IRS Capital Gains: General Anti-Avoidance Clause

Process: 51/2014-T

Date: November 27, 2014

Tax Type: IRS

Summary

CAAD arbitration case 51/2014-T examined whether the Portuguese Tax Authority correctly applied the General Anti-Abuse Clause (CGAA) under article 38(2) of the General Tax Law to disregard corporate transformations and assess €667,874.84 in additional IRS for 2009 capital gains. The taxpayer transformed several limited liability companies (sociedades por quotas) into stock companies (sociedades anónimas) before selling the equity interests, claiming exemption from capital gains taxation available for shares but not for quotas. The Tax Authority's Finance Directorate of Lisbon conducted an inspection under the 'Project of Untaxed Capital Gains' and proposed to fiscally disregard the transformations, arguing they constituted tax avoidance designed solely to obtain tax benefits without valid economic substance. The taxpayer defended the restructuring as a legitimate exercise of choosing a different legal form for conducting business activities, arguing that selecting a more tax-efficient structure does not constitute abuse. The Director-General authorized the anti-abuse procedure in August 2013, leading to additional assessments of €590,387.91 in tax, €77,486.93 in compensatory interest, and €3,121.91 in account adjustments. The arbitral tribunal, composed of three arbitrators appointed by CAAD's Ethics Board, heard arguments from both parties about whether the legal requirements for applying the anti-abuse clause were satisfied, specifically whether the corporate transformations lacked economic substance beyond tax savings and whether they violated the spirit of tax legislation on capital gains exemptions.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration
Case no. 51/2014 – T
Subject: IRS – Capital Gains; General Anti-Abuse Clause

The Arbitrators agree: Jorge Lopes de Sousa (Arbitrator President), José Pedro Carvalho and João Menezes Leitão, appointed by the Ethics Board of the Centre for Administrative Arbitration to form an Arbitral Tribunal in the following:

I – REPORT

On 23 January 2014, "A", taxpayer no. …, resident at …, holder of Identity Card no. …, issued in … by the Civil Identification Services of Lisbon, filed a request for the constitution of an arbitral tribunal, under the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the acts of additional assessment of Personal Income Tax no. 2013…, of 01/10/2013, relating to the year 2009, in the amount of €590,387.91 (five hundred and ninety thousand, three hundred and eighty-seven euros, ninety-one cents), of assessment of compensatory interest no. 2013…, of 07/10/2013, concerning the period between 29/05/2010 and 13/09/2013, in the amount of €77,486.93 (seventy-seven thousand, four hundred and eighty-six euros, ninety-three cents), and of the account adjustment no. 2010…, of 07/10/2013, relating to the year 2009, in the amount of €3,121.91 (three thousand, one hundred and twenty-one euros, ninety-one cents), in the total amount of €667,874.84 (six hundred and sixty-seven thousand, eight hundred and seventy-four euros, eighty-four cents).

To support his request, the Claimant alleges, in summary, that the legal requirements for the application of the general anti-abuse clause are not in fact met, since, in the Claimant's view, "one cannot speak of tax avoidance when someone chooses a different legal form to exercise a particular activity because they have discovered that, in their particular case, such a change would provide them with a tax saving: they are merely exercising a legitimate right".

On 24 January, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Administration (AT).

The Claimant did not appoint an arbitrator, so, under the provisions of paragraph a) of no. 2 of article 6 and paragraph a) of no. 1 of article 11 of the RJAT, the Chairman of the Ethics Board of CAAD appointed as arbitrator-president His Excellency Counsellor Dr. Jorge Lino, and the signatories José Pedro Carvalho and João Menezes Leitão as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable period.

On 11 March 2014, the parties were notified of these appointments and expressed no intention to refuse any of them.

In accordance with the provisions of paragraph c) of no. 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 27 March 2014.

On 5 May 2014, the Respondent, within the legal period for this purpose, filed its defence through objection and argued, in summary, that the conditions for the application of the anti-abuse clause are indeed met in the case.

On 19 May 2014, the meeting referred to in article 18 of the RJAT took place, in which, according to the respective minutes, 12 June 2014 was set for the examination of the witnesses listed, with the parties previously required to indicate the specific factual matters to which the witnesses should respond. Subsequently, by joint request of 9 June 2014, both parties communicated that they waived the production of witness testimony, thus rendering the scheduled examination without effect.

Subsequently, the Claimant and the Respondent presented, in succession, their respective written submissions, in which they maintained and developed the positions previously assumed and defended in their pleadings.

By order of 16/09/2014, the deadline for submission of the final decision in the present proceedings was extended to 27/11/2014.

By order of the Chairman of the Ethics Board of CAAD of 3 November 2014, His Excellency Counsellor Dr. Jorge Lopes de Sousa, president of this Tribunal, was appointed in replacement of His Excellency Counsellor Dr. Jorge Lino.

The Arbitral Tribunal is materially competent and is regularly constituted, under the terms of articles 2, no. 1, paragraph a), 5 and 6, no. 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, under the terms of articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings are free from nullities.

Thus, there is no obstacle to the examination of the merits of the case.

