for arbitral decision, pursuant to article 10, no. 1, subparagraph a) and no. 2, of Decree-Law no. 10/2011, of 20 January, as subsequently amended (Legal Regime for Tax Arbitration, hereinafter RJAT), for the assessment of the legality of tax acts relating to Income Tax Withholding, for 2009 and 2010, from which resulted tax of € 400,000.00, plus compensatory interest of € 67,879.44 and € 665,393.36, plus compensatory interest of € 82,855.27.
2. The referred additional IRS withholding liquidation resulted from the application by the Tax Administration of the general anti-abuse clause provided for in article 38, no. 2 of the General Tax Act ("LGT") to the Applicant following payments made by the Applicant to its shareholders to amortise the debt generated when it acquired, in 2008, the shares that those same shareholders held in company B…– … S.A., with the Tax Administration understanding that the payments made by A… SGPS to the shareholders assume the nature of dividends and that, as such, the Applicant failed to fulfil the duty to withhold income tax on profits placed at their disposal, thereby incurring liability as a tax substitute, pursuant to article 103 of the Income Tax Code.
3. Not accepting these tax liquidations and compensatory interest – on the grounds that the requirements necessary for application of the anti-abuse rule are not met and that the operation conducted represents a business reorganisation – the Applicant requested the constitution of the Arbitral Court pursuant to article 10, no. 1, subparagraph a), and article 2 of the RJAT, formulating the following claims:
i. Declaration of illegality and consequent annulment of the IRS withholding liquidation no. 2015…, of 8 April 2015;
ii. Declaration of illegality and consequent annulment of the IRS withholding liquidation no. 2015…, of 8 April 2015, both on the grounds:
a) Improper application of the anti-abuse clause, on the grounds that the four requirements for application of the anti-abuse rule provided for in no. 2 of article 38 of the LGT are not met (medium/means, result, intellectual and normative elements) and, subsidiarily,
b) Error in notification of the impugned liquidations to the applicant by:
i. Application of the sanction of ineffectiveness provided for in no. 2 of article 38 of the LGT; or, subsidiarily,
ii. Inapplicability to the tax substitute of the application of the general anti-abuse clause.
iii. Violation of the principle of contributive capacity provided for in article 104, no. 2 of the CRP.
iii. Condemnation of the Tax Administration for payment of indemnity for improper provision of guarantee, for all costs incurred until the guarantee is lifted, or subsidiarily, at least for the amount of € 10,781.27 already demonstrably incurred, pursuant to articles 53 of the LGT and 171 of the CPPT.
Seven documents were attached to the petition, with no witnesses being called.
4. In the request for arbitral decision, the Applicant chose not to designate an arbitrator.
5. Pursuant to subparagraph a) of no. 2 of article 6 and subparagraph b) of no. 1 of article 11 of the RJAT, the Deontological Council designated as arbitrators Counsellor José Baeta de Queiroz, Dr. Alexandra Gonçalves Marques and Dr. Nuno Maldonado Sousa, who accepted office within the legally stipulated period.
6. The Arbitral Court was constituted on 6 October 2015.
7. The Respondent submitted its reply on 11 November 2015.
8. With the agreement of the parties, it was decided not to hold the meeting provided for in article 18, no. 1 of the RJAT.
9. The parties submitted arguments.
10. The Arbitral Court scheduled 7 April 2016 for the delivery of the arbitral decision, subsequently extending the deadline until 30 June 2016.
II. SANCTION
11. The Court was properly constituted and is materially competent.
The proceedings do not suffer from any nullities and no issues have been raised that impede examination of the merits of the case.
The parties have legal personality and capacity, are legitimate and are duly represented.
III. ISSUES TO BE DECIDED
12. In light of the positions taken by the parties in their submissions and considering the grounds invoked, the issues to be decided in the present arbitration proceedings – relating to the assessment of the legality of the IRS withholding liquidation acts no. 2015…, of 8 April 2015, in the amount of € 400,000.00 and compensatory interest in the amount of € 67,879.44 and IRS withholding liquidation no. 2015…, of 8 April 2015, in the amount of € 665,393.36 and compensatory interest in the amount of € 82,855.27, considering the defects invoked by the Applicant, are as follows:
1. Improper application of the anti-abuse clause, on the grounds that the four requirements for application of the anti-abuse rule provided for in no. 2 of article 38 of the LGT are not met (medium/means, result, intellectual and normative elements) and, subsidiarily,
Error in notification of the impugned liquidations to the Applicant by:
i. Application of the sanction of ineffectiveness provided for in no. 2 of article 38 of the LGT; or, subsidiarily,
ii. By inapplicability to the tax substitute of the application of the general anti-abuse clause.
iii. Violation of the principle of contributive capacity provided for in article 104, no. 1 of the CRP.
In addition to the assessment of the legality of the impugned tax acts, the Court must also decide on the condemnation of the Tax Administration to pay indemnity for a bank guarantee, for all costs incurred until the guarantee is lifted, or subsidiarily, for the amount of € 10,781.27, already incurred, pursuant to articles 53 of the LGT and 171 of the CPPT.
IV. FACTUAL FINDINGS
Considering the positions taken by the parties in their respective submissions (petition, reply and arguments), the documentary evidence produced and the administrative file attached, the following facts are established as proven:
1. The Applicant was constituted in 2008 as a commercial stock company in the form of a company managing equity participations, with the corporate purpose of "management of equity participations in other companies, as an indirect form of conducting economic activities", with share capital of € 50,000.00 (fifty thousand euros), distributed as follows:
Shareholders
% of capital
Name
Tax ID
C…
…
20%
D…
…
20%
E…
…
20%
F…
…
20%
G…
…
20%
2. Each shareholder holds 2,000 shares with a par value of € 5.00 each.
3. In the four-year period from 2008 to 2011, the board of directors of the Applicant was composed of the sole Administrator and shareholder – C….
