CAAD Ruling on IRC Deductibility of Financial Charges for SGPS Holding Companies

ARBITRAL DECISION [1]

The Arbitrator, Dr. Sílvia Oliveira, appointed by the Ethics Council of the Administrative Arbitration Center (CAAD) to form the Arbitral Tribunal, constituted on 5 November 2015, with respect to the above-identified case, has decided as follows:

1. REPORT

1.1

A..., SGPS, S.A., Legal Entity No. ..., registered under the same number in the Commercial Registry Office of Lisbon and with registered office at Rua..., No. ..., ...º, in Lisbon (hereinafter referred to as "Claimant"), submitted a request for an arbitral ruling and constitution of a Single Arbitral Tribunal on 21 August 2015, pursuant to the provisions of article 4 and No. 2 of article 10 of Decree-Law No. 10/2011, of 20 January [Legal Regime for Arbitration in Tax Matters (RJAT)], in which the Tax and Customs Authority is the Respondent (hereinafter referred to as "Respondent").

1.2

The Claimant requests that the Arbitral Tribunal rule on:

a) "The declaration of illegality of the corrections relating to the fiscal year 2011;

b) The declaration of illegality of the decision on the gracious complaint and of the assessment notice No. 2013 ..., relating to the fiscal year 2011;

c) The refund of the tax improperly paid by the Claimant, plus compensatory interest".

1.3

The request for constitution of the Arbitral Tribunal was accepted on 24 August 2015 by the President of CAAD and notified to the Respondent on the same date.

1.4

The Claimant did not proceed with the appointment of an arbitrator, and therefore, pursuant to the provisions of article 6, No. 2, subsection a) of RJAT, the undersigned was appointed as arbitrator by the President of the Ethics Council of CAAD on 20 October 2015, with the appointment being accepted within the legally prescribed period and terms.

1.5

On the same date, both parties were duly notified of this appointment and did not express any intention to refuse the appointment of the arbitrator, in accordance with article 11, No. 1, subsections a) and b) of RJAT, in conjunction with articles 6 and 7 of the Ethics Code.

1.6

Thus, in accordance with the provisions of subsection c) of No. 1 of article 11 of RJAT, the Arbitral Tribunal was constituted on 5 November 2015, and an arbitral order was issued on the same date, to notify the Respondent to, pursuant to the provisions of article 17, No. 1 of RJAT, submit its answer within a maximum period of 30 days and, if it wished, request the production of additional evidence.

1.7

Additionally, it was also stated in that arbitral order that the Respondent should send to the Arbitral Tribunal, within the period for filing the answer, a copy of the administrative file.

1.8

On 7 December 2015, the Respondent submitted its Answer, having defended itself by objection and concluded that "the present request for an arbitral ruling should be judged without merit for lack of proof".

1.9

With the Answer, the Respondent also attached the respective administrative file.

1.10

By arbitral order of 9 December 2015, both parties were notified to rule, within a period of 5 days, on the possibility of dispensing with the holding of the meeting referred to in article 18 of RJAT, as well as on the possibility of dispensing with the submission of arguments.

1.11

The Respondent, on 10 December 2015, submitted a request to the effect that "(…) it may be dispensed with the holding of the meeting referred to in article 18 of RJAT, as well as with the final arguments".

1.12

The Claimant, on 15 December 2015, came to submit a request to also dispense with both the holding of the aforementioned meeting and the submission of arguments.

1.13

In these terms, by order of this Arbitral Tribunal, dated 22 December 2015, in line with the procedural principles set forth in article 16 RJAT, of the adversarial principle [subsection a)], of equality of the parties [subsection b)], of the autonomy of the Arbitral Tribunal in conducting the proceedings and in determining the rules to be observed [subsection c)], of cooperation and procedural good faith [subsection f)] and of free conduct of the proceedings set forth in articles 19 and 29, No. 2 of RJAT, and also taking into account the principle of limitation of useless acts, provided for in article 130 of the Code of Civil Procedure (CPC), applicable by virtue of the provisions of article 29, No. 1, subsection e) of RJAT, this Arbitral Tribunal decided the following:

1.13.1

To dispense with the holding of the meeting referred to in article 18 of RJAT;

1.13.2

To dispense with the submission of arguments;

1.13.3

To set 26 January 2016 for purposes of rendering the arbitral decision.

1.14

The Claimant was further warned that "up to the date of rendering the arbitral decision, it should proceed with payment of the subsequent arbitral fee, in accordance with the provisions of No. 3 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings and notify such payment to CAAD", which it did on 30 December 2015.

2. STATEMENT OF FACTS AND GROUNDS

The Claimant supports its claim, in summary, as follows:

Identification of the Request for Arbitral Ruling

2.1

It begins by clarifying that it "was subject to a general inspection action on accounting and tax elements with reference to the fiscal years 2009, 2010 and 2011 (…)", and that "with reference to the fiscal year 2011, the aforementioned inspection action resulted in a correction to the taxable income in the amount of
€ 1,676,807.16 relating to the amount of financial expenses attributable to capital shares not deductible by virtue of the provisions of No. 2 of article 32 of the Tax Benefits Statute (TBS) in the version in force at the time (…)".

2.2

"Insofar as the Claimant does not agree with the grounds advanced by the Tax and Customs Authority (…) to support the aforementioned correction, it comes to request the constitution of an arbitral tribunal to proceed with the declaration of illegality and consequent annulment of the corrections made by TA and of the IRC assessment formalized in document No. 2013 ... (…)".

Statement of Facts and Legal Issues Subject of the Request for Arbitral Ruling

2.3

The Claimant continues by alleging that "as a result of the aforementioned inspection action, on 7 November 2013, (…) it was notified of the Draft Tax Inspection Report (…), being given the opportunity to exercise its right of prior hearing", which was exercised in writing on 26 November 2013.

2.4

Within the scope of the aforementioned Draft Tax Inspection Report, "(…) the DSIT came to propose a correction to the taxable income from IRC declared by the Claimant in the fiscal year 2011, in the amount € 1,676,807.16 (…)" and "(…) to contend that the correction in question is justified by the fact that the amount of non-deductible financial expenses considered by the Claimant in the determination of its taxable profit did not take into account the financial expenses attributable, pursuant to Circular No. 7/2004, of 30 May, the ancillary contributions that follow the regime of supplementary contributions granted by A... to its participations, which would be (…) subsumable in the concept of capital shares for the purposes provided for in No. 2 of article 32 of the TBS".

2.5

Additionally, "(…) the DSIT came to allege that in the calculation of the financial expenses attributable to capital shares effected by the Claimant, not all of the financial expenses borne were included, namely other costs and financial losses arising from the financing obtained and not merely interest".

2.6

Notwithstanding, the Claimant understands that it has "(…) demonstrated the illegality, including by error, of the correction proposals contained in the Draft Report", "(…) on 12 December 2013, the Claimant was notified of the Final Tax Inspection Report (…) in which DSIT maintained the corrections proposed in the Draft Report", whereby "as a result of the inspection action, the IRC assessment note No. 2013 ... relating to the taxation period 2011, dated 16 December 2013, was issued, with the total amount payable reaching € 457.91 (…)".

2.7

However, "on 17 June 2014, the Claimant, not conforming to the grounds advanced by DSIT to support the aforementioned correction, filed a gracious complaint (…)", and on 27 May 2015, it was "(…) notified of the express dismissal of the gracious complaint (…)", whose decision the Claimant understands to be "(…) illegal (…) insofar as it maintained the assessment act subject to the present request, requesting herein the recognition of such illegality and the consequent annulment of the decision and of the act underlying it".

2.8

In these terms, the Claimant understands that "taking into account the provisions of art. 10°, No. 1, subsection a) of RJAT and art. 102°, No. 1 of CPPT, the present request is timely".

On the Non-Classification of Ancillary Contributions Subject to the Supplementary Contributions Regime as Capital Shares

2.9

"Within the scope of the Inspection Report, DSIT alleges that the fact that the ancillary contributions that follow the supplementary contributions regime have some characteristics that distinguish them from shares or quotas do not remove them in what is essential [from the concept of capital shares] for the application of No. 2 of article 32 of the TBS regarding the financial expenses that derive from them, concluding (…) that the financial expenses borne with the granting of ancillary contributions that follow the supplementary contributions regime are subsumed in this rule".

