IRC Financial Charges on Acquisition and Sale of Shareholdings and Loans to Subsidiaries – CAAD Arbitral Decision 538/2016-T Reform

TAX ARBITRATION JURISPRUDENCE

Case No. 538/2016-T

Decision Date: 2024-02-08

CIT

Claim Value: € 161,463.03

Subject Matter: CIT. Financial charges. Acquisition and disposal of shareholdings. Loans to subsidiaries. – Reform of the arbitral decision (appended to the decision).

ARBITRAL DECISION

(delivered following the judgment of the TCAS of 11 January 2023, Case No. 97/17.4BCLSB)

I. Report

The company A... SGPS, SA (hereinafter "Claimant"), legal entity no. ..., with registered office at ..., Street ..., no. ..., ..., came, pursuant to the provisions of articles 2, no. 1, paragraph a) and 10, no. 1, paragraph a), of Decree-Law No. 10/2011, of 20 January, which enacted the Legal Regime of Tax Arbitration (hereinafter "LRTA"), as well as pursuant to articles 1 and 2 of Ordinance No. 112-A/2011, of 22 March, to file a request for constitution of an arbitral tribunal, in which the Tax and Customs Authority (hereinafter "Respondent" or "TA") is named as respondent.

In its respective request for arbitral pronouncement, the Claimant requested the CAAD Ethics Council to designate the Arbitrators, pursuant to articles 6, no. 1 and 11 of the LRTA.

The request for constitution of the arbitral tribunal was accepted by the Distinguished President of CAAD and automatically notified to the TA on 26/09/2016, with the Parties being notified on 10/11/2016 of the arbitrators designated by the Ethics Council of CAAD.

Following acceptance by the designated arbitrators, the present Arbitral Tribunal was constituted on 25/11/2016, in accordance with articles 2, no. 1, paragraph a), 5, 6, no. 1, and 11, no. 1, all of the LRTA (as amended by article 228 of Law No. 66-B/2012, of 31 December).

On 09/03/2017, the Arbitral Tribunal Meeting was held, pursuant to article 18 of the LRTA, during which the testimonial evidence submitted by the Parties was produced, and the decision was announced for 25/05/2017.

The parties submitted written arguments.

In the context of the request for arbitral pronouncement presented by it, the Claimant petitioned for a declaration of illegality of the assessment of CIT, Compensatory Interest and Default Interest No. 2016..., of 22.02.2016, for the fiscal year 2012, which resulted in the establishment of an amount due of € 161,463.03, the voluntary payment deadline for which terminated on 11/05/2016.

It also petitioned for payment of compensation for costs incurred and to be incurred with the guarantee provided for suspension of the enforcement proceedings instituted for coercive collection of the assessment in crisis.

Finally, it petitioned for the Respondent to be ordered to pay the arbitration fee and any other costs.

The Claimant invokes in summary the following:

Neither the inspection report nor the assessment contains the calculation and verification operations, nor the factual and legal grounds that presumably underlie the taxable matter that served as the basis for the assessment (€ 1,027,019.38), so the contested assessment suffers from a defect of lack of substantiation, by violation of articles 77, nos. 1 and 2 of the GTL and 268, no. 3 of the CRP (see article 153, no. 2 of the APC);

Or, at least, it suffers from calculation and verification error, that is, error in quantifying the taxable matter and, consequently, error in quantifying the assessment;

With regard to the supplementary contributions made, they do not constitute loans granted, but rather equity capital instruments;

It further invokes that they have their own legal regime, being distinct from loans or advances and cannot be remunerated;

In carrying them out, the shareholder expects that the strengthening of the participating companies' equity will be reflected in greater business profitability and in the appreciation of the capital shares held;

In the sphere of the participating companies benefiting from the supplementary contributions, these are recorded in equity and not in liabilities;

With regard to the issue of unremunerated advances granted to its subsidiaries, it understands that loans granted, which were not remunerated in the fiscal year 2012, will be remunerated from the year in which the beneficiaries are financially stabilized and their respective business projects have reached the necessary level of maturity (which will occur, as a rule, in 10 years for hydroelectric projects and in 6 years for photovoltaic energy projects);

These unremunerated advances are intended to maximize the Claimant's financial return and increase the profitability of the subsidiaries, with the consequent appreciation of the capital shares held;

Both dividends and capital gains are subject to taxation in the sphere of the shareholder;

The capital shares were recorded accounting-wise in accordance with the Equity Method, such that the results and other facts occurring in the participating companies are reflected in A... itself;

Advances may be remunerated or not, depending on the agreement established between the parties, or what is decided in the general shareholders' meeting (as per the legal regime stipulated in articles 243 to 245 of the CSC);

The TA is wrong when it states that "part of the financing costs incurred by A... did not generate any direct, measurable and evident inflow in the exercise of its activity", as it neither established nor demonstrated any relationship of specific and unequivocal imputation between the remunerated loans obtained upstream and the unremunerated advances and supplementary contributions made downstream;

The financial charges supported, to be fiscally accepted under the terms of no. 1 of article 23 of the CITC, do not necessarily have to originate from or be related to the generation of income or profits;

The TA did not demonstrate to what extent the remunerated loans, obtained from Banks and shareholders, were contracted "for the purpose of freeing up financial resources for the participating companies";

The supplementary contributions made to the subsidiaries resulted in actual cash inflows, not having constituted "accounting cosmetics operations";

The impossibility of allocating the financing obtained upstream to the loans granted downstream results essentially from the fact that, upstream, the Claimant also had its own funds (from management services provided to the subsidiaries, dividends received, capital gains obtained, etc.) and, downstream, other treasury needs (personnel costs, F.S.E., taxes, social security, etc);

It is impossible to presume (as the TA did) that the financing obtained from Banks and shareholders was specifically used for the granting of loans and supplementary contributions to its subsidiaries – and even less to determine to what extent this could have occurred;

The financial charges supported by the Claimant cannot amount to € 1,360,308.35, as this amount improperly includes fiscal charges, namely Stamp Duty and banking services with no relation to any banking financial operation and which, moreover, were recorded in accounts other than account 69 – Interest Supported (in accounts 68 – Indirect Taxes and 62 – F.S.E., respectively);

In that context, the TA considered automobile leasing interest and compensatory interest in the calculation of financial charges supported, which could never be related to any advances or supplementary contributions made to the subsidiaries;

The correction suffers from error in the factual assumptions and erroneous quantification, and should be annulled pursuant to article 100, no. 1 of the TCPC;

The calculation of the amount disregarded as an expense by the TA is not correct and has no legal basis, as it is based on a calculation formula with no legal support whatsoever, aimed at "determining the effective cost of capital used by it", whose logical reasoning is not understood;

The TA advocates an indirect assessment of the taxable matter, in a completely illegitimate manner, by force of the principle of taxation of real income in the context of CIT (provided for in articles 104, no. 2 of the CRP and 17 of the CITC);

The effective rate of cost of foreign financing computed by the TA at 5.81% is erroneously quantified, since, for purposes of calculating the average annual balance of foreign financing (computed at € 23,411,847.89), the TA disregarded the balance of financial leases (on the ground that they are not loans obtained, but rather acquisitions of tangible fixed assets), but inconsistently considered the interest from those same leases in the total financing costs supported (which it calculated at € 1,360,308.35), which completely distorts the calculations in a deliberate and fraudulent manner, with the intent to harm the taxpayer and maximize the correction;

The TA omits from its quantification formula the remunerated loans granted by the Claimant to its subsidiaries, as well as the respective financial income, thus omitting that the remunerated financing obtained from Banks and shareholders could have been used to make those remunerated loans;

The TA ignores the loans obtained by the Claimant from its subsidiaries without remuneration, which were higher, in 2012, than the unremunerated loans granted, which demonstrates the practical impossibility of allocating some to others;

