CAAD Case 487/2017-T: IRC Capital Losses, Shareholder Loans Waiver & Related Party Transactions

Arbitral Decision

The arbitrators Fernanda Maçãs (chairman arbitrator), João Taborda da Gama and Luís M. S. Oliveira (member arbitrators), appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, hereby agree as follows:

Report

1. A..., SA, NIPC ..., currently with registered office at ..., ..., ..., ..., ..., ...-... – ... hereby, pursuant to article 2, paragraph 1, letter a), article 10, paragraph 1, letter a) and paragraph 2, of Decree-Law no. 10/2011, of 20 January, and articles 96 et seq. of the Code of Tax Procedure and Process (CPPT), submits a request for constitution of an arbitral tribunal and for an arbitral ruling, with cumulation of claims, having as its immediate object the rejection of two administrative appeals (one concerning the year 2012 and another concerning the years 2013 and 2014) and as its mediate object additional assessments of Corporate Income Tax (IRC) for the years 2012, 2013 and 2014, in the total amount of EUR 2,476,120.02, hereinafter indicated:

• Additional assessment no. 2016..., concerning the year 2012, in the total amount of EUR 1,284,652.65, comprising EUR 1,155,604.84 of tax and EUR 129,047.81 of compensatory interest;

• Additional assessment no. 2016..., concerning the year 2013, in the total amount of EUR 900,686.68, comprising EUR 817,718.07 of tax and EUR 82,968.61 of compensatory interest;

• Additional assessment no. 2016..., concerning the year 2014, in the total amount of EUR 290,780.69, comprising EUR 279,117.11 of tax and EUR 11,663.58 of compensatory interest;

1. The Claimant submitted, on 01/09/2017, a request for an arbitral ruling with a view to the annulment of the additional Corporate Income Tax assessments concerning the years 2012, 2013 and 2014 identified, in the total amount of EUR 2,476,120.02, with all other legal consequences.

2. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority.

3.1. The Claimant did not proceed with the appointment of an arbitrator, whereupon, in accordance with the provisions of letter a) of paragraph 2 of article 6 and letter b) of paragraph 1 of article 11 of RJAT, the President of the Deontological Council appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the deadline.

3.2. The parties were notified of the appointment of the arbitrators and did not raise any objection.

3.3. In accordance with the provision in letter c) of paragraph 1 of article 11 of RJAT, the collective arbitral tribunal was constituted on 23 November 2017.

3.4. In these terms, the Arbitral Tribunal is regularly constituted to appraise and decide the object of the case.

1. To substantiate the request for an arbitral ruling, the Claimant alleges, in summary:

A – Regarding the transaction of sale of shares of B...

• That the Tax Authority does not present a single fact that permits sustaining that the waiver of receipt of supplements by A... aimed at objectives foreign to its own business interest in such terms as would permit sustaining the claimed non-verification of the requirement of indispensability of the expense provided for in article 23 of CIRC;

• For the Claimant, this operation, including the waiver of the credit, neither had nor could have had any underlying intent of gratuity or of gratuitously benefiting anyone, nor were merely fiscal intents that justified it, and if the Tax Authority intended to disregard the operation it would have the possibility of using the anti-abuse mechanism provided for in article 38, paragraph 2 of the General Tax Law, which it manifestly did not choose to do;

• It argues in its defense the situation of crisis installed in the business fabric, particularly as it referred to real estate activity, from 2009/2010 onwards, with high accumulated losses and consequent difficulties in access to credit and with article 35 of the Commercial Companies Code imposing measures for injection of credit, whereby everything combined led to A... having only one way out being to sell its subsidiary B... and, for that purpose, it had to use the means it had at its disposal among which the use of the credit from supplements it held over it;

• According to the Claimant, the alternative was surely the loss of that credit and the loss of the company itself without any consideration, terms in which such an option cannot fail to be qualified as an acceptable decision from a business perspective and, as a consequence, absolutely justifiable and framing within the concept of "cost" to which article 23, paragraph 1, of CIRC refers;

• The Claimant argues that the alienation of shares of B... was preceded by two valuations by independent experts registered with CMVM, which set the average value of the company at approximately 16 million euros, and in this value was considered the coverage of losses;

• As to the grounds invoked in the Inspection Report to sustain the corrections based on double utilization of the same losses, invoking case law, particularly the Decision of the Supreme Administrative Court of 18.06.2013, proc. 01265/12, since A... deducted the costs of the losses and B..., in addition to benefiting from the waiver of supplements, would also have the right to deduct the fiscal losses of prior years covered by A..., the Claimant argues that the situation in the case is different from that referred to in the mentioned decision, inasmuch as paragraph 8 of the cited article 52 of CIRC, in the wording in force in 2012, prevented B... from deducting the fiscal losses of prior years since there was a change in the ownership of more than 50% of its share capital;

• The Claimant further contests the understanding defended by the Defendant regarding the meaning and scope of article 23 of CIRC, invoking in its favor particularly the Decision of the Central Administrative Court of the North of 13.09.2013, process 00595/06.5BEPNF, which dealt with a tax situation very similar to that which constitutes the object of the present challenge, where it was held that "it is unlawful and the part of the additional assessment resulting from the non-admission of the cost corresponding to the loss recorded on the cession of supplements for a value lower than that at which they were effected must be annulled (in the case dealt with in this decision the waiver had been partial), if from its grounds it results that it did not take into account either the relationship between the underlying business and the corporate purpose nor inquired into and evaluated the circumstances that determined it";

B – Regarding the transaction of sale to the directors of the Claimant of its shareholdings in the capital of C...

• It contests the reasoning of the Inspection Report, since all the substantiation to support the corrections proposed in the situation under analysis reduces to the invocation of tax planning maneuvers, completely disregarding the analysis of the requirements of indispensability of costs to which article 23 of CIRC refers and which regarding another situation it had already invoked;

• Contrary to what is suggested or affirmed by the Tax Authority, the operations carried out before and after 2005 by the company "D..., SA" when it acquired real estate property, by C... after that year selling that property and more recently by A... with the sale in 2012 of the shares it held, were, in the thesis of the Claimant, normal operations of companies whose corporate purpose is the pursuit of profit and whose duties include, among others, the proper management of its assets;

• It argues that the Tax Authority goes no further than suppositions that everything was nothing more than an operation of abusive tax planning but presents no fact that even permits establishing well-founded doubt that one is dealing with a case of undue obtaining of fiscal advantages, rising up particularly against the conclusions that the Tax Authority seeks to draw from the Inspection Report, particularly regarding the artificial formation of the price of sale of the shares;

• It contests the appeal made in the Inspection Report to the anti-abuse mechanism resulting from the conjunction of article 23, paragraph 5 with letter c) of paragraph 4 of article 63, equally of CIRC (wording in force in 2012), and the inspection report neither inquired into, nor presented, nor proved the requisites for the said anti-abuse norm to be applicable to the situation under review.