Everything considered, it is necessary to render

II. DECISION

A. MATTER OF FACT

A.1. Facts established as proved

On 14/10/2013, the Claimant was notified of the additional assessment of IRS no. 2013…, of 01/10/2013, relating to the year 2009, in the amount of €590,387.91 (five hundred and ninety thousand, three hundred and eighty-seven euros, ninety-one cents), of the assessment of compensatory interest no. 2013…, of 07/10/2013, concerning the period between 29/05/2010 and 13/09/2013, in the amount of €77,486.93 (seventy-seven thousand, four hundred and eighty-six euros, ninety-three cents), and of the account adjustment no. 2010…, of 07/10/2013, relating to the year 2009, in the amount of €3,121.91 (three thousand, one hundred and twenty-one euros, ninety-one cents), in the total amount of €667,874.84 (six hundred and sixty-seven thousand, eight hundred and seventy-four euros, eighty-four cents), with the indication of the payment deadline of 13/11/2013.
Within the scope of a tax inspection action - internal -, undertaken by the Finance Directorate of Lisbon, an analysis was made of the Claimant's tax situation, in the context of the "Project of Untaxed Capital Gains undertaken by the Department..." of that Finance Directorate, aimed at verifying compliance with his tax obligations, specifically assessing the "actual exclusion from taxation of the values of capital gains included by taxpayers in the Lisbon district in Annex G 1 of the Model 3 Declaration of IRS for 2008 and 2009 (...)", and the application of the anti-abuse rule procedure referred to in article 63 of the CPPT was proposed.
The application of the anti-abuse rule procedure obtained the authorization of the Director-General of the Tax and Customs Administration, through order of 02/08/2013.
The tax inspection action corresponded to Internal Service Order no. 0…, relating to the year 2009, issued by the Finance Directorate of Lisbon.
On 04/12/2012, the Claimant was notified of the "Project for Application of the General Anti-Abuse Clause", prepared by the Finance Director of the Finance Directorate of Lisbon, by application of the GAAC, provided for in article 38, no. 2, of the LGT, in which it is proposed to "disregard fiscally the act of transformation of limited liability companies into stock companies, subjecting, consequently, to taxation, under Personal Income Tax (IRS), the gains obtained from the costly alienation of equity interests as quotas".
From the same Project also results a proposal for a correction to the IRS collection (Category G - capital gains), relating to the year 2009, in the amount of €587,266.00 (five hundred and eighty-seven thousand, two hundred and sixty-six euros), through the application of the rate of 10% (ten percent), provided for in article 72, no. 4, of the CIRS, to the value of the income qualified as capital gains resulting from the costly transfer of equity interests that were held by the Claimant in commercial companies in the form of stock companies with the names "B - Fast Food Restaurants, S.A.", "C - Restaurant Management, S.A.", "D - Restaurant Management, S.A.", "E - Restaurant Management, S.A.", "F - Fast Food Restaurants, S.A." and "G - Food and Commerce, S.A.", in the total amount of €5,872,659.97 (five million, eight hundred and seventy-two thousand, six hundred and fifty-nine euros, ninety-seven cents), corresponding to the realization value of €6,295,959.97 (six million, two hundred and ninety-five thousand, nine hundred and fifty-nine euros, ninety-seven cents).
On 03/01/2013, the Claimant exercised the right to prior hearing with respect to the aforementioned Project and the proposal for correction to the IRS collection.
On 23/09/2013, the Claimant, through his representative, was notified of the "Final Report of Conclusions of the Inspection Action" ("Report"), through Office no. …, of 23/09/2013, which, not accepting what was alleged in the Statement presented under the right to prior hearing, and maintaining entirely the aforementioned Project, including the corrections and alterations to the taxable matter proposed therein, gave rise to the acts of additional IRS assessment, assessment of compensatory interest and account adjustment, in the total amount of €667,874.84 (six hundred and sixty-seven thousand, eight hundred and seventy-four euros, eighty-four cents) referred to above in point no. 1.
On 14/10/2013, the Claimant was notified of the aforementioned IRS assessments and compensatory interest and account adjustment, and on 13/11/2013, proceeded to pay the amount of €587,266.00 (five hundred and eighty-seven thousand, two hundred and sixty-six euros), corresponding to the principal of the tax debt allegedly outstanding, with the consequent waiver of payment of compensatory interest, in the amount of €77,486.93 (seventy-seven thousand, four hundred and eighty-six euros, ninety-three cents), since the Claimant made payment of such tax debt under the exceptional regime for settlement of tax and social security debts, approved by Decree-Law no. 151-A/2013, of 31 October.
At the origin of the aforementioned acts of additional IRS assessment and compensatory interest are the following income qualified as capital gains resulting from the costly transfer of equity interests (shares) made in the year 2009:
On 11/03/1994, a commercial limited liability company with the name "B - Fast Food Restaurants, Ltd." ("B, Ltd.") was established by public deed, with the partners "A" and "H", fixing the share capital at €9,976.20 (nine thousand, nine hundred and seventy-six euros, twenty cents - Esc. 2,000,000$00), with the Claimant holding one quota, at the nominal value of €9,876.20 (nine thousand, eight hundred and seventy-six euros, twenty cents - Esc. 1,980,000$00), and the partner "H" holding one quota, at the nominal value of €100.00 (one hundred euros - Esc. 20,000$00).
"B, Ltd." had as its initial object of business the activity and operation of restaurants and similar establishments and ice cream parlours, having, at present and at the date of the tax act impugned, as its object the operation, management and administration of restaurants of the international chain "I" under the franchising regime.
On 25/10/1994, a commercial limited liability company with the name "F - Fast Food Restaurants, Ltd." ("F, Ltd.") was established by public deed, with the partners "A" and "B, Ltd.", fixing the share capital at €9,975.96 (nine thousand, nine hundred and seventy-five euros, ninety-six cents - Esc. 2,000,000$00), with the Claimant holding one quota, at the nominal value of €8,978.36 (eight thousand, nine hundred and seventy-eight euros, thirty-six cents - Esc. 1,800,000$00), and the partner "B, Ltd." holding one quota, at the nominal value of €997.60 (nine hundred and ninety-seven euros, sixty cents - Esc. 200,000$00).
"F, Ltd." had as its initial object of business the activity and operation of restaurants and similar establishments and ice cream parlours, having, at present and at the date of the tax act impugned, as its object the operation, management and administration of restaurants of the international chain "I" under the franchising regime.
On 20/06/1996, a commercial limited liability company with the name "C - Restaurant Management, Ltd." ("C, Ltd.") was established by public deed, with the partners "A" and "B, Ltd.", fixing the share capital at €9,975.96 (nine thousand, nine hundred and seventy-five euros, ninety-six cents - Esc. 2,000,000$00), with the Claimant holding one quota, at the nominal value of €8,978.36 (eight thousand, nine hundred and seventy-eight euros, thirty-six cents - Esc. 1,800,000$00), and the partner "B, Ltd." holding one quota, at the nominal value of €997.60 (nine hundred and ninety-seven euros, sixty cents - Esc. 200,000$00).
"C, Ltd." had as its initial object of business the management and operation of restaurants and similar establishments and ice cream parlours, having, at present and at the date of the tax act impugned, as its object the operation, management and administration of restaurants of the international chain "I" under the franchising regime.
On 17/10/2000, a commercial limited liability company with the name "E - Restaurant Management, Ltd." ("E, Ltd.") was established by public deed, with the partners "A" and "H", fixing the share capital at €100,000.00 (one hundred thousand euros), with the Claimant holding one quota, at the nominal value of €99,000.00 (ninety-nine thousand euros), and the partner "H" holding one quota, at the nominal value of €1,000.00 (one thousand euros).
"E, Ltd" has, and always has had, as its object of business the operation, management and administration of restaurants of the international chain "I" under the franchising regime.
On 12/12/2000, a commercial limited liability company with the name "G - Food and Commerce, Ltd." ("G, Ltd.") was established by public deed, with the partners "J" and "K", fixing the share capital at €100,000.00 (one hundred thousand euros), with the partner "J" holding one quota at the nominal value of €99,000.00 (ninety-nine thousand euros), and the partner "K" holding one quota, at the nominal value of €1,000.00 (one thousand euros), whose equity interests were subsequently acquired by the aforementioned "E, Ltd" in 2008.
"G, Ltd" has, and always has had, as its object of business the operation, management and administration of restaurants of the international chain "I", under the franchising regime.
On 04/12/2001, a commercial limited liability company with the name "D - Restaurant Management, Ltd." ("D, Ltd.") was established by public deed, with the partners "A" and "C, Ltd.", fixing the share capital at €100,000.00 (one hundred thousand euros), with the Claimant holding one quota, at the nominal value of €90,000.00 (ninety thousand euros), and the partner "C, Ltd." holding one quota, at the nominal value of €10,000.00 (ten thousand euros).
"D, Ltd." has, and always has had, as its object of business the operation, management and administration of restaurants of the international chain "I" under the Franchising regime.
In October 2008, in order to obtain the consent of the company "L, Ltd." ("L") for the transformation of the companies "B Ltd.", "F. Ltd.", "C, Ltd.", "E, Ltd.", "D, Ltd." and "G, Ltd." into stock companies and, likewise, for the establishment of a company managing equity interests that would hold 100% (one hundred percent) of the share capital of each of the aforementioned 6 (six) companies - the Claimant prepared a document in which he justified such acts and legal transactions, contained in Annex no. 10 to the Tax Inspection Report.
On 05/12/2008, the management of the companies "B, Ltd.", "F, Ltd.", "C, Ltd.", "E, Ltd.", "D, Ltd." and "G, Ltd." in accordance with article 132 of the Commercial Companies Code ("CSC"), presented to the partners their respective Justification Reports for the Transformation of these companies from limited liability companies into stock companies, such Reports attached as docs. 12 to 17 of the initial request of the present proceedings.
On 22/12/2008, a commercial stock company with the name "M - SGPS, S.A." was established by private deed, whose exclusive object of business consists, and has always consisted, in the "management of equity interests of other companies, as an indirect form of exercise of economic activities", with the shareholders "A", "H", "N", "O" and "P", with the share capital fixed at €100,000.00 (one hundred thousand euros), represented by 100,000 (one hundred thousand) registered shares, at the unit nominal value of €1.00 (one euro), in which the Claimant, its sole administrator, came to hold 99,996 (ninety-nine thousand, nine hundred and ninety-six) registered shares, in the amount of €99,996.00 (ninety-nine thousand, nine hundred and ninety-six euros), with each of the remaining shareholders, who established in the partnership agreement free usufruct of their shares in favour of the Claimant, holding 1 (one) registered share, at the nominal value of €1.00 (one euro).
On 15/01/2009, the General Shareholders' Meeting of the company "G, Ltd." was held, at which it was unanimously resolved:

i. On the consent of the company and the partners for the division and transfer of quotas;

ii. On the transformation of the company into a stock company and on the manner of conversion of equity interests, approval of the report organized by the management justifying the transformation and the balance sheet, dated 30/11/2008;

iii. On the approval of the partnership agreement by which the company, in its new legal form (stock company), would be governed;

iv. On the election of the members of the corporate bodies for the four-year period 2009-2012.

On that date of 15/01/2009, at the aforementioned General Shareholders' Meeting of "G, Ltd.", through an operation of division and subsequent transfer of quotas, the equity interest, at the nominal value of €100,000.00 (one hundred thousand euros), belonging to the sole partner "E Ltd.", was divided into 4 (four) new quotas and subsequently transferred to the Claimant, "N", "P" and "M - SGPS, S.A.", which thus, for a price, acquired one quota, at the nominal value of €100.00 (one hundred euros), each, becoming partners of the company "G, Ltd." - "E, Ltd." retaining the divided equity interest, at the nominal value of €99,600.00 (ninety-nine thousand, six hundred euros).
At the same meeting, the company "G, Ltd." was transformed into a stock company, adopting the name "G - Food and Commerce, S.A." ("G, S.A.").
Also at the same meeting, it was established that the shareholders would retain, in the new company "G, S.A.", the following equity interests:

i. "E, Ltd.": equity interest, in the amount of €99,600.00 (ninety-nine thousand, six hundred euros), through the holding of 99,600 (ninety-nine thousand, six hundred) registered shares, at the unit nominal value of €1.00 (one euro);

ii. "A", now Claimant: equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro);

iii. "N": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro);

iv. "P": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro);

v. "M - SGPS, S.A.": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro).