The methodology used by the TA to disregard part of the financial costs supported by A... that respect unremunerated financing granted to its subsidiaries is completely wrong, as the TA presumed that such financing should be remunerated at an average rate of 5.81% (corresponding to the average rate calculated for the financing obtained), that is, that the Claimant should have had financial income of € 342,463.70;

The TA should, instead of correcting costs, increase income to the Claimant, applying the transfer pricing regime (article 63 of the CITC), and making the correlative adjustment in the participating companies, so that they would benefit from the same fiscally deductible cost, or have applied the general anti-abuse clause provided for in no. 2 of article 38 of the GTL;

The Claimant invokes, with regard to the correction of non-deductible financial charges, under article 32, no. 2 of the BFA, that the amount noted by the TA of € 1,017,844.65 is wrong;

The procedure adopted by the TA results in a double increase of the same financial charges item, totaling € 526,232.24, in manifest calculation error and obvious detriment to the taxpayer;

This, together with € 150,713.25 of financial charges already increased by the taxpayer itself and which were not taken into account by the TA, represents a total increase of € 676,945.49;

The value of remunerated assets considered by the TA in the amount of € 8,227,253.45 is not what is recorded in the Claimant's accounting;

This correction, having been made based on Circular 7/2004, lacks legal support, so no amount could be added as financial charges, determined under no. 2 of article 32 of the BFA, in the determination of its Taxable Income;

The TA's administrative doctrine has no legally binding character for taxpayers and decision-making entities such as courts, as it is not law; only the TA itself is bound by those guidelines, under the terms of no. 1 of article 68-A of the GTL;

The "blind" application of the formula contained in that Circular leads to the determination of an amount of financial charges with no adherence to reality in cases where the SGPS acquires shareholdings by financing itself through increases in capital by cash contributions or contributions in kind, with the SGPS not incurring any financial charges with such acquisitions;

With regard to the correction relating to charges with the disposal of shareholdings, the Claimant invokes that it relates to a commission related to its activity, in the amount of € 38,164.23, which was paid to the South African company G... for the sale of the shareholding it held in the South African company B...;

As this activity coincides with its statutory purpose, the TA proceeded to a wrong interpretation and application of no. 1 of article 23 of the CITC;

The corrections relating to the municipal surcharge and Special Payments on Account also suffer from lack of substantiation;

The Claimant must be compensated for the costs incurred with the guarantee provided for to suspend the fiscal enforcement proceedings relating to the debt in question.

The Arbitral Decision was delivered on 25 May 2017, the parties being notified of the closure of the case on 8 July 2017, with the tribunal being dissolved on that date, pursuant to article 23 of the LRTA.

The Claimant appealed to the Tax Dispute Section of the TCAS against the judgment rendered, and filed an application to the Plenary of the Tax Dispute Section of the Supreme Administrative Court for an opposition of judgments for uniformization of jurisprudence.

With regard to the action brought before the SAC, it was alleged that there was a contradiction between the arbitral decision and the SAC judgments of 19/4/2017 (Case No. 0925/16) and 24/9/2014 (Case No. 0779/12), as well as the judgment of the CCAN of 16/4/2015 (Case No. 215/09.6BEMDL).

The SAC delivered, on 24 March 2021, a judgment in Case No. 794/17.4BALSB, which became final on 15 April 2021.

It decided that only one issue raised potential problems of contradiction with the foundational SAC judgment of 19/4/2017 (Case No. 0925/16), that is, the issue of the indispensability of costs incurred in the specific cases of SGPS, or by a company subject to taxation under SGTG for the benefit of its subsidiaries, without remuneration.

Recognizing that in both decisions article 23, 1 of the CITC was invoked, the SAC concluded that there was no substantial identity between the two judgments, an essential requirement for proceeding to a uniformizing decision – deciding not to know the merits of the appeal.

With regard to the appeal filed before the TCAS, it was based on alleged omission of pronouncement:

as to the increase of Euro 342,463.70 (to the 2012 taxable income of Group C...), relating to financial charges with financing allegedly non-indispensable (article 23, no. 1 of the CITC),

as to compensatory interest, and

as to default interest, and also

in the segment in which that decision assessed the correction/reduction of SPAs, deductible from the Group's collection in fiscal year 2012.

The TCAS delivered, on 11 January 2023, a judgment in Case No. 97/17.4BCLSB, which became final on 26 January 2023.

That judgment found unfounded, in the segment relating to the increase of € 342,463.70 (CIT/SGTG 2012), relating to financial charges with supplementary contributions and unremunerated advances to subsidiaries, the request for impugnation of arbitral decision filed by the Appellant of that arbitral judgment, under articles 26 and 27 of the LRTA.

Therefore, in the segment relating to the increase of € 342,463.70 (CIT/SGTG 2012), relating to financial charges with supplementary contributions and unremunerated advances to subsidiaries, the Arbitral Decision of Case No. 538/2016, of 25 May 2017, became final on 26 January 2023.

The Claimant subsequently filed a new appeal to the Plenary of the Tax Dispute Section of the Supreme Administrative Court against the arbitral decision rendered in the arbitration case No. 538/2016-T, in the segment in which it reported on the increase of € 342,463.70 (CIT/SGTG 2012), relating to financial charges with supplementary contributions and unremunerated advances to subsidiaries, invoking opposition between what was decided there and what was decided in the arbitral judgment rendered in case No. 277/2016-T.

The SAC delivered a summary decision on 17 October 2023 on the preliminary issue of timeliness of the appeal for uniformization of jurisprudence, which became final on 2 November 2023.

The summary decision was in the sense of non-admission of the appeal, for untimeliness – establishing that the 30-day period for filing the appeal is counted, not from the date the contested judgment became final (general rule of article 152, 1 of the ACTP), but from notification of the arbitral decision (special rule of article 25, 3 of the LRTA), such notification having occurred in 2017.

Returning to the judgment delivered by the TCAS on 11 January 2023, in Case No. 97/17.4BCLSB, (which became final on 26 January 2023), that decision upheld the Appellant's position on two points:

omission of pronouncement as to the issue of compensatory interest;

omission of pronouncement as to the issue of default interest.

Specifically:

A. Omission of Pronouncement as to the Issue of Compensatory Interest

The Appellant argued that the contested judgment suffered from omission of pronouncement as to compensatory interest, as questions of fact and law regarding the interest in question had been raised that had not been analyzed, and which could determine the illegality of that compensatory interest. In the Appellant's view, the illegality of compensatory interest, in violation of articles 102° of the CITC and 35 of the GTL, would result from the circumstance that it lacks the requirement of adequate causal nexus between the taxpayer's conduct and the delay in the assessment, and the culpability of its conduct, whether by way of intent or negligence – being of the view that what had occurred was "merely a disagreement of legal interpretations between the TA and the taxpayer".

The Respondent understood that the Arbitral Tribunal had knowledge of the issue relating to compensatory interest, only having concluded that it was a question prejudiced by the decision as to the assessment of the tax, of which compensatory interest is accessory, also because interest is calculated and assessed based on that assessment – and specifically, having the Arbitral Tribunal concluded as to the non-illegality of the tax assessment, the maintenance of the corrections to the CIT assessment, and its non-annulment, it necessarily follows therefrom the non-illegality, the non-annulment and the maintenance in the legal order of the said compensatory interest.

