CAAD Case 521/2017-T: Deductibility of Financial Costs in Reverse Merger Under IRC Article 23 – Preliminary Ruling

Tax Arbitration Jurisprudence

Case No. 521/2017-T

Decision Date: 2019-10-01

Subject Matter: Corporate Income Tax (IRC) – Deductibility of Financial Expenses – Reverse Merger – Articles 23(1) and 23(2)(c) of the Corporate Income Tax Code (CIRC). Preliminary Ruling Decision (attached to the decision).

PRELIMINARY RULING

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ARBITRAL DECISION

The arbitrators designated to form the Arbitral Tribunal, constituted on December 20, 2017, Dr. Alexandra Coelho Martins (arbitrator-president), Prof. Dr. Tomás Cantista Tavares (designated by A..., S.A.) and Prof. Dr. Américo Brás Carlos (designated by the Tax Authority), agree as follows:

REPORT

A..., S.A., a legal entity with identification number..., with registered office at..., n.º..., ...-Piso..., hereinafter referred to as the "Claimant," requested the constitution of a Collective Arbitral Tribunal, pursuant to Article 10 of the Legal Framework for Tax Arbitration ("RJAT"), approved by Decree-Law No. 10/2011 of January 20. In this context, it chose to designate an arbitrator, in accordance with the terms and for the purposes set forth in Articles 6(2)(b) and 11 of the RJAT, having presented the following claims:

1. Declaration of illegality and consequent annulment of the Corporate Income Tax (IRC) assessments and compensatory interest relating to the fiscal years 2013 and 2014, issued under nos. 2017... (€174,370.59) and 2017... (€484,872.29), respectively, from which resulted a total settlement adjustment in the amount of €717,754.38; and

2. Condemnation of the Tax Authority (AT) to pay compensation for expenses incurred with the provision and maintenance of bank guarantees.

The Claimant, exercising the faculty provided for in Article 6(2)(b) of the RJAT, designated arbitrator Prof. Dr. Tomás Cantista Tavares, and the Tax Authority, observing the provisions of Article 11(2) of the RJAT, designated Prof. Dr. Américo Brás Carlos.

In the absence of agreement, the President of the Deontological Council of CAAD designated as arbitrator-president Dr. Alexandra Coelho Martins.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and followed its normal proceedings, namely with notification to the Tax Authority. All arbitrators communicated their acceptance within the applicable time limit. The parties, duly notified, did not manifest any intention to refuse the designations.

The collective arbitral tribunal was constituted on December 20, 2017, in compliance with the provisions of Article 11(1)(c) of the RJAT.

The Claimant alleges the following legal defects as grounds for its claim:

1. Violation of law due to error in the factual basis, resulting from the non-acceptance, as fiscally deductible financial expenses, of the interest incurred by the Claimant relating to a loan previously contracted by company B... S.A., an entity that was incorporated by merger into the Claimant (reverse merger). This loan had been contracted for the acquisition of the equity interests of the Claimant itself.

The Claimant contends that the assessment of the necessity of financial expenses should be made by reference to the entity that originally obtained the loan and at the time it was contracted, with no justification for the interest to cease being fiscally deductible due to the mere result of the merger.

Thus, the Claimant argues that the said interest "was contracted within the scope of activity and in the interest of the Claimant in operations capable of generating taxable income" and derives inevitably from the legal effects of the merger, and therefore, in its view, the Tax Authority's position constitutes an incorrect interpretation and application of the concept of necessity provided for in Articles 23(1) and 23(2)(c) of the IRC Code, and violates the fiscal neutrality regime;

1. Violation of the constitutional principles of tax legality and contributory capacity in its aspect of taxation on real income – cf. Articles 103(2) and 165(1)(i) and 104(2) of the Constitution of the Portuguese Republic ("CRP");

2. Absolute lack of reasoning and material quantification error in the calculation made by the Tax Authority in determining the component of hypothetically non-deductible interest associated with the financing of the acquisition of the Claimant's equity interests, in breach of Articles 77 of the General Tax Law ("LGT") and 268(3) of the CRP; and

3. Absolute lack of reasoning and material quantification error in the calculation made by the Tax Authority, by disregarding, without justification, the Claimant's reportable tax losses, in violation of Articles 77 of the LGT and 52 of the IRC Code.

The Tax Authority presented a response in which it defended that the claim should be judged as without merit and attached the administrative file. It contends, for such purpose, that:

1. With the concrete merger operation, no assets were transferred to the Claimant's sphere; only an increase in the valuation of the shopping center, which was already its property, was recorded, in exchange for the increase in liabilities due to the incorporation of the loan that had served to acquire its shares [of the Claimant] by the incorporated company. This was thus a debt-push-down operation that placed the acquired company itself in the position of debtor, with the financing not being dedicated to the operation of the Claimant's activity, but rather benefiting a third party, namely its sole shareholder;

2. The merger operation resulted in the dissociation between the loan and the acquisition of equity interests, thus implying the disappearance of the connection that existed between the interest and the business activity developed by the entity that recorded these expenses;

3. The incorporation of the loan by virtue of the merger contributed to the increase in financial expenses borne by the Claimant, without being capable of promoting the increase in its profit, and therefore such expenses are not necessary for the realization of income subject to IRC, nor do they have any justified relationship with the Claimant's income-producing activity;

4. The necessity test must be performed in relation to the company whose expenses are under consideration;

5. The temporal allocation of interest carried out in accordance with the principle of exercise specialization implies the determination of its necessity with reference to each fiscal year. The fact that expenses are necessary at a given time does not by itself mean that they must be in future years, in accordance with the combined analysis of Articles 18(1) and 23(1), both of the IRC Code;

6. The fiscal neutrality regime does not contemplate the waiver of the scrutiny of the deductibility of expenses and losses that, after the merger, arise in the sphere of the incorporating company;

7. There is no violation of any constitutional principles, inasmuch as not only the interpretation defended by the Tax Authority is framed within Article 23 of the IRC Code, but also the submission of the deductibility of costs to the necessity test that leads to the real income of the Claimant; and finally,

8. The criterion for allocation of interest is reasoned in the Tax Inspection Report ("RIT") and is based on a linear proportion.

On February 21, 2018, the meeting provided for in Article 18 of the RJAT was held, in which oral arguments were produced and April 30 was set as the deadline for the decision.

Subsequently, the Claimant presented a request for objective modification of the proceedings and alteration of the value of the case, on which the Arbitral Tribunal pronounced, relegating knowledge thereof to the final decision.