4. The Applicant is based on a family structure, with the entire share capital distributed between parents and children.
5. In its first year of activity, the Applicant acquired 100% of the share capital of company B…– … S.A. (hereinafter only B…, S.A.), collective entity no.….
6. In July 2010, the Applicant subscribed to the entire share capital of company H…– …, Lda., collective entity no.….
7. The Applicant has no facilities of its own, nor any dependent workers.
8. The Applicant does not have its own human and structural resources.
9. The Applicant's registered office is located at … no.…, …, in …, also the registered office of company B… S.A.
10. In the years 2009, 2010 and 2011, the Applicant had no persons in its employ, having submitted no Form J/Model 10 with reference to those years, and therefore incurred no personnel expenses.
11. Since it began its activity on 20 November 2008, it has not incurred any expenses with personnel, consulting and provision of services.
12. At the date of the facts, the Applicant provided no services to the companies in which it participated.
13. B…– …, S.A. is a commercial company established in 2004, with registered office at … no. … –…, …, …-… …, in the form of a commercial company by shares, with share capital of € 50,000.00.
14. In November 2008, the company was transformed into a stock company, with capital of € 50,000.00, distributed in 10,000 shares with a par value of € 5.00, having as shareholders C…, D… and E…, F… and G…, distributed as follows:
Shareholders
% of capital
Name
Tax ID
C…
…
20%
D…
…
20%
E…
…
20%
F…
…
20%
G…
…
20%
15. From a comparison of the shareholder structures of the Applicant and of B…, S.A., it follows that the shareholders are the same and the percentage holdings in the share capital in the companies are identical.
16. B… S.A. is based on a family structure, with the entire share capital distributed among parents and children.
17. The management of the company was assigned to partners C… and E….
18. B…, S.A. had profits from 2004 to 2011 as follows:
19. Between 2005 and 2008, no profits were distributed to the partners.
20. In 2009 – following the sale of 100% of the share capital of company B…, S.A. to the Applicant, that company proceeded to distribute dividends to the now Applicant, as shown in the table below:
21. Until 31 December 2010, with reference to the financial years 2008 and 2009, B…, S.A. approved the distribution of dividends to the now Applicant in the amount of € 4,600,000.00, transferred in the immediately subsequent years, that is, 2009 and 2010.
22. On 15 December 2009, the Applicant purchased from its shareholders C…, D… and E…, F… and G…, the shares that these held in the share capital of company B…, S.A., at the unit price of € 3,500.00 per share, that is, for the total value of € 35,000,000.00.
23. On 14 November 2008, before the Applicant's purchase of the shares representing the share capital of B…, S.A., consultant I… presented a Report in which it valued all the shares of B…, S.A., with reference to August 2008, at € 35,000,000.00.
24. As a result of the sale of the shares, the Applicant came to hold 100% of the share capital of B…, S.A.
25. The Applicant did not have the financial resources to make immediate payment for the shares of B…, S.A.
26. At 31 December 2008, the Applicant presented a net position of € 50,000.00, corresponding to cash values and equivalents.
27. The Applicant became indebted to its shareholders for the amount of € 35,000,000.00, corresponding to the acquisition price.
28. The Applicant and the shareholders agreed between themselves that payment of the agreed price would be deferred for a period of not less than 12 months.
29. In the share purchase and sale agreement executed between the Applicant and the then shareholders of B…, S.A., no interest was stipulated, nor was any deadline fixed for the repayment of the outstanding amounts.
30. In 2009, B… S.A. distributed dividends to the Applicant in the amount of € 2,000,000.00.
31. In 2009, contemporaneously with the distribution of dividends, the Applicant transferred to its shareholders, as payment of the debt from the acquisition of the shares, the amount of € 2,000,000.00.
32. In 2010, B… S.A. distributed dividends to the Applicant in the amount of € 3,100,000.00.
33. In 2010, contemporaneously with the distribution of dividends, the Applicant transferred to its shareholders, as payment of the debt from the acquisition of the shares, the amount of € 3,094,852.82.
34. The accounting records of the transfers made by the Applicant to its shareholders in the years 2009 and 2010 were as follows:
35. The Applicant remains indebted to the shareholders for part of the price due for the acquisition of the shares.
36. The Tax and Customs Authority conducted a partial scope inspection of the Applicant, pursuant to Service Orders nos. OI2011…, OI2012… and OI2012…, of partial scope, aimed at determining IRC and income tax withholdings, with focus on the years 2009, 2010 and 2011 and monitoring of abusive tax planning schemes.
37. By official letter no.…, of 11 November 2013, the Applicant was notified of the right to a prior hearing regarding the Inspection Report Draft.
38. The Applicant did not exercise its right to be heard within the legally granted period of 30 days.
39. The Applicant did not request the performance of any supplementary investigative procedures.
40. The Applicant was notified by the Lisbon Finance Department of the Final Inspection Report, pursuant to which the previously notified Inspection Report Draft was converted into final form, as set out in document no. 3 attached to the Initial Request, which is hereby reproduced.
41. In implementation of the conclusions of the Inspection Report, the Applicant was notified of IRS withholding liquidations and compensatory interest nos. 2015…, in the total amount of € 467,879.44, relating to the year 2009.