• According to the Claimant, tax law neither prohibits nor could prohibit, on pain of serious intrusion, hindrance to economic development and unacceptable discrimination between economic operators, that there be economic relations between entities linked by the said "special relationships", particularly between commercial companies themselves and the holders of their capital, with members of their corporate bodies and their respective family members, between economic groups, between the varied situations typified in the cited paragraph 4 of article 63 of CIRC;

• What is intended to be prevented with the said anti-abuse norm – which is totally justifiable to protect healthy competition between operators, whether on the economic plane or on the tax plane – is that in the economic relations that take place, terms should not be agreed that are different from those that would be practiced in the market between independent operators that have nothing to do with each other;

• It raises the unconstitutionality of the presumption established in letter c) of paragraph 4 of article 63 of CIRC when, conjugated with paragraph 5 of article 23 of the same Code, determines that the alienation of shares to members of the corporate bodies of the alienator involves always a situation of fiscal abuse, dispensing the Tax Authority from effecting any proof in that sense and impeding the interested parties from proving the contrary, because it leads to an irrebuttable presumption violating the principle of legality and also of contributory capacity;

• It invokes in its favor regarding the concept of "special relationships" as is the case, for example, of the decision of the Central Administrative Court of the South of 17.03.2016, proc. 04412/10 and the recent Decision no. 211/2017, of 2 May, of the Constitutional Court, which came to reaffirm the unconstitutionality of absolute or irrebuttable legal presumptions, by violation, namely, of the principle of equality provided for in article 13 of the Constitution and of its corollary of contributory capacity.

1. The Tax and Customs Authority submitted a reply and attached the inspection file, invoking in summary:

A – Regarding the alienation to the Real Estate Investment Fund (closed) E... of the shareholding representative of the entirety of the share capital of B... divided into 200,000 shares:

• That "the Claimant determined, as a result of the operations of alienation of shares of B... and the waiver of supplements, a book loss of EUR 14,227,622.89 and a fiscal loss of EUR 15,311,604.39, having influenced the determination of taxable profit in 50% of its value, i.e., in EUR 7,655,802.20, by force of the provision of paragraph 3 of article 45 of the Corporate Income Tax Code.

• "(…) The Claimant proceeded with the calculation of the loss, as if the cost of acquisition of the shares comprised, in addition to its original value, the value of supplements rendered and cancelled prior to the alienation, which amounted to EUR 13,413,685.39 (including accrued interest), having thus determined an overall loss of EUR 14,227,622.89.

• "However (…), prior to the alienation of the shares, the Claimant waived reimbursement of the supplements, in accordance with the resolution of the General Assembly of B..., which means that it cancelled the value of the credit recorded in assets, therefore, it could not have added such value to the original cost of acquisition of the alienated shares.

• "For this reason, the Inspection Authority understood that there were two distinct operations, albeit interrelated, whose tax effects impose a separate analysis: on the one hand, the patrimonial loss caused by the decision to waive supplements must be subjected to the test of the requirement of indispensability required by the body of paragraph 1 of article 23 of the Corporate Income Tax Code; and, on the other, the loss determined in the onerous transmission of shares must be subsumed in the regime applicable to gains and losses realized provided for in articles 46 to 48 and 45, paragraph 3, of the same Code."

• It contests the option of the Claimant "to waive reimbursement of supplements and simultaneously proceed with the cancellation of the credit over B..., which resulted, in substance, in a debt forgiveness, inasmuch as there was no conversion of the credit into an additional entry for own capital and, therefore, the amount of the financial investment constituted by the original cost of acquisition of the shares was not altered."

• "In contrast, in company B..., the cancellation of a debt (liability) took place and the recognition of an income or a positive patrimonial variation corresponding to debt forgiveness, which compensated the accumulated losses in the Retained Earnings account".

• It further contests the allegation of the Claimant that the value of B... was unique and resulted from effective valuation by independent experts and that the parties merely accommodated the data at their disposal to carry out the operation. Not only did the price actually practiced and paid by the Closed Real Estate Fund E..., of EUR 10,640,000, relate solely to the shares, as it shows a high deviation relative to the average value of EUR 16,120,500, resulting from the two valuations, with the selling party also assuming the loss of the supplements.

• "As is stated in the Inspection Report, "It is necessary to bear in mind that supplements constitute for A... an asset, and waiving their reimbursement is equivalent, in practice, to renouncing a right, with the same effect that renunciation of any other asset would have, and which translates into a patrimonial loss. One situation is the destination given to them by B... (coverage of losses); another situation is the impact that this decision taken by A..., which is the sole shareholder, caused in its own financial statements, and which translated into a loss, with reflections in the decrease of accounting and fiscal results (by 50%)."

• "Accordingly, the loss caused by the waiver of reimbursement of supplements does not meet the legal requirements for its deductibility set out in paragraph 1 of article 23 of the Corporate Income Tax Code, namely that of indispensability, since it was borne for the benefit of third parties – the acquirer of the shares and B...".

B – Regarding the Sale by the Claimant of the shareholding held in C...:

• It alleges that "The five purchase and sale contracts of shares representative of the entirety of the share capital (divided into 10,000 shares) of C... were entered into on 30.11.2012, with the directors of the Claimant as acquirers, with one of them acquiring 89.98% of the shares for EUR 31,493.00, two acquiring 5%, for EUR 1,750.00 and the remaining two 1 share each for EUR 3.50.

• "The operations carried out between the company – the Claimant – and its directors reveal that whoever decided its implementation acted in the dual capacity of seller and buyer, a situation that reveals the lack of independence in the fixing of the terms and conditions under negotiation, hence paragraph 4 of article 63 of the Corporate Income Tax Code considers the existence of special relationships between "An entity and members of its corporate bodies, or of any management, administration, direction, management or oversight bodies, and their respective spouses, ascendants and descendants".

• According to the Defendant, "this operation generated, in the sphere of the Claimant, a book loss of EUR 6,306,062.67 (EUR 6,341,062.67 – EUR 35,000.00) and a fiscal loss of EUR 7,130,400.82, having influenced the determination of taxable profit in 50%, i.e., in EUR 3,565,200.41, by force of the provision of paragraph 3 of article 45 of the Corporate Income Tax Code.

• Now the provision of paragraph 5 of article 23, in the wording at the time of the facts, provided that: "Also not accepted as expenses of the taxation period are those incurred with the onerous transmission of shares of capital, whatever the title by which it operates, to entities with which there are special relationships, pursuant to paragraph 4 of article 63, or to entities resident in Portuguese territory subject to a special taxation regime, as well as losses resulting from changes in the valuation model relevant for tax purposes, pursuant to paragraph 9 of article 18, which arise, in particular, from accounting reclassification or changes in the assumptions referred to in letter a) of paragraph 9 of this article."