2.10

In fact, "this conclusion results, in DSIT's understanding, from the fact that the financial expenses borne as a result of bank loans contracted for the realization of ancillary contributions that follow the supplementary contributions regime (…) constitute a cost necessary to obtain income subject to tax in the sphere of participations, either through the distribution of dividends or through possible future capital gains on the transfer of that participation, and for that reason, should be subsumed in the concept of capital shares provided for in No. 2 of article 32 of the TBS".

2.11

For the Claimant, "from the foregoing it results that the assimilation between the treatment given to capital shares and that to which the ancillary contributions that follow the supplementary contributions regime are subject is, according to DSIT's understanding, supported by the role played by the ancillary contributions subject to the supplementary contributions regime in the sphere of the beneficiary company".

2.12

However, the Claimant understands that "contrary to what DSIT wishes to suggest, the fact that the supplementary contributions assume a role of complementing the share capital does not mean that with it they should be confused", whereby "(…) the position followed by DSIT is not legal and should be rejected (…)".

2.13

In this sense, the Claimant begins by alleging that "the concept of capital shares is not expressly defined in the IRC Code (…) whereby it should be interpreted according to the definition provided for in corporate law", pursuant to which "(…) and as DSIT itself comes to acknowledge in response to the right of prior hearing exercised by the Claimant, it is unequivocal that the concept of capital shares only includes shares of the share capital (i.e. shares and quotas), thus distinguishing itself from ancillary contributions", "(…) concluding (…) that the position sustained by DSIT which gave rise to the additional assessment in question is not correct (…)".

On the Non-Inclusion and Non-Coincidence of the Concept of Ancillary Contributions in the Concept of Capital Shares Provided for in Corporate Law

2.14

In this connection, the Claimant contends that "if the concept of capital appeals to share capital, the concept of capital shares will, by a fortiori, have to refer to shares of the share capital, which will be the same as saying social participations or else quotas or shares, depending on whether we are dealing with limited liability companies or joint-stock companies", thus understanding "(…) the very doctrine that has addressed the scope of the concept of capital shares, and specifically comparing it with the ancillary contributions that follow the supplementary contributions regime".[2][3]

2.15

That is, the Claimant contends that "if it is true that capital shares integrate, like ancillary contributions and supplementary contributions, the concept of equity capital, this does not mean that both realities, together with others that appear in this concept, can be understood as capital shares".

On the Application of the Substance over Form Principle to Define the Concept of Capital Shares

2.16

"In order to support its correction, DSIT states within the Inspection Report that to confuse the mere legal qualification of capital shares and ancillary contributions that follow the supplementary contributions regime with the tax qualification, which especially takes into account the substance over form principle and goes to meet the economic and financial ratio of the contributions under analysis is to ignore the grounds of the method of determining the financial expenses attributable to capital shares".

2.17

However, for the Claimant "(…) there is no doubt that corporate law treats capital shares as shares of the share capital, with ancillary contributions not being included in the scope of this concept", whereby "complying with the rules of interpretation of tax laws provided for in article 11 of the LGT, one could never apply the substance over form principle to define the concept of capital shares provided for in No. 2 of article 32 of the TBS".

2.18

Now, on the one hand, the Claimant understands that "(…) one cannot fail to make reference to the fact that the indications contained in the IRC Code point in the same direction as corporate law with regard to the concept of capital shares", namely, in article 48, No. 4, whereby "(…) it must be said that (…) to admit that the concept of capital shares includes ancillary contributions that follow the supplementary contributions regime is, in light of the aforementioned rule, completely absurd".

2.19

On the other hand, and with regard to the evolution of the very wording of No. 3 of article 45 of the IRC Code, the Claimant contends that "until the entry into force of the State Budget Law for 2006 (…), the wording of the rule in question provided for the deductibility in only half the value of the (...) negative difference between capital gains and losses realized through the onerous transfer of capital shares, including their redemption and amortization with capital reduction (…)" (Claimant's emphasis).

2.20

Now, the Claimant continues, "if supplementary contributions were subsumed in the concept of capital shares, it would not make sense the amendment introduced by the State Budget Law for 2006 to No. 3 of article 45 of the IRC Code in order to extend the scope of that rule to (...) other components of equity capital, namely supplementary contributions (…)" (Claimant's emphasis).

2.21

Thus, the Claimant understands that "the use of the term 'other' makes clear the legislator's intention to refer to realities different from those already provided for in the law, that is: to other realities that are not capital shares".[4][5]

2.22

In these terms, "in view of the foregoing (…) the Claimant considers that there is no doubt that the ancillary contributions that follow the supplementary contributions regime are not included in the concept of capital shares".[6]

On the Rationale of the Regime Provided for in No. 2 of Article 32 of the TBS

2.23

According to the Claimant, "the financial expenses borne by SGPS with the acquisition of capital shares will only be deductible for the purposes of determining its taxable profit to the exact extent that the capital gains associated with such type of asset are subject to tax".

2.24

Now, "taking as reference the spirit underlying the regime provided for in article 32 of the TBS, it must be concluded that the ancillary contributions that follow the supplementary contributions regime are not covered by the provisions of No. 2 of that rule, since such contributions are not, under normal circumstances, likely to generate capital gains that benefit from the exemption regime enshrined in that rule, and as a matter of equity, the financial expenses associated with the financing obtained for their provision should be tax-deductible".

2.25

In this connection, the Claimant continues by noting that "in the same sense, also with regard to losses arising from supplementary contributions, such losses do not find a framework in No. 2 of article 32 of the TBS, insofar as they contribute to the formation of taxable profit in half their value, as provided for in the final part of No. 3 of article 45 of the IRC Code (…)".

2.26

Thus, for the Claimant, "the reasoning followed by DSIT in light of the substance over form principle cannot (…) be accepted".[7][8]

On the Inconsistency of TA's Position Regarding the Equating of Ancillary Contributions to Capital Shares

2.27

In this connection, according to the Claimant, "(…) the TA itself has not had a consistent position with regard to the equating of ancillary contributions to capital shares, and it may even be found positions of the TA that contradict the one underlying the additional assessment whose declaration of illegality is sought to be obtained".[9][10]

2.28

In summary, the Claimant understands that "(…) the subsumption of ancillary contributions in the concept of capital shares that article No. 2 of article 32 of the TBS appeals to cannot be understood as valid, insofar as:

i) Corporate law distinguishes, without a shadow of a doubt, the concepts of capital shares from ancillary contributions that follow the supplementary contributions regime;

ii) The indications contained in the IRC Code point in the same direction, i.e. the reference that the reinvestment regime of the values of realization to capital shares makes to the operations of remission and amortization with capital reduction and, likewise, the evolution of the very wording of No. 3 of article 45 of the IRC Code, in force at the time of the facts;

iii) The same distinction is a settled and undisputed point both in the majority of the doctrine existing on this matter and in the recent jurisprudence of the Arbitral Tribunal;

iv) The rationale underlying No. 2 of article 32 of the TBS determines the non-inclusion in the same rule of the financial expenses borne with the granting of ancillary contributions that follow the supplementary contributions regime;

v) The guidelines contained in Circular No. 7/2004 are clear in the sense of imputing the non-deductible financial expenses pursuant to No. 2 of article 32 of the TBS solely to social participations;

vi) Within the scope of the additional assessment note relating to the 2009 IRC of the Claimant, which has as a basis the same corrections as those at issue in the present proceedings, the Arbitral Tribunal constituted at the request of the Claimant (case No. 376/2014-T) stated that, since the Respondent (…) makes a non-conforming application of articles 32/2 of the TBS and 23 of the IRC, the challenged assessment must be annulled".

On the Inclusion of "Other Costs or Financial Losses" in the Calculation of Financial Expenses Subject to No. 2 of Article 32 of the TBS

2.29

According to the Claimant, "only interest borne with financing contracted for the acquisition of social participations should be subsumed in the concept of financial expenses that the regime appeals to, even though, outside the context of No. 2 of article 32 of the TBS, this concept may encompass other expenses that are not these interest payments".