On the same date, 15/01/2009, the General Shareholders' Meeting of the company "C, Ltd." was held, at which it was unanimously resolved:

i. On the consent of the company and the partners for the division and transfer of quotas;

ii. On the increase of the share capital, in the amount of €90,024.04 (ninety thousand, twenty-four euros, four cents), increasing from €9,975.96 (nine thousand, nine hundred and seventy-five euros, ninety-six cents), to €100,000.00 (one hundred thousand euros);

iii. On the consent of the company and the partners for the unification of quotas;

iv. On the transformation of the company into a stock company and on the manner of conversion of equity interests, approval of the report organized by the management justifying the transformation and the balance sheet, dated 30/11/2008;

v. On the alteration of the object of business;

vi. On the approval of the partnership agreement by which the company, in its legal form (stock company), would be governed;

vii. On the election of the members of the corporate bodies for the four-year period 2009-2012.

On that date (15/01/2009), at the aforementioned General Shareholders' Meeting of "C, Ltd.", an increase of the share capital was carried out, in the amount of €90,024.04 (ninety thousand, twenty-four euros, four cents), in the manner of "partial incorporation of the balance of the Carried Forward Results account into the Reserves item", for the purpose of creating 2 (two) new quotas, one of €81,021.60 (eighty-one thousand, twenty-one euros, sixty cents), and another of €9,002.44 (nine thousand, two euros, forty-four cents), to be subscribed, in the proportion of the corresponding participation in the share capital, by the Claimant and by "B, Ltd.", respectively.
Also at the aforementioned meeting, and through an operation of division and subsequent transfer of quotas, the new equity interest resulting from the increase of share capital, at the nominal value of €9,002.44 (nine thousand, two euros, forty-four cents), belonging to the partner "B, Ltd.", was divided into 5 (five) new quotas: one at the nominal value of €8,602.40 (eight thousand, six hundred and two euros and forty cents), another, at the nominal value of €100.04 (one hundred euros, four cents), and 3 (three) equal quotas, at the nominal value of €100.00 (one hundred euros), each, and subsequently transferred to "M - SGPS, S.A." (together with another quota of its own, at the nominal value of €997.60), to the Claimant, to "N" and to "P", respectively, which thus, for a price, acquired the quotas, becoming partners of the company "C, Ltd." - "B, Ltd." retaining the meanwhile divided equity interest, at the nominal value of €100.00 (one hundred euros).
At the same meeting, the company "C, Ltd." was transformed into a stock company, adopting the name "C - Restaurant Management, S.A." ("C, S.A."), and its object of business was altered, becoming "operation, management and administration of international chain "I" restaurants under the franchising regime.".
Also at the aforementioned meeting, and following the approval of the unification of the quotas belonging to "M - SGPS, S.A.", it was established that the shareholders would retain, in the new company "C, S.A.", the following equity interests:

i. "A", now Claimant: equity interest, in the amount of €90,100.00 (ninety thousand, one hundred euros), through the holding of 90,100 (ninety thousand and one hundred) registered shares, at the unit nominal value of €1.00 (one euro);

ii. "M - SGPS, S.A.": equity interest, in the amount of €9,600.00 (nine thousand, six hundred euros), through the holding of 9,600 (nine thousand and six hundred) registered shares, at the unit nominal value of €1.00 (one euro);

iii. "B, Ltd.": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro);

iv. "N": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro);

v. "P": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro).

On the same date, 15/01/2009, the General Shareholders' Meeting of the company "B, Ltd." was also held, at which it was unanimously resolved:

i. On the consent of the company and the partners for the division and transfer of quotas;

ii. On the increase of the share capital, in the amount of €90,023.80 (ninety thousand, twenty-three euros, eighty cents), increasing from €9,976.20 (nine thousand, nine hundred and seventy-six euros, twenty cents), to €100,000.00 (one hundred thousand euros);

iii. On the consent of the company and the partners for the unification of quotas;

v. On the approval of the partnership agreement by which the company, in its new legal form (stock company), would be governed;

vi. On the alteration of the object of business;

vii. On the election of the members of the corporate bodies for the four-year period 2009-2012.

On that date (15/01/2009), at the General Shareholders' Meeting of the company "B, Ltd.", an increase of the share capital was carried out in the amount of €90,023.80 (ninety thousand, twenty-three euros, eighty cents), in the manner of "partial incorporation of free reserves", for the creation of 2 (two) new equity interests, one of €89,121.41 (eighty-nine thousand, one hundred and twenty-one euros, forty-one cents), and another of €902.39 (nine hundred and two euros, thirty-nine cents), to be subscribed, in the proportion of the corresponding participation in the share capital, by the Claimant and by "H", respectively.
At the same meeting, and through an operation of division and subsequent transfer of quotas, the new equity interest resulting from the increase of share capital, at the nominal value of €902.39 (nine hundred and two euros, thirty-nine cents), belonging to the partner "H", was divided into 4 (four) new quotas: one, at the nominal value of €600.00 (six hundred euros), another, at the nominal value of €102.39 (one hundred and two euros, thirty-nine cents), and 2 (two) equal quotas, at the nominal value of €100.00 (one hundred euros), each, and subsequently transferred to "M - SGPS, S.A," (€600.00), to the Claimant (€102.39), to "N" (€100.00) and to "P" (€100.00), respectively, which thus, for a price, acquired the quotas, becoming partners of the company "B, Ltd.".
At the same meeting, the company "B, Ltd." was transformed into a stock company, adopting the name "B - Fast Food Restaurants, S.A." ("B, S.A."), and its object of business was altered, becoming "operation, management and administration of restaurants of the international chain "I" under the franchising regime".
At the aforementioned General Shareholders' Meeting, and following the resolution of the authorization granted for the unification of the equity interests belonging to the Claimant, it was established that the shareholders would retain, in the new company "B, S.A.", the following equity interests:

i. "A", now Claimant: equity interest, in the amount of €99,100.00 (ninety-nine thousand, one hundred euros), through the holding of 99,100 (ninety-nine thousand and one hundred) registered shares, at the unit nominal value of €1.00 (one euro);

ii. "M - SGPS, S.A.": equity interest, in the amount of €600.00 (six hundred euros), through the holding of 600 (six hundred) registered shares, at the unit nominal value of €1.00 (one euro);

iii. "H": equity interest, in the amount of €100.00 (one hundred euros), through holding of 100 (one hundred) registered shares at the unit nominal value of €1.00 (one euro);

iv. "N": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro);

v. "P": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro).

On the same date (15/01/2009), the General Shareholders' Meeting of the company "D, Ltd." was held, at which it was unanimously resolved:

i. On the consent of the company and the partners for the division and transfer of quotas;

iii. On the approval of the partnership agreement by which the company, in its new legal form, would be governed;

iv. On the election of the members of the corporate bodies for the four-year period 2009-2012.

At that General Shareholders' Meeting, through an operation of division and subsequent transfer of quotas, the original quota, at the nominal value of €1,000.00 (one thousand euros), belonging to the partner "C, Ltd.", was divided into 4 (four) new quotas, one of which at the nominal value of €700.00 (seven hundred euros), and the remaining 3 (three) quotas, at the nominal value of €100.00 (one hundred euros), each, and subsequently transferred to "M - SGPS, S.A." (€700.00), to "N" (€100.00) and to "P" (€100.00), respectively, which thus, for a price, acquired the quotas, becoming partners of the company "D, Ltd.", with "C, Ltd." retaining the meanwhile divided equity interest, at the nominal value of €100.00 (one hundred euros).
At the aforementioned meeting, the company "D, Ltd." was transformed into a stock company, adopting the designation "D - Restaurant Management, S.A." ("D, S.A.").
At the same General Shareholders' Meeting, it was established that the shareholders would retain, in the new company "D, S.A.", the following equity interests:

i. "J", now Claimant: equity interest, in the amount of €99,000.00 (ninety-nine thousand euros), through the holding of 99,000 (ninety-nine thousand) registered shares, at the unit nominal value of €1.00 (one euro);

ii. "M - SGPS, S.A.": equity interest, in the amount of €700.00 (seven hundred euros), through the holding of 700 (seven hundred) registered shares, at the unit nominal value of €1.00 (one euro);

iii. "C, S.A.": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro);

iv. "N": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro);

v. "P": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro).