With regard to the omission of pronouncement as to compensatory interest, the TCAS judgment of 11 January 2023 upheld the Appellant's position, there being no detailed reference to compensatory interest in the arbitral decision – and it being impossible to derive an implicit judgment of legality of compensatory interest based on the mere legality of the tax assessment. Given that the Appellant alleges that everything was merely a divergence of interpretations, the TCAS understands that the arbitral decision should have based the legality of compensatory interest assessment on a judgment of culpability of the taxpayer's conduct, given that liability for compensatory interest has the nature of civil reparation and, therefore, depends on the adequate causal nexus between the delay in the assessment and the taxpayer's conduct. Thus, the TCAS admits that such a judgment of culpability (by intent or negligence) can be dispelled by the demonstration, through evidence and rules of experience, that the taxpayer acted with the normal diligence in fulfilling its tax obligations, which would occur if the delay in the assessment had resulted, for example, from a divergence of criteria between the TA and the taxpayer as to the framing and/or qualification of a particular tax situation, as the Appellant alleged, or excusable error on the taxpayer's part.

The Judgment of the TCAS of 11 January 2023 concludes that, with regard to the issue of (il)legality of compensatory interest, the Arbitral Decision of 25 May 2017 omitted the due pronouncement, generating the corresponding (partial) nullity and the need to assess the issue whose knowledge was omitted and was not prejudiced.

B) Omission of Pronouncement as to the Issue of Default Interest.

The Appellant argued that the contested judgment suffered from omission of pronouncement as to default interest, as questions of fact and law regarding the interest in question had been raised that had not been analyzed, and which could determine the illegality of that interest. In the Appellant's view, the illegality of default interest, in violation of articles 109° of the CITC and 44 of the GTL, would result from the circumstance that there was no delay in payment of the tax on the part of the Appellant – and only a delay in the assessment (not in payment); a delay that, at best, would entail compensatory interest, not default interest.

The Respondent understood that the Arbitral Tribunal had knowledge of the issue relating to default interest, only having concluded that it was a question prejudiced by the decision as to the tax assessment, of which default interest is accessory, also because interest is calculated and assessed based on that assessment – and specifically, having the Arbitral Tribunal concluded as to the non-illegality of the tax assessment, the maintenance of the corrections to the CIT assessment, and its non-annulment, it necessarily follows therefrom the non-illegality, the non-annulment and the maintenance in the legal order of the said default interest.

With regard to the omission of pronouncement as to default interest, the TCAS judgment of 11 January 2023 upheld the Appellant's position, there being no reference whatsoever to default interest in the arbitral decision – and it being impossible to derive an implicit judgment of legality of default interest based on the mere legality of the tax assessment. In the view of the TCAS, the Claimant's argument regarding the nature of the interest should have been explicitly weighed, given that, if it were true what was alleged (that the delay had occurred in the assessment and not in payment), the nature of the interest in question would be different, bearing in mind that the regime for default interest is considerably more onerous than that for compensatory interest. The Judgment of the TCAS of 11 January 2023 concludes that, with regard to the issue of (il)legality of default interest, the Arbitral Decision of 25 May 2017 omitted the due pronouncement, generating the corresponding (partial) nullity and the need to assess the issue whose knowledge was omitted and was not prejudiced.

The judgment delivered by the TCAS on 11 January 2023, in Case No. 97/17.4BCLSB, concludes:

"In a summary of what has been stated, in light of all that has been decided, the present impugnation only partially succeeds, meaning that it is only as to compensatory interest and default interest that it is accepted that the arbitral judgment indeed omitted the pronouncement that it was responsible for, with the corresponding nullity to be declared in that respect and the remittal of the case to CAAD for the steps that subsequently become necessary. In all other respects, the judgment remains unchanged.

Therefore, the judges of the Tax Dispute Section of the TCA South agree to find the present impugnation of the arbitral decision partially well-founded, declaring the partial nullity of the impugned judgment, specifically in the segments relating to compensatory interest and default interest, ordering the remittal of the case to CAAD for assessment of the issues regarding which pronouncement was omitted."

By Orders of 29 November 2023 from the President of the CAAD Ethics Council, the arbitrator-president and the arbitrator-adjuncts of the collective arbitral tribunal were replaced, with the new arbitrators communicating their acceptance.

It thus falls to the arbitral tribunal, reconstituted in its new composition, to give effect to the judgment delivered by the TCAS on 11 January 2023, in Case No. 97/17.4BCLSB, assessing the issues regarding which pronouncement was omitted in the Arbitral Decision of 25 May 2017, namely:

the issue of compensatory interest;

the issue of default interest.

The text that follows constitutes a partial re-edition of the arbitral judgment previously rendered in this case, with the necessary alterations to give effect to what was decided in the TCAS judgment of 11 January 2023, Case No. 97/17.4BCLSB.

II. Sanitation

The tribunal is competent and regularly constituted.

The parties have legal personality and capacity, being properly represented.

The procedural means is appropriate.

There are no nullities, exceptions or preliminary issues that prevent assessment of the merits of the case.

III. Factual Matters Considered as Established

With regard to the factual matters brought to the case by both Parties, the Tribunal considers as proven, based on the testimonial and documentary evidence produced, the following facts, with relevance for the final decision:

The Claimant exercises the activity of management of shareholdings held in various Portuguese and foreign companies (based in Spain, France, South Africa, Malta and the Netherlands), all operating in the renewable energy sector: hydroelectric, wind, photovoltaic, biomass, cogeneration and concentrated solar thermal (see Page 4 of the Tax Inspection Report);

As of 01/01/2012, the Claimant became subject to taxation under the special regime for taxation of groups of companies (SGTG), provided for in article 69 of the CIT Code, being the dominant company of the group;

The Claimant was subject to an external inspection procedure in the context of CIT, in compliance with Service Order No. OI2015..., which commenced on 23/06/2015 and was concluded on 03/11/2015 (see Page 3 of the Tax Inspection Report) and in the context of which corrections were made in the context of VAT and CIT;

The corrections made in the context of CIT amounted to a total of € 564,395.48, broken down as follows:

Financial charges non-deductible under no. 1 of article 23 of the CITC, relating to loans to subsidiaries, in the amount of € 342,463.70;

Financial charges non-deductible under no. 2 of article 32 of the BFA, related to shareholdings, in the amount of € 183,768.54;

Charges not deductible under no. 1 of article 23 and no. 2 of article 46 of the CITC, inherent to the disposal of shareholdings, in the amount of € 38,163.24.

Following the implementation of the corrections made by the Tax Inspection Services in the aforementioned amount of € 564,395.48, from the algebraic sum of the results of the entities comprising the Group of which the Claimant is the dominant company for CIT purposes, a taxable profit of € 1,077,437.60 came to be determined, rather than the € 513,042.12 previously declared by the Group;

The amount of the correction referred to in D) was determined by the Tax Inspection Services as follows:

The Claimant entered in field 303 of Table 9 of the Group's Personal Income Declaration Form 22, as deductible fiscal losses, the amount of € 50,418.22, of which € 40.30 related to the company "D..., Lda" (taxpayer no. ...), € 22,883.42 to the company "E..., Lda" (taxpayer no. ...) and € 27,494.49 to the company "F..., Lda" (taxpayer no. ...);

The Tax Inspection Services considered that the fiscal losses declared by the Claimant in fiscal year 2012 met the deductibility requirements defined in paragraph a), of no. 1 of article 71 of the CITC, having deducted from the Taxable Income determined based on the corrections made (of € 1,077,437.60) the amount of those fiscal losses;

With regard to financial charges relating to loans granted by the Claimant to its subsidiaries, these were corrected by the Tax Inspection Services according to the following procedure (See Tax Inspection Report):

Calculation of the average annual balance of foreign financing of the Claimant (from Banks, ... and H... and from subsidiaries);

Determination of financing costs supported by the Claimant in the periods under analysis;

Determination of the effective cost rate of foreign financing of the Claimant;

Calculation of the average annual balance of unremunerated financing to participating companies;

Application of the effective cost rate of foreign capital to the value of financing made to said companies;

Disregard as a tax expense of the amount so determined;