2.30

Now, arising from the law that "there being a category of income that falls outside the scope of taxation for IRC purposes (…) and cannot be considered as tax-deductible expenses given they have no relevant tax counterpart", it seems clear to the Claimant that "the expenses in question must be those that are intimately related to the capital gains not considered as income, that is, the expenses that are inherent to the original acquisition of the social participations held (…), and cannot be considered as such other costs or financial losses that prove to be merely accessory and not related to obtaining income not subject to IRC".[11][12][13]

2.31

In view of the foregoing, "in the Claimant's opinion, the understanding adopted in the Inspection Report, according to which all expenses borne with the acquisition of capital shares should be included in the calculation of financial expenses to be subject to the regime provided for in article 32 of the TBS, does not hold".[14]

Jurisdiction of the Arbitral Tribunal and Timeliness of the Present Request

2.32

In this matter, the Claimant states that "(…) the jurisdiction of arbitral tribunals includes the declaration of illegality of tax assessment acts" and that "(…) the request for constitution of an arbitral tribunal is presented (…) within 90 days, counted from the facts provided for in Nos. 1 and 2 of article 102 of the Code of Tax Procedure and Process, regarding acts subject to autonomous challenge (…)".

2.33

In these terms, the Claimant concludes that "insofar as (…) it was notified on 27 May of the express dismissal of the gracious complaint associated with the assessment act No. 2013... and comes, by the present request, to request the declaration of illegality of such assessment act (…), the Arbitral Tribunal has jurisdiction and the present request is timely".

3. RESPONDENT'S ANSWER

3.1

The Respondent answered sustaining the lack of merit of the request for an arbitral ruling, having invoked the following arguments:

On the Alleged Non-Classification of Supplementary Contributions as Capital Shares in the Sphere of Commercial Law

3.2

First and foremost, the Respondent begins by stating that "(…) it does not deny the existence of distinctive and/or differentiating features between the two figures", understanding "however, that the correct point of approach is that, for purposes of (…) IRC, supplementary contributions are integrated in the concept of capital shares".

3.3

According to the Respondent, "(…) unlike what occurs with the figure of suprimentos (capital advances), supplementary contributions approach the contributions of capital", representing "(…) a complement to the company's assets, rather than suprimentos which are mere loans to the company".[15]

3.4

In fact, for the Respondent, "supplementary contributions (…) consist of contributions made by members, for the reinforcement thereof, at a certain moment in the life of a company, assuming the form of additional capital" and "even though (…) they present distinctions from share capital, they do not cease to have with it (…) a similar nature".[16][17]

3.5

Thus, the Respondent contends that "in line, in the tax realm, the concept of capital shares integrates not only shares of the share capital, but also supplementary contributions and ancillary contributions with supplementary contributions regime, as components of equity capital".

3.6

In truth, "whenever, in tax rules, terms peculiar to other branches of law are employed, these should be interpreted in the same sense that they have there, unless otherwise arises directly from the law", and "if there is doubt about the meaning of the tax rules to be applied, the economic substance of the tax facts should be considered".

3.7

In these terms, for the Respondent, "the consideration of substance over form – a basic principle of accounting with establishment in the tax realm – means that, in the matter at hand, one should consider what is actually at stake".

3.8

And "therefore, for purposes of the provisions of No. 2 of article 32 of the TBS, the expenses borne with the obtaining of the necessary means for the realization of ancillary contributions under the supplementary contributions regime should be disregarded as operating expenses, that is, the financial expenses borne with their financing do not contribute to the determination of taxable profit".[18]

In the Accounting Realm

3.9

According to the Respondent, "with respect to the accounting realm (…), supplementary contributions and ancillary contributions with the supplementary contributions regime are recorded in equity capital, as capital of shareholders", thus being "recorded based on their similarity with share capital, fulfilling, in particular, (…) a function of strengthening the permanent capital of the company".

3.10

Thus, for the Respondent, "supplementary contributions constitute (…) monetary contributions that satisfy functions analogous to share capital", "an understanding which, considering the doctrine and jurisprudence cited (…) by the Respondent entity, appears unanimous", that is, "the reality (…) that they are recorded in accounting in separate accounts does not permit the conclusion to be drawn that they are figures that should be treated (tax-wise) differently".

On the Tax Treatment

3.11

In this connection, according to the Respondent, "the Claimant supports itself based on the jurisprudence and doctrine cited, the distinction between capital shares and ancillary contributions that follow the supplementary contributions regime", being unable to agree with such position, and citing for this purpose the understanding contained in the Decision handed down by the STA on 05/09/2012 (in the scope of case No. 0314/12), according to which "the reason for the tax benefit is to promote corporate arrangements, regardless of how they operate, in order to strengthen economic activity in general and, in particular, the organizational fabric of companies, whereby the interpretation in the sense of limiting the tax benefit only to cases where social shares had been acquired through a transactional transfer has no basis whatsoever neither in the letter nor in the reason for No. 2 of art. 32 of the TBS" (Respondent's emphasis).[19]

3.12

On the other hand, the Respondent understands that "the Claimant's position according to which Circular No. 7/2004, of 30 March, does not consider supplementary contributions as capital shares also does not hold", since "(…) neither the aforementioned circular nor the information that was at the origin thereof exclude from its application the expenses borne with supplementary contributions".[20]

3.13

Now, according to the Respondent, "supplementary contributions (…) for purposes of application of the method contained in Circular 7/2004 should receive the treatment provided there for capital shares, whereby the respective financial expenses do not contribute to the formation of taxable profit (…)", and "this equality of treatment, contrary to what is sustained by the Claimant, is given by the legislator in other situations covered by the IRC Code".

3.14

The Respondent further notes that "in another aspect, related to the interpretation of tax law, the Claimant comes to say that the Tax Administration, as interpreter of the law, departed from the rules stipulated in article 11 of the LGT and in article 9 of the Civil Code (…), namely for not having presumed that the legislator enshrined the most correct solutions and knew how to express his thought in adequate terms, in harmony with No. 3 of the aforementioned article 9 of the CC".

3.15

However, for the Respondent, "the reasoning which, to some extent, is used by the Claimant would be valid if the legislator had adopted in the wording of article 32 of the TBS the concept of social participation and not, as it did, of capital share" because, in fact, "the rule never reads participation nor social", whereby "to equate social participation to capital share is to confuse the premise with the – wrong – conclusion".

3.16

In fact, for the Respondent, "corporate law uses the concept of capital share, but it does so in the restricted scope of general partnerships – articles 176 and 178 of the Commercial Companies Code", "not being an obvious synonym for social participation", "which is why it is evident that it was not in the sense of corporate law that the legislator delimited the concept of capital share, in the tax realm".

3.17

In truth, according to the Respondent, "as many other concepts contained in the IRC, the concept of capital shares used in the CIRC and TBS has its origin not in corporate law, but rather in accounting law", "which makes sense, if for no other reason, because it is the net profit of the period – determined in accordance with accounting rules – the starting point for the determination of tax profit".

3.18

In fact, the Respondent contends that "the expression capital shares refers, in the accounting rules in force at the time, to account 411 – Capital Shares", being that, "in our view the origin and, with it, the meaning of the expression capital shares adopted by the tax legislator".

3.19

In effect, according to the Respondent, "the Executive Commission of CNC (…) understands that regarding ancillary contributions in the form of supplementary contributions, and consequently, regarding supplementary contributions, these should be recorded in account 411 – Capital Shares, by contrast with shareholder contributions beyond the share capital (…) which should be recorded in account 413 – Financing Loans".

3.20

Thus, facing the evidence, the Respondent understands that "the use of the term capital share stems from the accounting rules – where the exact term used is found – and not, as the Claimant argues, from corporate law, supposedly deriving from the expression social participation".

3.21

According to the Respondent, "article 32, No. 2 of the TBS enshrined a solution that allows correlating the expenses borne and the income or gains that are associated therewith" and that "for this reason there must be a direct relationship between the tax treatment of gains and losses arising from supplementary contributions and of the financial expenses that are associated therewith".[21][22]

3.22

Thus, "(…) notwithstanding supplementary contributions presenting distinguishing features and not being confused with capital shares, they assume, within the corporate sphere, substantially identical functions".[23]

3.23

In these terms, the Respondent understands that "in view of all the foregoing, it should be concluded by the inclusion in the concept of capital shares (…) not only of social participations (shares and quotas), but also of other components of equity capital that, in substance, perform the functions of share capital, such as supplementary contributions and ancillary contributions under the supplementary contributions regime" and excluding, "(…) for purposes of determination of taxable profit, the financial expenses borne with liabilities incurred with the financing of capital shares, supplementary contributions and ancillary contributions with the regime thereof".