The Tribunal also decided to extend the time limit provided for in Article 21(1) of the RJAT by two months, i.e., until August 20, 2018, given the complexity of the technical issues raised, including the possible preliminary referral to the Court of Justice of the European Union to assess the (in)compatibility of the non-deductibility of financial expenses in the legal sphere of the company benefiting from the merger with the regime of Directive 90/434/EEC of the Council of July 23, 1990, subsequently replaced by Directive 2009/133/EC of the Council of October 19, 2009, of which the parties were notified and to which they did not object.

CASE MANAGEMENT

The Tribunal was regularly constituted and is competent ratione materiae (cf. Articles 2(1)(a) and 5 of the RJAT).

The parties enjoy legal personality and capacity, have legitimacy, and are regularly represented (cf. Articles 4 and 10(2) of the RJAT and Article 1 of Ordinance No. 112-A/2011 of March 22).

The proceedings do not suffer from any nullities, and no preliminary issues were raised.

GROUNDS FOR DECISION

FACTUAL MATTER

For purposes of the decision, the following facts are relevant:

1. A..., S.A., hereinafter "A..." or Claimant, is a commercial company engaged in the activity of operation, administration, and management of shopping centers and stores, and may additionally engage in the purchase and sale and leasing of real property and is framed under the General Regime for IRC purposes – cf. Tax Inspection Report ("RIT"), contained in the administrative file ("PA").

2. In concrete terms, the Claimant has been engaged in the operation, administration, and management of the Shopping Center... – cf. RIT and financial information contained in Documents 3 to 17 attached by the Claimant.

3. In the fiscal year 2000, the date on which the process of constitution of the Claimant company began, a construction contract for the gallery of the Shopping Center... was concluded by its shareholders and in representation of the Claimant (still to be constituted), in the value of €53,360,787.00, located in the metropolitan area of Porto – cf. RIT and Annex to Document 3 attached by the Claimant.

4. After the formal constitution of the Claimant, completed in 2002, and so that it could finance the construction of the Shopping Center..., a real property asset that became its property, the Claimant obtained financing via capital contributions from its two shareholders – C... and D...– in equal parts, by loan in the amount of the construction – cf. RIT and Documents 4 and 5 attached by the Claimant.

5. In July 2003, shareholder C..., which held 50% of the Claimant's capital, was sold to company E..., S.A., belonging to the E... Group, a French-based group listed on the main French stock exchange CAC 40, which thus came to hold indirectly 50% of the Claimant, as illustrated below. The respective credits were also transferred – cf. RIT and Annex 2 to Document 3 attached by the Claimant:

[Organizational chart showing 100% ownership structure]

50% 50%

1. In June 2005, C... and D... established company F..., to which they transferred, by contribution in kind, the equity interests they held in the Claimant and the respective credits, at that date valued at €47,486,435.00, resulting in the following structure – cf. RIT and Annex 2 to Document 3 attached by the Claimant:

[Organizational chart showing 100%, 50%, 50% ownership structure]

1. In July 2009, D... sold to C... its equity interest in F..., representing 50% of the Claimant's capital, such that F... came to be held 100% by C... as illustrated below – cf. RIT and Annex 2 to Document 3 attached by the Claimant:

[Organizational chart showing 100% ownership structure]

1. Also in July 2009, in the context of an internal restructuring of the E... group, F... sold at fair market value, for the global amount of €69,884,000.00, its equity interest in the Claimant to company B..., S.A., established in April 2009 with capital of €50,000.00 and held 100% by G... SGPS, S.A., which in turn was held 100% by E..., S.A., resulting in the Group in Portugal having the following structure – cf. RIT and Annex 2 to Document 3 attached by the Claimant:

[Organizational chart showing 100%, 100% ownership structure]

1. In order for company B..., S.A. to acquire the shares of the Claimant from F..., G... SGPS, S.A. granted to the former [B...] a loan in the aforementioned amount for acquisition of the equity interests, of €69,884,000.00 – cf. RIT and Document 5 attached by the Claimant.

2. Furthermore, the remaining credit that F... still held over the Claimant, in the amount of €35,817,057.30, relating to the loan initially granted for the construction of the shopping center, was assigned to G... SGPS, S.A. – cf. RIT and Document 5 attached by the Claimant.

3. On November 18, 2009, the Claimant absorbed, through merger by incorporation, its sole shareholder B..., S.A., coming to be held directly (previously indirectly) 100% by G... SGPS, S.A., as graphically illustrated below – cf. RIT and Annex 4 to Document 3 attached by the Claimant:

[Organizational chart showing 100% direct ownership]

1. The merger operation was carried out through the global transfer of the assets and liabilities of company B..., S.A. (incorporated company) to the Claimant (incorporating company), including the respective debts and financial expenses, producing (retroactive) effects as of April 22, 2009 – cf. RIT and Annex 4 to Document 3 attached by the Claimant.

2. Thus, the loan granted to B..., S.A. by G... SGPS, S.A., in the amount of €69,884,000.00, for the acquisition of the equity interests representing the capital of the Claimant, was transferred with the merger operation to the Claimant's legal sphere, consolidating with the remaining (not yet paid) portion of the loan initially granted, in the amount of €35,817,057.30, for the construction of the shopping center. Thus, G... SGPS, S.A. came to hold a consolidated credit over the Claimant in the total amount of €104,937,330.91 – cf. RIT and Documents 5 and 6 attached by the Claimant.

3. As consideration for the increase in the Claimant's liabilities in the amount of €69,884,000.00, the increase in the valuation of the Shopping Center was recorded. No assets from the incorporated company were transferred to the Claimant's sphere, as the only asset that the incorporated company held was the financial equity interest in the Claimant – cf. RIT and Documents 5 and 6 attached by the Claimant.

4. The consolidated loan which after the merger amounted to €104,937,330.91 has gradually decreased due to repayments made, as shown in the table below – cf. RIT and Documents 3 and 6 to 12 attached by the Claimant:

1. The total interest expenses, recorded and recognized as expenses by the Claimant, amounted to €3,673,438.00 in fiscal year 2013 and €3,607,234.24 for fiscal year 2014, having been calculated with the same interest rate applied to the total amount of the loan – cf. RIT and Annex 6 to Document 3 and Documents 10 and 11 attached by the Claimant.

2. The Claimant did not add these amounts in section 07 of the Model 22 Declarations submitted for the fiscal years 2013 and 2014 – cf. RIT.

3. Following service orders nos. OI2017... and OI2017..., with dispatch of January 24, 2017, the Claimant was subject to an external tax inspection for the fiscal years 2013 and 2014, of limited scope, regarding IRC, for analysis of financing provided by group companies and corresponding financial expenses recognized as costs. The external inspection acts occurred from February 2, 2017 to April 7, 2017 – cf. RIT and Document 13 attached by the Claimant.