42. In implementation of the conclusions of the Inspection Report, the Applicant was notified of IRS withholding liquidations and compensatory interest no. 2015…, in the total amount of € 748,248.63, relating to the year 2010.
43. On 23 July 2015, at the request of the Applicant, J…, S.A. issued a document designated as "Bank Guarantee N…", up to the maximum amount of Euro 1,550,919.66, in favour of the TAX AND CUSTOMS AUTHORITY – OEIRAS FINANCE SERVICE –…, which is intended to "provide security for the suspension of Fiscal Enforcement Proceedings nos. …2015… and …2015…".
44. On 24 July 2015, J… S.A. proceeded to debit from the bank account of which the Applicant is the holder, the costs inherent to the issuance of that Bank Guarantee, in the amount of Euro 10,781.27.
45. On 24 July 2015, the Applicant requested the constitution of the Arbitral Court pursuant to article 10, no. 2 of the RJAT, aimed at the annulment of the IRS withholding liquidations no. 2015… and compensatory interest, relating to 2009, the annulment of the IRS withholding liquidations no. 2015… and compensatory interest, relating to 2010, as well as the payment of indemnity for improper provision of bank guarantee.
The Court's conviction regarding the factuality established as proven was based on the documents in the file, the administrative file, including the Inspection Report, regarding factual elements that are not contested or impugned by the Applicant (cf. article 76, no. 1 of the General Tax Act and 115, no. 2 of the Code of Tax Procedure and Process).
No other facts of relevance to the decision of the case were established.
V. LEGAL GROUNDS
V/a. The substantive issue
The main issues to be resolved in this judgment are:
I – The legality of the application of the general anti-abuse clause contained in the provision of article 38 of the LGT;
II – To assess whether as a result of the application of the clause, the effects intended by the TA are in conformity with law, namely whether the liquidations relating to income tax withholdings should be levied on the Applicant.
The greater purpose of the Portuguese tax system is enshrined in the provision of article 103-1 of the CRP and consists ultimately in the satisfaction of the financial needs of the State and in the fair distribution of income and wealth. It is with this objective that the entire tax structure is built, seeking to collect contributions from citizens to meet collective needs in a balanced manner, without foregoing the distribution of this burden according to the criterion drawn: the actual income and real wealth of each one.
The increasing complexity of economic relationships and the evolution and technicality of legal instruments that have been created, gave rise to methods, normally linked to business management, in search of less onerous tax solutions, which constitute after all well-structured modes of configuration aimed at the purpose in view. This design of the legal configuration is usually referred to as tax planning, which can essentially follow two paths: (i) the resort to optimised means of conducting business aimed at the economic end in question; (ii) the use of means that only apparently have economic purpose for the end in view, having as objective the avoidance of tax payment. It is precisely this combination of the use of lawful figures that are inadequate means for the intended business, aimed at avoiding taxation, that constitutes abusive tax planning and which corresponds to the concept of tax avoidance. It is precisely tax avoidance that the CGAA seeks to combat.
With this objective – combating tax avoidance – the regime contained in article 38 of the LGT was adopted in the Portuguese legal order, which has the following wording:
Article 38. Ineffectiveness of acts and legal transactions
1 - The ineffectiveness of legal transactions does not preclude taxation, at the moment when it should legally occur, if the economic effects intended by the parties have already been produced.
2 - The following are ineffective within the tax sphere: acts or legal transactions essentially or mainly directed, by artificial or fraudulent means and with abuse of legal forms, at the reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or legal transactions of identical economic end, or at the obtaining of tax advantages that would not be achieved, in whole or in part, without use of these means, with taxation then being carried out in accordance with the applicable norms in their absence and the referred tax advantages not being produced.
The CGAA has been studied by the doctrine and its concepts have been gradually established by case law. These studies have privileged as a technique for analysing the framing of a given factual situation in the provision of the CGAA, the dissection of its traditional elements or requirements for application: medium/means, result, intellectual, normative and sanctioning. This methodology will be followed.
Let us examine the requirement of means or form utilised. The provision of the norm requires that the legal structure used to materialise the business or businesses causing the tax avoidance situation has used artificial or fraudulent means and with abuse of legal forms.
For the analysis of the case in question, it is important to determine what is the parameter that should be used to qualify as artificial the means used or to assess whether the legal format of the operation is abusive. As has been said, the application of the CGAA normally occurs when the legal structure underlying the transaction is, from an objective perspective, legally permissible and lawful; it should not therefore be the law that serves as the standard by which to assess whether the model used constitutes artifice or if there is an objectionable use of the legal figures on which it rests.
It is believed that the test of the fiscal regularity of the legal structure will be conducted by investigating the adequacy of the structure adopted to the economic purpose aimed at. In this sense, Lopes Courinha states that "It is, in conclusion, from the level of incoherence between the form or structure chosen and the final economic-practical purpose of the taxpayer, between the purpose for which that adopted form is actually employed and the cause that is proper to it, that the aforementioned element will be assessed"[2]. In turn, Leite de Campos et al.[3] also place emphasis on the existence of economic coherence in any case but clearly distinguish (i) artificial or fraudulent means, constituted by useless or unnecessary transactions for the business project, devoid of a "valid economic reason, or a reasonable justification" for conducting the transaction; (ii) abuse of legal forms when unusual business formulas are used to achieve the typical economic purpose of the transaction.
Let us now frame the factual situation in light of these guidelines.
