Withholding Tax on Director Remuneration: CAAD Ruling 555/2015-T on IRC/IRS Retention and Compensatory Interest

ARBITRAL AWARD

The arbitrators Councillor Jorge Manuel Lopes de Sousa (arbitrator-president, designated by agreement of the other Arbitrators), Prof. Doctor Diogo Leite de Campos and Dr. Maria Manuela do Nascimento Roseiro, designated respectively by the Claimant and the Respondent, to form the Arbitral Tribunal, constituted on 01-12-2015, agree as follows:

1. Report

A… SGPS, S.A, Corporate Person No. … and with registered office at Rua…, No.…, …, …, … –… Lisbon, submitted a request for annulment of the Personal Income Tax (withholding tax) assessments contained in documents Nos. 2015…, 2015… and 2015… and respective compensation notes, increased by compensatory interest.

The Respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY.

The Claimant proceeded to designate an arbitrator, Prof. Doctor Diogo Leite de Campos, pursuant to the provisions of article 6, no. 2, paragraph b) of the RJAT.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Authority on 14-09-2015.

Pursuant to the provisions of paragraph b) of no. 2 of article 6 and no. 3 of article 11 of the RJAT and within the deadline provided for in no. 1 of article 13 of the same legislation, the highest official of the Tax Administration service designated as Arbitrator Dr. Maria Manuela do Nascimento Roseiro.

The designated arbitrators designated the third arbitrator, Councillor Jorge Manuel Lopes de Sousa, pursuant to article 11, no. 4 of the RJAT.

The signatories designated to integrate this present collective Arbitral Tribunal accepted the designations, in accordance with the legally provided terms.

Pursuant to and for the purposes of the provisions of no. 7 of article 11 of the RJAT, the President of CAAD informed the Parties of this designation on 02-11-2015.

Thus, in accordance with what is provided for in no. 7 of article 11 of the RJAT, in the wording introduced by article 228 of Law No. 66-B/2012, the Arbitral Tribunal was constituted on 01-12-2015.

The Tax Authority and Customs Authority submitted a response defending the unfoundedness of the requests.

On 11-02-2016, a hearing took place at which the Parties produced testimonial evidence and agreed that the proceedings would continue with written submissions.

The Parties submitted written submissions.

The Arbitral Tribunal is competent and was regularly constituted.

The Parties are duly represented, possess legal personality and capacity and the Claimant has standing (articles 4 and 10, no. 2, of the same legislation and article 1 of Ordinance No. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities and no exceptions were raised.

2. Matters of Fact

2.1. Established Facts

The following facts are considered established:

a. The Claimant A…– SGPS SA, has as its purpose the management of shareholdings in other companies, as an indirect form of exercising economic activities;

b. The company is constituted in the form of a joint-stock company with share capital of € 71,000.00 (represented by 71,000 ordinary shares, nominative or bearer, with a nominal value of 1 euro each), fully subscribed, with the following shareholder structure:

c. On 30-09-2009, the Claimant acquired company G… SA, NIPC…, with a 100% holding in the capital (hereinafter the company will be referred to as "G…");

d. On 16-09-2009, the Claimant acquired H… UNIPESSOAL LDA, NIPC…, with a 100% holding in the capital (hereinafter the company will be referred to as "H…");

e. G… was constituted by public deed on 2002-10-16, in the form of a private company, having commenced operations on 01-04-2003, with initial capital fully paid in cash of €6,000.00, divided as follows:

– I…, quota of € 2,835.00;

– F…, quota of € 2,835.00;

– J…, quota of € 330.00;

f. The corporate object of G… consisted of "provision of management consultancy services, vocational training and business management services," having on 19-04-2006 been amended to "provision of consultancy services in equipment and computer programming, databases and vocational training";

g. On 08-02-2007, the managing partners of G… I… and F…, resigned from management, and on the same day the new members of the corporate bodies were designated:

– B… (NIF…);

– C… (NIF…);

h. On 22-02-2007, the following amendments were made to the contract of company G…:

– Transfer of Quotas: Resulting from the division of the quota of partner J…, in the amount of € 330.00, into two quotas of € 165.00, which were transferred to B… and C…;

– Transfer of Quotas: The quota of € 2,835.00 of partner I… was transferred to C…;

– Transfer of Quotas: The quota of € 2,835.00 of partner F… was transferred to B…;

i. I… and F…, are spouses, respectively of B… and C…;

j. Following the transfer of quotas, the share capital of company G… which remained at the value of € 6,000.00, had the following structure (See Annex VIII, page 4 of the Inspection Report):

– B…- Quota - € 3,000.00

– C…- Quota - € 3,000.00;

k. On 13-04-2007, another amendment was made to the contract of company G…, with the transfer of two quotas in the amount of € 150.00 each, resulting from the division of the quotas of € 3,000.00, of partners B… and C…, to the new partner D…, leaving him with a quota of € 300.00, and the other two partners, namely B… and C…, with a quota of € 2,850.00 each;

l. On 19-05-2008, the increase in capital was registered at the Commercial Registry Office of …, the transformation of company G… into a joint-stock company and the corporate bodies were designated, the corporate object being maintained;

m. By resolution of 08-04-2008 the following corporate bodies were designated for the Board of Directors:

– Chairman - B…,

– Board Member – C…;

n. By resolution of 08-04-2008, a capital increase of company G… was carried out in the amount of € 44,000.00, which was carried out €43,800.00 by incorporation of free reserves and € 200.00 by the entry of two new partners, F… and E…, with the sum of € 100.00 each;

o. F… and E…, are relatives of C… and B…, respectively, spouse and father;

p. Thus, company G… is constituted in the form of a joint-stock company with share capital of € 50,000.00 (represented by 50,000.00 ordinary shares, nominative or bearer, with a nominal value of 1 euro each), fully subscribed, with the following shareholder structure:

q. Regarding the economic reasons underlying the decision to transform company G…, the Tax Authority and Customs Authority questioned partner C…, who stated the following:

"(…) private companies are, fundamentally, intended for the organization of small enterprises, showing little flexibility with respect to:

a) decision-making centers;

b) attracting investments;

c) capital mobility and the capacity to respond that needs to be demonstrated in day-to-day requests.

Joint-stock companies are those that best adapt to the structure of our company in growing development, through management flexibility and the concentration of management powers in the management body, with ease:

a) in quick and independent decisions;

b) in the organization of the company.

Management considered that the business development of the company should be accompanied by a substantial modification of the legal structure, in order to provide greater flexibility in its daily operations (…)";

r. From its inception until the 2009 financial year, company G… did not proceed to distribute results to its partners/shareholders;

s. From the 2008 financial year onwards, the net result of this company suffers an increase, which coincides with the financial year in which the succession of economic acts already mentioned began to be outlined;

t. Following its acquisition by A…, G… began to distribute dividends to its sole shareholder, A…- as shown in the table below:

The contracts then entered into, plus the amount delivered in kind by the partners totaled the following amounts:

– Contract entered into between A… and shareholder B…: unit price per share of € 142.00, global price of € 3,358,300.00 (total shares – 23,650);

– Contract entered into between A…- SGPS SA and shareholder C…: unit price per share of € 142.00, global price of € 3,118,178.00 (total shares – 21,959);

– Contract entered into between A… and shareholder D…: unit price per share of € 142.00, global price of € 595,122.00 (total shares – 4,191);

– Contract entered into between A…- SGPS SA and shareholder E…: unit price per share of € 142.00, global price of € 14,200.00 (total shares – 100);

– Contract entered into between A…- SGPS SA and shareholder F…: unit price per share of € 142.00, global price of € 14,200.00 (total shares – 100);

– Global value of shares: € 7,100,000.00;