In light of the corrections mentioned, a total of € 342,463.70 in Financial Charges was disregarded by the Tax Inspection Services, when the Claimant had declared Charges in the amount of € 1,360,308.35 in its CIT Declaration Form 22;

The Cash Flows from Operating Activities in 2012 of the Claimant presented a positive balance of € 2,056,097.22, as confirmed in Table 04-C of the Claimant's CIT Declaration Form 22 for fiscal year 2012, reproduced below:

The Cash Flows from Investment Activities presented a surplus balance of € 364,454.34, while the Cash Flows from Financing Activities presented a negative balance of € 1,995,433.41 (See Table 04-C of the CIT Declaration Form 22 for fiscal year 2012);

With regard to financial charges considered for purposes of calculating financial charges allocated to shareholdings, the Tax Inspection Services, based on the doctrine issued in Circular 7/2004, noted the financial charges declared by the Claimant minus those it considered should be disregarded for tax purposes, because they were associated with loans granted to its subsidiaries without any remuneration (which amounted to € 1,017,844.65);

In light of the understanding set forth in M), the Tax Inspection Services considered that, of the mentioned € 1,017,844.65, € 334,481.79 would not be tax deductible by virtue of being considered allocated to shareholdings;

Given that the Claimant had increased this item by € 150,713.25, the Tax Inspection Services increased the overall amount of € 183,768.54, with reference to financial charges allocated to shareholdings (See Tax Inspection Report);

The Tax Inspection Services did not accept as a tax expense for fiscal year 2012 the amount of € 38,163.24, relating to charges recorded by the Claimant with commissions paid to the South African company G... Limited, associated with the disposal of the subsidiary B..., also a company based in South Africa, in the amount of € 30,450.00 (recorded in account # 62213) and to legal services rendered in South Africa by the company "J...", in the amount of € 7,713.24;

The Claimant grants loans to its subsidiaries, in the form of advances or supplementary contributions, without charging any interest or fees, for a variable period, which may be up to 10 years (see testimony of the Claimant's witnesses and arbitration request);

The Claimant disregarded 40% of part of the financial charges supported with the acquisition of shareholdings;

The increase which the Claimant made, in the amount of € 150,713.25, did not result from any study of the financing obtained or an assessment as to whether or not they were intended for the acquisition of capital shares, being unrelated to compliance with article 23, no. 1 of the CITC or article 32, no. 2 of the BFA;

Following the inspection action referred to above, an Additional CIT Assessment No. 2016..., of 22.02.2016, was issued with reference to fiscal year 2012, as well as the respective Statement of Compensatory Interest and Statement of Account Settlement No. 2016..., from which an amount of tax due of € 161,463.03 resulted, with a voluntary payment deadline of 11.05.2016;

The Claimant proceeded to present two guarantees for purposes of suspension of the enforcement proceedings instituted for collection of the CIT debt in crisis, namely the bonds provided by the companies "H... SGPS, S.A." and "I..., SGPS, S.A.", in favor of the Claimant, in that case (See copies that were attached as Doc. No. 26 with the arbitration request).

No other facts with relevance for the final decision were proven.

IV. Motivation of the Decision

First and foremost, it should be noted that Courts, including Arbitral Tribunals, do not have to assess all arguments presented by the parties, as evidenced for example by the Judgment of the Plenary of the 2nd Section of the SAC of 07/06/1995, rendered in appeal No. 5239.

In fact, the issues invoked by the parties should not be confused with arguments, reasons or motivations produced. Issues, specifically for purposes of no. 2 of article 608 of the Code of Civil Procedure, are only those of substance and that form part of the decision-making matter, that is, those related to the claim, the cause of action and defenses (see in this sense the Judgment of the Supreme Court of Justice of 29/11/2005, rendered in case No. 05S2137 or the Judgment of the Central Administrative Court of the South of 25/09/2012, rendered in case No. 05073/11).

Now, the Claimant invoked, throughout its extensive procedural pleadings, numerous arguments that do not necessarily require an express pronouncement by the Tribunal, although they were noted for the final decision.

Thus and having in mind what was stated above, the issues that relate directly to the claim formulated by the Claimant are the following:

Lack of substantiation and error in quantification of the taxable matter underlying the assessment;

Illegality of the correction that disregarded financial charges supported with loans and supplementary contributions from the Claimant to its subsidiaries;

Illegality of the correction that disregarded financial charges related to shareholdings;

Illegality of the correction that disregarded charges inherent to the disposal of capital shares;

Request for compensation for undue guarantee.

Compensatory interest and default interest.

These are the issues to be decided.

VI. On the Law

A) Lack of Substantiation and Error in Quantification of the Taxable Matter Underlying the Assessment

The Claimant invokes that the assessment in crisis suffers from lack of substantiation or, at least, calculation and verification error, also claiming the existence of well-founded doubt as to the quantification of the tax fact.

Let us then examine this.

For an adequate analysis of this defect, as alleged by the Claimant, it is important to highlight that the latter was subject to an external inspection procedure in the context of CIT, in compliance with Service Order No. OI2015....

This procedure, as is proven and was not contested by the Claimant, commenced on 23/06/2015 and was concluded on 03/11/2015, with the respective inspection acts being performed. In the context of same, corrections were made in the context of VAT and CIT better identified in the Tax Inspection Report validly notified to the Claimant.

Now, from reading the said Tax Inspection Report it is evident that the corrections made by the Tax Inspection Services, with regard to CIT for fiscal year 2012 of the Claimant, amounted to a total of € 564,395.48. From this resulted the determination of a taxable profit of € 1,077,437.60, with reference to all the Group of which the Claimant is the dominant company, rather than the € 513,042.12 previously declared by the same Group.

The said correction of € 564,395.48 was made in the manner described below and not contested by both Parties:

Furthermore, it also became evident that the Claimant entered in field 303 of Table 9 of the Group's Personal Income Declaration Form 22, as deductible fiscal losses of the Group, the total amount of € 50,418.22. Of this amount, € 40.30 related to the company "D..., Lda" (taxpayer no. ...), € 22,883.42 to the company "E..., Lda" (taxpayer no. ...) and, finally, € 27,494.49 to the company "F..., Lda" (taxpayer no. ...). Facts that result from the case files and were likewise not contested.

In light of this, the Tax Inspection Services, by accepting the amount of fiscal losses declared by the Claimant in this fiscal year 2012, for meeting the requirements contained in paragraph a), of no. 1 of article 71 of the CITC, the amount of € 50,418.22 was deducted from the Taxable Income determined as a consequence of the corrections made and which amounted to € 1,077,437.60.

From these calculations results the determination of a Taxable Matter, by reference to fiscal year 2012, of € 1,027,019.38, as evidenced in the Additional CIT Assessment No. 2016..., now in dispute.

Now, jurisprudence has always endorsed the understanding that the administrative act – here including the act in tax matters – is sufficiently substantiated when from it is possible to extract the respective cognitive course. This is also what results from the provisions of articles 63 of the Complementary Regulation of the Tax Inspection Procedure, 77, no. 1 of the General Tax Law and 153, no. 1 of the Code of Administrative Procedure.

In the words of the Supreme Administrative Court (SAC), expressed in the Judgment of 11.12.2007, rendered in appeal No. 615/04, "the degree of substantiation must be adequate to the concrete type of act and the circumstances in which it was performed, so as to satisfy the disagreement existing between the position of the Tax Administration and that of the taxpayer".

Also according to the same SAC, in the Judgment of 10.02.2010, rendered in case No. 01122/09, it was considered that "the substantiation of the administrative act is a relative concept that varies depending on the type of act and the circumstances of the specific case, but it is only sufficient when it allows a normal recipient to become aware of the cognitive and evaluative itinerary followed by the author of the act to render the decision, that is; when that person may know the reasons why the author of the act decided as it did and not differently, so as to be able to trigger administrative or contentious impugnation mechanisms".