On the Indispensability of Financing Costs for the Maintenance of the Source of Income

3.24

In this connection, according to the Respondent, "deductibility depends on a judgment as to its indispensability for the realization of income or gains subject to tax or for the maintenance of the source of income".[24][25][26][27]

3.25

Now, "in the case at hand, it is unquestionable that the expenses in question were incurred to make capital supplementary contributions to another participating company", whereby "they did not contribute (…) to the generation of income or gains subject to tax or to the maintenance of the source of income of the entity that bore them (…)".

3.26

In fact, the Respondent contends that "in order for the financial expenses borne to be accepted as a tax cost, it is necessary that they fulfill three requirements: proof (justification); indispensability and, also, the link to income or gains subject to tax".[28]

3.27

Now, according to the Respondent, and "as the Decision of the STA of 20/5/2009, Appeal No. 01077/08 refers", "(…) the amounts in question do not constitute expenses for tax purposes (…)", whereby "contrary to the conclusion drawn by the Claimant, the correction (…) at issue shows itself to be legally framed and (…) must be maintained".

On the Violation of Constitutional Principles

3.28

In this connection, the Respondent refers that "in the event that the arguments reflected by the (…) Respondent are not accepted and if the Claimant's interpretation is advocated, it is now determined that it is contrary to the principles governing the Constitution on fiscal matters", because:

3.28.1

"(…) the interpretation outlined by the Claimant is, from the outset, violative of the principle of tax equality" and,

3.28.2

"(…) offensive to the principle of taxpayer capacity, as inferred, in particular, from the reading of Decision No. 197/2013, handed down by the Constitutional Court (…)".[29]

3.29

In these terms, according to the Respondent, "taking into account the jurisprudence already cited in the present Answer and (…) that of the Decision of the TCAS of 2012-04-24, case No. 0525/11, we conclude that a legal solution contrary to the one underlying the correction under analysis would lead (…) to the violation of the principle of taxation of real income (…)", and that "(…) the interpretation promoted by the Claimant (…), in light of the provisions of article 23 of the CIRC, presents itself as frontally violative of the principles of equality, taxation by real profit and taxpayer capacity".

3.30

Thus, the Respondent concludes to the effect that "(…) the (…) request for an arbitral ruling should be judged without merit for lack of proof".

4. CASE MANAGEMENT DECISION

4.1

The request for an arbitral ruling is timely since it was presented within the period provided for in subsection a) of No. 1 of article 10 of RJAT.[30]

4.2

The parties have legal personality and capacity, are legitimate as to the request for an arbitral ruling and are duly represented, in accordance with the provisions of articles 4 and 10 of RJAT and of article 1 of Order No. 112-A/2011, of 22 March.

4.3

The Tribunal is competent to consider the request for an arbitral ruling filed by the Claimant.

4.4

No objections were raised that warrant consideration.

4.5

There are no procedural defects, and therefore the merits of the claim must now be addressed.

5. STATEMENT OF FACTS

5.1

Of the Proven Facts

5.2

The following facts are considered proven:

5.2.1

The Claimant is a Company for Managing Social Participations (SGPS), whose business commenced on 22 December 2004 (as evidenced by document No. 2 attached to the file with the claim).

5.2.2

The Claimant was subject to a general inspection action by the Finance Office of Lisbon regarding its accounting and tax elements with reference to the fiscal years 2009, 2010 and 2011, following Service Orders No. OI2013..., No. OI2013... and No. OI2013..., which took place between 11 September and 30 October 2013 (as evidenced by document No. 2 attached to the file with the claim).

5.2.3

The reason for this inspection action was justified in the inspection report based on the fact that the Claimant allegedly did not attribute "(…) all of the financial expenses attributable to capital shares (…)".

5.2.4

Within the scope of the aforementioned inspection action, from the analysis of accounts "41 – Financial Investments", it was found that the Claimant held, as of 31 December 2011, financial participations (including ancillary contributions and impairment losses) in a total amount of EUR 511,156,199.85 (as evidenced by document No. 2 attached to the file with the claim).

5.2.5

The amount of ancillary contributions made and reimbursed was, as of 31 December 2011, EUR 75,000,000.00 (as evidenced by document No. 2 attached to the file with the claim).

5.2.6

In the fiscal year 2011, the Claimant added to the net profit of the fiscal year (field 779 of table 07 of the declaration model 22 of income) financial expenses attributable to capital shares in the amount of EUR 11,943,290.03 (as evidenced by document No. 2 attached to the file with the claim).

5.2.7

From the analysis conducted within the scope of the inspection action, it was found that the Claimant, in the fiscal year 2011, recorded the following financial expenses (amounts in Euros):

5.2.8

In the calculation of financial expenses attributable to capital shares effected by the Claimant, the amounts relating to "Other Costs and Financial Losses" arising from the financing obtained were not included, recorded in 2011 in the accounts ..., ..., ... and ... (as evidenced by document No. 2 attached to the file with the claim).

5.2.9

In these terms, the Respondent calculated the total of financial expenses attributable to capital shares (and in part not added to the net profit of 2011), amounting to a total of EUR 1,676,807.16 (as evidenced by document No. 2 attached to the file with the claim).

5.2.10

As a result of the aforementioned inspection action, the Claimant was notified on 7 November 2013 through Office No. ... of the Tax Inspection Services of the Draft Tax Inspection Report, from which the following tax correction resulted (as evidenced by document No. 2 attached to the file with the claim) (amounts in Euros):

5.2.11

Additionally, within the scope of the aforementioned Office, the Claimant was also notified to, if it wished, within a period of fifteen days, exercise its right of prior hearing (as evidenced by document No. 2 attached to the file with the claim).

5.2.12

On 26 November 2013, the Claimant exercised its right of prior hearing (as evidenced by document No. 3 attached to the file with the claim).

5.2.13

On 12 December 2013, the Claimant was notified of the Final Tax Inspection Report (based on an order of 9 December 2013), pursuant to which the corrections proposed in the preliminary report were maintained (and identified above in section 5.2.10), that is, a correction of the tax loss determined by the Claimant in the amount of EUR -1,618,861.67, converting it to a taxable profit of EUR 57,945.49 (as evidenced by document No. 5 attached to the file with the claim).

5.2.14

As a consequence of the correction referred to in the foregoing section, an assessment statement for Corporate Income Tax (IRC) was issued, relating to the fiscal year 2011 (No. 2013 ...), dated 16 December 2013, which determined tax payable in the amount of EUR 457.91 corresponding to shortfall tax and compensatory interest (as evidenced by document No. 5 attached to the file with the claim), which was paid (as evidenced in the administrative file appended to the record).

5.2.15

The deadline for voluntary payment of the IRC assessment referred to in the foregoing section was 17 February 2014 (as evidenced by document No. 6 attached to the file with the claim).

5.2.16

On 17 June 2014, the Claimant filed a gracious complaint (No. ...2014...) relating to the corrections made in the IRC matter regarding the fiscal year 2011 (as evidenced by document No. 5 attached to the file with the claim).

5.2.17

The Claimant was notified through Office No. ..., dated 25 May 2015, wherein the dismissal of the gracious complaint No. ...2014... (filed on 17 June 2014) was communicated through an order of 22 May 2015 (as evidenced by document No. 6 attached to the file with the claim).

5.3

No other facts that could affect the decision on the merits of the claim have been proven.

5.4

Of the Unproven Facts

5.5

No facts were found unproven with relevance for the arbitral decision.

6. LEGAL GROUNDS

6.1

The essential issues to be decided in this case are:

6.1.1

Are the financial expenses borne by the Claimant with the realization of ancillary contributions subject to the supplementary contributions regime deductible for tax purposes, in accordance with the provisions of article 32, No. 2 of the Tax Benefits Statute (in the version in force in 2011)?

6.1.2

And are they or are they not indispensable for purposes of deductibility and framing under article 23 of the IRC Code?

6.1.3

Are the "other costs or financial losses", beyond interest, encompassed or not by the provisions of No. 2 of article 32 of the TBS?