• In its favor, the Defendant invokes the Decision of the Supreme Administrative Court (of 08/01/2014, proc. no. 0437/13 and in line with prior case law (cf. decision of the Supreme Administrative Court of 11/02/2009, Process no. 862/08) which decided that:

"II - In the application of the then paragraph 7 of article 23 of the Corporate Income Tax Code to the case at hand, there is no need to consider whether the conditions observed in the onerous transmissions that gave rise to the negative patrimonial variations were identical or diverse from those that would be practiced between independent entities, since "(…) for the application of the norm of paragraph 7 of article 23 of the Corporate Income Tax Code, it is irrelevant or immaterial the circumstance "of those conditions being different or the same as those that would be agreed between independent entities", since this norm does not include in its provision "those conditions", rather, it simply establishes the non-acceptance "as costs or losses of the year of those incurred with the onerous transmission of share capital" to entities with which there are "special relationships".

III - Such application of the then paragraph 7 of article 23 of the Corporate Income Tax Code does not appear to violate the Fundamental Law or the principles of proportionality and necessity."

• Against the argument of the Claimant to the effect that it is an irrebuttable presumption violating the principle of legality and also of contributory capacity and consequently excluded both by the Constitution and by article 73 of the General Tax Law, the Defendant invokes the case law of the Constitutional Court – Decision No. 753/2014.

1. As there were no reasons justifying it, the Tribunal, by order of 4 February 2018, dispensed with the holding of the first meeting provided for in article 18 of RJAT, which it did under the principle of the Tribunal's autonomy in conducting the case.

2. On the same date an order was issued with the following content:

"1. Following the request made at the end of the arbitral request regarding witness testimony, the Claimant, in addition to the already appointed witness, indicated witnesses F..., NIF ... and G..., NIF ....

1. In response, the Defendant Authority objected on the basis that article 552, paragraph 2, of the Code of Civil Procedure requires presentation of the list of witnesses with the Petition.

2. In addition to that same provision admitting alteration of the probative request after submission of the reply, pursuant to the provision of article 598, paragraph 2, of the same normative, "the list of witnesses may be added to or altered up to 20 days before the date on which the final hearing takes place".

3. Terms in which the request of the Claimant is granted.

Let both parties be notified of this order."

1. The hearing took place on 23 February at 10 a.m., with the questioning of the witnesses indicated by the Claimant.

The Tribunal notified both parties to submit written arguments in succession within 15 days and set 23 May 2018 as the date for pronouncement of the arbitral decision.

The Claimant and the Defendant submitted arguments, reiterating, in essence, the legal arguments presented in earlier procedural documents.

1. On 19 May 2018, an order was issued setting 23 July 2018 as the final deadline for pronouncement of the arbitral decision.

On 21 July 2018, a new order was issued, setting 23 September 2018 as the final deadline for pronouncement of the decision.

Preliminary Examination

10.1. The parties have legal personality and capacity, show themselves to be legitimate and are regularly represented (articles 4 and 10, paragraph 2, of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

10.2. The tribunal is competent and is regularly constituted.

10.3. The cumulation of claims is admitted regarding the additional assessments indicated, notwithstanding that the present challenge has as its immediate object two administrative appeals, since its mediate object is additional Corporate Income Tax assessments levied on the basis of the same grounds. In summary, the success of the claims formulated by the Claimant depends essentially on the appraisal of the same factual circumstances and the interpretation and application of the same legal principles or rules.

10.4. The case does not suffer from nullities.

10.5. No exceptions were raised.

10.6. There are no circumstances that prevent consideration of the merits of the case.

Merits

III.1. Matter of Fact

1. Proven Facts

11.1. With relevance for the appraisal and decision of the issues raised, preliminary and on the merits, the following facts are taken as established and proven:

A – Regarding the transaction of sale of shares of B...

An external inspection procedure was activated against taxpayer A..., SA, (A...), in compliance with Service Order no. OI2015..., of 2015/08/12, with order of 2015/08/13 and pursuant to the provisions of articles 2, paragraph 1 and 2, letter a) and 12, paragraph 1, both of the Supplementary Regime of the Procedure for Tax and Customs Inspection (RCIPTA);

• A... is described in the Commercial Registry Office of Lisbon-... section, and has as its object the "purchase, sale or rental of real estate and the realization, promotion and management of developments, as well as the construction, promotion, marketing and management of buildings or parts thereof and also urban planning consultation and advice and direction and supervision of works and undertakings. The company may also engage in the resale of real estate acquired for that purpose and the purchase and sale of shareholdings in companies with the same or different objects";

• The additional assessment concerning the year 2012 results from a correction to the taxable income declared for this year in the amount of EUR 9,256,994.74;

• This increase in taxable income was based on the following values (in euros) (See Inspection Report, particularly the summary table on page 78):

Declared taxable profit ..................................... 26,755,935.85

To be added:

• Of fiscal losses – supplements B...: 6,706,842.70
• Of fiscal losses – shareholdings C...: 3,565,200.41

Total to be corrected ........................................ 10,272,043.11

Corrected taxable profit ................................... 37,027,978.96

Fiscal losses permitted to be deducted .................... 27,770,984.22

Corrected taxable income ................................... 9,256,994.74

• These corrections had repercussions in the years 2013 and 2014 (…), with disregard of fiscal losses that had been deducted by the now claimant that gave rise to corrections of, respectively, EUR 4,675,875.52 and EUR 1,733,646.65;

• On page 14 of the Inspection Report, the figures for the purchase and sale of shares of B... and how the loss was determined, are as follows:

Cost of acquisition of shares in 2005: EUR 11,453,937.50;

Price of sale of shares in 2012: EUR 10,640,000.00

Value of supplements held by A... in B...: EUR 13,413,685.39;

Book loss: EUR 14,227,622.89;

• On 27 July 2012, a contract for purchase and sale of shares was entered into between A... and B..., as first parties, and the Investment Fund E..., as second party, by which, among other things, A... sells to E..., for the price of EUR 10,640,000.00, the 200,000 shares it held and which represented 100% of the share capital of said B...;

• As a result of this operation, E... became the holder of the entirety of the share capital of B...;

• In the context of the sale operation, a capital increase reserved for the new shareholder E... was resolved and it was further resolved to waive reimbursement of supplements in order to cover the accumulated losses;

• From the contract for purchase and sale of shares and from minutes no. 22 of the now claimant, documents 29 and 30 annexed to the Inspection Report (Joined to the Petition as doc. no. 4), it results that B... had an accumulated loss of EUR 14,507,395.97 and that the shareholder A... decided to reduce that loss to EUR 1,093,710.58 through the waiver of supplements it held in the amount of EUR 13,413,685.39;

• As a consequence of the operations described, a book loss of EUR 14,227,622.89 and a fiscal loss of EUR 15,311,604.39 were generated (justifying the difference in values with the application of monetary revaluation coefficients), which figure influenced the taxable result declared in EUR 7,655,802.20, that is, in 50% of the said amount of the fiscal loss (Inspection Report);