Also by way of example, cite the Judgment of the Central Administrative Court of the North of 15.02.2012, rendered in case No. 00881/08.0BEBRG, which aligned in the same sense, considering that "If from the impugnation of the assessment it results that the taxpayer understood the reasons that determined the act, then this should be considered substantiated".

The duty of substantiation of administrative or tax acts aims essentially, on the one hand, to inform the respective recipient of the reasons or motives that led to the taking of decision in a certain sense and, on the other hand, to permit control over the legality of the decision and over the validity of the reasons underlying a specific decision.

"(…) the imperative of express substantiation (…) thus typically performs a role of functional guarantee, with the claim of ensuring the rationality and controllability of the characteristic moments of the administrative function, those in which the organs of the Administration take decisions of authority that produce legal modifications in the external world (…)" (cf. JOSÉ CARLOS VIEIRA DE ANDRADE, The duty of express substantiation of administrative acts, Coimbra, 1992, p. 215).

Being said that, the values referred to above are easily understood and derive from the corrections contained in the Tax Inspection Report and from the Personal Income Declarations themselves presented by the various companies that form part of Group C..., as to fiscal year 2012.

Furthermore and without need for any other consideration or calculation, it would be sufficient for the Claimant to calculate the difference between the value resulting from the Tax Inspection Report (€ 1,077,437.60) and the value contained in the contested assessment (€ 1,027,019.38), which is € 50,418.22, to conclude that this difference corresponded precisely to the amount of fiscal losses declared by Group C....

Therefore, from the outset with regard to the calculation of the Taxable Matter entered in the assessment now in dispute, it appears to us that the same does not suffer from the defect pointed out by the Claimant.

The same applying, it should be noted, to the other corrections made by the TA, to the extent that it is far too evident that these derive directly from the corrections made to CIT for fiscal year 2012 and are set out in the respective Tax Inspection Report validly notified to the Claimant. Without even needing to presume it.

Identical understanding applies to the corrections to the municipal surcharge and Special Payments on Account in this fiscal year 2012, as the assessment issued results, also in that part, from the declarative elements of the various companies making up Group C... in the year 2012 and from the corrections themselves made by the Tax Inspection Services.

Finally, as to the issue of doubt as to the quantification of the tax fact, under the terms of article 100, no. 1 of the TCPC, it is considered that, for all that has been said above, such a defect also cannot proceed.

But it should be added that in this matter we would always consider, as did the Central Administrative Court of the North in the Judgment of 15.02.2012, rendered in case No. 00881/08.0BEBRG, that the doubt that implies annulment of the assessment cannot be considered well-founded if it is based "on the absence or evidentiary inertia of the parties, especially the impugner. (…) The impugner should not merely allege facts that cast doubt on the existence and quantification of the tax fact. Only through conclusive proof of such facts is it possible to conclude that such doubt is well-founded".

The truth is that the Claimant has not brought to the case any evidentiary element capable of generating doubt as to the calculations made by the TA, notably because these are easily explained, as was verified.

Thus, the defects invoked, relating to lack of substantiation and doubt as to the quantification of tax facts, do not proceed.

B) Financial Charges Supported with Loans and Supplementary Contributions to Subsidiaries

Let us now move to the analysis of the question of whether, in light of the provisions of article 23 of the CITC, the financial expenses incurred by the Claimant with advances and supplementary contributions made to its subsidiaries, without charging any interest or fees, could have been corrected.

First and foremost, it is important to make reference to the legal regime of Companies Holding Shareholdings (SGPS), as, the Claimant assuming this legal form, the assessment of compliance with the rule provided for in article 23 of the CITC will have to be made taking into account this aspect. Now, SGPS were created by Decree-Law No. 495/88 of 30 December, in the context of Portugal's integration into the common European market, with the objective of providing Portuguese companies with mechanisms, in particular of a tax nature, that would allow them to compete with their European counterparts.

Furthermore, the intent was to stimulate the creation of economic groups, providing them with instruments that would allow centralized and specialized management of shareholdings.

In fact, the sole business purpose of SGPS is the management of shareholdings in other companies, as an indirect form of the exercise of economic activities. This shareholding is considered indirect when it does not have a casual character and comprises at least 10% of the capital with voting rights of the participating company, whether by itself or through shareholdings of other companies in which the SGPS is dominant.

This does not prevent SGPS from also engaging in other activities, such as the provision of technical services of administration and management of the participating companies, notably when they constitute the parent company of a group of companies or, in exceptional situations, the acquisition of real estate.

As a rule, SGPS is prohibited from granting credit, except if they do so with regard to dominated companies, pursuant to article 486 of the Code of Commercial Companies, or to companies in which they hold a Typified Participation or an Excepted Participation (as defined in article 5 of Decree-Law No. 495/88.

Now, the activity of SGPS is, as was verified, the management of shareholdings, even though this may also involve the financing and acquisition, administration and disposal of the subsidiaries themselves. But, although it is admitted that SGPS may finance, the truth is that they do not have the purpose of financing or providing services. That is not their essence.

In this way, the financing of a subsidiary may, ultimately or in the abstract, also serve the interest of the participating company itself, the SGPS, to the extent that it is potentially generating income in the sphere of the latter. However, immediately, these financing operations, as occurred with those carried out by the Claimant in the fiscal year in question, generally aim to strengthen the capital of the subsidiaries and increase their individual results.

And this is all the more true by the fact, unequivocally confirmed by the Claimant and by its own witnesses, that there is always a maturation period of the debt itself, which may be 4, 5 or 10 years. A period during which the subsidiaries do not have the capacity to pay, but in which, unless we are mistaken, the value of the financing must be adjusted in the sphere of the beneficiary entity.

It would not be otherwise if it were impossible to establish a causal nexus between the charges supported with the financing of the subsidiaries and the income obtained individually by each of the financed entities. Being possible to do so, as is the case, the participating companies should balance such costs with their respective income (if these exist). It is certain that they should be taken into account in determining the net result of the subsidiaries in the fiscal year in which they are charged.

In fact, the Claimant could charge such interest to the subsidiaries, even though the same would only be paid later.

Otherwise, effect is not being given to the legal requirement provided for in article 70 of the CIT Code, that companies subject to SGTG, as is the case, are required to determine the taxable profit of each of these companies in its respective periodic income declaration.

In fact, pursuant to the provisions of article 70 of the CIT Code, in the wording in force at the time of the facts (identical to the current wording of that same rule), the determination of the result of the Group is effected "through the algebraic sum of the taxable profits and fiscal losses determined in the periodic declarations of each of the companies belonging to the group".

No reasons are apparent for why this should not be the case, nor any justification, in the face of such legal imperative, for the Claimant to assume exclusively the financial charges arising from advances and supplementary contributions made by it, subtracting the amounts in question from its own results. Even though, in light of the application of the taxation regime provided for in that article 70 of the CIT Code, the effect is identical, whether the cost is imputed to the sphere of the participating company or the subsidiary.