4. On May 10, 2017, following the completion of the inspection procedure and having not exercised its right to a hearing, the Claimant was notified of the Final Tax Inspection Report ("RIT") which recommends the following adjustments to its IRC taxable base – cf. RIT and Document 3 attached by the Claimant:

1. The basis for the corrections made to the Claimant's IRC taxable base is the disallowance of the interest borne by the Claimant in the aforementioned fiscal years, in the proportional part attributable to the loan contracted by B..., S.A. for the acquisition of all equity interests representing the capital of the Claimant, a loan which, via the merger by incorporation of B..., S.A. in 2009 (reverse merger), ultimately transferred to the Claimant's own legal sphere – cf. RIT.

2. In this context, without calling into question that the Claimant should assume all expenses that the incorporated company held, the RIT maintains that: "the financial expenses resulting did not contribute to the realization of profits or gains and to the maintenance of the income-producing source of A..., since that loan when contracted was used only for payment of the shares of A..., already that the only asset of A... was precisely the equity interest of A... (…). In summary, those expenses are not related to the activity of A... but rather to a firm B..., being unnecessary for the realization of the profits of A..." – cf. RIT, p. 16.

3. Additionally, the RIT considers (p. 19):

"The financial expenses of A... [read B...], with the acquisition of A..., via reverse merger, became financial expenses of A... itself, with no distinction having been made in its accounting of the financial expenses incurred with its own acquisition, originating a reduction in A...'s taxable result.

These financial expenses cannot be accepted as fiscal expenses of A..., by not being necessary for the realization of income subject to IRC, under the terms of no. 1 of Article 23 of the CIRC, that is, of A...'s activity, the acquisition of itself does not form part, and since they were not added in section 07 of Model Declaration 22 of IRC, they are improperly reducing the taxable base under IRC.

Thus we have: Total loan in fiscal year 2009: €104,937,330.90.

Value of the initial loan for construction of the shopping center, at the date of merger: €35,053,330.91

Value of the loan assumed by the merger, in 2009: €69,884,000.00

Thus, the proportion of the initial loan, over the total loan is 33% and 67% the proportion of the loan resulting from the merger over the total loan.

Since fiscal year 2009, the debt of company A... has been assumed and managed in accounting terms, both as to amortizations and as to expenses, as a whole.

Given that financial expenses were considered as costs, for fiscal years 2013 and 2014, in the amount of €3,673,438.01 and €3,607,234.24, respectively, arising from the total loan, the interest not accepted as expense amounts to €2,461,203.46 (€3,673,438.00 x 0.67) for 2013 and €2,416,846.94 (€3,607,234.24 x 0.67) for 2014."

1. The Claimant was notified of the additional IRC assessments and compensatory interest issued under nos. 2017..., dated May 22, 2017, for fiscal year 2013, and no. 2017..., dated June 7, 2017, for 2014, in the respective amounts of €174,370.59 and €484,872.29, from which resulted the total amount due of €717,754.38 (2013 - €174,935.04 and 2014 - €542,819.34) – cf. Document 1 attached by the Claimant (IRC assessment statements, interest assessment statements, and settlement statements).

2. In the context of the tax execution proceedings instituted for collection of the aforementioned additional assessments, and aiming at their suspension, the Claimant proceeded with the provision of bank guarantees –..., issued on September 4, 2017, in the amount of €221,648.51, and..., issued on September 21, 2017, in the amount of €687,396.01 – cf. Documents 18 to 21 attached by the Claimant.

3. On September 27, 2017, the Claimant submitted a request for constitution of the Arbitral Tribunal through the CAAD computer system.

UNPROVEN FACTS AND REASONING

The facts relevant to the judgment of the case were selected and delimited in accordance with their legal relevance, in light of the plausible solutions to the legal questions, under Article 596 of the Code of Civil Procedure (CPC), applied by reference to Article 29(1)(e) of the RJAT.

For purposes of the decision, there are no facts that should be considered unproven.

With respect to the facts proven, the conviction of the arbitrators was based on critical analysis of the documentary evidence attached to the proceedings.

LEGAL GROUNDS

2.1. Delimitation of the Legal Question: Deduction of Financial Expenses

The fundamental question that must be examined and decided concerns the fiscal deductibility (for IRC purposes) of the financial expenses incurred by the Claimant, a matter governed by Article 23(1) of the IRC Code, which, with reference to fiscal year 2013, provided as follows:

"Article 23
Expenses

1 — Expenses are those which are demonstrably necessary for the realization of income subject to tax or for the maintenance of the income-producing source, in particular:

(…)

c) Of a financial nature, such as interest on borrowed capital applied in operations, discounts, premiums, transfers, exchange differences, expenses on credit operations, debt collection, and issuance of bonds and other securities, redemption premiums and those resulting from the application of the effective interest method to financial instruments valued at amortized cost;"

The "IRC Reform" carried out by Law No. 2/2014 of January 16, applicable to fiscal year 2014, introduced some amendments to Article 23 of the IRC Code, which now provides:

"Article 23
Expenses and Losses

1 - For the determination of taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or guarantee income subject to IRC are deductible.

2 - The following expenses and losses are considered included in the previous number, in particular:

(…)

c) Of a financial nature, such as interest on borrowed capital applied in operations, discounts, premiums, transfers, exchange differences, expenses on credit operations, debt collection, and issuance of bonds and other securities, redemption premiums and those resulting from the application of the effective interest method to financial instruments valued at amortized cost;"

The principal change relates to the notion of fiscal expense from which the requirement of necessity, foreseen in 2013, was eliminated, now being limited "only" by the establishment of a causal nexus between the expense and the income subject to tax. However, the concept of fiscal expense current in 2014 continues to depend on the connection with income subject to taxation, that is, with the interest of the company, projecting a purposive result that does not substantially differ from the previous criterion of necessity.

The application of the said necessity criterion and/or the requirement of necessary connection of such expenses to the activity and corporate interest of the Claimant, as provided by the IRC Code, is capable of calling into question the respective fiscal deductibility. However, given that these are expenses that passed to the Claimant's sphere as a result of a merger operation (by incorporation) by the company that held entirely the equity interests of the Claimant (reverse merger), with no questioning of the necessity thereof (in the parent company, which was meanwhile incorporated), the question arises of the conformity of such interpretation in light of Community Law, as described in the following section.