• The waiver of supplements was resolved by general assembly of B..., with the presence of the sole shareholder, the now claimant A..., duly represented, which took place on 18 July 2012, in accordance with minutes no. 22 of the same date, convened, in accordance with its respective agenda, to: i) "decide on the coverage of the losses (negative retained earnings) of the Company; ii) "decide on a capital increase of one million euros to sixty-one million euros through cash contributions of up to sixty million euros and subscription of up to twelve million new ordinary shares at the nominal value of five euros each"; and iii) "decide on the amendment of article five of the Partnership Agreement";

• It equally results from the said minutes (See point one of the agenda) that the sole shareholder, noting from the last approved Financial Statements the existence of EUR 14,507,395.97 of accumulated company losses / negative retained earnings, decided to proceed with the reduction of the same to EUR 1,093,710.58 through coverage thereof by the amount of EUR 13,413,685.39, which figure the sole shareholder held as credit over B... by way of supplements;

• The alienation of shares of B... was preceded by two valuations by independent experts registered with CMVM (document attached by the Claimant);

• A... sold 200,000 shares representing 100% of the Share Capital of the Subsidiary, for the Price of EUR 10,640,000.00, with the Contract providing for Price revision in the amount of EUR 5,490,000.00, as soon as the Development Project Plan, relating to the entire area of the Eastern Tourist Development Nucleus of ..., is approved by the Municipal Chamber of ...;

B – Regarding the transaction of sale of C... to the directors of the Claimant

• A... acquired, between 2005 and 2007, for the price of EUR 6,341,062.67, the shares of the commercial company "D..., SA", which company in 2007 came to be designated as "C..., SA (Inspection Report);

• On 31 December 2005, the predecessor of C..., said D..., promised to alienate all of its real estate property to E..., for the price of EUR 6,350,000.00, with the definitive contract being entered into on 31 January 2006 (Inspection Report);

• The members of the board of directors of A..., in the 2011-2014 quadrennium, in accordance with permanent certification, were:

• H...;

• I...;

• J...;

• K...;

• L....

• Through contracts entered into on 30 November 2012, A... sold to its directors, for the total price of EUR 35,000.00, the 10,000 shares representative of the entirety of the share capital of said C..., namely:

• A lot of 8,998 shares to H... for the price of EUR 31,493.00;

• A lot of 500 shares to I..., for the price of EUR 1,750.00;

• A lot of 500 shares to J..., for the price of EUR 1,750.00;

• One share to K..., for the price of EUR 3.50 and

• One share to L..., for the price of EUR 3.50;

• According to the Inspection Report, as a result of this alienation, a book loss of EUR 6,306,062.67 and a fiscal loss of EUR 7,130,400.82 were generated (this figure is corrected by monetary correction coefficients), which was deducted by 50% in line 769 of table 07 of the declaration model 22, that is, by EUR 3,565,200.41, which loss was disregarded pursuant to paragraph 5 of article 23 in conjunction with letter c) of paragraph 4 of article 63, both of CIRC, and subject to correction in the taxable income of 2012, with consequences in 2013 and 2014.

11.2. Substantiation of the Matter of Fact

The proven factuality was based on critical analysis of the position assumed by the parties, the documents submitted by the Claimant and not contested and the inspection file.

The witness testimony produced at the hearing did not alter the Tribunal's conviction formed by analysis of the Inspection Report and documents submitted by the Claimant.

1. There are no facts with relevance for appraisal of the merits of the case that have not been proven.

III.2. Matter of Law

III.2.1. There are two issues to be clarified in the present case:

(A) the tax treatment of losses generated in the transaction of sale of the entirety of shares of B... to Fund E...;

(B) the tax treatment of losses generated in the transaction of sale of the entirety of shares of C... to the directors of the Claimant.

The Treatment of Losses Generated in the Transaction of Sale of the Entirety of Shares of B... to Fund E...

As referred to above, the Defendant understands that the loss realized with the sale of shares of B... is not deductible. It sustains that "there were two distinct operations, albeit interrelated, whose tax effects impose a separate analysis: on the one hand, the patrimonial loss caused by the decision to waive supplements must be subjected to the test of the requirement of indispensability required by the body of paragraph 1 of article 23 of the Corporate Income Tax Code; and, on the other, the loss determined in the onerous transmission of shares must be subsumed in the regime applicable to gains and losses realized provided for in articles 46 to 48 and 45, paragraph 3, of the same Code". The Defendant contests the option of the Claimant "to waive reimbursement of supplements and simultaneously proceed with the cancellation of the credit over B..., which resulted, in substance, in a debt forgiveness, inasmuch as there was no conversion of the credit into an additional entry for own capital and, therefore, the amount of the financial investment constituted by the original cost of acquisition of the shares was not altered." Concluding that "accordingly, the loss caused by the waiver of reimbursement of supplements does not meet the legal requirements for its deductibility set out in paragraph 1 of article 23 of the Corporate Income Tax Code, namely that of indispensability, since it was borne for the benefit of third parties – the acquirer of the shares and B...".

The issue at hand – fundamentally regarding the deductibility of a loss – can be approached through its division into the following sub-issues:

• Should the waiver of supplements be considered a gift?
• Should it be considered that there were two distinct operations: (a) the waiver of supplements and (b) the alienation of shares of B...?
• Should the value of supplements rendered and cancelled prior to the alienation of shares of B..., which amounted to EUR 13,413,685.39, be considered for purposes of calculating the loss, increasing the cost of acquisition of the shares, following the cancellation of the respective credit?
• Should account be taken of the fact that the sale of shares was effected at a value lower than the valuations, as well as the structure of the operation (i.e., coverage of losses through a waiver of supplements, followed by a sale of the shareholdings)?

Regarding the first issue – whether the waiver of supplements should be considered a gift.

It is important to begin by highlighting that not all transactions where a discernible or immediate sinalagma does not exist configure a gift. The forgiveness of supplements may or may not be a gift, depending on whether the consideration is integrated into the business of alienation of the shareholdings and whether it is one of the components of the value underlying the calculation of the corresponding price.