– Payment conditions (as per Clause Two) - "(…) to be paid in whole or in part within a maximum period of 10 (ten) years, as the parties may agree."

v. The price of the shares was justified by the result of the valuation carried out by the Company of Official Auditors K…, NIPC…, with reference to 31-12-2008, and concluded on 12-05-2009.

w. The Claimant did not have the financial capacity to proceed with payment of € 7,100,000.00, did not have liquidity, own capital of sufficient value, nor did it resort to financing for this purpose;

x. On 16-09-2009, a sole private company was constituted with share capital of € 5,000.00, fully paid in cash, represented by a quota of equal nominal value belonging to the sole partner A…- SGPS, SA;

y. Management of the company is in charge of B… and C…;

z. H… began to distribute dividends to its sole shareholder - A…- SGPS, in the 2012 financial year, according to the following table:

aa. On 06-07-2012, the General Meeting of the sole private company H… met, for the purpose of deliberating on the distribution of dividends for the 2011 financial year, which were accounted for as carried-over results, in the amount of € 153,391.12 and to proceed with the distribution of anticipated dividends for the 2012 financial year, in the amount of € 250,000.00, to the sole shareholder A… SGPS, totaling € 403,391.12, transferred in that financial year;

bb. On 22-06-2009, the constitution of company A…- SGPS, SA, was submitted for registration at the Commercial Registry Office, having commenced operations on 30-06-2009;

cc. The Claimant A… SGPS has no employees and, in the financial years 2009 to 2012, there are no records of any personnel costs accounted for, nor had the company delivered any Annex J/Form 10 at the time the inspection procedure was completed;

dd. The Claimant A… SGPS does not provide any services to its subsidiaries either through its own personnel or through hired third-party services for this purpose;

ee. The only activity of Claimant A… SGPS recorded in accounting consists of the distribution of dividends it receives from its subsidiaries;

ff. The administrators/managers appointed by G… and H… were remunerated, during their terms, under Personal Income Tax – category A (Dependent Work), by G…, held 100% by A… SGPS, not receiving, according to the minutes of General Meetings, any remuneration for the exercise of the functions inherent to the position of managers of the Claimant;

gg. The Claimant presented the following Balance Sheets for the financial years 2009 to 2012:

Balance Sheet as of 2009-12-31:

hh. Before the acquisition of holdings corresponding to 100% of the share capital of G…, for € 7,100,000.00, the company presented a net equity position of € 49,937.60;

ii. The cash flow statement of the Claimant for the years 2010 to 2012 is as follows:

jj. Beyond some treasury applications, the activity of the Claimant is limited to the "management" of dividends paid by its subsidiaries, which are clearly channeled to remuneration of the partners (field A 5318 vs field A 5329);

kk. During the financial years 2010 to 2012, the amounts transferred from the Claimant to its shareholders and the accounting records made as a result of these transfers were as contained in the following table:

ll. In the financial years 2010, 2011 and 2012, the shareholders of the Claimant received as payment of the amount owed for the acquisition of shares in G… (in the said financial years), the amount of € 3,262,500.00;

mm. The payment of the aforementioned amounts was not burdened with the payment of any tax;

nn. Under the service orders Nos. OI2014…, OI2014… and OI2014…, directed to A…– SGPS SA, partial scope inspection actions were carried out, aimed at Corporate Income Tax and Personal Income Tax Withholdings;

oo. The inspection procedure commenced on 21-07-2014, with the signing of the respective service orders and ended on 10-09-2014;

pp. At the conclusion of the aforementioned inspection an inspection report was prepared which is contained in the Administrative Proceedings, part 1, whose contents are hereby reproduced, which was notified to the Claimant on 23-12-2014, in which the following is stated, among other matters:

I - Conclusions of the Inspection Action

In the course of the present inspection procedure, legal acts and transactions were analyzed that were essentially or primarily directed through artificial means and with abuse of legal forms, to the reduction of taxes that would be due without the use of such means, which constitute grounds for proceeding with the application of the legal anti-abuse norm provided for in no. 2 of article 38 of the General Tax Law (LGT).