2.2. On the Compatibility of the Non-Deduction of Financial Expenses with the Directive on the Common Tax Regime Applicable to Mergers

The reverse merger that originated the transfer, to the Claimant's legal sphere, of the liability generating the financial expenses here disputed, was carried out under the regime provided for in internal law (Articles 73 and 74 of the IRC Code), modeled after Directive 90/434/EEC of the Council of July 23, 1990, subsequently replaced by Directive 2009/133/EC of the Council of October 19, 2009 (hereinafter Directive).

The aforementioned provisions read:[1]

"SUBSECTION IV

Special Regime Applicable to Mergers, Divisions, Partial Divisions, Contributions of Assets, and Exchanges of Shares

Article 73
Definitions and Scope of Application

1 — A merger is an operation by which:

a) The global transfer of the assets of one or more companies (merging companies) to another already existing company (beneficiary company) takes place, and the shareholders of those companies are attributed equity interests representative of the capital of the beneficiary and, possibly, cash amounts not exceeding 10% of the nominal value or, in the absence of nominal value, of the accounting value equivalent to the nominal value of the equity interests to be attributed to them;

b) A new company (beneficiary company) is established to which the global assets of two or more companies (merging companies) are transferred, the shareholders of these companies being attributed equity interests representative of the capital of the new company and, possibly, cash amounts not exceeding 10% of the nominal value or, in the absence of nominal value, of the accounting value equivalent to the nominal value of the equity interests to be attributed to them;

c) The global transfer of the assets of a company (merging company) to the company holding all equity interests representative of its capital (beneficiary company);

d) The global transfer of the assets of a company (merging company) to another already existing company (beneficiary company), when all equity interests representative of the capital of both are held by the same shareholder;

e) The global transfer of the assets of a company (merging company) to another company (beneficiary company), when all equity interests representative of the capital of the latter are held by the merging company.

2 — A division is an operation by which:

a) A company (dividing company) separates one or more branches of its activity, maintaining at least one of the branches of activity, to establish other companies with them (beneficiary companies) or to merge them with already existing companies, by attributing to its shareholders equity interests representative of the capital of the latter companies and, possibly, a cash amount not exceeding 10% of the nominal value or, in the absence of nominal value, of the accounting value equivalent to the nominal value of the equity interests to be attributed to them;

b) A company (dividing company) is dissolved and its assets are divided into two or more parts, each intended to establish a new company (beneficiary company) or to be merged with already existing companies or with parts of the assets of other companies, separated by identical procedures and with the same purpose, by attributing to its shareholders equity interests representative of the capital of the latter companies and, possibly, a cash amount not exceeding 10% of the nominal value or, in the absence of nominal value, of the accounting value equivalent to the nominal value of the equity interests to be attributed to them;

c) A company (dividing company) separates one or more branches of its activity, maintaining at least one of the branches of activity, to merge them with the company (beneficiary company) holding all equity interests representative of its capital;

d) A company (dividing company) separates one or more branches of its activity, maintaining at least one of the branches of activity, to merge them with another already existing company (beneficiary company), when all equity interests representative of the capital of both are held by the same shareholder;

e) A company (dividing company) separates one or more branches of its activity, maintaining at least one of the branches of activity, to merge them with another already existing company (beneficiary company), when all equity interests representative of the capital of the latter are held by the dividing company.

3 — A contribution of assets is an operation by which a company (contributing company) transfers, without being dissolved, all or one or more branches of its activity to another company (beneficiary company), having as consideration equity interests of the beneficiary company.

4 — For the purposes of the preceding number and of subsections a), c), d) and e) of no. 2, a branch of activity is considered to be the set of elements that constitute, from an organizational standpoint, an autonomous economic unit, that is, a set capable of operating on its own means, which may comprise debts contracted for its organization or operation.

5 — An exchange of shares is an operation by which a company (acquiring company) acquires an equity interest in the capital of another (acquired company), which has the effect of conferring on it the majority voting rights of the latter, or by which a company, already holding such a majority equity interest, acquires a new equity interest in the acquired company, by attributing to the shareholders of the latter, in exchange for their securities, equity interests representative of the capital of the first company and, possibly, a cash amount not exceeding 10% of the nominal value or, in the absence of nominal value, of the accounting value equivalent to the nominal value of the securities delivered in exchange.

6 — For the purposes of applying Articles 74 and 76, with respect to mergers and divisions of companies from different Member States of the European Union, the term "company" has the meaning resulting from the annex to Directive No. 90/434/EEC of July 23.

7 — The special regime established in this subsection applies to merger and division operations of companies and contributions of assets, as defined in nos. 1 to 3, in which participate:

a) Companies with seat or effective management in Portuguese territory subject to and not exempt from IRC;

b) A company or companies from other Member States of the European Union, provided that all companies are in the conditions established in Article 3 of Directive No. 90/434/EEC of July 23.

8 — The special regime does not apply whenever, by virtue of the operations referred to in the preceding number, ships or aircraft, or movable property dedicated to their operation, are transmitted to an international maritime or air navigation entity not resident in Portuguese territory.

9 — To mergers and divisions, carried out in accordance with legal terms, of IRC taxpayers resident in Portuguese territory who are not companies and to their respective members, as well as to contributions of assets and exchanges of shares in which a legal entity participating is not a company, the regime of this subsection applies, with necessary adaptations, in the respective part.

10 — The special regime established in this subsection does not apply, in whole or in part, when it is concluded that the operations covered by it had as the principal objective or one of the principal objectives tax evasion, which may be considered verified, in particular, in cases where the participating companies do not have all their income subject to the same IRC tax regime or when the operations were not carried out for valid economic reasons, such as the restructuring or rationalization of the activities of the participating companies, proceeding then, if applicable, to the corresponding additional tax assessments.

Article 74
Special Regime Applicable to Mergers, Divisions, and Contributions of Assets

1 - In the determination of the taxable profit of the merged or divided companies or of the contributing company, in the case of contribution of assets, no result derived from the transfer of patrimonial elements is considered as a consequence of the merger, division, or contribution of assets, nor are considered as income, under the terms of no. 3 of Article 28 and no. 3 of Article 28-A, adjustments in inventories and impairment losses and other value corrections with respect to receivables, inventories, and likewise, under the terms of no. 4 of Article 39, provisions relating to obligations and charges subject to transfer, accepted for fiscal purposes, with the exception of those relating to permanent establishments situated outside Portuguese territory when these are the subject of transfer to non-resident entities, provided that it is a matter of:

a) Transfer made by a company resident in Portuguese territory and the beneficiary company is equally resident in that territory or, being resident of a Member State of the European Union, these elements are effectively dedicated to a permanent establishment situated in Portuguese territory of that same company and contribute to the determination of taxable profit attributable to that permanent establishment;

b) Transfer to a company resident in Portuguese territory of a permanent establishment situated in this territory of a company resident in another Member State of the European Union, verifying, as a consequence of that operation, the extinction of the permanent establishment;

c) Transfer of a permanent establishment situated in Portuguese territory of a company resident in another Member State of the European Union to a company resident in the same or another Member State, provided that the patrimonial elements dedicated to that establishment continue to be dedicated to a permanent establishment situated in that territory and contribute to the determination of profit attributable to it;

d) Transfer of permanent establishments situated in the territory of other Member States of the European Union carried out by companies resident in Portuguese territory in favor of companies resident in this territory.