The Applicant states that its shareholders constituted A…, SGPS with the purpose of "reorganising the business group by establishing an SGPS that would hold the group's companies" and that "the intention with this reorganisation was to create synergies, enhance financing in a single entity, that [A…, SGPS] would centralise administrative services and provide services to the subsidiaries, etc."[4]. The purpose declared by the Applicant is, moreover, in line with the economic purpose for which SGPS companies are established, a figure that historically was created with the objective of creating favourable conditions that facilitate and encourage the creation of economic groups, providing entrepreneurs with a legal framework that allows them to bring together in one company their equity participations, for purposes of their centralised and specialised management[5].
In the proceedings it was established, in summary[6], that A…, SGPS has no facilities of its own, nor any dependent workers, does not have its own human and structural resources, its registered office is also the registered office of company B… S.A., in the years 2009, 2010 and 2011 it had no persons in its employ and in those years did not incur personnel expenses and since it began its activity on 20 November 2008, it has not incurred expenses with personnel, consulting and provision of services, and at the date of the facts provided no services to the companies in which it participated. It was also established that B…– …, S.A. was established in 2004 and its share capital was held by the same persons and with identical stakes to those holding in A…, SGPS; since 2005 it had profits that it did not distribute until 2008.
It is now important to draw conclusions and for this we must assess whether the establishment of A…, SGPS has a valid economic reason and whether the acquisition of B…, S.A. has a reasonable justification in light of the objectives it stated. It is believed that the answer can only be negative for reasons relating to (i) the general objectives that are expected to be achieved with the creation of an SGPS; (ii) the specific objectives that the Applicant states guided the business plan developed.
At the level of general objectives, it must be recognised that no real economic group was constituted; the commercial operations that were carried out by B… continued to be so, without any known intervention of A…, SGPS in the context of its centralised and specialised management. As for the specific objectives, no intentions of reorganisation, of creation of synergies are visible, as no other company with activity was established, nor of centralisation of administrative services or providing services to the subsidiaries.
In light of criteria of economic rationality, no reason is found that would justify the interposition of the SGPS between the actual proprietors of the business and the unit that generates income, but rather the contrary. The new structure was only a source of costs.
It is therefore to be concluded that the combination of legal transactions (i) establishment of A…, SGPS; (ii) sale to A…, SGPS of equity participations in B…, S.A. on credit; (iii) distribution of profits by B…, S.A. to A…, SGPS; (iv) payment of part of the price of the participations to the original proprietors of B…, S.A.'s capital, is a means adequate to eliminate the taxes that would be due if the legal structure of the company had remained in its original form. If B…, S.A. had distributed profits to its shareholders, these would have been taxed in income tax (article 5-2-h of the CIRS), which did not happen with the structure adopted.
It should also be noted that the Applicant is mistaken when it states that the subscription of A…, SGPS capital through contributions in kind, embodied by participations in B…, S.A., would allow the shareholders to receive indirectly the profits, without taxation, through a capital reduction operation. The reason is that the realisation of contributions in kind was undoubtedly the model that would best serve the constitution of the economic group, which would begin its activity without liabilities and with very strong equity. It could not, however, achieve the indirect withdrawal of dividends through capital reduction, without that act being subject to taxation since it would be precluded by the capital gains regime regulated in article 10-1-b of the CIRS.
In conclusion, it must be stated that the business model used constitutes an artificial means as it is not based on criteria of economic rationality.
Let us now analyse whether the result element is also verified. The factual species corresponding to this element is configured in article 38-2 of the LGT as the obtaining of tax advantages that would not be achieved without the use of the means in question and which can be reflected in the reduction, elimination or temporal deferral of taxes.
Following Lopes Courinha[7], it is believed that the tax advantage provided for in law is a "relative concept, susceptible to delimitation by comparison with the level and terms of taxation or tax burden assessed in a normal operation", considering as such the format or system of business organisation that would be adopted if tax advantage were not sought. In agreement, Leite de Campos et al.[8] seem to attribute to this term merely quantitative nature; advantages must exist and be achieved through the use of the means, but they are not by themselves indicators of the use of abusive planning.
In the situation of the proceedings, the investigation of the existence of a nexus between the means used and the tax advantages seems to result evident. Indeed, even placing the benefit in hypothetical form, it is recognised, and the Applicant itself admits that advantages may have accrued to its shareholders.
Concretely, if B…, S.A. had distributed the dividends it delivered to A…, SGPS, in the amount of € 2,000,000.00 in 2009 and € 3,100,000.00 in 2010, to its shareholders, these would have been taxed in income tax, pursuant to article 5-2-h of the CIRS at the liberating rate of 20% in 2009 and 21.5% in 2010 (article 71-1-c of the CIRS), which would have resulted in tax amounts of, respectively, € 400,000.00 and € 666,500.00. Through the structure created, no taxation was generated, so it is confirmed here that there was an actual tax advantage amounting to € 1,066,500.00.
Let us now examine the volitional or intellectual requirement, which entails determining whether it is possible to attribute to the agent the orientation of the means used, predominantly for the obtaining of tax advantages.
According to Leite de Campos et al., regarding what they denominate as "tax purpose", the CGAA refers to "legal transactions essentially or mainly directed at the tax purpose", it being incumbent on the TA to "prove fraudulent intent, in terms of fraud, or point to objective circumstances equivalent to that proof, whose verification allows concluding without doubt the intention of a tax saving, as it is not possible to find any alternative explanation in terms of economic-financial rationality"[9]. Lopes Courinha[10] understands that one only has to ascertain whether there was fiscal motivation, which may be verified by investigating whether the forms chosen (means) are directed at the fiscal effect, in other words "once the said purposes are achieved, as a consequence of the acts conducted for this purpose, the motivation of the taxpayer will be of no further relevance."