On the aforementioned date, 15/01/2009, the General Shareholders' Meeting of the company "F, Ltd." was held, at which it was unanimously resolved:

i. On the consent of the company and the partners for the division and transfer of quotas;

ii. On the increase of the share capital, in the amount of €40,024.04 (forty thousand, twenty-four euros, four cents), increasing from €9,975.96 (nine thousand, nine hundred and seventy-five euros, ninety-six cents), to €50,000.00 (fifty thousand euros);

iii. On the consent of the company and the partners for the unification of quotas;

v. On the alteration of the object of business;

vi. On the approval of the partnership agreement by which the company, in its new legal form (stock company), would be governed;

vii. On the election of the members of the corporate bodies for the four-year period 2009-2012.

On that date, at the aforementioned General Shareholders' Meeting of "F, Ltd.", an increase of the share capital was carried out, in the amount of €40,024.04 (forty thousand, twenty-four euros, four cents), in the manner of "partial incorporation of the balance of the Other Reserves - Free Reserves account", for the creation of 2 (two) new quotas, one of €36,021.62 (thirty-six thousand, twenty-one euros, sixty-two cents), and another of €4,002.42 (four thousand, two euros, forty-two cents), to be subscribed in the proportion of the corresponding participation in the share capital, by the Claimant and by the partner "B, Ltd.", respectively.
Also at the aforementioned meeting, and through an operation of division and subsequent transfer of quotas, the new equity interest resulting from the increase of share capital, at the nominal value of €4,002.42 (four thousand, two euros, forty-two cents), belonging to the partner "B, Ltd.", was divided into 5 (five) new quotas, one, at the nominal value of €3,602.40 (three thousand, six hundred and two euros, forty cents), one, at the nominal value of €100.02 (one hundred euros, two cents), and 3 (three) equal quotas, at the nominal value of €100.00 (one hundred euros), each, and subsequently transferred to "M - SGPS, S.A." (together with another quota of its own, at the nominal value of €997.60), to the Claimant, to "N" and to "P", respectively, which thus, for a price, acquired the quotas, becoming partners of the company "F, Ltd." - "B, Ltd." retaining the meanwhile divided equity interest, at the nominal value of €100.00 (one hundred euros).
At the same meeting, the company "F, Ltd." was transformed into a stock company, adopting the name "F - Fast Food Restaurants, S.A." ("F, S.A."), and its object of business was altered, becoming "operation, management and administration of restaurants of the international chain "I" under the franchising regime."
At this meeting, and following the approval of the unification of the 3 (three) equity interests belonging to the Claimant (€8,978.36, €36,021.62 and €100.02), it was established that the shareholders would retain in the new company "F, S.A," the following equity interests:

i. "A", now Claimant: equity interest, in the amount of €45,100.00 (forty-five thousand, one hundred euros), through the holding of 45,100 (forty-five thousand and one hundred) registered shares, at the unit nominal value of €1.00 (one euro);

ii. "M - SGPS, S.A.": equity interest, in the amount of €4,600.00 (four thousand, six hundred euros), through the holding of 4,600 (four thousand and six hundred) registered shares, at the unit nominal value of €1.00 (one euro);

iii. "B, Ltd.": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro);

iv. "N": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro);

v. "P": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro).

On the aforementioned date (15/01/2009), the General Shareholders' Meeting of the company "E, Ltd." was held, at which it was unanimously resolved:

i. On the consent of the company and the partners for the division and transfer of quotas;

iii. On the approval of the partnership agreement by which the company, in its new legal form, would be governed;

iv. On the election of the members of the corporate bodies for the four-year period 2009-2012.

At that General Shareholders' Meeting, through an operation of division and subsequent transfer of quotas, the quota, at the nominal value of €1,000.00 (one thousand euros), belonging to the partner "H", was divided into 4 (four) new quotas, one of which at the nominal value of €700.00 (seven hundred euros), and the remaining 3 (three) quotas, at the nominal value of €100.00 (one hundred euros), each, and subsequently transferred to "M - SGPS, S.A." (€700.00), to "N" (€100.00) and to "P" (€100.00), respectively, which thus, for a price, acquired the quotas, becoming partners of the company "D, Ltd." - the partner "H" retaining the meanwhile divided equity interest, at the nominal value of €100.00 (one hundred euros).
At the same meeting, the company "E, Ltd." was transformed into a stock company, adopting the designation "E - Restaurant Management, S.A." ("E, S.A.").
At the aforementioned General Shareholders' Meeting, it was established that the shareholders would retain, in the new company "E, S.A.", the following equity interests:

i. "A", now Claimant: equity interest, in the amount of €99,000.00 (ninety-nine thousand euros), through the holding of 99,000 (ninety-nine thousand) registered shares, at the unit nominal value of €1.00 (one euro);

ii. "M - SGPS, S.A.": equity interest, in the amount of €700.00 (seven hundred euros), through the holding of 700 (seven hundred) registered shares, at the unit nominal value of €1.00 (one euro);

iii. "H": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro);

iv. "N": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro);

v. "P": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro).

On 29/01/2009, the General Shareholders' Meeting of the company "D, Ltd." was held, at which it was unanimously resolved to rectify the Minutes no. 10 of the General Shareholders' Meeting held on 15/01/2009, in which it had been resolved and approved, inter alia, the division and transfer of quotas and the transformation of the company from a limited liability company into a stock company.
At that General Shareholders' Meeting, and following the rectification of the resolutions that were taken at the General Shareholders' Meeting held on 15/01/2009, namely of the divisions and transfers of quotas, the shareholders retained in the company "D, S.A." the following equity interests:

i. "A", now Claimant: equity interest, in the amount of €90,000.00 (ninety thousand euros), through the holding of 90,000 (ninety thousand) registered shares, at the unit nominal value of €1.00 (one euro);

ii. "M - SGPS, S.A.": equity interest, in the amount of €9,700.00 (nine thousand, seven hundred euros), through the holding of 9,700 (nine thousand and seven hundred) registered shares, at the unit nominal value of €1.00 (one euro);

iii. "C, S.A.": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro);

iv. "N": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro);

v. "P": equity interest, in the amount of €100.00 (one hundred euros), through the holding of 100 (one hundred) registered shares, at the unit nominal value of €1.00 (one euro).

On 14/10/2009, the Claimant, in the capacity of seller, entered into a contract for the purchase and sale of securities with "M - SGPS, S.A.", as purchaser, by which he sold to it 45,100 (forty-five thousand and one hundred) registered shares, at the unit value of €1.00 (one euro), of which he was the holder in "F, S.A.", for the global price of €230,965.35 (two hundred and thirty thousand, nine hundred and sixty-five euros, thirty-five cents).
On the same date, 14/10/2009, the Claimant, in the capacity of seller, entered into a contract for the purchase and sale of securities with "M - SGPS, S.A.", as purchaser, by which he sold to it 90,100 (ninety thousand and one hundred) registered shares, at the unit value of €1.00 (one euro), of which he was the holder in "C, S.A.", for the global price of €1,884,614.73 (one million, eight hundred and eighty-four thousand, six hundred and fourteen euros, seventy-three cents).
On the aforementioned date, 14/10/2009, the Claimant, in the capacity of seller, also entered into a contract for the purchase and sale of securities with "M - SGPS, S.A.", as purchaser, by which he sold to it 90,000 (ninety thousand) registered shares, at the unit value of €1.00 (one euro), of which he was the holder in "D, S.A.", for the global price of €1,656,510.57 (one million, six hundred and fifty-six thousand, five hundred and ten euros, fifty-seven cents).
Also on the aforementioned date (14/10/2009), the Claimant, in the capacity of seller, entered into a contract for the purchase and sale of securities with "M - SGPS, S.A.", as purchaser, by which he sold to it 99,000 (ninety-nine thousand) registered shares, at the unit value of €1.00 (one euro), of which he was the holder in "E, S.A.", for the global price of €1,397,092.17 (one million, three hundred and ninety-seven thousand, ninety-two euros, seventeen cents).
On the same date, the Claimant, in the capacity of seller, entered into a contract for the purchase and sale of securities with "M - SGPS, S.A.", as purchaser, by which he sold to it 99,100 (ninety-nine thousand and one hundred) registered shares, at the unit value of €1.00 (one euro), of which he was the holder in "B, S.A.", for the global price of €1,126,777.15 (one million, one hundred and twenty-six thousand, seven hundred and seventy-seven euros, fifteen cents).
On the aforementioned date, 14/10/2009, the Claimant, in the capacity of seller, entered into a contract for the purchase and sale of securities with "M - SGPS, S.A.", as purchaser, by which he sold to it 100 (one hundred) registered shares, at the unit value of €1.00 (one euro), of which he was the holder in "G, S.A.", for the global price of €100.00 (one hundred euros).
On 11/11/2009, the Claimant filed the Model 4 IRS Declaration ("Acquisition and/or Alienation of Securities"), in which is recorded the costly alienation of the equity interests held by the Claimant in the companies "B, S.A.", "C, S.A.", "D, S.A.", "E, S.A.", "F, S.A." and "G, S.A.", for the realization values mentioned above.
On 25/05/2010, the Claimant filed the Model 3 IRS Declaration relating to the year 2009, in which is recorded, among others, the costly alienation of the aforementioned shares held by the Claimant, for the realization values mentioned above.
The capital gains realized and obtained were declared in Annex G1 of Model 3 ("Untaxed Capital Gains"), whereby they were excluded from taxation under IRS.
In the "Final Report of Conclusions of the Inspection Action" it was considered that the conditions for the application of the anti-abuse rule were met, from which "results the disregard, for tax purposes, of the act of transformation of the companies from limited liability companies into stock companies, and the consequent taxation of the gains obtained from the alienation of equity interests as quotas, which should have been declared in annex G, of model 3 of IRS, in accordance with article 10, paragraph b), no. 1 of the CIRS", invoking, in particular, the following:

"As is evident from the document prepared by taxpayer "A" in October 2008 (copy sent by "L, Ltd" (see Annex 10), the taxpayer carried out a succession of pre-ordained acts which, taken together, led to the act of transfer of the equity interests in the companies referred to in II.3.1 falling within the scope of the rule provided for in no. 2 of article 10 of the CIRS";
"In order for the capital gain from alienation to be concretely subsumed under that "exclusion" provided for in the IRS Code, it was sufficient for the taxpayer to transform the six companies from limited liability companies into stock companies, an act which, given the objective revealed as final, and which is shown to have also been the first, was unnecessary";
"We do not see what other motivation, other than fiscal (of preponderant relevance in the legal transaction in question) could have guided the taxpayer's choice of transformation, the only one capable of explaining the sequence of legal transactions which, temporally, culminated in the transfer of all the equity interests of the companies (100% of the share capital) to "M, SGPS, S.A. Pursuing normal economic rationality, it is reaffirmed that, given that SGPS companies have the legal faculty to manage quotas or shares, those equity interests could have been transferred in their capacity as quotas, without further delays and expenses, namely those associated with registrations in commercial registries";
"If [the taxpayer] had chosen the normal transaction, he would have obtained the same economic result that he obtained with the whole complicated series of acts that preceded the transformation act, which, moreover, is only explicable by the avoidance of taxation that such a maneuver allowed" (point no. III.3.2.1);
"The stock company is thus a type of company whose establishment implies, a priori, superior economic and procedural burden, which, in the present case, makes the transformation carried out by the taxpayer, beyond an unnecessary act, an illogical act, cleverly conceived so as to avoid the emergence of a tax obligation";
"Pursuing rational fairness, normatively founded, the conditions are revealed to defend the fiscal unacceptability of the transformation act which, being economically unnecessary, comes, in compression and constitutional principles, illegitimately to evade taxation in IRS, the capital gain obtained from the sale of the equity interests" (point no. III.3.2.4);
"From the facts described it is clear that the act of transformation of quotas into shares was a pre-conceived and pre-ordained act, intended not to obtain any economic advantage resulting, in particular, from the increase in the potential business based on the new company form, but solely to obtain a tax advantage" (point no. III.4).

In the year 2009, the 6 (six) companies in question together employed approximately 300 (three hundred) employees.
In the year 2009, financing to the 6 (six) companies in question was €1,134,209.00 (one million, one hundred and thirty-four thousand, two hundred and nine euros), corresponding in the years 2009 to 2011 to a total investment/financing of €1,940,435.58 (one million, nine hundred and forty thousand, four hundred and thirty-five euros, fifty-eight cents).
In view of the financing to the companies in question, the risk analysis carried out by the banking entities came to be considered on a global basis, taking into account the various companies that make up the Group.
The group company relationship thus created allows inter-company financing.
On 23/01/2014, the Claimant filed the request for arbitral pronouncement that gave rise to the present arbitral proceedings.

A.2. Facts established as not proved

With relevance to the decision, there are no facts that should be considered as not proved.

A.3. Substantiation of the matter of fact proved and not proved

With respect to the matter of fact, the Tribunal does not have to pronounce on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and discriminate between proved and not proved matters (see article 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable pursuant to article 29, no. 1, paragraphs a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are chosen and delimited according to their legal relevance, which is established in attention to the various plausible solutions of the legal question(s) (see the previous article 511, no. 1, of the CPC, corresponding to the current article 596, applicable pursuant to article 29, no. 1, paragraph e), of the RJAT).

Thus, taking into account the positions assumed by the parties, the documentary evidence and the legal file attached to the record, the facts listed above were considered proved, with relevance to the decision, as they were not contested by the parties.

What is contained in paragraph zz) of point 4 of the Claimant's submissions was not given as proved or not proved, since it constitutes a mere conclusion (and not a fact) to be drawn, or not, from the remaining facts proved, that is, it is from these that it can be ascertained whether the transformation of the companies occurred, or not, in a context of corporate reorganization, which will depend on the various organization acts that are proved and from which a relationship with the corporate transformation carried out can be drawn.

B. ON THE LAW

At issue in the proceedings is determining whether, in fact, the requirements for the application of the general anti-abuse clause are met, or not, as it was carried out by the AT.

The aforementioned general anti-abuse clause is provided for in article 38, no. 2 of the LGT, with the following text:

"Acts or legal transactions that are essentially or primarily directed, by artificial or fraudulent means and through abuse of legal forms, to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, wholly or partially, without the use of such means, are ineffective in the tax field, and taxation shall then be carried out in accordance with the rules applicable in their absence and the aforementioned tax advantages shall not take effect.".

From the analysis of the aforementioned rule, from whose application derives the ineffectiveness, in the tax field, of acts or legal transactions, and regardless of the greater or lesser doctrinal development that bears upon it, it is verified from the respective structural analysis that its application presupposes the occurrence of the following elements:

è that the acts or legal transactions be essentially or primarily directed to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages;

è that the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, results from artificial or fraudulent means and from abuse of legal forms or that the tax advantages would not be achieved, wholly or partially, without the use of such means.

In the case at hand, the legal transaction that the AT seeks to cover with the mantle of ineffectiveness is the transformation into stock companies of the limited liability companies held by the Claimant. This is, beyond any doubt, the act which, in a causally appropriate manner, prevents the taxation that the AT believes to be due, on the capital gains realized with the sale of the equity interests held in the transformed companies to the SGPS.

It is evident, from the outset, that the legal transaction in question – transformation of the limited liability companies into stock company – was undertaken, if not essentially, at least primarily (which is sufficient, in view of the applicable rule), in view of obtaining tax advantages.

Although the Claimant alleges that "those transformations of companies and sales of shares do not present themselves as "central" acts of a structure of acts and legal transactions "essentially or primarily directed" at obtaining a tax advantage." (article 264 of the initial request), the truth is that the facts, objectively viewed, do not reveal this.

Indeed, those - as they are established, in a list which is moreover practically coincident with that suggested by the Claimant himself in his submissions - demonstrate that the only real, concrete and unquestionably verifiable advantage of the elaborate set of operations carried out by the Claimant was the tax gain obtained by him.

Let us see.

The Claimant, by force of the overwhelming superiority he held over the companies in question, in summary, carried out the following set of operations, with respect to the limited liability companies involved:

è He carried out an operation of division and transfer of quotas, using for this purpose people who were close to him;

è He carried out an increase of the share capital of companies C, Ltd, B, Ltd and F, Ltd, through incorporation of reserves;

è He carried out an operation of unification of quotas;

è He carried out an operation of transformation of a limited liability company into a stock company;

è He carried out the alienation of all the equity interests resulting from the preceding operations to the SGPS.