2 - Whenever, due to a merger, division, or contribution of assets, in the conditions referred to in the preceding numbers, a permanent establishment situated outside Portuguese territory of a company resident there is transferred to a company resident in another Member State, the special regime provided for in this article does not apply with respect to that permanent establishment, but the resident company may deduct the tax which, in the absence of the provisions of Directive No. 2009/133/EC of the Council of October 19, would be applicable in the State where that permanent establishment is situated, with such deduction being made in the same manner and in the same amount as would be due if that tax had been actually levied and paid.

3 - The application of the special regime determines that the beneficiary company maintain, for fiscal purposes, the patrimonial elements subject to transfer at the same values they had in the merged, divided companies, or in the contributing company before the completion of the operations, considering that such values are those resulting from the application of the provisions of this Code or from revaluations carried out pursuant to tax legislation.

4 - In the determination of the taxable profit of the beneficiary company, the following must be taken into account:

a) The determination of results relating to the transferred patrimonial elements is done as if the merger, division, or contribution of assets had not occurred;

b) Depreciations or amortizations of tangible fixed assets, intangible assets, and investment properties recorded at historical cost transferred are carried out in accordance with the regime that was being followed in the merged, divided companies, or in the contributing company;

c) Adjustments in inventories, impairment losses, and provisions that were transferred have, for fiscal purposes, the regime that was applicable to them in the merged, divided companies, or in the contributing company.

5 - For purposes of determining the taxable profit of the contributing company, capital gains or losses realized with respect to the equity interests received in consideration of the contribution of assets are calculated by considering as the acquisition value of these equity interests the net accounting value accepted for fiscal purposes that the transferred assets and liabilities had in that company before the completion of the operation.

6 - When the beneficiary company holds an equity interest in the capital of the merged or divided companies, the capital gain or loss eventually resulting from the annulment of the equity interests held in those companies as a consequence of the merger or division does not contribute to the formation of taxable profit.

7 - When the merged company holds an equity interest in the capital of the beneficiary company, the capital gain or loss eventually resulting from the annulment of the equity interests held in that company as a consequence of the merger or the attribution to the shareholders of the merged company of equity interests of the beneficiary company does not contribute to the formation of taxable profit.

8 - (Repealed.)"

Article 73(10) of the IRC Code quoted above transposes into national law what is provided in Article 15 of the Directive.

It should be added that, according to Recital (2) of Directive 2009/133/EC: "Mergers, divisions, partial divisions, contributions of assets and exchanges of shares between companies from different Member States may be necessary to create, within the Community, conditions analogous to those of an internal market and thus ensure the proper functioning of that internal market. These operations should not be hindered by restrictions, disadvantages or distortions resulting in particular from the tax provisions of the Member States (…)".

It should also be noted that Articles 4 and 15 of the Directive are supported, respectively, by Articles 74 and 73(10) of the IRC Code.

It is relevant, having reached this point, to summarize the factual framework that is material to the case.

In 2009, a company called B..., S.A. (parent company), which had been established in April of that same year, contracted loans of approximately 70 million euros to acquire a 100% equity interest in another company, the Claimant or "A..." (subsidiary company), both companies being resident in Portugal.

The interest borne by the parent company B..., S.A. (as consideration for the financing obtained) was fiscally deducted from its result, as was accepted by the Tax Authority.

Still in 2009, the parent company B..., S.A. and the Claimant merged into a single entity, with retroactive effects as of April 22 of that same year:

a) By incorporation of the parent company B..., S.A. (incorporated company) into the Claimant (incorporating company), in a reverse or inverted merger;

b) With the application of the regime provided for in internal law (Articles 73 and 74 of the IRC Code), modeled after Directive 90/434/EEC of the Council of July 23, 1990, subsequently replaced by Directive 2009/133/EC of the Council of October 19, 2009 (hereinafter Directive).

In compliance with the said regime of the IRC Code, the results (gains and losses) resulting from the transmission of assets and legal positions as a consequence of the merger – were not taxed; that is, they obtained fiscal neutrality, through suspension (deferral) of fiscal results with those transmissions.

By legal effect of the merger, the financial expenses resulting from the loan originally contracted by the incorporated company (B..., S.A.) were transmitted to the incorporating company (A..., here Claimant), which became the debtor of those amounts, which it thus undertook to support and pay.

In 2013 and 2014, those loans were still "in effect" and the Claimant bore interest of €3,673,438.00 and €3,607,234.24, respectively – and considered them as fiscally deductible from the value of its annual income.

The Tax Authority does not accept that such interest may be deducted in the sphere of the incorporating company (that is, the Claimant), based on the provisions in internal law - Article 23(1) and its subsection (c) of the IRC Code - which require a causal relationship of necessity between the interest (cost) and the profits, the maintenance of the income-producing source, and the application of funds in the operation of the organization.

It is important to note three clarifying points:

a) If there had been no merger, the interest would have been fiscally deductible from the result of the company that originally contracted the loan and that held the equity interest (B..., S.A.);

b) That interest is not fiscally deductible, according to the Tax Authority, because and as a result of the said reverse merger, it understands that in 2013 it does not meet the requirements of Article 23(1) and its subsection (c) of the IRC Code and, in 2014, does not meet the requirements of Article 23(1) and (2) subsection (c) of the same Code;

c) The Tax Authority denies the fiscal deduction of such interest as a result of the said merger, as a result of the interpretation of the internal law in force in 2013 and 2014 (the cited Article 23(1), subsection (c) and (2) subsection (c) of the IRC Code) and not of the anti-abuse clause of the Directive (Article 15) or of internal law in its adherence (Article 73(10) of the IRC Code).