It has already been stated regarding the means element that in light of criteria of economic rationality no reason is found that justifies the operation of the group that it is claimed was to be created, with the interposition of the partnership management company between the actual proprietors of the business and B…, S.A., which is the unit generating income. It is therefore to be concluded that the combination of the identified legal transactions was conceived, at least predominantly, with as the motive the obtaining of tax advantage. The presence of the volitional element is thus considered verified.
It should be noted that it is not even necessary that the conception of the business system have as its exclusive purpose the obtaining of tax advantage; as Lopes de Sousa[11] points out "it will not be necessary, to determine the ineffectiveness of the act or transaction, to demonstrate that it was entered into with the sole objective of reducing, eliminating or deferring the taxes that would be due, it being sufficient that this objective be essential or the main one".
With the first three requirements verified, it is common to analyse the presence of the fourth, which some doctrine, not unanimous[12], considers necessary and which is the called normative element, which arises above all from doctrinal construction. Lopes Courinha[13] attributes to it the meaning of censurability of the effects obtained, "which are not desired, foreseen or promoted by Law, but rather rejected" as only if this happens should the transaction in question be considered ineffective.
Although this element is considered absent from the norm, it is referenced by the Applicant (paragraphs 43 and 44 RI) and by the TA (paragraphs 327 and 356 R-TA) and so the arguments must be weighed.
The Applicant counters that the business structure is a legal and legitimate objective as the establishment of A…, SGPS has no instrumental character and that it is precisely the main element in the group reorganisation it intended to carry out.
What has already been said regarding the means element is what offers itself on the question; not a single, absolutely not a single trace of reorganisation was visible. It does not seem to the court that, in face of the objective elements available – no testimonial, expert or party declaration evidence was produced nor was a single document attached, whether a project or a plan, study, presentation, prospectus or simple announcement that would illustrate any intention of business reorganisation – can only be concluded that at the very least predominantly everything indicates that the establishment of A…, SGPS was aimed at obtaining tax advantage and this purpose is not desired by Law, the provision of article 38-2 of the LGT says so.
Finally, the applicant objects that the TA did not analyse the sanctioning element, i.e. the application of the enactment of the norm which is materialised with the concrete definition of the effects of ineffectiveness on the acts analysed, which leads to assessing the defect that the Applicant points at, as a subsidiary title, to the impugned act and which it designates as "error in notification of the impugned liquidations" which were directed to it.
Regarding the effects that the CGAA should produce, Lopes Courinha[14] observes that "the tax effects considered ineffective by the CGAA should be solely those which directly realise the tax advantage" and concludes by stating that "to disregard the overall effects of avoidance transactions is, in addition to being counterproductive, unsustainable and scarcely admissible in consideration of the express purpose of the CGAA – to prevent the circumvention of law". As a solution he proposes the resort to reconstruction of the transaction, which is a methodology of legal dogmatics, which follows the following guidelines: (i) avoid the effects of that operation from repercussing beyond what is absolutely necessary; (ii) adopt in that operation a substantive perspective, from an economic viewpoint, as is proper to the treatment of transactions by tax law (article 11-3 of the LGT) and (iii) seek the result equivalent to that which would be produced without the use of the artifice used. In a sense that is not divergent, Leite de Campos et al.[15] emphasise that the transactions underlying the application of the anti-abuse clause "are not null or voidable, they are simply ineffective in the tax sphere" but this does not affect the legal validity of the transaction, which produces all its civil effects, as tax law "accepts and recognises the pre-existing legal reality", limiting itself to denying that the effects of the transaction are produced in its sphere of action.
Note that the CGAA does not overlap with simulation, in which the parties declare to celebrate a certain transaction, when underneath it exists another that is intended to be effectively conducted (article 39 of the LGT)[16], nor does it overlap either with deficient legal qualification of tax facts as in those situations there will be only the need to carry out its qualification in accordance with tax characterisation (article 36-4 of the LGT); the CGAA applies precisely in cases where neither the tax requalification nor the simulation regime have application, as these disciplines, when they can be applied, prevail[17].
If the position of the doctrine is well understood, it is believed that it pronounces itself in the sense of considering that tax Law acts solely to ensure the realisation of tax interests, and should reduce the action of its acts to what is indispensable. It is believed that this is proportioned if the TA makes the income tax directly apply to the holder of income, avoiding that the private legal relationship comes to be affected by the exercise of the right of recourse, based on an act that in light of private law remains lawful.
Recent case law, however, has shown itself divided, with decisions in divergent senses. In the judgment of the Arbitral Court in the CAAD of 24-11-2014, in case no. 379/2014, it was decided to constitute as illegality the liquidation of income tax to the tax substitute, understanding that "as the elimination of these tax advantages is the expressed objective of the general anti-abuse clause, the recipient of the application of this clause, the one in whose patrimony the effects of the application will be produced, cannot but be the one who benefited from these tax advantages.". In concordant sense, in the judgment of the Arbitral Court in the CAAD of 07-01-2016, in case 335/2015, it was understood that "in truth, it is concluded from the final part of no. 2 of article 38 of the LGT, in the wording of Law no. 30-G/2000, that the general anti-abuse clause does not aim merely to assign to the Tax Administration compensation for acts that have caused it loss of tax revenue, but rather aims, concurrently, to eliminate the illegitimate tax advantages that someone obtained, which shows that it is underpinned by concerns of equality and tax justice, which can only be satisfied with the imposition of the omitted taxation on those who obtained these advantages.", adding further that "What boils down to, by the very nature of the withholding obligation, the application of the general anti-abuse clause, dependent on a posteriori verification of the requirements for its application, cannot originate withholding obligations that did not exist at the moment the abusive acts or transactions from which an illegitimate tax advantage emerged were conducted, in light of the factual and legal circumstances existing at that time."