On this point, we align with the decision rendered by the Central Administrative Court of the South of 24.04.2012, in case No. 05251/11, in which the following was considered: "As is not in question, the now appealed from constitutes the dominant company of a group of companies, all subject to the special regime for taxation of groups of companies (hereinafter SGTG), contained in articles 63 et seq of the CITC (wording of Dec-Law No. 198/2001 of 3 July), having in this fiscal year 2006 come to opt for taxation under this regime, which came to replace, with amendments, the former regime of taxation by consolidated profit, provided for in the then article 59 of the CITC, in which the taxable matter of all these companies is determined by the dominant company, through the algebraic sum of the taxable profits and fiscal losses determined in the periodic declarations of each of the companies belonging to the group – see no. 1 of article 64 – and it is also certain that the now appealed from had for its business purpose the 'Management of Shareholdings and Real Estate Investments', which, as in part well stated by the Honorable Judge of the Court "a quo", by inherence, in the dominant company, make investments of a financial nature inherent to acquisitions of shares or quotas of the participating companies, so that in the fiscal year in which profits are attributed to the company holding the shareholdings, or that the shareholdings are disposed of, the corresponding amounts obtained will come to be considered income of the fiscal year, so that the charges supported resulting from the holding of those shareholdings, the disposal of which determines the corresponding gains/losses in fixed assets, or the profits attributed to it by the participating companies, are considered income of the fiscal year, so that being susceptible to generating profits and/or capital gains on the disposing party, in the future, they cannot be disregarded ab initio, in a judgment of indispensability of costs for the realization of income, in short, the framing of taxable profits of all the companies in that consolidation perimeter inherent to the special regime for taxation of groups of companies presupposes observance of the requirement relating to all of the income of the companies belonging to the group being subject to the general taxation regime and being calculated by the dominant company, under the terms of the provisions in nos. 3, paragraph a) and 8, paragraph a) of the cited articles 63 and 64, no. 1.

As in this part, equally, well stated by the Honorable Judge of the Court "a quo" in the sentence appealed from, the deliberation of the board of directors of the dominant company, in binding it to the carrying out of accessory capital contributions with the regime of supplementary capital contributions, was not refuted by the TA in the report of the examination of the records carried out and nor was it under its authority that such costs were disregarded (they could be, by force of the provisions of article 210, no. 1 of the CSC, given that these are only possible if the articles of association permit it, which was not the case), but rather because such amounts, necessary to acquire such financial shareholdings, are to be attributed in the legal sphere of the dominated companies and not in the dominant company, as autonomous entities that are, with autonomous purpose of determining the taxable matter, having legal personality and capacity distinct from that which their relationship of dominance does not affect or annul.

As mentioned in that decision, 'Now, although the now appealed from also includes in its business purpose the management of shareholdings in other companies, what is not at issue here are those shareholdings in themselves, but rather their accessories, that is, the financial charges relating to bank loans contracted and which were applied in those associates, directly for the normal pursuit of the activities of these, and that is where, from the outset, directly, the normal effects will take place (susceptibility of generating profits), in a causal relationship or dependence, so that such charges were to these companies that directly should be imputed and not to the dominant company, under penalty of effects of the exercise of the activities in the pursuit of the purpose of these subsidiaries being attributed to this, resulting in an assumption of liability of some by another, with tax results different from those that would be obtained if the financing were allocated to the companies that need it, for the exercise of their activities, since even in the field of the determination of the taxable profit of this special taxation regime, the taxable profit of the group is calculated by the dominant company, but through the algebraic sum of taxable profits and fiscal losses determined in the periodic declarations of each of the companies belonging to the group, under the terms of the provisions of article 64, no. 1 of the CITC.

Were it not so, disrespecting these rules of determining taxable profit, under the general terms, in particular regarding the allocation of eligible costs to each of them, autonomously and independently, then it would make no sense for the law to mandate determining the taxable profit of each of them in its respective periodic income declaration for that fiscal year, being sufficient to determine that relating to the dominant company with such positive and negative components of all these associates, unitarily and globally, depersonalizing all these associate companies, in particular at the level of their commercial and tax autonomy, which the law, in particular in the cited rules, did not come to establish.

On the other hand, as well stated by the tax inspection, in its respective report, the rule of article 31 of the BFA (in the republication of Dec-Law No. 198/2001 of 3 July, amended by article 45 of Law No. 109-B/2001 of 27 December – State Budget Law for 2002, applicable here), determined that to SGPS and SCR the provisions of nos. 1 and 5 of article 46 of the CITC applied, as well as the provisions of nos. 1 and 4 of its article 45, that is, that profits distributed by participating companies to participating companies were deducted from the tax base of determining the taxable profit of these, as well as benefited from the difference between losses and gains realized as long as they were subject to reinvestment, which in the case implied that such charges from loans supported by the now appealed from would cease (or could cease, in the case of capital gains) to have reflexes at the level of the income that by way of profit could come to be distributed to it, to the contrary of what seems to be defended by the Honorable Judge of the Court "a quo" in the sentence appealed from, where we did not see that with the application of such regime immanent to that article 31 of the BFA determined the lapsing of the general taxation regime in CIT, it being certain that the invoked rules of nos. 3 and 8 of article 63 of the CITC do not impose it, all of them inserted in Chapter III of that Code under the heading, Determination of taxable matter, in whose sections I to VI determine the concrete manner of determining the taxable matter in accordance with the various situations that, in each of them, are subsumed, in this way, not being able to cease to exist, in the sphere of the now appealed from, the lack of balancing or matching between the costs supported with those charges and the respective income (or possibly not existing, as to capital gains), which would prevent such cost from being considered a tax cost in that same company.

Even though such contributions in favor of the associates are to be qualified as financial fixed assets, as the appellant invokes – see its conclusion 4 – it is not such contributions in themselves that are directly at issue here, but rather the financial charges incurred in their obtaining, which, in any case, may dispel the qualification of such amounts from the general discipline of costs contained in article 23 of the CITC, nor is it understood the reference to the exclusion of taxation of capital gains whose related charges would not constitute tax costs, at the basis of article 32 of the BFA – see its conclusion 16 – when such rule relates to Investor Clubs, not to SGPS, which rather finds regulation in the previous rule of its article 31, with its field of application analyzed above.

It is true that in the previous regime of taxation by consolidated profit provided for in the then article 59 of the CITC, this constituted an exception to the rule of taxation in CIT according to the individuality proper to each one, with taxation being effected within the group of which they were part, conferring thus on the group of companies autonomous tax personality encompassing those of the comprising companies, IRC calculated together for all companies of the group ... see no. 1 of that same article 59 – a regime then conditioned to authorization by the Minister of Finance and somewhat different from that presently in force in this SGTG, as that, although the taxable profit be calculated by the dominant company, is that resulting from the algebraic sum of taxable profits and fiscal losses determined in the periodic declarations of each of the companies belonging to the group – no. 1 of article 64 – all these subject to the general taxation regime in CIT – article 63, no. 3, paragraph a) – to which there will then be place to the correction relating to distributed profits, which constitutes the single collection to be paid, there being no place for such authorization request but only for communication of that choice to the DGCI, under the terms of no. 7 of that same article 63 of that same CITC.

However, until the moment of determining the taxable profit, by the dominant company, in that group of companies located in that consolidation perimeter, in its relations with third parties, whether in fulfilling the business purpose of each of them, everything happens as if each of these companies constituted a distinct and diverse legal person from each of the others in that group, not being in this respect affected by the relationship of dominance existing in relation to the dominant company, all subject to the general taxation regime in CIT, and as such, subject to the general rules of determining the taxable matter of articles 15 et seq of the CITC, in particular as to the qualification of costs, provided for in its article 23, and the relation of causality between certain cost and its indispensability for the realization of income or for the maintenance of the productive source, even though such causality does not have to be of the type conditio sine qua non or of concrete results obtained with that cost, but rather a relation that takes into account the normal circumstances of the market, considering the normal risk of the economic activity, in terms of economic adequacy to the purpose of the maximized obtainment of results intended to be obtained".

But also if we analyze this issue solely in light of the provisions of the rule in paragraph c) of article 23 of the CITC, we cannot fail to conclude the obligation of recognizing costs in the spheres of their beneficiaries.

At this point, we must make reference to the Judgment of the Supreme Administrative Court of 30/05/2012, rendered in case No. 0171/11, of which Counselor Fernanda Maçãs was the Rapporteur, in which the question to be decided consisted precisely of whether, in light of that rule, costs with interest and stamp duty on bank loans contracted should or should not be considered as fiscally relevant, even though they resulted in loss and were not strictly necessary for obtaining the gains of the paying entity. Between the latter and the benefited companies there was a relationship of total dominance.