2.3. Suspension of Proceedings and Preliminary Referral to the CJEU

The Claimant, among the various arguments advanced in the proceedings, indicated that Article 23 of the IRC Code, if interpreted in the sense of refusing the deduction of interest after the indicated reverse merger, would involve a distortion of the objectives of the Directive. It is recalled in this respect that Recital (2) establishes that operations such as "mergers" are considered as potentially necessary to create, in the Community, conditions analogous to those of an internal market, and therefore such operations "should not be hindered by restrictions, disadvantages or distortions resulting in particular from the tax provisions of the Member States".

The Tribunal understands that:

1. The question is legally relevant;

2. That it involves the interpretation and application of a Community directive – and that the Court of Justice of the European Union has jurisdiction, even where it concerns the application of internal law between entities resident all in Portugal, to prevent future divergences in interpretation and with a view to harmonizing jurisprudence (Judgments of that Court of March 22, 2018, Marc Jacob, C-327/16; November 15, 2016, Ullens de Schooten, C‑268/15; and March 14, 2013, Allianz Hungária, C‑32/11);

3. That, as far as is known, there is no consolidated jurisprudence of the Court of Justice of the European Union on the matter;

4. This arbitral proceeding functions as the final degree of appeal with respect to the question posed.

It is thus to be understood, for all these reasons, that a preliminary referral is mandatory, in light of the provisions of Article 267 of the Treaty on the Functioning of the European Union ("TFEU"), which establishes that "whenever a question of this nature is raised in proceedings pending before a national court whose decisions are not subject to the judicial review provided for in internal law, that court is obliged to submit the question to the Court".

2.4. Preliminary Questions

In light of the foregoing, the following questions are formulated:

First Question

When interpreted in the sense that, after the said reverse merger, the interest on loans contracted from third parties (which would be deductible in the incorporated company, if there had been no merger), for acquisition of the capital of the daughter-incorporating company, transmitted as a result of the merger, cease to be fiscally deductible from the profits of the incorporating company, will Articles 23(1) and subsection (c) of the IRC Code, as worded in 2013, and Article 23(1) and (2) subsection (c) of the IRC Code, as worded in 2014, be compatible with Community Law, in particular, to the extent that this non-deductibility of interest is capable of constituting a barrier or restriction to the concentration operations covered by Directive 2009/133/EC of the Council, violating its principles and objectives and likewise the provisions of Article 4 thereof?

Second Question

If the answer to the first question is in the sense of the compatibility of this non-deduction of fiscal interest with the Directive, will it be maintained in light of the fact that such correction was not made on the basis of the anti-abuse provision of the Directive (Article 15) or of the national law that replicates it (Article 73(10) of the IRC Code), but rather of another provision of national law (Article 23 of the CIRC)?

DECISION

For these reasons, the Tribunal agrees to suspend the proceedings until the pronouncement of the Court of Justice of the European Union on the aforementioned questions, and orders the forwarding of a letter, to be sent by the CAAD secretariat to that of the Court, with a request for a preliminary ruling, accompanied by a copy of the proceedings, including copies of this judgment, the request for arbitral decision, the response of the Tax Authority and Aduaneira and the submissions of the Parties, as well as a copy of the administrative proceedings and of the documents attached to the procedural pleadings.

Lisbon, June 14, 2018

Text prepared by computer, under the terms of Article 131(5) of the Code of Civil Procedure ("CPC"), applicable by reference to Article 29(1)(e) of the RJAT, with blank verses and reviewed by the arbitral panel.

The Arbitrators

Alexandra Coelho Martins
Tomás Cantista Tavares
Américo Brás Carlos

[1] Wording that incorporates the amendments introduced by the IRC Reform in 2014, which did not significantly alter, to the extent relevant here, the prior versions.

SECOND DECISION

ARBITRAL DECISION

The arbitrators designated to form the Arbitral Tribunal, constituted on December 20, 2017, Dr. Alexandra Coelho Martins, arbitrator-president designated by the Deontological Council of the Administrative Arbitration Center (CAAD), Prof. Dr. Tomás Cantista Tavares (designated by A..., S.A., here Claimant) and Prof. Dr. Américo Brás Carlos (designated by the Respondent), agree as follows:

I. Report

A..., S.A. ("Claimant"), a legal entity with identification number..., with registered office at..., n.º..., ...–..., ...-... ..., requested the constitution of a Collective Arbitral Tribunal, pursuant to Article 10 of the Legal Framework for Tax Arbitration in Matters of Taxation ("RJAT"), approved by Decree-Law No. 10/2011 of January 20. In this context, it chose to designate an arbitrator, in accordance with the terms and for the purposes provided for in Articles 6(2)(b) and 11 of the RJAT, having presented the following claims:

1. Declaration of illegality and consequent annulment of the Corporate Income Tax (IRC) assessments (including municipal surcharges) and compensatory interest relating to the fiscal years 2013 and 2014, issued under nos. 2017... (€174,370.59) and 2017... (€484,872.29), respectively, from which resulted a total settlement adjustment in the amount of €717,754.38; and

2. Condemnation of the Tax Authority to pay compensation for expenses incurred with the provision and maintenance of bank guarantees.

The respondent is the Tax Authority and Customs Authority, hereinafter also referred to as "Tax Authority".

The Claimant, exercising the faculty provided for in Article 6(2)(b) of the RJAT, designated arbitrator Prof. Dr. Tomás Cantista Tavares. On September 27, 2017, the request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and followed its normal proceedings, namely with notification to the Tax Authority on September 29, 2017.

In accordance with the provisions of Article 6(2)(b) and (3) of the RJAT, and within the time limit provided for in Article 13(1) of the RJAT, the senior official of the Tax Authority service designated arbitrator Prof. Dr. Américo Brás Carlos.

Following the request presented by the arbitrators designated by the parties for the arbitrator-president to be designated by the Deontological Council, this was, by dispatch of November 27, 2017, by the President of the Deontological Council, designated Dr. Alexandra Coelho Martins in that capacity, in accordance with Article 6(2)(b), second part of the RJAT.

All arbitrators communicated their acceptance within the applicable time limit, with the President of CAAD informing the parties of such designation on November 27, 2017, for purposes of Article 11(7) of the RJAT.

The Collective Arbitral Tribunal was constituted on December 20, 2017.

1. Position of the Claimant

The Claimant alleges the following legal defects as grounds for its claim:

1. Violation of law due to error in the factual basis, resulting from the non-acceptance, as fiscally deductible financial expenses, of the interest incurred by it with respect to a loan previously contracted by company B... S.A., an entity that incorporated by merger (reverse). This loan had been contracted for the acquisition of the Claimant's own equity interests.

The Claimant contends that the assessment of the necessity of financial expenses should be made by reference to the entity that originally obtained the loan and at the time it was contracted, with no justification for the interest to cease being fiscally deductible due to the mere result of the merger.