Additionally, within the same framework of operations, the Claimant established the SGPS, exclusively intended for the acquisition and holding of the equity interests of the remaining companies involved, of which he originally came to hold 99,996 out of 100,000 (99.996%) registered shares that constituted the respective capital.

Situating ourselves exclusively within the scope of taxation of capital gains, which is what the object of the present proceedings is limited to, what is at stake is a tax gain – immediate, concrete and directly apprehensible (not only by this Tribunal and by the AT, but also, according to any judgment of reasonableness and normality, by the Claimant himself at the moment of choosing to execute the set of operations where the transformation of limited liability companies into stock companies is inserted) – of more than half a million euros.

That is: so evident, notorious and relevant is this gain that, objectively, it is not at all credible, in any manner whatsoever, that the same was not grasped, weighed and, in the end, intended, by the Claimant, within the framework of the complex sequence of operations carried out and implemented by him.

Therefore, there is no doubt that the tax advantage obtained was the motivation for the act whose ineffectiveness, in this case, the AT seeks.

From this, then, it is necessary to proceed to ascertain whether this tax advantage, which motivated the legal transaction in question, was of this motivation the exclusive or primary character.

For it to be shown that that motivation had a character of exclusivity, it should be demonstrated, within the reasonably possible (given that it is a matter of proof of a negative fact), that there did not exist other relevant motivations for the performance of the act or legal transaction in question.

For it to be shown that the motivation in question was the primary motivation for the performance of the act or legal transaction, it should be demonstrated that the same prevails, predominates, stands out, from among the remaining motivations that present themselves as capable of having assisted the action under review. It becomes necessary, in short, to demonstrate that among all the reasons that, demonstrably, have determined the performance of the act or legal transaction whose effectiveness is questioned, the tax advantage sought assumes itself as prominent, in terms of being able to say that the same will have given a decisive impulse for its accomplishment.

It is important to note that, moving in the shifting terrain of intentions, here a pure subjectivism cannot be accepted, reducible, in the final analysis, to the demonstration of the psychological and emotional state of the agents at the moment of the performance of the act or the conclusion of the transaction. Rather, the motivation as revealed in facts objectively and concretely apprehensible will be relevant, which is obviously not to be confused with the mere embodiment, in documents, of declarations of intention.

Given this, the Claimant argues that the transformation of the limited liability companies carried out by him was due, primarily, not to the tax advantage that the same, downstream, would provide him, but to:

è A corporate reorganization justified by economic-business reasons (redundancy of the Claimant);

è To the constitution of a group company relationship, with the advantages resulting therefrom, namely in the commercial, labor and human resources, financial and obtaining financing (inter-company and banking), so as to confer a "reinforced negotiating position" before its suppliers and, in particular, before the franchiser "L Ltd.";

è To the creation of a social structure that would allow it to effectively respond to the needs of the market - which would require a modern legal structure with greater impact with clients, banking entities and suppliers;

è To the creation of the possibility of access of the companies to the capital markets, with all the advantages resulting therefrom, particularly with respect to financing.

Regarding these reasons set forth by the Claimant, suffice it to say that the same, as they are presented, pale, in what concerns their objective relevance, in the face of the tax advantage that was seen as the motivation, at least primarily, for the conversion of the six limited liability companies into stock companies. Indeed, none of those reasons presents itself as generating advantages quantifiably approximable, or even comparable, to the amounts to which the tax advantage actually obtained amounts.

Furthermore, the motivations advanced by the Claimant, as the AT notes, are merely generic, potential and abstract, never managing the Claimants to demonstrate – and quantify – the alleged gains that would result from those, nor, much less, to contrast them with the expenses that resulted from the operation for the corporate group. Indeed, a "corporate reorganization", a "reinforced negotiating position", a "modern legal structure", or even "advantages in financing", should, when compared with a tax gain of the nature obtained by the Claimant, present themselves quantifiably reported to concrete gains obtained or, at least, reasonably foreseeable.

It is further added that, even from the perspective of group corporate organization, where the Claimant centers this question, any gains that, from a perspective of normality can reasonably be granted as foreseeable as resulting from the scheme devised by the Claimant, will be overwhelmingly obliterated by the expenses that, in fact and, again, in a perfectly quantifiable manner, resulted for such group, generator of the organizational, commercial, financial synergies, etc. In fact, the entire process involving the six limited liability companies and the SGPS established by the Claimant, implied for the group created, centered in its controlling company, an expense of more than five million euros, resulting from the acquisition of the companies from the Claimant, with it not being demonstrated in the record, neither near nor far, any advantages that, in a concrete and objective manner, are justified in relation to such order of values.

In other words, and in sum, from the strictly corporate perspective (limited to the companies involved), the scheme concretely carried out by the Claimant was, remarkably, contrary to the patrimonial interests involved. Only the entry into consideration of the personal interests of the Claimant, not only in what concerns the tax gain, but also in the transfer of accumulated wealth or to be accumulated in the companies to his personal sphere, without the normal route of distribution of profits, is that, from a perspective of objective motivation, will explain the conception and accomplishment of all the operation where the act whose effectiveness the AT seeks, for tax purposes, to suppress is inserted.

The relevance of the motivations linked to tax gains in the subjective sphere of the Claimant are also underlined by the other acts and transactions that make up the complex of operations described above, where the transformation of limited liability companies into stock companies is inserted and makes sense. In fact, both, for example, the form of the capital increase (incorporation of reserves), and the value of the sale of the equity interests to the SGPS are particularly striking, in this respect, since from the perspective of the motivations alleged by the Claimant for the scheme implemented by him, both would be unnecessary, especially considering that, in practice, there was no transfer, total or even partial, of the domain of the companies to any third party, since the result of that referred scheme was, rather, a reinforcement of the already very narrow domain of the Claimant over the companies. That is: being, as is the case, the purpose of the set of operations more than a maintenance, a reinforcement of the status quo, in what concerned the factual control of the companies, there was no reason – other than of a fiscal nature – either for the capital increase or for the increase in the selling price of the Claimant's equity interests to the SGPS, which reveals, to the utmost, the fiscal pre-ordination of the entire scheme.

It is concluded, thus, far beyond any reasonable doubt, that the legal transaction in question – transformation of limited liability companies into stock company, was undertaken, if not essentially, at least primarily with a view to obtaining tax advantages, which is not to say – on the contrary, as seems to be the AT's understanding – that such is sufficient to legitimize the application of the anti-abuse clause.

Subscribed are thus the considerations of Prof. Saldanha Sanches, transcribed by the Claimant, according to which "even if the transformation of a limited liability company into a stock company was motivated exclusively by fiscal reasons, one would not be faced with an act reprehensible in the face of the tax legal order, since the tax legislator himself expressly chose to tax under IRS the gains resulting from the sale of quotas and not to tax under that tax the gains resulting from the sale of shares in that context.".

Indeed, and this is made very clear from the outset, it is understood, as regards the application of the general anti-abuse clause subject of article 38, no. 2 of the LGT, here at issue, that the mere undertaking of an act or legal transaction for reasons strictly fiscal, and even if it has no other material justification than those, shall not license, per se, the AT to strip it of effectiveness.

In order for it to be legally possible to deprive of effectiveness the act or legal transaction undertaken essentially or primarily for fiscal reasons, including the transformation of a limited liability company into a stock company, it becomes further indispensable that there was a use in a causally relevant manner, of artificial or fraudulent means and of abuse of legal forms.

We shall look at this aspect immediately below.

Essentially, the crux of the central issue of the present proceedings is situated, precisely, here.

Indeed, as already noted, it is meridianly clear that the motivation of the legal transaction in question was, at least, primarily the tax advantage that resulted therefrom for the Claimant, resulting from the non-taxation under IRS of the increase in patrimony that the entire operation implied, in his personal sphere.

However, for the effectiveness of that transaction to be, for tax purposes, legitimately withdrawn, it becomes then necessary to demonstrate that such advantage would not be achieved, wholly or partially, without the use of artificial or fraudulent means and with abuse of legal forms.

The legal expression of the requirement for application of the general anti-abuse clause that now concerns us is not particularly felicitous, being eminently conceptualistic and, it is thought, redundant.

Whatever the doctrinal construction one adheres to in the matter in question, there will be agreement in any case that the legal expression reports to an abnormal use of legal forms, in terms of there being a contradiction between the purpose of the normative protection granted by means of the norms or legal structures used, and the use that is, in fact, made of them.