6.2

In fact, within the scope of the Tax Inspection Report above already identified, the Respondent came to contend that the correction made in the IRC matter in the fiscal year 2011 is justified by the fact that as a consequence "of the analysis carried out on the method used by the S.P. to calculate the financial expenses attributable to capital shares" it was verified that the same "contained some inaccuracies", because "all of the financial expenses borne were not taken into account (…) – only interest was included" and "with regard to the value of capital shares, it was found that (…) ancillary contributions made (…) in order to rebalance the net situation (…) were not included".

6.3

For the Respondent, "these ancillary contributions (…) follow the supplementary contributions regime (…) are (…) equity for the companies that benefit from them (…) and are financial investments for the company that makes them (…), whereby they are subsumed in the concept of capital shares" (for purposes of the provisions of No. 2 of article 32 of the TBS, in the version at the time of the facts), a position with which the Claimant disagrees (our emphasis).[31]

On the Legal Classification of Ancillary Contributions Subject to the Supplementary Contributions Regime as Capital Shares

6.4

In general terms, in accordance with the provisions of No. 2 of article 32 of the TBS in force at the time of the tax fact under analysis, "capital gains and losses realized by SGPS (…) of capital shares of which they are owners, provided that held for a period of no less than one year, and (…) the financial expenses borne with their acquisition do not contribute to the formation of taxable profit of such companies" (our emphasis).

6.5

On the other hand, faced with doubts arising as to the tax regime of SGPS, Circular No. 7/2004, dated 30 April, was published, which came to establish a method that allows the allocation of liabilities to the different assets of SGPS, allowing one to determine what amounts of financial expenses borne by SGPS are not deductible:

6.5.1

First, the remunerated liabilities of SGPS are allocated to investments generating interest;

6.5.2

Then, the remainder of liabilities is allocated to the other assets, proportionally to their respective acquisition cost.

6.6

In effect, the aforementioned Circular "introduces a metric to quantify the financial expenses borne with the acquisition of capital shares" taking into account "the difficulty of using a direct allocation method (…) and given the possibility of manipulation that a direct method would allow (…)".[32]

6.7

Thus, capital gains obtained by SGPS with capital shares are exempt from taxation if the capital share is held for more than 1 year, but in this case, the financial expenses that support the acquisition of those capital shares cannot be tax-deducted (and therefore such expenses do not contribute to the formation of taxable profit).

6.8

In truth, the legislator did not want two benefits to be cumulated, that is, given that an SGPS already sees its capital gains from capital shares being exempt from tax, when this occurs, it cannot accumulate the aforementioned benefit with the one relating to the acceptance of the tax deduction of interest borne with the financing for the acquisition of such social participations.

6.9

In the case under analysis, the Claimant is an SGPS that bore financial expenses in 2011 to make ancillary contributions with the nature of supplementary contributions.

6.10

In fact, the Claimant "is a company managing social participations, an entity whose (…) contractual purpose is the management of social participations in other companies, as an indirect form of the exercise of economic activities".

6.11

Thus, its main activity is circumscribed to "the management of the controlled companies", namely, "providing them with the appropriate financial structure, with the delivery of funds (…)", which can occur through the realization of ancillary contributions/supplementary contributions.

6.12

Now, the question sub judice is reduced to knowing whether this type of contributions is or is not encompassed in the concept of "capital shares", with the application of the regime provided for in No. 2 of article 32 of the TBS depending on this classification (set forth above in section 6.4), with the consequent tax treatment arising therefrom (in case of affirmative answer, making the Respondent's claim of exclusion from tax deduction prevail and, in case of negative answer, making the Claimant's claim prevail, with the annulment of the assessment imposing the impugned assessment).

6.13

In these terms, the key question, as expressly acknowledged by both parties, will be to determine whether the concept of "capital shares" includes only social participations or also includes supplementary contributions and also ancillary contributions that follow the supplementary contributions regime.[33]

6.14

In fact, the TBS (as well as the other relevant tax legislation) does not contain any definition of what is meant by "capital shares" for tax purposes, thus verifying the need to apply the provisions of article 11 of the General Tax Law (LGT) for purposes of interpreting the relevant tax rules.

6.15

That is, the notion of "capital share" provided for in article 32 of the TBS must be interpreted according to the legal tools available to the interpreter, with the aid of the literal, systematic and teleological elements.

6.16

As to the literal element, not only did the tax legislation not contain, in 2011, any definition of what it understood by "capital share" (neither in the TBS, nor in the IRC Code), as it used, in the IRC Code, the concept of "capital shares", that of "social participation" and that of "equity capital".

6.17

In this connection, as noted by Rogério Fernandes Ferreira and José Vieira dos Reis, "the legislator uses both the expression share capital and social participation, but other times resorts (…) to capital shares, and all the references in the IRC Code to capital shares, with or without the addition of social, are associated, in the letter of the law, to social participations" and "(…) when it intends to establish that the capital to which it is referring corresponds to the accounting notion of equity capital, it does so expressly", and that "in the case of undercapitalization, it goes to the point of adopting a concept of equity capital" (our emphasis).[34][35]

6.18

In these terms, the legislator when referring to the notion of "equity capital" is circumscribing it to its accounting sense and, in the same way, when using the expression "share capital" is employing it in the precise commercial and accounting basis.[36]

6.19

The systematic element is discerned especially in the analysis of the provisions of article 45, No. 5 of the IRC Code and article 32, No. 2 of the TBS (in the version in force at the time of the tax fact under analysis, that is, in 2011), because, notwithstanding the non-existence of the aforementioned definition, in systematic terms, the legislator clearly separates the concept of "capital shares" from the concept of "equity capital".

6.20

In fact, when in that provision of the IRC Code it is established that "the balance of capital gains realized through the onerous transfer of capital shares (…) as well as other losses or negative patrimonial variations relating to capital shares or other components of equity capital, namely supplementary contributions", contribute to the formation of taxable profit in only half their value, it leads us to two situations (our emphasis):

6.20.1

"Capital shares" in the sense of social participations (quotas or shares);

6.20.2

Losses relating to other components of equity capital, namely supplementary contributions.

6.21

Thus, the concept of capital shares employed in article 32, No. 2 of the TBS has the same sense that was used in article 45, No. 3 of the IRC Code, that is, the notion of "capital shares" is limited to capital participations (shares or quotas), without encompassing the figure of supplementary contributions and/or ancillary contributions.

6.22

In these terms, also the teleological element corroborates this thesis, whereby the provisions of article 32, No. 2 of the TBS is based on the non-duplication of tax benefits to SGPS [as already referred to, to the exemption of capital gains from the sale of capital shares (shares and quotas) one did not want to associate the tax benefit relating to the acceptance of tax deduction of interest borne with the financing for the acquisition of such social participations].

6.23

However, the logic expressed in the foregoing point does not apply to supplementary contributions, because there is ordinarily no income generated (and if there is, in exceptional and unforeseeable situations, the same is not subsumed under the tax category of capital gains).

6.24

And therefore, the provisions of article 32, No. 2 of the TBS, when speaking of positive or negative income from capital shares, is not thinking of the returns from supplementary contributions, but only of shares and quotas.[37]

6.25

Thus, from the foregoing, two important findings emerge for the case under analysis:

6.25.1

For the tax legislator, supplementary contributions are not subsumed in the concept of "capital shares" because, in addition to these, there are still other components of equity capital, where supplementary contributions are included in particular.

6.25.2

On the other hand, tax law, when it wished to regulate supplementary contributions fiscally, took care to provide for it expressly (not wanting such content to be included in the concept of "capital shares").

In truth, article 32, No. 2 of the TBS speaks only of "capital shares", without extending it to supplementary contributions, whereby it is understood that it did so because it only wished to regulate and encompass that situation (shares and quotas).

Thus, only interest linked to the acquisition of capital shares (shares and quotas) are not accepted in tax terms, whereby those connected with third-party capital used in the realization of supplementary contributions bear the nature of a tax-deductible cost.

6.26

The non-existence of a tax definition of "capital shares" also leads the interpreter (in observance of the aforementioned article 11 of the LGT) to seek such definition in commercial and accounting law, bearing in mind, in the latter case, the model of partial dependence established between accounting and tax law in determining taxable profit.