Following the application of no. 2 of article 38 of the LGT, the following tax corrections result from the inspection action carried out on A…-SGPS.SA, NIPC…:

• Table 1 - Corrections of missing tax - Personal Income Tax Withholdings

(...)

From the facts established during the inspection procedure, and specifically regarding the economic reasons invoked by the administrators, underlying the transformation of a private company into a joint-stock company, the following should be noted:

We agree that the decision to transform a private company into a joint-stock company, considering the costs associated with this decision, should be related, and as the taxpayer states, to the opening of capital to new investors, providing companies with financial sustainability in a global market. On the other hand, the administration structure defined for these entities, characterized by the creation of an administrative council and appointment of a President, allows concentrating management powers in a management body, with ease in quick and independent decisions.

We also agree that the structure of the joint-stock company is that which best adapts to a company in growing development.

However, in this specific case, the alterations did not occur that could motivate/justify the burden of transforming a private company into a joint-stock company, which are moreover pointed out by the taxpayer. Let us see:

— There was no increase in share capital that would provide this entity with the financial sustainability it did not have at the time. It is noted that the capital increase that existed before the transformation process was carried out at the expense of incorporation of reserves, in fact there was only an effective capital contribution of € 200.00 (cf. minutes attached to annex IX);

— On the other hand, there was, in fact, no real opening of capital to new investors. Note that to achieve the minimum number of five shareholders, E… (father of B…- majority shareholder) and F… (spouse of C…- the other majority shareholder) enter this company and whose holding represents 0.2% of the share capital, and

— As for the "flexibility of management and concentration of management powers in the aforementioned management body" referred to by the administrators, we observe that this continues to be performed, in fact, by the majority shareholders: B… and C…, who move from managers to administrators. There was therefore no change in the management bodies.

Without questioning the economic reasons for the decision to transform a private company into a joint-stock company on the part of the capital holders and decision-makers, it seems acceptable that facing this reality the Tax Authority concludes that in this specific case, this decision was not accompanied by the corporate alterations that would allow this company to equip itself with better competitive performance.

(...)

On 30 September 2009 (the date on which the taxpayer acquired G…, SA), purchase and sale contracts for shares were entered into between company A…SGPS and each of the shareholders of company G… (see table 2), for the acquisition of all the shares representing the share capital of G… that each one owned (Annex XII, 19 pages).

No minutes were drawn up regarding the decision to acquire and conditions of acquisition of G…, which would show the reasons and objectives of this transaction.

Note that the capital gains obtained from the sale of stakes in capital were, at the time of the facts, excluded from taxation under Personal Income Tax pursuant to paragraph a) of no. 2 of article 10 of the Personal Income Tax Code (wording at the time).

That is, if the transformation of the private company into a joint-stock company had not occurred, this capital stakes sale transaction would have resulted in taxation of the tax gain, which in this specific case, considering the autonomous taxation at the rate of 10%, provided for in article 72 of the Personal Income Tax Code (wording at the time), would have been, in total, € 709,380.00, as demonstrated below:

This transaction raises the following questions immediately:

i) What is the business logic of selling the shareholdings to the taxpayer without a true corporate alteration, creating a debt that could prove to be an obstacle to a true business restructuring/reorganization, when other alternatives can be chosen, namely the exchange of shares?

ii) If in fact the motivation was business reorganization, maintaining the same corporate structure, what is the purpose of the taxpayer (A…SGPS), acquiring shareholdings when it can exchange them, benefiting from the regime of tax neutrality, provided for in article 73, no. 5 and no. 10 of the Corporate Income Tax Code?