Thus, the Claimant argues that the said interest "was contracted within the scope of activity and in the interest of the Claimant in operations capable of generating taxable income" and derives inevitably from the legal effects of the merger, and therefore, in its view, the Tax Authority's position constitutes an incorrect interpretation and application of the concept of necessity provided for in Articles 23(1) and (2)(c) of the IRC Code, and violates the fiscal neutrality regime;

1. Violation of the constitutional principles of tax legality and contributory capacity in its aspect of taxation on real income – cf. Articles 103(2) and 165(1)(i) and 104(2) of the Constitution of the Portuguese Republic ("CRP");

2. Formal defect of absolute lack of reasoning and material quantification error by the Tax Authority in determining the component of hypothetically non-deductible interest associated with the financing of the acquisition of the Claimant's equity interests, in breach of Articles 77 of the General Tax Law ("LGT") and 268(3) of the CRP; and

3. Absolute lack of reasoning and material quantification error by the Tax Authority regarding the Claimant's reportable tax losses, by having disregarded, without justification, the value of €96,534.61, in violation of Articles 77 of the LGT and 52 of the IRC Code.

The Claimant attached 22 documents and did not request the production of witness testimony.

2. Position of the Respondent

On February 1, 2018, the Respondent filed a Response, in which it defends itself by objection, having attached the administrative file ("PA"). It concludes by requesting a judgment that the claim be dismissed and the Claimant absolved, with the following arguments:

1. With the concrete merger operation, no assets were transferred to the Claimant's sphere; only an increase in the valuation of the shopping center, which was already its property, was recorded, in exchange for the increase in liabilities due to the incorporation of the loan that had served to acquire its shares [of the Claimant] by the incorporated company. This was thus a debt-push-down operation that placed the acquired company itself in the position of debtor, with the financing not being dedicated to the operation of the Claimant's activity, but rather benefiting a third party, namely its sole shareholder;

2. The merger operation resulted in the dissociation between the loan and the acquisition of equity interests, thus implying the disappearance of the connection that existed between the interest and the business activity developed by the entity that recorded these expenses;

3. The incorporation of the loan by virtue of the merger contributed to the increase in financial expenses borne by the Claimant, without being capable of promoting the increase in its profit, and therefore such expenses are not necessary for the realization of income subject to IRC, nor do they have any justified relationship with the Claimant's income-producing activity;

4. The necessity test must be performed in relation to the company whose expenses are under consideration;

5. The temporal allocation of interest carried out in accordance with the principle of exercise specialization implies the determination of its necessity with reference to each fiscal year. The fact that expenses are necessary at a given time does not by itself mean that they must be in future fiscal years, in accordance with the combined analysis of Articles 18(1) and 23(1), both of the IRC Code;

6. The fiscal neutrality regime does not contemplate the waiver of the scrutiny of the deductibility of expenses and losses that, after the merger, arise in the sphere of the incorporating company;

7. There is no violation of any constitutional principles, inasmuch as not only is the interpretation defended by the Respondent framed within Article 23 of the IRC Code, but also the submission of the deductibility of costs to the necessity test leads to the real income of the Claimant; and finally,

8. The criterion for allocation of interest is reasoned in the Tax Inspection Report ("RIT") and is based on a linear proportion.

3. Arguments, Modification of the Proceedings, and Preliminary Referral

On February 21, 2018, the meeting provided for in Article 18 of the RJAT was held at CAAD, in which oral arguments were produced, setting the date for the pronouncement of the arbitral decision.

On April 19, 2018, the Claimant presented a request for objective modification of the proceedings and alteration of the value of the case, as a consequence of obtaining favorable judgment in another arbitral action relating to fiscal year 2012, whose reportable tax losses led to the issuance of a new IRC assessment to the Claimant for fiscal year 2014 under discussion here, under no. 2018..., of March 19, 2018, in the amount of €216,020.52.

This new tax act annulled and replaced the assessment no. 2017..., relating to fiscal year 2014, in the amount of €484,872.29, which constitutes the object of the present arbitral action, together with the assessment reported to 2013 (in the amount of €174,370.59), which remains unchanged.

The Arbitral Tribunal admitted the request, relegating knowledge thereof to the final decision and, given the complexity of the questions, extended by two months the time limit for pronouncement of the decision.

The parties were notified to pronounce themselves on the preliminary referral to the Court of Justice ("CJ"), as doubts were raised, with relevance for the decision on the merits, concerning the compatibility of the non-deductibility of financial expenses in the legal sphere of the company benefiting from the merger with the regime of Directive 90/434/EEC of the Council of July 23, 1990, subsequently replaced by Directive 2009/133/EC of the Council of October 19, 2009.

A preliminary referral decision was pronounced by the Arbitral Tribunal on June 14, 2018, with the consequent suspension of the arbitral proceedings.

The Court of Justice, on July 15, 2019, pronounced a Dispatch relating to the preliminary referral proceedings in question, to which was assigned the number C-438/18, declaring that:

"Directive 90/434/EEC of the Council of July 23, 1990, on the common tax regime applicable to mergers, divisions, partial divisions, contributions of assets and exchanges of shares between companies of different Member States and the transfer of the seat of a European Company (SE) or European Cooperative Society (SCE) from one Member State to another, as amended by Council Directive 2006/98/EC of November 20, 2006, must be interpreted to the effect that it does not preclude a national regulation such as that at issue in the main proceedings, which provides that expenses that were fiscally deductible for the incorporated company before the merger between those companies are not considered fiscally deductible for the incorporating company, and would have been so if that merger had not taken place."

On that date, the Dispatch of the Court of Justice was notified to the Arbitral Tribunal, and the suspensive effect ceased. By arbitral dispatch of July 18, 2019, the time limit for pronouncement of the arbitral decision was extended by a further two months.

On August 1, 2019, the Claimant presented a request with recent jurisprudence of the Supreme Administrative Court ("STA") – Judgment of January 30, 2019, in case no. 02176/15.3BEPRT – and the South Central Administrative Court ("TCAS") – Judgment of June 5, 2019, in case no. 1550/15.0BELRS.

II. Case Management

The Tribunal was regularly constituted and is competent, ratione materiae, to know the acts of IRC assessment and inherent compensatory interest in question, in light of the provisions of Articles 2(1)(a), 5(3)(a), 6(2)(a), and 11(1) of the RJAT.

The parties enjoy legal personality and capacity, have legitimacy, and are regularly represented (cf. Articles 4 and 10(2) of the RJAT and Article 1 of Ordinance No. 112-A/2011 of March 22).