The Claimant himself accepts this, subscribing that "The fiscal legislator's option requires "that the due consequences be drawn as to the structuring of the transaction which, beyond being directed to the obtaining of the aforementioned tax advantage, shall furthermore be simultaneously, endowed with an abnormal, unusual, artificial, complex, or even contradictory form, in consideration of the economic-practical purposes aimed at by the taxpayer. It is, in conclusion, at the level of incoherence between the form or structure chosen and the economic-practical purpose of the taxpayer, between the purpose for which that adopted form is concretely employed and the cause that is proper to it..."", and, further on, that "it is not all and any behavior that should be qualified as abnormal, unusual, artificial or complex, embodying fiscal normative fraud only in cases where there is a manifest abuse of forms, with absurd, unusual or pointless clauses, that defunction the transactions used, moving them away from their habitual vocation."

With deference to the Claimant's opinion, it is considered that, in the case, there is clearly evidenced, an action that, globally considered, presents itself unequivocally directed to the obtaining of the (previously) referred to (and demonstrated) tax advantage, simultaneously, with the abnormal, unusual, artificial, complex, use of legal forms, even in a manner contradictory, with the economic purposes aimed at by the taxpayer.

Indeed, and as advanced above, the purposes presented by the taxpayer as having determined the performance of the set of operations where the legal transactions of corporate transformation signaled by the AT are integrated, are, per se, largely contradicted by the cost that, from the perspective of the corporate group, this ended up assuming, related to the acquisition of equity interests from the Claimant.

There is no doubt in affirming that "The group company relationship thus created - originating with the transfer of the securities in question to "M - SGPS, S.A." – allows(will allow) a bank financing that, otherwise, in view of current circumstances, the Claimant cannot(could not) see assured", forgetting the substantial need for financing that the very operation executed generated for the corporate group, is to see less than half of the relevant reality. And, even if it can be granted that "the synergies generated with the integration of the aforementioned company positions in that managing company of equity interests, namely at the level of administration and human resources", may allow some gains, given some there are that allow them to be situated in the order of magnitude of the expenses assumed by the group of companies, with its concrete creation. In other words, nowhere is it demonstrated – on the contrary – that the financing advantages supposedly obtained exceed, or even cover, the financing needs generated by the operation.

Therefore, it is concluded that the economic purposes (allegedly) aimed at by the taxpayer are, frontally, contradictory with those concretely verified, insofar as it would be sought, in the ultimate analysis, to improve the economic and financial capacities of the group of companies, and instead ends up, in fact, burdening it heavily with an expense of more than five million euros, it being impossible to ignore that, precisely, the beneficiary of those burdening expenses of the corporate group that underwent, and resulted from, the entire operation executed by the Claimant, was precisely him, thus revealing, in the foreground, the artificial and fraudulent character of that action, which, under the guise of a purported corporate interest, in a biased manner and heavily burdening the corporate group held by him, manages to substantially increase his own personal patrimonial sphere, avoiding, in the manner described, that such increase be subject to the respective tax.

On the other hand, and as will be demonstrated immediately below, the very legal forms instrumentalized in the operations carried out denote an "incoherence between the form or structure chosen and the economic-practical purpose of the taxpayer", and "defunction the transactions used, moving them away from their habitual vocation.".

Let us see.

As the Claimant himself very pertinently argues, it is subscribed that "The normative intent, or rather, the purpose aimed at by the tax legislator, in granting the exclusion from taxation of "capital gains from the alienation of shares held by their holder for more than 12 months" seems obvious, in what we could consider as a tax benefit granted to "longer-term" investors, aimed at capturing capital investments, national and foreign, the promotion and development of the capital markets and economic activity in general, harmed as it is(was) by the "mere speculation" of the capital markets (with the consequent taxation under IRS)".

It is further subscribed that, undoubtedly "the tax legislator demonstrated all interest in the dynamization, organization and installation of economic groups in Portugal, promoting them", and that "the Portuguese legislator could not remain indifferent to the phenomenon of the proliferation of "capital companies" as an inescapable reality of economic activity in general and of forms of organization of companies in particular, in the present globalized world".

However, it follows, precisely, from what has just been said, that, in fact, there exist and operate stock companies and corporate groups, as such.

Now, as is known, companies, as legal entities, have long been understood as "collectivities of persons or patrimonial complexes organized with a view to a common or collective purpose to which the legal order attributes the quality of subjects of rights", being specifically understood as a "set of persons – two or more – who contribute with goods or services for the exercise of an economic activity aimed at obtaining profits and their distribution among the partners."

And as Professor Carlos Alberto da Mota Pinto elucidates, "The existence of legal entities results from the existence of durable human interests of a common or collective character. The achievement of these interests requires the concurrence of the means and activities of several persons or, at least, several persons are interested in it.", concluding that "Collective personality is, therefore, a technical-legal mechanism justified by the idea of, with greater convenience and efficiency, organizing the achievement of collective and durable interests." In sum, further in the words of the same Professor, "The economic-social function of the institute of collective personality is linked to the achievement of common or collective interests, of a durable character."

This doctrinal convergence serves to recall that the purposes underlying the legal tax regimes in question in the proceedings, correctly pointed out by the Claimant, do not dispense with, as they could not dispense with, the interests protected by the institutional type to which they are reported.

That is, if, in fact, the regime of no. 2 of article 10 of the CIRS aimed to grant a benefit "to "longer-term" investors, aimed at capturing capital investments, national and foreign, the promotion and development of the capital markets and economic activity in general", and "the tax legislator demonstrated all interest in the dynamization, organization and installation of economic groups in Portugal, promoting them", and "could not remain indifferent to the phenomenon of the proliferation of "capital companies" as an inescapable reality of economic activity in general and of forms of organization of companies in particular, in the present globalized world" the truth is that, in the case, all these purposes are seen as emptied in the action of the Claimant, insofar as the final product of the set of operations by him delineated and executed results, precisely, in the opposite of what is protected by the institute of collective personality in general, and of corporate (whether individual or group) in particular.

Because, well viewed, as they present themselves in reality, the result of the legal work undertaken by the Claimant was the creation of a corporate group that holds 100% of the capital of six stock companies, controlled in 99.996% by the Claimant!

This purpose is, moreover, absolutely assumed by the Claimant before the business franchiser operated by the transformed companies, not only referring several times to the companies as "mine", but expressly declaring that: "in the specific case of my companies, in order for us to arrive at the framework presented, which represents a total reinforcement of the intuitu personae character in the franchising contracts indirectly concluded with the ceding companies, we will have to perform various continuous legal acts, step by step, until I arrive at the possession of all the shares of the SGPS, and thus, indirectly, of all the shares of the ceding companies."

Now this is, precisely, the negation of one of the most basic teleological elements that sustain the institute of collective personality, and of companies in particular, which is the idea of collectivity.

Indeed, the organization resulting from the entire plan where the legal transactions of corporate transformation whose ineffectiveness the AT seeks were inserted is nothing more than a mere extension of the Claimant, that exhausts it, not aiming nor pursuing the achievement of any collective interests, the exploitation of common goods or resources or the distribution of profits, revealing itself, in sum, the Claimant as a deus ex machina of the corporate group.

Such an organization aims at nothing – it is this that follows from the facts ascertained – than to place at the service of the personal interests of the Claimant the technical-legal mechanism of collective personality, instrumentalizing it, and contravening, frontally, the very economic-social function of the institute of collective personality, by directing itself, deliberately, to the exclusive achievement of the individual interests of the Claimant.

And it shall not be said that the intuitu personae character of the franchising contracts did not allow things to be otherwise. Indeed, either that intent is centered on the companies (which are, obviously, personae), and in that case there would be no obstacles to the dispersal of capital, or it is centered on the Claimant, in which case all the corporate structures built are merely masks placed on the true titleholder of the franchising legal relationship, aiming at nothing more than to instrumentalize the technical-legal mechanisms underlying that type of organization, for personal benefit of that one.

Thus, not only are not reflected in the situation created by the Claimant the purposes pointed out by him himself as being underlying the non-taxation of capital gains, and the tax promotion of corporate groups, as the same are, frontally contradicted, since, there being no material substrate of "company", nor much less of corporate group, there is no intervention of investors or capital markets, nor the dynamization, organization or installation of any economic groups, since the entire corporate structure designed and implemented was directed, deliberately and, even, assumedly, to a type of organization entirely individual, in terms of one being able to question even whether are not gathered in fact the requirements necessary for, even in the absence of the rule of article 38, no. 2 of the LGT, the mechanism of disregard of legal personality were to be resorted to.