Indeed, case law makes the existence of gifts correspond to the verification of donative intent and benefit to third parties. In this sense, see, first of all, the case law of an Arbitral Tribunal within CAAD, in process 37/2016-T, from which it results that the "donative intent" is "inherent to gifts". In this sense, also the Central Administrative Court of the North, in process 00595/06.5BEPNF, of 13/09/2013, refers that "a loss resulting from cession of supplements for a value lower than that at which they were effected and which constitute a gift is not recognized as a cost for purposes of I.R.C. – article 24, paragraph 1, letter a), of the Corporate Income Tax Code; But the cession of supplements for a value lower than that at which they were effected and which, in accordance with the agreed terms, integrates the consideration in the business of alienation of social participations and is one of the components of the value underlying the calculation of the corresponding price, is not a gift (…). A loss resulting from cession of supplements for a value lower than that at which they were effected and which is not a gift only constitutes a deductible cost for tax purposes if, among other things, it proves to be indispensable for the realization of profits or the maintenance of the income-generating source – article 23 of the Corporate Income Tax Code; 1.5. In making a judgment on the indispensability of that cost, it does not fall to the tax administration to evaluate the soundness or appropriateness of the management decision that determined the cession of supplements for a value lower than the real one, but only to formulate an external judgment, of a cognitive type, on the probable insertion of those decisions in their profit-seeking scope, with reference to the moment they were taken and to the circumstances of the overall business in which they were inserted;" Concluding that (…) "It is unlawful and the part of the additional assessment resulting from the non-admission of the cost corresponding to the loss recorded on the cession of supplements for a value lower than that at which they were effected must be annulled, if from its grounds it results that it did not take into account either the relationship between the underlying business and the corporate purpose nor inquired into and evaluated the circumstances that determined it". It also results from the said Decision that the "waiver of part of the value of the same supplements was not effected with a spirit of gratuity because it was not an act of unilateral will of the person renouncing, with the intent of benefiting others. What results impressively from the case is that such act was inserted in a complex negotiation process that involved concessions by both sides with a view to safeguarding the respective interests of each contracting party".

It is a situation altogether close to that of the present case.

Thus, the existence or non-existence of a gift implies a coordinated analysis of the entire operation and not merely of the waiver of the credit resulting from supplements, i.e., it implies answering the second issue regarding whether we are, from a systematic point of view, faced with two operations with distinct tax relevance (the waiver of supplements and the alienation of shares of B...) or whether there was only one operation that should be treated in its entirety as to its tax effects.

Regarding this second issue, it is important to begin by highlighting that the activity of companies should be analyzed, as far as possible, holistically. This continuity in analysis (which should therefore not be done contract by contract, transaction by transaction, act by act) is a consequence of the principle of contributory capacity which implies an analysis of all the activity of taxpayers in its aspects with positive and negative arithmetic expression.

That has also been the jurisprudential trend with regard to the deductibility of costs. Indeed, it will not be, thus, because a management decision does not result in an immediate profit that it will cease to be deductible. The same applies to options intended to reduce the loss.

Doctrine has increasingly reinforced, in the specific case of waiver of credit resulting from supplements, the need to look at the entirety of the operation. In this sense, Tomás Cantista Tavares reinforces that the "problem, in light of national legislation, of the propriety of intra-group financial operations is confined to cases of abandonment of credits held by the parent company over the subsidiary. This situation constitutes, without a shadow of a doubt, the most delicate and complex case of application of the theory of abnormal act of management, given the drastic consequences that occur at the tax level. In fact, the creditor records a cost, by the amount of forgiveness, and the debtor, in turn, incurs a profit of equal value. Now from these contours flows an enormous caution in the general admissibility of this figure, given the risk of illicit modeling of the taxable income of each of the parties involved (by transfer of profits to deficit companies and assumption of costs by profitable organizations). Note, first of all, that the abandonment of credits, even in favor of third parties, does not constitute, ipso facto, an abnormal act of management. In fact, in relations between commercial partners not linked in the same group of companies, forgiveness subsumes itself in the interest of the creditor company, provided that the third-party debtor finds itself in a difficult financial situation. In fact, the preservation of commercial interchange, (often essential to the pursuit of the creditor's activity) legitimizes the insertion of that act of credit forgiveness in the business interest focused in the long term." (Tomás Maria Cantista de Castro Tavares, "On the Relationship of Partial Dependence between Accounting and Tax Law in the Determination of Taxable Income of Legal Entities: Some Reflections at the Level of Costs", Tax Science and Technique Notebooks, no. 396, October-December, 1999, pp. 150-151).

This Tribunal understands that the operation should be considered in its totality, i.e., it should not be abstractly segmented into two successive operations.

Looking at the sale of the shareholding as a whole, it is understood without any doubt what the reason was why the Claimant dispensed with its supplements, given that this waiver is intimately related to the conditions of sale of the shares – it waived the supplements so that they would buy it the subsidiary, which is, moreover, a common step in business practice.

The Claimant did not intend to liberate B... from its payment obligation with the objective of enriching it at the expense of its assets – everything else remaining equal. It intended merely to reduce the liabilities of its subsidiary as a prior contractual condition for proceeding with the sale of the respective shares at the agreed price with Fund E....

Thus, the loss caused by the waiver of reimbursement of supplements was not borne for the benefit of third parties, but for the benefit of the Claimant itself, since it had been a condition of sale of the shares. It was not, therefore, and answering directly to the issue first raised, a gift, but a causal legal transaction, a commercial condition with influence on the contract for sale of shares, in its occurrence and in its terms, in particular, in the price of the shares.

Regarding the third – on the inclusion of the value of supplements in the calculation of the loss – it is emphasized that both case law and doctrine have come to consider that coverage of losses should not be treated as a cost, for purposes of article 23 of CIRC, but should be added to the value of acquisition of the shareholding. On the other hand, the manner in which coverage of losses is effected is not relevant for purposes of the calculation of gains/losses.

In this sense, the Supreme Administrative Court pronounced itself, which, in process no. 01265/12 of 06/18/2013, decided that the "coverage of losses of a subsidiary company by a holding company does not fall within the concept of tax costs of the latter, either because deliveries by partners for coverage of losses of the company are not to be considered as negative components, in light of the provisions of articles 23 and 24 of CIRC, nor positive components of taxable profit pursuant to article 21 of the same Code, nor because the subsidiary does not lose the right to carry forward losses referred to in article 46 of CIRC.

The said decision adds that "costs to which article 23 of the Corporate Income Tax Code refers must relate to the contributing company itself, in itself considered, the holding company, and not to its subsidiaries, and that accepting coverage of losses of the subsidiary by the holding company would lead to a situation of double consideration of the same values in question, whether as costs in the holding company, whether by deduction of losses from prior years in the sphere of (…) the subsidiary company. It further adds that the fact that the holding company has covered the losses of its subsidiary translates into a form of financing that, in economic terms, is substantially identical to a capital increase, and should therefore have the same tax treatment as additional entries of partners to the company".

In the same sense, it results from the Decision of the Central Administrative Court of the North, process no. 00958/11.4BEAVR, that coverage of losses may "fall within the value of acquisition of shares, for purposes of calculating losses resulting from the dissolution and partition of the company pursuant to article 75, paragraph 2, letter b), of CIRC, carried out by the parent company in the subsidiary in the moment prior to the dissolution of the latter, regardless of the legal form or the recapitalization instrument involved."