The request for arbitral pronouncement is timely, as it was presented within the time limit provided for in Article 10(1)(a) of the RJAT.

The joinder of claims is admissible, under the terms of Article 3(1) of the RJAT, given that the deductibility of interest as a result of a reverse merger operation is under discussion, with verification of the identity of factual circumstances and legal regime, in particular Article 23 of the IRC Code, despite the tax acts relating to two distinct fiscal years [2013 and 2014].

No procedural nullities or preliminary issues preventing knowledge of the merits were identified.

III. Factual Grounds

A. Proven Factual Matters

For purposes of the decision, the following facts are relevant:

1. A..., S.A., hereinafter "A..." or Claimant, is a commercial company engaged in the activity of operation, administration, and management of shopping centers and stores, and may additionally engage in the purchase and sale and leasing of real property and in the acquisition or participation in the capital of other companies, established or to be established, with object or legal nature different from its own, to the extent that it proves useful to the pursuit of corporate activities, and is framed under the general IRC regime – cf. Tax Inspection Report ("RIT"), contained in the administrative file ("PA") and corporate document contained at address www...pt.

2. In concrete terms, the Claimant has been engaged in the operation, administration, and management of the Shopping Center... – cf. RIT and financial information contained in documents 3 to 17 attached by the Claimant.

3. In fiscal year 2000, the date on which the process of constitution of the Claimant company began, a construction contract for the gallery of the... was concluded by its shareholders and in representation of the Claimant (still to be constituted), in the value of €53,360,787.00, located in the metropolitan area of Porto – cf. RIT and annex to document 3 attached by the Claimant.

4. After the formal constitution of the Claimant, completed in 2002, and so that it could finance the construction of the Shopping Center..., a real property asset that became its property, the Claimant obtained financing via capital contributions from its two shareholders – C... and D... – in equal parts, by loan in the amount of the construction – cf. RIT and documents 4 and 5 attached by the Claimant.

5. In July 2003, shareholder C..., which held 50% of the Claimant's capital, was sold to company E..., S.A., belonging to the E... Group, a French-based group listed on the main French stock exchange CAC 40, which thus came to hold indirectly 50% of the Claimant, as illustrated below. The respective credits were also transferred – cf. RIT and annex 2 to document 3 attached by the Claimant:

[Organizational chart showing 100% ownership]

50% 50%

1. In June 2005, C... and D... established company F..., to which they transferred, by contribution in kind, the equity interests they held in the Claimant and the respective credits, at that date valued at €47,486,435.00, resulting in the following structure – cf. RIT and annex 2 to document 3 attached by the Claimant:

[Organizational chart showing 100%, 50%, 50% ownership structure]

1. In July 2009, D... sold to C... its equity interest in F..., representing 50% of the Claimant's capital, such that F... came to be held 100% by C... as illustrated below – cf. RIT and annex 2 to document 3 attached by the Claimant:

[Organizational chart showing 100% ownership structure]

1. Also in July 2009, in the context of an internal restructuring of the E... group, F... sold at fair market value, for the global amount of €69,884,000.00, its equity interest in the Claimant to company B..., S.A., established in April 2009 with capital of €50,000.00 and held 100% by G... Portugal, SGPS, S.A., which in turn was held 100% by E..., S.A., resulting in the Group in Portugal having the following structure – cf. RIT and annex 2 to document 3 attached by the Claimant:

[Organizational chart showing 100%, 100% ownership structure]

1. In order for company B..., S.A. to acquire the shares of the Claimant from F..., E... Portugal, SGPS, S.A. granted to the former [B...] a loan in the aforementioned amount for acquisition of the equity interests, of €69,884,000.00 – cf. RIT and document 5 attached by the Claimant.

2. Furthermore, the remaining credit that F... still held over the Claimant, in the amount of €35,817,057.30, relating to the loan initially granted for the construction of the shopping center, was assigned to G... Portugal, SGPS, S.A. – cf. RIT and document 5 attached by the Claimant.

3. On November 18, 2009, the Claimant absorbed, through merger by incorporation, its sole shareholder B..., S.A., coming to be held directly (previously indirectly) 100% by G... Portugal, SGPS, S.A., as graphically illustrated below – cf. RIT and Annex 4 to Doc. 3 attached by the Claimant:

[Organizational chart showing 100% direct ownership]

1. The merger operation was carried out through the global transfer of the assets and liabilities of company B..., S.A. [incorporated company] to the Claimant [incorporating company], including the respective debts and financial expenses, producing (retroactive) effects as of April 22, 2009 – cf. RIT and annex 4 to document attached by the Claimant.

2. Thus, the loan granted to B..., S.A. by G... Portugal, SGPS, S.A., in the amount of €69,884,000.00, for the acquisition of the equity interests representing the capital of the Claimant, was transferred with the merger operation to the Claimant's legal sphere, consolidating with the remaining (not yet paid) portion of the loan initially granted, in the amount of €35,817,057.30, for the construction of the shopping center. Thus, G... Portugal, SGPS, S.A. came to hold a consolidated credit over the Claimant in the total amount of €104,937,330.91 – cf. RIT and documents 5 and 6 attached by the Claimant.

3. As consideration for the increase in the Claimant's liabilities in the amount of €69,884,000.00, the increase in the valuation of the Shopping Center was recorded. No assets from the incorporated company were transferred to the Claimant's sphere, as the only asset that the incorporated company held was the financial equity interest in the Claimant – cf. RIT and documents 5 and 6 attached by the Claimant.

4. The consolidated loan which after the merger amounted to €104,937,330.91 has gradually decreased due to repayments made, as shown in the table below – cf. RIT and documents 3 and 6 to 12 attached by the Claimant:

1. The total interest expenses, recorded and recognized as expenses by the Claimant, amounted to €3,673,438.00 in fiscal year 2013 and €3,607,234.24 for fiscal year 2014, having been calculated with the same interest rate applied to the total amount of the loan – cf. RIT and annex 6 to document 3 and documents 10 and 11 attached by the Claimant.

2. The Claimant did not add these amounts in section 07 of the Model 22 Declarations submitted for the fiscal years 2013 and 2014 – cf. RIT.

3. Following service orders nos. OI2017... and OI2017..., with dispatch of January 24, 2017, the Claimant was subject to an external tax inspection for the fiscal years 2013 and 2014, of limited scope, regarding IRC, for analysis of financing provided by group companies and corresponding financial expenses recognized as costs. The external inspection acts occurred from February 2, 2017 to April 7, 2017 – cf. RIT and document 13 attached by the Claimant.