iii) On the other hand, given that the acquired entity and the acquiring entity have in common the same capital holders, that is, in practice we are witnessing a transaction where sellers and buyers are the same, why define the alienation value so high for this transaction, if in practice, whoever buys is who sells?

iv) If the transformation had not occurred, would the sale of stakes (quotas) have been for the same amount? Knowing that such amounts would be subject to taxation, which as determined in the above table, would amount to € 709,380.00?

v) Finally, what is the economic sense of carrying out this transaction of purchase and sale of shares, when the typical function of this transaction is to transfer "ownership"? In light of the foregoing, it seems logical that the Tax Administration could conclude that this transaction aimed to artificially create a debt, which allows remuneration of capital holders up to the limit of €7,100,000.00, without any taxation.

The contracts then entered into, plus the amount delivered in kind by the partners totaled the following amounts (Annex XII, 19 pages):

Contract entered into between A…- SGPS SA and shareholder B…: unit price per share of € 142.00, global price of € 3,358,300.00 (total shares -23,650);

Contract entered into between A…- SGPS SA and shareholder C…: unit price per share of 1142.00, global price of € 3,118,178.00 (total shares - 21,959);

Contract entered into between A…- SGPS SA and shareholder D…: unit price per share of € 142.00, global price of € 595,122.00 (total shares-4,191);

Contract entered into between A…- SGPS SA and shareholder E…: unit price per share of € 142.00, global price of € 14,200.00 (total shares - 100);

Contract entered into between A…- SGPS SA and shareholder F…: unit price per share of € 142.00, global price of € 14,200.00 (total shares -100);

Global value of shares: € 7,100,000.00;

Payment conditions (as per Clause Two) - "(...) to be paid in whole or in part within a maximum period of 10 (ten) years, as the parties may agree."

The price of the shares was justified by the result of the valuation carried out by the Company of Official Auditors K…, NIPC…, with reference to 2008-12-31, and concluded on 2009-05-12.

With regard to the payment conditions agreed, the following should be noted:

a) As we will see below, the accounts of company A… SGPS SA, constituted on 2009-06-22, revealed that it did not have the financial capacity to proceed with payment of € 7,100,000.00, did not have liquidity, own capital of sufficient value, nor did it resort to financing for this purpose.

b) The sellers and shareholders of A… SGPS SA, become creditors in relation to it for the price of the sold shares in the capacity of shareholders of G…, the amount owed has the nature of debt to third parties - other creditors (who are also shareholders of A… SGPS SA), which is recognized accounting-wise by moving the account … - Other Various Creditors.

Let us see that not only is the transaction of alienation of stakes in capital of G… to A… SGPS SA, not taxed, but, having underlying the particular conditions drawn up in the contracts, is constituted in the latter a debt to its shareholders in the amount of € 7,100,000.00, which allows them to be remunerated up to that amount, without taxation, to the extent that the payments made, take on the guise of payment of the price of shares, instead of dividends.

• On the creation of H…- UNIPESSOAL LDA - NIPC…

The registered office of the company is coincident with the registered office of A- SGPS SA, NIPC…, in Rua…, No. …, …-… LISBON (Annex XIII, 4 pages).

On 2009-09-16, a sole private company was constituted with share capital of € 5,000.00, fully paid in cash, represented by a quota of equal nominal value belonging to the sole partner A…- SGPS, SA. The management of the company is in charge of B…, NIF … and C…, NIF … (Annex XIV, 7 pages).

H… began to distribute dividends to its sole shareholder - A…- SGPS, in the 2012 financial year, according to the following table:

On 2012-07-06, the General Meeting of the sole private company H… met, for the purpose of deliberating on the distribution of dividends for the 2011 financial year, which were accounted for as carried-over results, in the amount of € 153,391.12 and to proceed with the distribution of anticipated dividends for the 2012 financial year, in the amount of € 250,000.00, to the sole shareholder A… SGPS, totaling € 403,391.12, transferred in that financial year (Annex XV, 3 pages).

(...)