The Central Administrative Court of the South, in process no. 4783/01, of 06/26/2001, determines, in the same sense, that the "coverage of losses of a subsidiary by a holding company does not fall within the concept of tax costs of the latter, either because deliveries by partners for coverage of losses of the company are not to be considered as negative components, in light of the provisions of articles 23 and 24 of CIRC, nor positive components of taxable profit pursuant to article 21 of the same Code, nor because the subsidiary does not lose the right to carry forward losses referred to article 46 of CIRC." It adds, pursuant to the same Decision, that in the "system of the C.I.R.C., coverage of losses (capital contributions under any title) are tax-neutral at the moment of their realization, whether for the company that carries it out, or for the company that receives it. In this sense goes article 21, paragraph 1, letter a), of the C.I.R.C., in establishing that coverage of losses do not compete for the determination of taxable profit, that is, do not increase the amount of the tax debt of the company that receives them, the same occurring in the sphere of the entity that effects the coverage of losses, that is, coverage of losses has no tax relevance and, therefore, it is a negative patrimonial variation not reflected in results but only in capital and excluded from tax relevance. The partner made a certain outlay, but the outflow of funds was compensated by entry into its legal sphere of rights, more precisely of a right of credit (if it is a supplement) or the reinforcement of its shareholding (if it is some form of capital increase) over the subsidiary that receives the coverage of losses (M. H. de Freitas Pereira, The Tax Base of I.R.C., C.T.F. no. 360, p. 115 et seq.; J. L. Saldanha Sanches and Others, Business Restructuring and Limits of Tax Planning, Coimbra Editora, 2009, p. 188 et seq.)."

The Central Administrative Court of the South, in the said process no. 4783/01, of 06/26/2001, further holds that the "tax irrelevance of coverage of losses is maintained as long as the subsidiary receiving them continues to exist. On the contrary, if the dissolution and partition of the subsidiary takes place, this moment should be recorded as that in which the partner renounces the possibility of being reimbursed for the coverage of losses effected. What was a loss or a latent loss becomes a real loss, and is therefore deductible. There are typically two opposing systems to give tax relevance to coverage of losses. A first one that accepts its deduction at the moment they are effected, taxing them in the sphere of those who receive them. The second, the one in force in the Portuguese tax legal order, only admits its deductibility at the moment of transmission or extinction of shares. Whereby, the tax disregard of coverage of losses in both moments mentioned violates head-on the principle of taxation according to real profit provided for constitutionally in article 104, paragraph 2, of the Portuguese Constitution. Concluding, coverage of losses must have tax relevance at the moment of extinction of shareholdings, integrating the historical cost of acquisition of the same shares. Otherwise, we would be before a cost that would never be deductible, without any norm providing for it, which would directly contradict the said principle of taxation according to real profit provided for constitutionally (cf. J. L. Saldanha Sanches and Others, Business Restructuring and Limits of Tax Planning, Coimbra Editora, 2009, p. 195 et seq.; J. L. Saldanha Sanches, The Limits of Tax Planning, Coimbra Editora, 2006, p. 219 and 220)."

As one of the member arbitrators in the present case once wrote, "the perspective of the cost of acquisition for tax purposes as a concept that encompasses both the price paid at the moment of acquisition (the original cost of acquisition) and subsequent acquisition costs not only is what results from our POC – and which is not excluded by any tax norm –, but also has been widely developed in German doctrine, in which the concept of nachträgliche Anschaffungskosten is grounded. In subsequent costs, which are contrasted with original acquisition costs (ursprüngliche Anschaffungskosten), we find always included a series of realities, among which we highlight the amounts spent as coverage of losses." (João Taborda da Gama, "Coverage of Losses, Value of Shareholding and Deductibility of Losses", in J.L. Saldanha Sanches, Francisco Sousa da Câmara and João Taborda da Gama, Business Restructuring and Limits of Tax Planning, Coimbra Editora, 2009, pp. 197-198).

Adding that "the partner has full freedom of choice as to how it will finance its subsidiaries. However, whatever form is chosen (capital increase, supplementary and accessory capital contributions, coverage of losses through delivery of money), all of this will have substantially the same effects: in the assets of the beneficiary company, improvement of the net situation and increase of available funds; in the subsidiary company, increase of the cost of shareholding and outflow of funds. That is, considering coverage of losses tax-irrelevant at the moment of alienation leads to the principle of freedom of form of financing being trampled and, taken to its ultimate consequences, would cause a normal capital increase not to be taken into account for the determination of gains and losses at the moment of alienation." (idem, pp. 200-201).

Regarding the fourth issue – on whether account should be taken of the fact that the sale of shares was effected at a value lower than the valuations, as well as the structure of the operation (i.e., coverage of losses through a waiver of supplements, followed by a sale of shareholdings), it is emphasized that it is not for this Tribunal to assess the reasonableness of the value of sale of shares of B..., since no facts were presented to the case demonstrating the existence of abuse.

In fact, the shares having been acquired by unrelated entities, the value is necessarily market value: the value that the market was willing to pay, at that moment and under those conditions, for the shareholdings. But moreover, acquisition below fair market value should not lead to disregard of the cost, unless the operation is considered abusive, which would require basing the correction not on article 23 of the Corporate Income Tax Code, but, perhaps, on article 38, paragraph 2 of the General Tax Law – which was not even attempted by the Defendant.

As results from the Decision of the Supreme Administrative Court issued in process no. 0627/16, of 06/28/2017, "[o]ne could question the reality of the values at which the acquisition and alienation of the shareholdings were effected and the reasons underlying these operations in view of the relationships between the two companies, but such was not the path followed by the Tax Authority, which, as was stated in the sentence, invoked a single reason for excluding the tax relevance of the loss: the failure to demonstrate the indispensability of the same "for the profits or gains to the company", "in that it did not identify in what it translated the "supposed" profit obtained". With due respect, it is not possible to invoke indispensability, thus understood, to disregard the tax relevance of the loss. First of all, if such thesis were to be sustained, never could a realized loss be relevant negatively in the determination of taxable profit since it is in its nature the lack of direct relationship with profits. As the Appellant rightly emphasized, the sale of an asset of the fixed assets "is not, by definition, instrumental relative to the realization of any future profits, it is only the exchange of an asset for its market value". Indeed, it was the legislator itself who included in the exemplary list of fiscal costs or losses of paragraph 1 of article 23 of CIRC "realized losses", which destroys the argument attempted in the sentence.

With due respect, it is absurd to attempt to establish a direct connection between a loss and any profits or gains, and it does not make sense to inquire into "the nexus of causality between the loss realized and the profits to be obtained by the Claimant", which the sentence – after expressly recognizing that the alienation of shareholdings constitutes an act of management, a management choice of the company in which the Tax Authority "cannot intervene" – erected as a "second level of analysis" of indispensability.

On the other hand, the understanding of indispensability adopted by the sentence reduces to the requirement of a necessary and direct relationship of causality between costs and profits long rejected by doctrine and case law (In addition to the doctrine and case law already cited, the decision of 24 September 2014 of the Tax Litigation Section of the Supreme Administrative Court, issued in process no. 779/12, available at

http://www.dgsi.pt/jsta.nsf/35fbbbf22e1bb1e680256f8e003ea931/6c3dfbcbec2b7f7f80257d5f005091ec?.), as we stated above.