In divergent sense, in the judgment of the Arbitral Court in the CAAD of 22-05-2015, in case no. 377/2014 (in concordant sense with this see also the judgment of the Arbitral Court in the CAAD in case no. 173/2015, of 04-11-2015), it is noted that "art. 38, no. 2 of the LGT makes autonomous two phenomenologies, both at the level of hypothesis and at the level of enactment"; in the first provision of the norm is posed the hypothesis of the acts being aimed at obtaining the avoidance consubstantiated in the reduction, elimination or temporal deferral of taxes and for these situations, taxation should be carried out in accordance with the applicable norms in the absence of the artificial, fraudulent or abusive acts. In turn, the second normative provision is filled by situations in which the avoidance acts aim at the obtaining of tax advantages that would not be achieved, without use of these means, regarding which the consequence is that the referred tax advantages are not produced. In summary, when the acts aim at the optimisation of the tax value, taxation shall be carried out abstaining from these acts; when the acts aim at tax advantages, those advantages will no longer be produced.
In that line of orientation and considering that in the case the taxpayer used fraudulent or artificial means, the arbitral tribunal understood that the carrying out of taxation in accordance with the applicable norms pursuant to the enactment of no. 2 of article 38 of the LGT had as a consequence the assumption by the Applicant of the role of tax substitute in accordance with the provisions of tax law relating to taxation in income tax of dividends, contained in the provisions of articles 71, no. 1, al. c) and 101, no. 2, al. a) of the CIRS, the paying company thus becoming the recipient of the liquidation resulting from the disregard, for tax purposes, of the abusive acts and legal transactions, as it was she who emerged as the debtor entity and who placed at the disposal, with evasive intents, the payment of debts or entries in capital increases, the patrimonial increases that in fact were due directly to the shareholders themselves. Concluding, the presupposition of the obligation to proceed with the withholding, pursuant to the invoked norms, was formed in relation to the substitute.
And it considers that it should be thus – with taxation falling on the substitute – because the taxation of dividend income operates by withholding as a final matter, by application of a liberating rate, as provided for in the provision of article 71, no. 1, subparagraph c) of the CIRS, with the nature of liberating payment (although with possibility of option for inclusion, pursuant to article 71, no. 6 and article 22, no. 3, al. b) of the CIRS). It also understands that it results from the very enactment of the CGAA that by prescribing the application of taxation corresponding to the avoidance act (as is referred to at the end of no. 2 of article 38 of the LGT), that the tax should be exacted from the tax substitute who cannot but be covered by the enactment of the norm, which is entirely applicable to it.
The judgment given in case no. 377/2014T which has been being cited, also responds to the criticisms that are usually made to the thesis it incorporates, namely the "affecting of the patrimonial position" of the substitute and the taxation in accordance with the contributive capacity of the tax substitute. With this intent it states that the solution results from the proper functioning of tax substitution, namely from the regime applicable to the relationships between substitute and substituted, which presuppose the existence of the "right of recourse" and that it is through this that the connection is obtained between the tax applied to the substitute and the contributive capacity to be taken into account, which is that of the substituted. It also considers that the exercise of the right of recourse is of mandatory exercise by the substitute when this is a liable person of IRC as was the case of the tax substitute in the proceedings in question (45-1-c of the then current CIRC).
There is now a need to take a position.
Notwithstanding the weight of the arguments on which the two orientations contained in the jurisprudence referred to are anchored, it is believed that the most correct solution passes through the interpretation of the provision of article 38-2 of the LGT in the sense that it should privilege the solution that best achieves the fundamental reason for the provision and which is the removal of the tax advantages provided by the abusive use of the legal construction in question.
Although it is true that the decomposition of article 38-2 of the LGT can reveal the coexistence of two hypothetical situations admissible with different purposes (the reduction, elimination or temporal deferral of taxes on one hand or on the other the obtaining of tax advantages) it is no less true that the element aimed at is, in any case, the obtaining of tax advantages, which can be consubstantiated by any one of the expressed manifestations or by others understood in this concept. For all the referred tax advantages, typical or atypical, the consequence is the same: the ineffectiveness of the transactions and the non-production of the advantages.
Although in the interpretation of the precept excessive relevance should not be attributed to the literal element, it should be noted that the two typical situations that are presented in the factual species of the norm are linked by the disjunctive conjunction or, whilst the enactment of the norm contains two segments connected by the copulative conjunction and, which is consonant with the idea that two consequences were not foreseen for two hypotheses but a sole result for all hypotheses.
As the elimination of tax advantages is the immediate objective that the CGAA intends to achieve, the recipient of its application, the one in whose patrimony the effects of ineffectiveness will be produced, must be the one who actually benefited from those advantages. In situations where the tax in question should have been withheld and was not, the actual beneficiary is the tax substituted, who is the true recipient of the obligation to pay the tax and not the tax substitute, to whom it was certainly incumbent, the operation of withholding and delivery to the State, without this constituting any burden for it. Now in the same way that the operation of withholding and delivery to the State of the tax brings no burden to the substitute, the lack of its obligation to withhold the tax does not bring to it any benefit either, as this has effects solely on the holder of income, who remained with the tax advantage of not being taxed.