Indeed, and as is referred to in the Judgment of the Court of Appeal of Coimbra of 03/07/2013, handed down in case 943/10.8TTLRA.C1, among the conditions for application of the disregard of legal personality institute, one finds that the legal personality must have been used fraudulently or abusively, and that as a result the separation between the legal entity and its members becomes contrary to the purposes of the legal system, particularly when used to evade rights of creditors or to commit fraud to the detriment of third parties. In the case under examination, beyond the fraudulent or abusive use of legal personality is evident, namely by its instrumentalization for the exclusive benefit of the Claimant, in contravention of the function attributed to it by the legal system, is also evident that such use contravenes the purposes of the legal system, namely the purposes explicitly highlighted by the Claimant himself as underlying the favorable tax treatment of corporate groups and capital gains from long-held shares.

In fact, the construction undertaken by the Claimant is precisely the polar opposite of what was intended by the legislator in the tax provisions referred to, serving the "abusive and artificial use of legal forms" in its purest state, because the specific corporate structure used – the group company relationship – is diverted from its intended purpose of allowing the organization of durable collective interests, to serve exclusively, and in an abusive manner, the personal interests of the Claimant.

Therefore, there is no doubt that, in the case under examination, the conditions for the application of the general anti-abuse clause provided for in article 38, no. 2 of the LGT are fully met.

Accordingly, and given that the Tribunal has found that the Claimant acted in a manner that is essential or primarily directed to obtaining tax advantages, through the use of artificial and fraudulent means, with an abuse of legal forms, it is necessary that the decisions issued by the AT be upheld, reversing, in this way, the apparent illegality alleged by the Claimant.

The acts of additional assessment of IRS, assessment of compensatory interest and account adjustment issued by the Tax Administration must therefore be considered legal.

III. RULING

For the foregoing reasons, the Tribunal decides:

To reject the request for annulment of the acts of additional assessment of Personal Income Tax no. 2013…, of 01/10/2013, relating to the year 2009, for the amount of €590,387.91 (five hundred and ninety thousand, three hundred and eighty-seven euros, ninety-one cents), of assessment of compensatory interest no. 2013…, of 07/10/2013, relating to the period between 29/05/2010 and 13/09/2013, for the amount of €77,486.93 (seventy-seven thousand, four hundred and eighty-six euros, ninety-three cents), and of account adjustment no. 2010…, of 07/10/2013, relating to the year 2009, for the amount of €3,121.91 (three thousand, one hundred and twenty-one euros, ninety-one cents).
To maintain the application of the general anti-abuse clause provided for in article 38, no. 2 of the LGT, as carried out by the Tax Administration.
To maintain the disregard, for tax purposes, of the transformation of the limited liability companies into stock companies, undertaken by the Claimant, for the purposes of the taxation of the capital gains resulting from the alienation of the equity interests.

Lisbon, 27 November 2014.

The Arbitrators:

Jorge Lopes de Sousa
(Arbitrator President)

José Pedro Carvalho
(Arbitrator)

João Menezes Leitão
(Arbitrator)

Frequently Asked Questions

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What are the tax implications of capital gains (mais-valias) under Portuguese IRS?

Under Portuguese IRS (Personal Income Tax), capital gains (mais-valias) from the transfer of equity interests are taxed in Category G at rates that vary depending on the type of participation and holding period. As established in CAAD case 51/2014-T, the CIRS (IRS Code) article 72(4) provides for a 10% tax rate on certain capital gains. However, different taxation rules apply depending on whether the equity interests are quotas (shares in limited liability companies) or shares in stock companies. The tax treatment of capital gains depends on factors including the nature of the securities transferred, the duration of ownership, and whether exemptions apply. In case 51/2014-T, the dispute centered on whether capital gains from selling shares in stock companies after transforming them from limited liability companies should be taxed or exempted, with the Tax Authority proposing to apply the 10% rate to €587,266 in gains that the taxpayer had excluded from taxation.

How does the General Anti-Avoidance Clause (CGAA) apply to IRS capital gains in Portugal?

The General Anti-Avoidance Clause (Cláusula Geral Anti Abuso - CGAA) under article 38(2) of Portugal's General Tax Law (LGT) allows tax authorities to disregard legal transactions or structures that lack economic substance and are designed primarily to obtain tax benefits contrary to the spirit of tax legislation. In CAAD case 51/2014-T, the Tax Authority applied the CGAA to capital gains, arguing that the transformation of limited liability companies into stock companies before selling equity interests constituted tax avoidance because it was done solely to access more favorable tax treatment for shares versus quotas. The application of the CGAA requires authorization from the Director-General of the Tax and Customs Administration and follows a specific procedure outlined in article 63 of the Tax Procedure Code (CPPT). The taxpayer challenged this application, arguing that choosing a different legal structure for legitimate business reasons, even if it provides tax savings, does not constitute abuse but rather the exercise of a legitimate right to structure affairs tax-efficiently.

Can a taxpayer choose a different legal structure to reduce tax liability without triggering anti-avoidance rules?

Portuguese taxpayers generally have the right to choose legal structures that minimize their tax liability, as this constitutes legitimate tax planning rather than tax avoidance. However, as illustrated in CAAD case 51/2014-T, the General Anti-Abuse Clause (CGAA) may apply when the chosen structure lacks economic substance beyond obtaining tax benefits. The taxpayer in this case argued that 'one cannot speak of tax avoidance when someone chooses a different legal form to exercise a particular activity because they have discovered that, in their particular case, such a change would provide them with a tax saving: they are merely exercising a legitimate right.' The Tax Authority countered that transforming multiple limited liability companies into stock companies immediately before selling them, specifically to access capital gains exemptions available only for shares, crossed the line from legitimate planning into abusive tax avoidance. The key distinction lies in whether the restructuring has valid business purposes and economic substance, or whether it is artificial and designed solely to circumvent tax obligations. The outcome of such cases depends on factual analysis of the taxpayer's motivations and the economic reality of the transactions.

What is the procedure for challenging an additional IRS tax assessment through CAAD tax arbitration?

To challenge an additional IRS assessment through CAAD (Centro de Arbitragem Administrativa) tax arbitration in Portugal, taxpayers must follow the procedure established in the Legal Regime of Arbitration in Tax Matters (RJAT - Decree-Law 10/2011). As demonstrated in case 51/2014-T, the process begins with filing a request for constitution of an arbitral tribunal under articles 2 and 10 of the RJAT, identifying the contested tax assessments and amounts. The taxpayer must specify the acts being challenged (in this case, the additional assessment, compensatory interest, and account adjustment totaling €667,874.84) and present legal arguments for their illegality. After the request is accepted and notified to the Tax Authority, an arbitral tribunal is constituted with three arbitrators if the taxpayer doesn't appoint one. The Tax Authority then files its defense, typically within 30 days. The tribunal may hold hearings for witness examination and receive written submissions from both parties. The CAAD arbitration provides an alternative to judicial court appeals, offering a faster and specialized forum for resolving tax disputes, with arbitrators who are experts in tax law appointed by the CAAD Ethics Board to ensure qualified adjudication of complex tax matters.

What was the outcome of CAAD arbitration process 51/2014-T regarding the €667,874.84 tax assessment?

While the excerpt from CAAD arbitration process 51/2014-T does not include the final decision on the €667,874.84 tax assessment, the case record shows the procedural history and substantive issues examined by the arbitral tribunal. The tribunal, composed of three arbitrators appointed by CAAD's Ethics Board, was constituted on March 27, 2014, to decide whether the Tax Authority correctly applied the General Anti-Abuse Clause to disregard corporate transformations and assess additional IRS on 2009 capital gains. The taxpayer challenged the assessment of €590,387.91 in additional tax, €77,486.93 in compensatory interest (covering the period from May 29, 2010, to September 13, 2013), and €3,121.91 in account adjustments. Both parties submitted written arguments and initially scheduled witness examinations, though they jointly waived testimony on June 9, 2014. The parties then filed final written submissions maintaining their positions—the taxpayer arguing the restructuring was legitimate tax planning, and the Tax Authority arguing it constituted abusive tax avoidance lacking economic substance. The tribunal found itself materially competent, the parties properly represented, and no procedural defects, proceeding to examine the merits of whether the legal requirements for applying the anti-abuse clause were satisfied in this capital gains context.

IRS Capital Gains Tax and General Anti-Avoidance Clause – CAAD Arbitration 51/2014-T

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IRS Capital Gains Tax and General Anti-Avoidance Clause – CAAD Arbitration 51/2014-T

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