(…)

It does not matter, even, to inquire about who bears the burden of proving indispensability, since this, as we understand it (resulting from a normal act of management, determined by a business purpose), is not questioned in the case.

(…)

In final note, we will say that, if the Tax Authority had any reason to suspect that the actual values at which the said negotiations for acquisition and alienation of shareholdings were concluded are not those declared or that some of these were effected with the intent of manipulating the taxable income illegitimately, in particular in function of special relationships between the companies, it should have chosen a different path than that of disregarding the loss realized on the basis of failure to verify the indispensability required by article 23 of CIRC."

Secondly, as also results from the cited case law, the Tax Authority should not substitute itself for taxpayers in their management decisions. Thus, the Tax Authority's agreement or disagreement with the content of operations carried out by taxpayers should be limited to abusive or illegal situations. Indeed, it will not be, therefore, different to sell a company for 100 when it has losses of 50 or for 50 when it has no losses. On the other hand, taxpayers may opt for the operation that is fiscally most efficient provided they do not fall within the scope of specific anti-abuse norms or the general anti-abuse clause.

In this sense, it also results from process 37/2016-T that "it cannot be a ground for excluding deductibility in light of article 23 of CIRC, a critical judgment by the Tax and Customs Authority on the management options of the Claimant" and it is "for the companies to decide what business options they consider preferable to ensure their interests. In fact, there is no legal support for the Tax and Customs Authority to exclude the deductibility of expenses by considering that the companies' business options do not correspond to the acts of management that the Tax and Customs Authority considers preferable".

Thus, and concluding, this Tribunal considers that the Claimant correctly treated the losses resulting from the sale of shares of B....

B – The Treatment of Losses Generated in the Transaction of Sale of the Entirety of Shares of C... to the Directors of the Claimant

As results from the matter of fact given as proven, the alienation by the Claimant, in favor of the members of its respective Board of Directors, of the entirety of shares of C... (former D...), generated for the Claimant, in the year 2012, a fiscal loss of EUR 7,130,400.82, applying the monetary correction coefficients to a book loss of EUR 6,306,062.67. The said fiscal loss was deducted by the Claimant in 50%, that is, in EUR 3,565,200.41, being disregarded by the Tax Authority, pursuant to what is jointly provided in articles 23, paragraph 5 and 63, paragraph 4, letter c) of CIRC, and subject to correction in the taxable income of 2012, with consequences in 2013 and 2014.

Of substance and in summary, in the Arbitral Request, the Claimant argues the unconstitutionality of what it qualifies as an irrebuttable presumption established in the said provisions, whereby the alienation of shares to members of the corporate bodies involves always a situation of fiscal abuse, tending to diminish fiscal revenue, and exempting the respective legal establishment from the Tax Authority from effecting proof that an effective diminution of revenue occurred by reason of agreed conditions and achieved results in terms different from those that would have verified if the agreement had been concluded in open market between independent entities, and preventing the interested parties from proving the contrary. The said unconstitutionality results, in the formulation of the Claimant, from the violation of the principles of legality and contributory capacity enshrined particularly in articles 13 and 103, paragraph 3 of the Constitution (as well as by article 73 of the General Tax Law).

It develops, arguing that the tax figure of "special relationships" aims at ensuring that agreed, accepted and practiced terms and conditions are substantially identical to those normally agreed between independent entities in comparable operations, but it does not aim to prevent, "on pain of serious intrusion in the right to economic initiative and unacceptable discrimination between economic operators", that there be normal economic relations between entities linked by the said "special relationships", particularly between commercial companies and members of their corporate bodies. If what is intended to be prevented with the said anti-abuse norm is that agreed conditions different from those that would be practiced in the market between independent operators – which is what the Claimant postulates –, this leads to the conclusion that, for it to be applicable and the tax consequences of a certain contract to be disregarded, it is not enough that the parties be linked by special relationships, rather it is necessary that simultaneously it can be verified that conditions and results were agreed and achieved that benefited one or both of the parties in terms different from those that would have verified if the agreement had been concluded in open market between independent entities, that there was, therefore, an abusive tax planning.

It understands that the Decision of the Constitutional Court no. 753/2014 did not have as its object a situation identical to that which is the object of the correction in question: in the Decision of the Constitutional Court, the criteria for fixing the price of the alienated shareholdings were not presented, contrary to the situation sub judice, in which all information was presented to justify its fixing. It brings into the discussion also the Decision of the Central Administrative Court South of 17.03.2016, proc. 04412/10, as well as Decision no. 211/2017, of the Constitutional Court, the former "reflecting on the interpretation of the concept of 'special relationships'", the latter reaffirming the unconstitutionality of absolute or irrebuttable legal presumptions, by violation, namely, of the principle of equality provided for in article 13 of the Constitution and of its corollary of contributory capacity.

In the Arguments, it resumes the argument, deepening what it understands to be the constitutional case-law line inherent in Decision no. 211/2017 of the Constitutional Court, without fail to refer that the Tribunal analyzes a tax provision different from those at issue here. The Claimant transcribes excerpts from the Decision, from which we select one, as it raises the need for particularly careful exegetical reference by this Tribunal: "The Constitutional Court has pronounced itself several times on the constitutional conformity of recourse to presumptions as a form of determining the taxable income, in light of the principle of contributory capacity, taking as a determining element of the judgment of non-unconstitutionality the possibility conferred on the taxpayer of rebutting the presumption (see, in particular, Decisions nos. 26/92, 348/97, 84/2003, 211/2003 and 452/2003 […] The same criterion served the judgment of unconstitutionality of norms of tax incidence with recourse to irrebuttable presumptions. In fact, at two moments, constitutional case law took the cited principle (while a concretization of the principle of fiscal equality and other principles founding fiscal justice) as a source of constitutional devaluation of taxation norms that established absolute presumptions. To this case law refers Decision no. 753/2014".

For its part, the Tax Authority reaffirms what was stated in the Inspection Report and emphasizes, first, the case law of the Supreme Administrative Court on the disputed issue of Law. In this context, it refers that the issue pertaining to the exclusion of deduction of losses was already the object of recourse to that higher court, which, in the Decision of 08/01/2014 in proc. no. 0437/13 and in line with prior case law (decision of the Supreme Administrative Court of 11/02/2009, Process no. 862/08) decided that "II - In the application of the then paragraph 7 of article 23 of the Corporate Income Tax Code to the case at hand, there is no need to consider whether the conditions observed in the onerous transmissions that gave rise to the negative patrimonial variations were identical or diverse from those that would be practiced between independent entities, since "(…) for the application of the norm of paragraph 7 of article 23 of the Corporate Income Tax Code, it is irrelevant or immaterial the circumstance "of those conditions being different or the same as those that would be agreed between independent entities", since this norm does not include in its provision "those conditions", rather, it simply establishes the non-acceptance "as costs or losses of the year of those incurred with the onerous transmission of share capital" to entities with which there are "special relationships". III - Such application of the then paragraph 7 of article 23 of the Corporate Income Tax Code does not appear to violate the Fundamental Law or the principles of proportionality and necessity. […] We believe that such faculty is not prohibited to the legislator either by the Fundamental Law (article 104 of the Constitution) or by the principles of European Law, in particular that of proportionality and necessity, since, although such is not the rule, it is admitted that specific anti-abuse norms may legitimately translate – in cases that offer special risk from the point of view of erosion of the tax bases –, in the non-deductibility of certain negative components of profit, that is, in their irrelevance for tax purposes."