It should also be noted that the tax substitute not only did not benefit from the operation but if it is attributed to it in the first place the responsibility for payment of the withholding of the tax, this will result in it ending up bearing twice the same burden, whilst the holder of income ends up bearing no tax. In any case, let it not be said that the substitute is entirely exonerated of any responsibility; it is not so. The tax substitute is secondarily liable for payment of the tax that should have been withheld (article 28-2 of the LGT), with reversal operating against it in the fiscal enforcement proceedings (article 23-1 of the LGT). It should be noted that the substitute would not even enjoy the guarantees that are normally associated with tax debts, as it would be forbidden the resort to sub-rogation, which presupposes that the substituted is the debtor of the tax (article 91 of the CPPT), as well as the prerogative of conducting the fiscal enforcement itself against the holder of the income.
Of course, one could think that tax Law is indifferent to this issue, which concerns only the holder of income and the tax substitute who should have effected the withholding. It is not so. The State's tax activity is destined to provide means for the satisfaction of its needs but also aims at justice in the distribution of income and wealth (article 103-1 of the CRP). It is evident that tax revenue must be guaranteed but will there be better guarantee than having the two entities committed to payment, the holder of income via enforcement and the tax substitute via reversal?
It is not believed that this interpretation obeys a merely utilitarian model as may appear at first sight; rather, it is inspired in the most traditional Portuguese doctrine and is rooted in the general provisions on legal interpretation, namely the provisions of article 9 of the Civil Code, in consonance with article 11-1 of the LGT which impose the search for the legislative intent or the reason for being of the norm and when the interpreter is confronted with several equally possible meanings, says Manuel de Andrade[18], he must prefer that one, which proves to be "more salutary and produces the most beneficial effect". It seems consensual that the ratio of the CGAA is the restoration of the normality that the abusive use of certain legal instruments perverted. Now this normality cannot but consist in: (i) the State collects the tax that the adequate use, from an economic perspective, of the said instruments provides; (ii) that taxation falls on the one who should bear it. Withholding, tax substitution, right of recourse, sub-rogation, enforcement and all the legal-technical figures are not in themselves Law but solely the means that this creates to achieve its objectives. And ultimately it is in light of the objectives to be achieved that interpretation must be guided.
Jorge Lopes de Sousa (in a dissenting vote in the judgment of case no. 377/2014T, cited) further considers, regarding the interpretation he defends, that the tax should fall on the tax substituted: "this is the only interpretation that is compatible with the (...) principle of taxation with respect for material justice (article 5, no. 2, of the LGT)." And he advances other arguments, which in general are considered valid and to which this Court adheres, to support the orientation he defends, among them the impossibility of exercising the alleged right of recourse and the need for special tax procedure for there to be ineffectiveness of abusive transactions (article 63-7 of the CPPT).
From the foregoing it follows that the TA could not direct to the Applicant the impugned liquidations, which would have to fall on the holders of the income created by the application of the CGAA contained in the provision of article 38-2 of the LGT.
Concluding, although the presence of all the requirements on which the application of the CGAA depends is verified, the TA did not draw the necessary consequences from them and so its action was illegal and must be annulled, as the Applicant requests.
V/b. Costs with guarantee
The Applicant also petitions that the TA be condemned to pay indemnity for improper provision of guarantee, for all costs incurred until its lifting, or subsidiarily, at least for the amount of € 10,781.27, already demonstrably incurred.
In the judgment of the factual matter it was established that on 23 July 2015, at the request of the Applicant, J…, S.A. issued a document designated as "Bank Guarantee N…", up to the maximum amount of € 1,550,919.66, in favour of the Tax and Customs Authority, intended to "provide security for the suspension of Fiscal Enforcement Proceedings nos. …2015… and …2015…" and that on 24 July 2015, J…, S.A. proceeded to debit from the bank account of which the Applicant is the holder, the costs inherent to the issuance of that bank guarantee, in the amount of € 10,781.27.
Pursuant to the provision of article 100 of the LGT "the tax administration is obliged, in case of full or partial success of claims or administrative appeals, or judicial proceedings in favour of the liable person, to the immediate and full restitution of the situation that would exist if the illegality had not been committed". In turn the provisions of article 53-1 and 2 of the LGT provide for compensation by the TA, for the costs of the guarantee borne by the liable person, and the proceedings to which the exercise of this right is subject can be seen in article 171 of the CPPT.
It is, however, important to assess whether this Arbitral Court has competence to recognise this right to the Applicant or to condemn the TA in this sense. For this it is important to bear in mind that (i) with the RJAT it was intended to strengthen effective protection of the rights and legally protected interests of liable persons (preamble to Decree-Law no. 10/2011 of 20 January); (ii) the imperative character of arbitral decisions, which for the TA has the extent provided for in the exact terms of those same decisions (article 24-1 of the RJAT); (iii) the obligation of restitution by the TA is subordinate to the very scope of the success of the claim, which can be full or partial (article 100 of the LGT).
The first interpretive element cited prevents one from conceiving any system that obstructs or hinders that the arbitral decision achieves its objective, which is the definition of the right in the specific case. The protection of the rights of liable persons is not satisfied with less, i.e., from the decision must result all the consequences necessary to obtain legality. It cannot be conceived that once the illegality of the tax act is declared by the arbitral tribunal, the liable person still has to resort to another instance to see declared its right to restitution of the situation.
On the other hand, the second element - the imperative nature of arbitral decisions - leads to considering that as arbitral decisions are imperative in their exact terms (article 24-1 of the RJAT), this means that these decisions must contain all the elements necessary for the TA to be able, with complete exactness, to restore legality and for this it is indispensable that the decision contains the precise limits and terms in which it judges.