The decision then rendered was the one now partially transcribed: "The aforementioned legal rule provides 'Costs or losses are those that are proven to be indispensable for the realization of income or gains subject to tax or for the maintenance of the productive source, including in particular the following: …c) charges of a financial nature, such as interest on foreign capital applied in operations, discounts, agio, transfers, exchange differences, costs with credit operations, debt collection and issuance of shares, bonds and other securities and redemption premiums…'.

From this it results that the costs provided for there cannot fail to relate, from the start, to the contributing company itself.

That is, for a certain amount to be considered a cost of that entity it is necessary that the respective activity be developed by it itself, not by other companies.

Were it not for this, how could the exercise of the activity of another company with which it had some relationship be attributed to a company.

The controversial amounts correspond to interest on bank loans and stamp duty contracted by the appellant and applied in the free financing of an associated company.

Such amounts are not, therefore, directly related to any activity of the taxpayer inscribed in its business purpose, which is real estate ventures and management and not the management of shareholdings or financing of risk companies, nor even relate, although indirectly, to its activity.

On the other hand, this is not about interest on foreign capital applied in its own operations, such as those provided for as costs in paragraph c) of no. 1 of article 23 of the CITC.

The mere possibility of being able to have in the future gains resulting from the application of such capital in its associate does not determine solely by itself that such investments can be framed in the concept of tax costs because for that it was necessary that such charges were indispensable for the realization of income or gains subject to tax or for the maintenance of the productive source.

And such indispensability is far from having been demonstrated in this case.

In conclusion, it will be said, therefore, that the amounts in question do not constitute costs for tax purposes".

Identical conclusion must be drawn in the present case, it also being certain that, by force of the fact that the possible return with the advances occurs only some years after the capital injection, immediately, nor was the indispensability of such charges with the activity of the Claimant demonstrated.

Furthermore, if the loans granted by the Claimant were remunerated, the question of accounting probably would not arise, as there would be no doubt as to its allocation in the sphere of the participating companies.

Finally, the Tribunal considers that some questions were left unclear by the Claimant.

From the testimony of witness Q..., responsible for the accounting of the Claimant since 1995, it follows that it is not possible to establish a direct connection between the financing obtained by the Claimant and the financing granted, as the Claimant itself asserted, so that it cannot be stated peremptorily that the former were not intended to support the latter, especially when some of the accounting elements presented by the Claimant seem to attest to the contrary. In particular, the Statement of Cash Flows relating to the financial movements in 2012, which shows, for example, that the Cash Flows from Financing Activities are in deficit of approximately € 1,995,433.41, that is, that the Claimant granted a financing value substantially higher than what it received.

Thus, the Tribunal became convinced that the financial charges in question are not directly related to the activity proper to the Claimant, and their deductibility in the sphere of the latter cannot be accepted, under the terms of the provisions of article 23 of the CITC, so that the Tax Authority rightly corrected the respective amounts. Consequently, the arbitration request does not proceed in this part, maintaining the CIT assessment now contested.

C) Financial Charges Related to Shareholdings

At this point, it is necessary to assess whether the correction of the increase relating to financial charges related to shareholdings, made by the TA in fiscal year 2012, is legally admissible.

To decide this question, it is important to note that the Claimant disregarded 40% of the financial charges supported with the acquisition of shareholdings.

For its part, the Tax Inspection Services considered that, of the totality of charges noted by the Claimant, in the amount of € 1,017,844.65, the amount of € 334,481.79 could not be fiscally accepted for being considered allocated to shareholdings. Thus, having been increased by the Claimant the amount of € 150,713.25, it was in these terms increased to the Taxable Result for the year 2012 and under the terms of no. 2 of article 32 of the BFA, the amount of € 183,768.54.

This correction was based solely on the understanding set forth in Circular No. 7/2004, of the CIT Services Directorate.

Let us then see whether this correction has grounds.

Pursuant to no. 2 of article 32 of the BFA, in the wording in force at the time of the facts, "Capital gains and losses realized by SGPS, by SCR and by ICR of capital shares of which they are holders, as long as held for a period not less than one year, as well as the financial charges supported with their acquisition do not contribute to the formation of the taxable profit of these companies".

Already the mentioned Circular No. 7/2004 postulates the following: "(...)as to the method to be used for purposes of allocating financial charges supported to the acquisition of shareholdings, given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that the same would allow, such allocation should be effected on the basis of a formula taking into account the following: the remunerated liabilities of SGPS and SCR should be allocated, in the first place, to remunerated loans granted by these to participating companies and to other investments generating interest, allocating the remainder to the remaining assets, in particular shareholdings, proportionally to their respective acquisition cost".

Now, in this matter, the Jurisprudence, whether of arbitral tribunals or of administrative and tax courts, has been unanimous in considering the understanding fixed in the mentioned Circular No. 7/2004 illegal, not only for endorsing the use of an indirect allocation method, but also because the determination of non-deductible financial charges cannot be effected by Circular or Administrative Instruction.

Examples of this are the decisions rendered in arbitration in cases Nos. 21/2012-T, 24/2012-T, 292/2015-T, 295/2015-T, 738/2014-T, 69/2016-T and 663/2015-T.

Similarly, see the decisions rendered by the SAC (case No. 0227/16 of 08/03/2017) or by the CCAN (cases Nos. 00997/12.8BEPRT of 14/03/2013, No. 00946/09.0BEPRT of 15/01/2015).

In fact, all the decisions above identified considered, unanimously, that Circular No. 7/2004 suffers from the defect of formal unconstitutionality, by violation of the principles of legality and reservation of law to the Assembly of the Republic.

By way of example, cite the decision embodied in that CCAN Judgment rendered in case No. 00946/09.0BEPRT of 15/01/2015, to which we adhere:

"In Portugal the principle of legality prevails having as a corollary according to classical doctrine the principle of closed typology and tax incidence matter is of relative reservation to the Assembly of the Republic. In the present case the law does not establish criteria for the allocation of financial resources to the acquisition of shareholdings and the tax administration cannot, through administrative means create norms of incidence (through the so-called 'circulatory law'), under penalty of being faced with a material unconstitutionality, since such norms must emanate from law (of the Assembly of the Republic) or Decree-Law (of the Government) duly authorized.

The taxpayers are not obliged to follow the procedures set out in Circular 7/2004 of 30.3.2004 (hereinafter referred to as circular 7/2004) as the same are only binding on tax officials before their supervision and nothing more.

We cannot agree with what is stated in Circular 7/2004 in its point 7 where it refers 'given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that the same would allow': due to the development and sophistication of management information systems available on the market, the method of direct allocation should be privileged and only in the impossibility of using the same; would one advance as an alternative method the one recommended in Circular 7/2004'.

In fact and here we accompany what was decided by CAAD in Judgment No. 277/2016-T: "In truth, there is no minimum legal support for, instead of determining casuistically whether or not there is an allocation of financial resources generating charges to the acquisition of certain capital shares, allocating charges, 'in the first place, to remunerated loans granted by these to participating companies and to other investments generating interest, allocating the remainder to the remaining assets, in particular shareholdings, proportionally to their respective acquisition cost'. Now this method would only correspond to what is legally required to determine non-deductible charges, if it were proven that, in fact, the financing to which the financial charges relate had been allocated in the manner provided for there and, in particular, as concerns shareholdings, had been used proportionally to acquire them. But, beyond that lack of proof of the correspondence between reality and the criterion of allocation used by the Tax and Customs Authority, nor is any explanation even ventured in the mentioned Circular as to why the indicated formula would be used and not another".