Thus, according to the Tax Authority, in the understanding of the Supreme Administrative Court, the tax disregard of losses resulting from the onerous transmission of shares between related entities was the remedy found by the legislator to prevent evasive practices known and recurrent tending to the artificial decrease of the taxable profit of the subsidiary companies, and which, precisely because such practices are known and recurrent, opted purely and simply to strip them of any tax relevance, independently of the weighing of the concrete conditions of the operation.

Secondly, the Tax Authority seeks support in Decisions nos. 753/2014 and 139/2016 of the Constitutional Court, from which it extracts the recognition that the purpose of non-submission of these operations to the scrutiny of the principle of full concurrence by which operations between related entities should be governed, pursuant to paragraph 1 of article 63 of the Corporate Income Tax Code, is based on the fact that, although both provisions have as their object operations carried out between related entities, that of paragraph 5 of article 23, constitutes "a special norm in relation to that other provision: on the one hand, it relates only to transactions on shareholdings and thus has a more restricted scope of application; on the other hand, it imposes a more serious consequence in that it determines the non-acceptance, pure and simple, of the losses realized, in contrast to what is provided in article 58 which establishes a general principle of correction, by the Tax Administration, of the transfer price when this does not correspond to what would normally be agreed between independent entities." and also in the decision in arbitral process no. 727/2016.

In the Arguments, the Tax Authority reproduces, synthesizing them, the considerations and case-law invocations presented in the Reply, without adding aspects that should be considered.

Having made this excursion, it behoves us to appraise and decide.

The good exegesis of the provisions whose interpretation and application is at issue and the best dogmatics surrounding the ratio legis immanent to the regime of disregard of losses derived from onerous transmission of shares to entities with which there are special relationships, in particular the appraisal of the respective constitutional conformity – namely, in light of the principles of legality and contributory capacity – are condensed in Decision no. 753/2014 of the Constitutional Court, in terms that merit full adherence of this Arbitral Tribunal.

To the legal construction realized in the said decision, reference is therefore made, without it appearing necessary or proper to immediately proceed with transcriptions of the same, without prejudice to the need for some later.

It is important, as is good methodology, to proceed to two verifications. The first has as its object to grasp whether the dogmatics to which adherence is made is sustained and just application in the case under analysis. The second scrutiny whether there is reason, and it is pertinent for the decision of the case, the Claimant's assertion that the Constitutional Court departed from that line of case law in Decision no. 211/2017, which it brings into the discussion with the assertion that it represents a relevant recovery of an interpretive line that reaffirms the unconstitutionality of absolute or irrebuttable legal presumptions, by violation, namely, of the principle of equality provided for in article 13 of the Constitution and of its corollary of contributory capacity.

We begin with the first verification: the Constitutional Court developed the following iter of determination and application of Law: "The norm has […] as its target the transaction itself, and not the price practiced by the parties, and serves to suppress the operations of sale of shareholdings that are carried out with an exclusively fiscal purpose, aiming to obtain a deductible cost. Hence the need to institute that special regime which cannot be consumed by other existing provisions, such as that relating to transfer prices (article 58), which merely aim to permit mere administrative corrections of the value of transactions. On the other hand, and by identity of reason, it is not relevant to consider that the purpose aimed at by the legislator could be obtained by less burdensome means for the taxpayer through recourse to the general anti-abuse clause provided for in article 38, paragraph 2, of the General Tax Law. […] It could, however, still be said that the norm of article 23, paragraph 7, of CIRC, in that it imposes the tax irrelevance of negative patrimonial variations resulting from the transmission of shares between related companies, is nonetheless a presumption subject to non-admission of proof, which, as such, could violate the principle of contributory capacity. The Constitutional Court has already pronounced itself in the sense of unconstitutionality of tax provisions that established irrebuttable presumptions […] However, in the case at hand, it is, first, debatable that the norm of article 23, paragraph 7, of CIRC configures a presumption for tax purposes. […] There is not here a presumption in the proper sense. The norm does not permit presuming any tax fact, from the occurrence of transactions of shares between companies in a group relationship, which the taxpayer could contradict through a probative procedure. It merely disqualifies as a cost the negative results that emanate from those transactions. It is true that such disqualification can determine an increase in the tax to be assessed by virtue of it not being possible to reflect in the taxable income the losses attributable to the operation. But that is the necessary consequence of a legal mechanism of automatic operation that impacts the criteria of deductibility of costs or losses. Being a legal criterion of appraisal of the taxable income, and not a tax fact presumible that is attributable to the taxpayer, there is no place for the admission of proof to the contrary. The issue that arises is whether the non-deductibility of costs, as provided for, does not constitute an unacceptable restriction on the right to be taxed according to real profit. […] Although, in general thesis, the principle of contributory capacity implies that only net income should be considered taxable, with the consequent exclusion of all expenses necessary for the production or obtaining of income, the fact is that recognition cannot be denied to the legislator – as doctrine admits – "a certain margin of freedom to limit to a certain amount, or even exclude, certain specific deductions that, although relating to expenses necessary for the obtaining of the corresponding income, prove to be of difficult appraisal" (CASALTA NABAIS, op. cit., p. 521). The point is that such limitations or exclusions have an adequate rational foundation and apply to the generality of income in question. These are fiscal policy options based on an idea of practicability, which requires of the legislator the elaboration of laws whose application and execution is efficient and economic or effective, and which lead to results consonant with the purposes intended. With this purpose, with which it is also intended to ensure the material principles of equality and fiscal justice, it is constitutionally justifiable that the legislator may resort not only to the said legal presumptions, but also to techniques of typification and simplification, which permit the regulation of certain aspects of tax law according to criteria of normality, excluding atypical or abnormal situations (idem, pp. 622-623). With regard to the situation regulated in article 23, paragraph 7, what the legislator seems to have considered is that losses resulting from transmission of shares between related companies are not normally indispensable for the realization of profits or gains subject to tax or for the maintenance of the income-generating source, permitting at the same time to prevent the risk of artificial creation of losses, with the consequent effect of fiscal evasion, and also to address the difficulty of verification, by the Tax Administration, of the existence of an effective economic interest in the transaction (for which mere demonstration that market values were practiced would not suffice).