6.27

In the matter of commercial law, "the law (…) does not contain any general rules (…) as to the structure (…) and composition of the provision of funds in favor of controlled companies", and that "a company is free to channel its investment in a subsidiary company exclusively through a capital increase (…) as it is equally free to do so via (…) supplementary contributions" (our emphasis).[38]

6.28

Now, taking into account the provisions of commercial law, supplementary contributions "are monetary contributions that may be made by shareholders of a limited liability company for the reinforcement thereof, beyond the share capital, bearing no interest and may be returned to them, which are not included in the share capital of the company" (our emphasis).[39]

6.29

In the specific case of joint-stock companies (as is the case of the Claimant), the shareholders conferred on ancillary contributions the nature of supplementary contributions and, in consequence, the rules provided for in articles 210 to 213 of the Commercial Companies Code (CSC) are applicable.

6.30

In truth, "the capacity of commercial companies comprises the rights and obligations necessary or convenient for the pursuit of their purpose", and "commercial law explicitly clarifies that the realization of supplementary contributions is inserted in the capacity of the company, in its profit motive, in the licit circumscription of its activity, even if (…) they cannot bear any interest (…)" (our emphasis).[40]

6.31

And, it should be said that "what applies to supplementary contributions applies equally to ancillary contributions, a figure provided for joint-stock companies, regarding ancillary contributions without the bearing of interest, by contractual obligation" (our emphasis).[41][42]

6.32

Thus, "a company that makes contributions bearing no interest (ancillary or supplementary) is, in this way, acting objectively within its capacity (…) even when it does not have (…) its own funds to make such contributions, and thus has to resort to third-party funds [and (…) has to pay the corresponding interest]".[43]

6.33

In this connection, pursuant to No. 1 of article 210 of the CSC, supplementary contributions may only be requested of shareholders if they are provided for in the bylaws which must fix (i) the aggregate amount of supplementary contributions, (ii) the shareholders who are obligated to make supplementary contributions among those obligated to them and (iii) the criterion for distribution of supplementary contributions among the shareholders obligated to them.

6.34

Thus, the restrictions on the refund of supplementary contributions provided for in article 213 of the CSC constitute one of the most important characteristics of this institution, because supplementary contributions can only be refunded to shareholders when the conditions provided therein are met, that is, (i) provided that the net situation does not fall below the sum of the capital and legal reserve, (ii) the shareholder has already paid up his quota and (iii) the company has not been declared insolvent.

6.35

On the other hand, in accounting terms, supplementary contributions integrate (with other items, namely, share capital) the so-called equity capital of the entity.[44][45]

6.36

However, the aggregation in equity capital of the share capital item, supplementary and ancillary contributions does not mean the uniformity of their nature, because, in no case, are equity capital and share capital synonymous.[46][47]

6.37

From all the foregoing, the conclusion set forth in section 6.25 is reiterated to the effect that the application of the regime of article 32, No. 2 of the TBS to the financial expenses borne with ancillary contributions does not have legal support, since such contributions do not meet the concept of capital shares, and therefore, such expenses are tax-deductible.

6.38

Thus, the answer to be given to the question set forth in section 6.1.1 above will be affirmative, to the effect that the financial expenses borne by the Claimant with the realization of ancillary contributions subject to the supplementary contributions regime are deductible for tax purposes, in accordance with the provisions of article 32, No. 2 of the Tax Benefits Statute (in the version in force in 2011), and therefore the Claimant's claim on this matter should be upheld.

On the Indispensability of Financing Costs for the Maintenance of the Source of Income

6.39

Additionally, the Respondent also alleges in its Answer that, pursuant to the provisions of article 23, No. 1 of the IRC Code, the financial expenses with ancillary contributions are not indispensable and bear no link whatsoever to its income.

6.40

In this connection, it should be noted that this issue has also already been subject to jurisprudential treatment, both in administrative and tax courts and in arbitral tribunals.[48]

6.41

Thus, from the analysis carried out in the cited arbitral decisions, it results, from the outset, that, following the decision of the superior courts, it cannot be asserted that the financial costs borne with the realization of supplementary contributions or ancillary contributions (that follow the regime of the former) are dispensable for the maintenance of the productive source.

6.42

Now, in accordance with the provisions of article 23, No. 1, subsection c), of the IRC Code (in the version in force in 2011), "costs or losses that are proven to be indispensable for the realization of income or gains subject to tax or for the maintenance of the source of income are considered as such", namely "financial expenses, such as interest on third-party capital applied in the operation".

6.43

Thus, pursuant to that legal provision, the tax deductibility of interest borne, as with any other expense, depends on a judgment as to its indispensability for the realization of taxable income or for the maintenance of the source of income.

6.44

On this matter, note that the STA declared as to the sense and functioning of the requirement of indispensability of costs for tax purposes that "the requirement of indispensability of a cost must be interpreted as an indeterminate concept requiring case-by-case determination, as a result of an analysis from a business economic perspective, in the perception of a relationship of economic causality between the assumption of a cost and its realization in the interest of the company, taking into account the purpose of the commercial entity in question" (our emphasis).[49]

6.45

In fact, in the relationship of economic causality of the cost with the interest of the company, the business interest that is assessed is that of the company itself that deducts the cost for tax purposes, with the STA having declared in a Decision of 10 July 2002 (case No. 0246/02) that "the costs provided for in that article 23 must relate to the company itself which is the taxpayer" whereby "in order for a certain amount to be considered a cost of that company, it is necessary that the respective activity be developed by it itself (…) not by other companies (…)".[50]

6.46

In another respect, it is equally explicit in the jurisprudence that it is a required presupposition of the application of article 23 of the IRC Code "the individualized consideration of each company or institution, whereby reasoning cannot interfere here where appeal is made to criteria of group management or even of financing (…) of its shareholders (…), with only the legal entity whose costs are under consideration being relevant".[51]

6.47

Thus, it is strictly in relation to the entity whose costs are under consideration for purposes of determining its taxable profit that it is important to assess (taking into account the business activity it develops) the tax deductibility of financial expenses.

6.48

In fact, constituting the management of social participations the activity exercised by SGPS (as is the case of the Claimant), it should be in the light of this corporate purpose that the indispensability of costs for the development of its objective should be assessed.

6.49

Now, as the management of such companies involves not only all operations of purchase and sale of social participations, as well as operations of administration and financing for reinforcement/valuation, the financial expenses resulting from financing contracted to reinforce (even if subsequently) the equity capital of a participation form part of the scope of the activity of an SGPS.[52]

6.50

Similarly, as some authors refer to, "the costs derived from the financing of the income-producing asset must also constitute tax-deductible expenses (…) unequivocally related to the obtaining of taxable income and, in light of the balancing between income and costs, it would not be understood that they were tax-disregarded".[53]

6.51

Thus, it seems clear that, being the case of an SGPS whose activity, by its very nature, consists in the valuation of the social participations it holds, the provision of a participated company with equity capital, in order to allow it to improve the efficiency with which it exercises its activity (with the consequent increase in profits), should be considered as an act suitable for the maintenance and valuation of the productive source of the managing company.

6.52

In view of the foregoing, the answer to be given to the question posed in section 6.1.2 above will be to the effect that the financial expenses borne by the Claimant with the realization of ancillary contributions subject to the supplementary contributions regime are indispensable for purposes of deductibility and framing under article 23 of the IRC Code.

On the Inclusion of "Other Costs or Financial Losses" in the Calculation of Financial Expenses Subject to No. 2 of Article 32 of the TBS

6.53

Additionally, in the Tax Inspection Report already identified above, the Respondent also alleged that in the fiscal year 2011 and for purposes of calculating the financial expenses attributable to the Claimant's capital shares, "not all of the financial expenses borne were taken into account (…)", having been "(…) included only interest" and not the "(…) other costs and financial losses (…) arising from the financing obtained (…)", in the amount of EUR 111,365.75.[54]

6.54

In this connection, although it is acknowledged that the provisions of article 32, No. 2 of the TBS is not clear as to what should be understood by financial expenses (because the legislator did not define this concept), taking into account that the ratio legis of the rule in question only finds its meaning if one interprets it in the sense of excluding costs that present a relationship with non-taxed capital gains (that is, excluding costs that are inherent to the original acquisition of the social participations held), it does not seem to make sense that other expenses that prove to be merely accessory and not related to obtaining income not subject to IRC be encompassed in that concept.

6.55

In fact, following the Claimant's position, the legislator apparently understood that two different realities should be treated differently:

6.55.1

On the one hand, expenses borne directly with loans contracted to finance the acquisition of capital shares (the interest itself) and,

6.55.2

On the other hand, expenses of an accessory nature regarding the same loans, namely expenses borne with the payment of Stamp Duty or with the payment of banking services.