The third element – the scope of restitution - actually illustrates this need for exactness or precision of the decision. By stating that the obligation of restitution by the TA is subordinate to the very scope of the success of the claim, the law (article 100 of the LGT) creates a nexus of dependence between the annulling decision and the obligation of restitution. Restitution is made to the extent that the claim is judged successful. There is no restitution without success and the measure of success defines the measure of restitution. The need for this precision is very clear in cases of partial success. When partial success occurs, how should the TA behave? The answer can only be one – in the exact terms and limits in which the decision was rendered, whether it be judicial or arbitral.
From the foregoing it follows that the decision on restitution should be taken by the arbitral tribunal when it is asked to assess the question, pursuant to the law and that in the case of indemnity for improper bank guarantee it is those contained in article 171 of the CPPT, and the provision of its number 2 should be interpreted in the sense of considering the request for arbitral decision among the means of challenging the act provided for in that command.
As in these proceedings it was established that the Applicant bore costs with the bank guarantee, provided to secure a fiscal debt that after all did not exist, in the amount of € 10,781.27, it has the right to full restitution of the situation that would exist if the liquidations had not been made, and so should be indemnified that amount.
VI. DECISION
Considering the factual and legal elements collected and exposed, the arbitral tribunal decides to judge the request for arbitral decision successful and in consequence:
a) Declare the illegality of the two IRS liquidations identified in the proceedings, annulling them in consequence;
b) Condemn the Tax and Customs Authority to payment to the Applicant of the value of € 10,781.27, as indemnity for the costs borne with the improper bank guarantee.
The Tax and Customs Authority is condemned to payment of the costs, which are assessed in an autonomous chapter.
VII. VALUE OF THE PROCEEDINGS
In accordance with the provision of article 306-2 of the CPC, under article 29-1-e) of the RJAT and article 97-A, no. 1-a) of the CPPT under article 3-2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is set at € 1,226,909.34 (467,879.44 + 748,248.63 + 10,781.27).
VIII. COSTS
The costs are borne by the party which caused them, it being understood that the losing party causes them (article 527-1 and 2 of the CPC). In these proceedings and considering the said rule, responsibility for costs is that of the TA, as the losing party.
Pursuant to article 22-4 of the RJAT, the amount of costs is set at € 16,830.00, which is borne by the Tax and Customs Authority, pursuant to Table I attached to the Regulation of Costs in Tax Arbitration Proceedings.
Lisbon, 30 June 2016
The arbitrators,
(José Baeta de Queiroz, presiding arbitrator)
(Alexandra Gonçalves Marques)
(Nuno Maldonado Sousa)
Text prepared by computer, pursuant to article 131, no. 5 of the Code of Civil Procedure, applicable by referral from article 29, no. 1, subparagraph e) of the RJAT.
[1] In this document the following acronyms, abbreviations and initials are used, with the meaning indicated:
- TA: Tax and Customs Authority
- CGAA: General anti-abuse clause provided for in article 38-2 of the LGT
- CIRS: Income Tax Code for Individuals
- CPC: Code of Civil Procedure
- CPPT: Code of Tax Procedure and Process
- CRP: Constitution of the Portuguese Republic
- DL: Decree-Law
- IRS: Income Tax for Individuals
- LGT: General Tax Act
- NIF: Tax identification number
- R-TA: Reply of the TA
- RI: Initial Request of the Applicant
- RJAT: Legal Regime for Tax Arbitration instituted by DL no. 10/2011 of 20 January
- SGPS: Company managing equity participations.
[2] Gustavo Lopes Courinha – The general anti-abuse clause in tax law: contributions to its understanding. Coimbra: Almedina, 2009, pp. 167-168.
[3] Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa - General Tax Act: annotated and commented. 4th ed., Lisbon: Encontro de Escrita, 2012, pp. 309-310.
[4] See paragraph 36 of the RI.
[5] Preamble to Decree-Law no. 495/88 of 30 December which defines the legal regime of companies managing equity participations.
[6] Ut. 7-12.
[7] Gustavo Lopes Courinha, op. cit., pp. 171-172.
[8] Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, op. cit., p. 311.
[9] Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, op. cit., pp. 308-309.
[10] Gustavo Lopes Courinha, op. cit., pp. 176-183.
[11] Jorge Lopes de Sousa - Code of Tax Procedure and Process: Annotated and commented. Vol. I. 6th ed., Lisbon: Áreas Editora, 2011, pp. 581.
[12] In the sense of the omission of this requirement in the Portuguese legal order, see Gonçalo Avelãs Nunes – "The general anti-abuse clause in tax law – article 38, no. 2 of the General Tax Act – in light of constitutional principles of tax law" in Taxation, no. 3, ISG, July 2000, pp. 56-58.
[13] Gustavo Lopes Courinha, op. cit., pp. 185-197, in particular p. 187 and p. 189.
[14] Gustavo Lopes Courinha op. cit., pp. 201-202.
[15] Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, op. cit., pp. 305-306.
[16] A contract of sale and purchase of real estate (subject to IMT at the maximum rate of 6.5%) is celebrated when it is intended to contract a donation (taxed in IS at the rate of 10% by item 1.2 of the TGIS).
[17] Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, op. cit., pp. 302-304.
[18] Manuel A. Domingues de Andrade - Essay on the theory of interpretation of laws. 4th ed., Coimbra: Arménio Amado Editor, 1963, pp. 26-27.