Effectively, even if the method of determination set out in the Circular in question is, at times, more favorable than would be the mere application of the elements provided by the taxpayer itself, the truth is that it is an indirect method and that uses a presumption, in evident violation also of the principle of taxation by real income, embodied in article 103 of the CRP.

Thus, given that no fixed criterion has been established for purposes of recognizing these charges, the criterion used by the taxpayer is not susceptible to censure.

Wherefore this correction lacks grounds and should be annulled.

D) Financial Charges Related to the Disposal of Capital Shares

At this point and as was alluded to, the Tax Inspection Services did not accept as a tax expense for fiscal year 2012 the amount of € 38,163.24, relating to charges recorded by the Claimant with commissions paid to the South African company G... Limited, associated with the disposal of the subsidiary B..., also a company based in South Africa, in the amount of € 30,450.00 (recorded in account # 62213) and legal services rendered in South Africa by the company "J...", in the amount of € 7,713.24.

According to the Respondent's submission, making appeal to what was considered in this regard by the Tax Inspection Services, these charges, which amounted to € 38,163.24, contributed to determining the Taxable Result for the year 2012 as a negative component, since they were recorded as Expenses by the Claimant. The disposal of subsidiary B... generated a capital gain of € 438,700.00 for A... in the year 2012, which was not taxed by virtue of the application of the tax regime for SGPS stipulated in article 32, no. 2 of the BFA, having been deducted by the taxpayer in field 767 of table 07 of Declaration Form 22 relating to 2012".

Furthermore and as to the legal framework invoked to substantiate this correction, the Respondent considers that: "However, article 46 of the CITC stipulates in its no. 2 the following: 'Capital gains and losses are given by the difference between the realization value, net of charges inherent to it, and the acquisition value minus losses by impairment and other adjustments (…)'. This means that the charges in the amount of € 38,163.24, being charges inherent to the sale of B..., were not accepted as a tax expense for fiscal year 2012, having been therefore increased to the Taxable Result of that fiscal year, as was decided by the arbitral tribunal within the scope of Case No. 277/2016-T".

However and once again, we do not align with what was decided in that Arbitral Judgment, because we understand that the substantiation used by the TA to justify this correction suffers from an error in appreciation of the rules to be applied.

In fact, article 46, no. 2 of the CITC provides that: "Capital gains and losses are given by the difference between the realization value, net of charges inherent to it, and the acquisition value minus losses by impairment and other adjustments (…)".

But this rule aims only to establish the manner of calculating capital gains and losses obtained by SGPS, it has no interference whatsoever in assessing the deductibility of the cost relating to the acquisition of capital shares. To carry out this analysis, the TA should have resorted solely and exclusively to the rule contained in article 23 of the CIT Code.

And in that measure, and also in coherence with all that has been said above, we consider that the payment of the commission and the legal services in question is related to the activity of managing capital shares, exercised by the Claimant as an SGPS.

The TA's framing of this issue is incorrect, because based on a rule – no. 2 of article 46 of the CIT Code – that does not have the faculty of defining the terms of the deductibility and indispensability of the cost and its greater or lesser contribution to the maintenance of the productive source. Wherefore this correction suffers from the defect of violation of law, by wrong interpretation and application of the provisions of articles 46, no. 2 and 23, no. 1, both of the CITC.

The assessment in crisis should therefore be annulled in this part, with the arbitration request also proceeding in this part.

E) Request for Compensation for Undue Guarantee.

As was demonstrated in the case files, the Claimant had to proceed with the constitution of guarantees for suspension of the enforcement proceedings instituted for collection of the debt relating to the assessment in crisis, namely the two bonds better identified and whose copy was attached to the arbitration request as Doc. No. 26.

Thus, in the part in which it was found to be correct, within the scope of the present arbitration request, recognizing the illegality of the procedure adopted by the TA and, consequently, the illegality of the assessment in crisis, the Claimant must be compensated, in the end, for the costs incurred with the provision of that guarantee.

Only thus will be ensured, as article 100 of the GTL requires, the immediate and full reconstitution of the situation that would have existed, had such illegality not been committed.

Furthermore, no. 1 of article 53 of the GTL establishes that "1 - The debtor who, to suspend enforcement, offers a bank guarantee or equivalent shall be indemnified wholly or partially for the losses resulting from its provision, should it have maintained it for a period exceeding three years in proportion to the success in administrative appeal, judicial impugnation or opposition to execution which have as their object the debt guaranteed. And its no. 2 that "The period mentioned in the previous number does not apply when it is verified, in gracious reclamation or judicial impugnation, that there was error attributable to the services in the assessment of the tax".

Also according to no. 3 of the same rule, "The indemnification referred to in no. 1 has as a maximum limit the amount resulting from the application to the guaranteed value of the rate of indemnity interest provided for in this law and may be requested in the own process of reclamation or judicial impugnation, or autonomously", finally determining no. 4 that "Indemnification for provision of undue guarantee shall be paid by abate to the revenue of the tax of the year in which payment was made."

In these terms, the Claimant's right to payment of the indemnification due, under the terms provided for in article 53 of the GTL, for the costs incurred with the provision of said guarantee should be recognized, in the proportion of the success of the present action.

F) Compensatory Interest and Default Interest.

Let us recall that at issue in the present case is the request for a declaration of illegality of the assessment of CIT, Compensatory Interest and Default Interest No. 2016..., of 22.02.2016, relating to fiscal year 2012, from which an amount due of € 161,463.03 resulted, and whose voluntary payment deadline terminated on 11.05.2016.

Of the € 161,463.03 due, € 15,731.06 correspond to compensatory interest and € 155.10 to default interest.

1. It is noteworthy that, throughout the proceedings, only the Claimant addresses the subject of compensatory interest (articles 731 et seq PPA, 376 et seq Arguments) and default interest (articles 745 et seq PPA, 379 et seq Arguments), with the Respondent being silent on these two points, both in its Response and in Arguments.

We will disregard the Claimant's arguments that rest on the presumption of the illegality of the tax assessment, because that matter is already resolved, against the Claimant's claim, by final decisions of the TCAS and SAC.

It happens that, subsidiarily, the Claimant used other arguments in support of the idea that such interest would not be due: the non-existence of an adequate causal nexus between the conduct of the taxpayer and the delay in the tax assessment, as well as the ethical-personal culpability of such conduct, by way of intent or negligence – invoking in support thereof the Judgment of the SAC, 2nd Section, of 16.12.2010, Case 0587/10, in whose summary one can read that "Liability for compensatory interest has the nature of civil reparation and, therefore, depends on the adequate causal nexus between the delay in assessment and the conduct of the taxpayer, as well as the possibility of formulating a judgment of censure of its conduct (by way of intent or negligence). II – In this context, and in face of the provisions of articles 35° of the GTL and 89° of the CIVA, the essential requirements for assessment of compensatory interest are the existence of a VAT debt, a delay in effectuation of an assessment of that tax and the imputability of the delay to culpable conduct of the taxpayer. III – Guilt consisting in the reprehensible omission of a duty of diligence, which must be assessed according to general duties of diligence, aptitude and knowledge of a reasonable person"; or the Judgment of the SAC, 2nd Section, of 23.10.2002, case No. 01145/02, according to which «I - Compensatory interest arising from the delay in assessment of the respective tax (article 90° of the CIRS, article 80° of the CIRC and article 89° of the CIVA) presupposes the existence of guilt (intent or negligence) of the taxpayer for the delay or absence of assessment. II - The possible impugnation of these, when autonomously assessed, if based on autonomous facts, does not depend and much less necessarily of the impugnation of the assessment of the respective tax. III - Verifying itself perchance that the eventual delay in assessment was rather due to mere and understandable divergence of criteria between the AF and the taxpayer or excusable error...

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