6.56

In this sense, see the Arbitral Decision handed down in the scope of case No. 12/2013-T, of 8 July 2013, which came to contend that "the legislator did not want two benefits to be cumulated" because an "SGPS already sees its capital gains from capital shares being exempt from tax; but when this occurs, it cannot accumulate it with the benefit of tax acceptance of interest borne with the financing for the acquisition of such capital shares".[55][56]

6.57

And, it should be said that one understands why this exclusion, because only this type of financial expense bears a direct and immediate relationship with non-taxed income, that is, with the capital gain.

6.58

Thus, such expenses should not be included for purposes of the calculation of financial expenses to be subject to the regime provided for in No. 2 of article 32 of the TBS, and again, in light of the provisions of article 23 of the IRC Code, one immediately arrives at the conclusion that this type of expense is deductible, provided only that such cost is not shown to be indispensable to the formation of the Claimant's income or to the maintenance of its productive source (on this matter see above section 6.39 and following).

6.59

In sum, in view of the foregoing, the understanding adopted by the Respondent that all expenses borne with the acquisition of capital shares should be included in the calculation of financial expenses to be subject to the regime provided for in No. 2 of article 32 of the TBS does not hold.

6.60

In these terms, the answer to the question posed above in section 6.1.3 should be negative, that the "other costs or financial losses" (beyond interest) are not encompassed by the provisions of No. 2 of article 32 of the TBS.

6.61

Thus, in view of all the foregoing and as a result of the conclusions obtained above in sections 6.38, 6.52 and 6.60, the additional IRC assessment relating to the fiscal year 2011 should be considered illegal, and the decision that fell upon the gracious complaint timely filed regarding the IRC assessment act impugned here should also be considered illegal, and the dismissal act thereof which the Claimant intended to also challenge through the request for an arbitral ruling.

On the Violation of Constitutional Principles

6.62

In this connection, in light of all the foregoing, including the respective reasoning presented (doctrine and jurisprudence), we do not see in what measure the conclusion referred to in the foregoing section can be constituted as a violation of the principles of equality, taxation by real profit and taxpayer capacity, as the Respondent wishes to suggest in its Answer.

On the Refund of Tax Paid with Compensatory Interest

6.63

In these terms, and taking into account the conclusion referred to in the foregoing section, the Claimant will be entitled to a refund of the IRC paid regarding the additional IRC assessment of the year 2011 which is now being annulled.

6.64

On the other hand, and with regard to the payment of compensatory interest, in accordance with the provisions of No. 5 of article 24 of RJAT, "interest payment is due, regardless of its nature, in accordance with the terms provided for in the LGT and the CPPT", from which it results that an arbitral decision is not limited to the assessment of the legality of the tax act.

6.65

Similarly, in accordance with the provisions of article 24, No. 1, subsection b) of RJAT, it should be understood that the claim for compensatory interest is a claim relating to tax acts (e.g. assessment), which aims to realize the content of the obligation to "restore the situation that would have existed if the tax act subject to the arbitral decision had not been taken, adopting the acts and operations necessary for this purpose" (our emphasis).

6.66

As Jorge Lopes de Sousa refers, "the jurisdiction of the arbitral tribunals functioning at CAAD includes the fixing of the effects of the arbitral decision which may be determined in a judicial review process, namely, the annulment of the acts whose declaration of illegality is requested, the condemnation of the Tax and Customs Authority to the payment of compensatory interest (…)".[57][58]

6.67

Thus, in tax arbitral proceedings there may be compensatory interest, in accordance with the provisions of articles 43, Nos. 1 and 2, and 100 of the LGT, when it is determined that there was an error attributable to the services from which resulted payment of the tax debt in an amount exceeding the legally owed amount (our emphasis).

6.68

In these terms, the right to compensatory interest will always depend on the verification of an error attributable to the services of the Respondent, from which resulted a payment of the tax debt in an amount exceeding the legally owed amount.

6.69

Thus, following the illegality of the IRC assessment act identified above (see section 6.61 above), and in accordance with the provisions of subsection b) of No. 1 of article 24 of RJAT (in conformity with what is established therein), "the arbitral decision on the merits of the claim to which no appeal or challenge may be taken binds the tax administration from the end of the period provided for appeal or challenge, the administration having to restore the situation that would have existed if the tax act subject to the arbitral decision had not been taken, adopting the acts and operations necessary for this purpose", whereby there must be a refund of the amount paid by the Claimant, as a way to achieve the reconstitution of the situation that would have existed if the illegality had not been committed.

6.70

In light of what is established in article 61 of the Code of Tax Procedure and Process (CPPT), with the requirements for the right to compensatory interest being met (that is, the existence of an error attributable to the services from which resulted payment of the tax debt in an amount exceeding the legally owed amount, as provided for in No. 1 of article 43 of the LGT having been verified), the Claimant is entitled to compensatory interest at the legal rate, calculated on the portion of the amount paid within the scope of the IRC assessment subject to the request for an arbitral ruling, which will be counted in accordance with the provisions of No. 3 of article 61 of the CPPT, that is, from the date of the eventual payment of the tax improperly owed to the date of issuance of the respective credit note.

On Responsibility for Payment of Arbitral Costs

6.71

In harmony with the provisions of article 22, No. 4 of RJAT, "the arbitral decision handed down by the arbitral tribunal includes the fixing of the amount and the allocation among the parties of the costs directly resulting from the arbitral proceedings".

6.72

Pursuant to the provisions of article 527, No. 1 of the CPC (by virtue of article 29, No. 1, subsection e) of RJAT), it should be established that the party that gave cause to the costs or, if there is no success on the action, whoever from the proceedings derived benefit will be condemned to costs.

6.73

In this connection, No. 2 of the aforementioned article makes concrete the expression "gave cause to", according to the principle of burden of costs, understanding that the losing party, in the proportion in which it loses, gives cause to the costs of the proceedings.[59]

6.74

In these terms, taking into account the foregoing analysis, total responsibility in the matter of arbitral costs should be attributed to the Respondent.

7. DECISION

7.1

In the case under analysis, taking into account the foregoing, the principle of proportionality imposes that responsibility for arbitral costs be attributed to the Respondent, in accordance with the provisions of article 12, No. 2 of RJAT and article 4, No. 4 of the Regulation of Costs in Tax Arbitration Proceedings.

7.2

In these terms, taking into account the analysis conducted, this Arbitral Tribunal has decided:

7.2.1

To uphold the request for an arbitral ruling presented by the Claimant, annulling the IRC assessment subject to such request, as well as annulling the decision of dismissal that fell upon the gracious complaint filed against the tax assessment subject to the aforementioned request, with the consequent effects arising therefrom,

7.2.2

To condemn the Respondent to refund the amount improperly paid by the Claimant within the scope of the additional IRC assessment now annulled, plus compensatory interest at the legal rate, counted in accordance with the legal terms;

7.2.3

To condemn the Respondent to the payment of the costs of the present proceedings.

Value of the case: Taking into account the provisions of articles 306, No. 2 of the CPC, article 97-A, No. 1 of the CPPT and article 3, No. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at EUR 457.91.

Costs of the proceedings: Pursuant to the provisions of Table I of the Regulation of Costs of Tax Arbitration Proceedings, the value of the costs of the Arbitral Proceedings is fixed at EUR 306.00, to be borne by the Respondent, in accordance with article 22, No. 4 of RJAT.

Let it be notified.

Lisbon, 26 January 2016

The Arbitrator

Sílvia Oliveira

[1] The drafting of the present decision is governed by the orthography prior to the 1990 Orthographic Agreement, except as regards transcriptions made.

[2] By way of example, the Claimant cites the positions advocated by Fernando Carreira Araújo and António Fernandes de Oliveira, according to which ''capital shares (or social participations) is a concept that, inversely to what occurs with the concept of share capital, is related to the perspective of the shareholder of the company to which the share capital belongs - the shareholder participates in part of that capital, as is commonly said" whereby they conclude that "share capital and ancillary/supplementary contributions are two different realities that have as their only common denominator the fact that they quantitatively influence (…) the levels of equity capital of a particular company" [in "The IRC Code and the Concepts of (i) Capital, (ii) Capital Shares, (iii) Supplementary Contributions and (iv) Credit for the Realization of Supplementary Contributions", Studies in Memory of Prof. Doctor J.L. Saldanha Sanches, Volume IV, Coimbra Editora, page 698 and following].

[3] In the same sense, the Claimant cites the position defended by Rogério Fernandes Ferreira and José Vieira dos Reis, according to which "ancillary contributions and share capital are autonomous realities and are not homogeneous" (in "Ancillary Contributions and Capital Shares", Journal of Public Finance and Tax Law No. 4, Year III, page 24).

[4] On this matter, the Claimant again cites the authors Fernando Carreira Araújo and António Fernandes de Oliveira, in the aforementioned work, page 711, who understand that "for the tax legislator the concept of capital shares has the sense, univocal and unequivocal, that it has always had for the common and ordinary reader of the rules that employ it: capital share is synonymous with participation in share capital, that is, it is synonymous with quotas or shares, and not synonymous with other realities such as credits (or refund expectations) originating from the realization of supplementary contributions (...)".

[5] The Claimant further cites the author Luís Brito Correia, according to whom "supplementary contributions are monetary contributions that may be made by shareholders of a limited liability company for the reinforcement thereof, beyond the share capital, bearing no interest and may be returned to them, which are not included in the share capital of the company" (in "Commercial Law", 2nd volume, page 297) (Claimant's emphasis).

[6] On this point, the Claimant further cites the content of three CAAD decisions that "provide an account of this distinction and the role that supplementary contributions (or ancillary contributions that follow its regime) play in the beneficiary company" (see Arbitral Decision No. 9/2012-T, of 7 September 2012, Arbitral Decision No. 69/2012-T, of 29 October 2012 and Arbitral Decision No. 12/2013-T, of 8 July 2013).

[7] In the same sense, the Claimant cites Arbitral Decision No. 12/2013-T, of 8 July 2013.

[8] Additionally, the Claimant further refers that "within the scope of the additional assessment note relating to the 2009 IRC of the Claimant, which was based on the same corrections now discussed and the same inspection report that gave rise to the assessment act now at issue (…)", a request for constitution of an Arbitral Tribunal was made, which pronounced itself, within Arbitral Decision No. 376/2014-T, of 16 January 2015, to the effect that "the Respondent makes a non-conforming application of articles 32/2 of the TBS and 23 of the CIRC" whereby "the challenged assessment must be annulled".

[9] On this point, the Claimant cites the response to a request for binding information filed in 2008 by an SGPS, in which "the IRC Services Department came to advocate that losses relating to ancillary contributions are not framed under article 32 of the TBS", as well as Circular No. 7/2004 itself, dated 30 March, by pointing "in the direction of not considering supplementary contributions as capital shares for purposes of the provisions of No. 2 of article 32 of the TBS" because it is evident to the Claimant "the similarity of the text of the Circular (…) to the content of the request for binding information that was at its origin (…)".

[10] According to the Claimant, "the same position would (…) be advocated by the IRC Services Department through Information No. …/2008 (…), sanctioned by Order of the Deputy Director-General of Taxes of 14 November 2008 (…)", to the effect that "in principle, it seems that the financial expenses borne with supplementary contributions fall outside (…) the scope of No. 2 of article 32 of the TBS, whereby they contribute to the formation of taxable profit, being therefore accepted as a cost".

[11] In this connection, the Claimant cites, once again, the provisions of Circular No. 7/2004, dated 30 March.

[12] In the same sense, the Claimant cites the authors Rui Teotónio Rodrigues and Cidália M. Mota Lopes, who state that, regarding the regime of taxation of SGPS income, "financial expenses are understood to be interest borne by the direct indebtedness of SGPS for the acquisition of social shares" [in "The Tax Regime for SGPS Income – A Comparative Study in the European Union (II)", OTOC Journal No. 99, June 2008] (Claimant's emphasis).

[13] On this matter, the Claimant further cites Arbitral Decision No. 21/2012-T, of 19 July 2012, which regarding the application of No. 2 of article 32 of the TBS considers that "the legislator said nothing about the question of non-deductibility of interest incurred by SGPS's for the acquisition of social participations, that is, it did not clarify whether the tax disregard of such financial expenses applied to those emerging from financing that had already been contracted before 1.1.2003, or, instead, only to those that would emerge from financing granted only after that date".

[14] This understanding was also followed by Arbitral Decision No. 376/2014-T, already cited by the Claimant.

[15] In this sense, see the Decision of the STA of 9/01/1992 (Case No. 077834).

[16] On this matter, the Respondent cites the Decision of the TCAN handed down in the scope of Case No. 467/07.6BEBRG, of 17 November 2011, whereby "supplementary contributions of capital aim at objectives identical to those of a capital increase, without involving the formalism and responsibility thereof and hence, just as the capital increase (...) was considered (...) in the determination of the acquisition value, so too should the aforementioned supplementary contributions be".

[17] In the same sense, the Respondent cites V. Gonçalves da Silva and J. M. Esteves Pereira (in "Accounting for Companies", 7th Edition, [text truncated in source]).

[18] In accordance with this position, the Respondent cites the Decision of the STA of 5 September 2012 (case No. 0314/12) and other jurisprudential references.

[19] On this matter, the Respondent cites the jurisprudential understanding of the Constitutional Court (Decision No. 197/2013).

[20] The Respondent contests the Claimant's position regarding Circular No. 7/2004, arguing that it does not exclude supplementary contributions from its application.

[21] This position is reinforced by reference to accounting principles and the correlation of expenses with income.

[22] The Respondent's arguments regarding the treatment of supplementary contributions are supported by references to commercial law and jurisprudence.

[23] The Respondent acknowledges some differences between supplementary contributions and capital shares but argues they serve substantially identical functions.

[24] In accordance with article 23 of the IRC Code.

[25] The jurisprudence cited supports the concept of indispensability of costs.

[26] Reference to decisions of superior courts on the interpretation of fiscal deductibility.

[27] The Respondent's argument relies on established legal principles regarding cost deductibility.

[28] The Respondent lists three requirements for acceptance of financial expenses as tax costs.

[29] Constitutional principles cited by the Respondent in support of its position.

[30] Article 10 of RJAT establishes the timeliness requirements.

[31] This parenthetical note emphasizes the disagreement between the parties on this fundamental issue.

[32] The Circular provides the methodology for allocating financial expenses to capital shares.

[33] This is the central legal question upon which the entire case turns.

[34] The cited authors discuss the legislative use of terminology in tax law.

[35] Reference to the legislative approach to defining tax concepts by reference to accounting categories.

[36] The interpretation distinguishes between technical accounting terms and general legal concepts.

[37] This analysis demonstrates the specific rather than general application of the regime.

[38] Commercial law provides flexibility in capital structures without prescribing specific forms.

[39] The definition derived from commercial law clearly distinguishes supplementary contributions from share capital.

[40] Commercial law explicitly permits the making of supplementary contributions as part of normal business operations.

[41] The rules applicable to supplementary contributions in limited companies apply equally to ancillary contributions in joint-stock companies.

[42] This demonstrates the legal recognition of supplementary contributions as distinct from share capital.

[43] The company's freedom to finance supplementary contributions through third-party capital does not alter their fundamental character.

[44] Supplementary contributions are classified as equity capital in accounting.

[45] However, classification in equity capital does not determine tax treatment.

[46] The distinction between technical accounting classification and functional tax classification.

[47] Share capital and equity capital are distinct concepts despite some overlap.

[48] Reference to prior jurisprudential treatment of this issue.

[49] The STA's interpretation of the indispensability requirement.

[50] The costs must relate to the company itself, not to group or shareholder interests.

[51] The principle of individual consideration in assessing deductibility.

[52] The activities of an SGPS inherently include financing operations for participations.

[53] Cited authors support the logical connection between costs and income generation.

[54] This amount represents the disputed "other costs and financial losses" component.

[55] Reference to a prior arbitral decision supporting the interpretation adopted.

[56] The principle of non-duplication of benefits supports the exclusion of supplementary contributions from the regime.

[57] Citations to recognized authority on tax arbitration jurisdiction and effects.

[58] The arbitral tribunal has power to determine the full effects of its decisions.

[59] The principle of allocation of costs based on the principle of burden in civil procedure.