Four years having elapsed from the transaction of the stakes and consequently from the constitution of the SGPS, which proved to be a fundamental element to avoid taxation of shareholder remuneration, the capital holders have already received € 3,262,500.00, free from any tax (see table 10 of this Report).

These amounts, as mentioned, were not subject to any taxation and had their origin in the profits distributed by G…, and in the 2012 financial year, also by company G…, which in turn are the sole source of liquidity of A… SGPS. Let us see that in some situations there is even coincidence of dates (months) - attached is a table showing the distribution of dividends from the aforementioned companies to A… SGPS (Annex XVIII, 12 pages):

Source: Minutes, account extracts … and supporting documents

(a) The excess amount is applied to the subscription of financial products considered to be low risk, namely "Caixa …", of CGD

(b) Payment to shareholders does not occur exactly on these days, but still during the month of July and the remainder at the beginning of September

Finally, it is noted that we see in some of the situations the deliberation of anticipated dividends to company A… SGPS, in order to ensure payment to capital holders, with the minutes referring to "given the need to remunerate the capital holders" (cf. meetings 16, 22 (G…) - Annex XI and meeting 5 (H…) - Annex XV). Note that the activity of the SGPS in the years under review is summarized in managing payments to shareholders, through the liquidity generated by the distribution of dividends from its subsidiaries, some of which are anticipated, and making some treasury applications with the remaining amount.

III.2 - On the Law

(...)

III.2.1 - Assessment of the Specific Case

The facts reported, and more the sequence in which these were designed, result in an evident tax advantage, objectively, in the cancellation of the tax that the capital holders would have to pay, if the amounts they actually received had not taken on the guise of payment of the price of stakes in capital, but rather the receipt of dividends. In fact, we see a remuneration of the capital holders, without any taxation, using for this purpose:

(i) the transformation of company G… LDA into a joint-stock company, allowing that in the alienation the capital gain obtained from the realization of stakes in capital of this company to company A… SGPS, regardless of the value assigned, remained excluded from taxation;

(ii) The creation of the SGPS, so that, through the alienation of stakes in capital of company G… to company A… SGPS SA, a debt to the capital holders would be created in the amount of € 7,100,000.00, guaranteeing their remuneration, without any taxation;

(iii) The instrumental use of company A… SGPS S.A., for the remuneration of capital holders through the receipt of dividends in the guise of payment of the price of shares.

Now, it is the understanding of CASALTA NABAIS that the recourse to general anti-abuse norms proves to be necessary and useful, for the Author, "both individuals and companies can, in particular, give vent to their economic action in legal acts and non-legal acts according to their private autonomy guiding themselves even by criteria of avoidance or evasion of taxes (tax avoidance) or of fiscal savings, provided that, by such means, they do not violate the tax laws nor abuse the (freedom of) legal configuration of tax facts, causing tax evasion or escape from taxes through pure maneuvers or legal disguises of economic reality (tax evasion). Maneuvers and disguises against which one seeks to struggle presently through recourse whether to special clauses whether to general anti-abuse clauses, as those currently existing in our tax legal system."

Analyzing the norm transcribed in subchapter III.2 and following recent jurisprudence on this matter, in particular as set forth in Judgments of the South Central Administrative Court (see judgments of the South CAC Proceedings No. 4255/10 of 2011-02-15 and No. 5104/11 of 2012-02-14), which follows what was instituted in the work of GUSTAVO LOPES COURINHA, it is concluded that the same contains four requirements that need to be proven for the Tax Authority (AT) to be able to apply it, they are:

• The form used - means element;

• The tax advantage and economic equivalence obtained - result element;

• The motivation of the taxpayer - intellectual element;

• The normative disapproval - systematic of the advantage obtained - normative element;

Now, from the evaluation of all the elements that were made known to the procedure it is possible, in consideration with the conditions mentioned, to identify:

1. Means Element

In accordance with the provisions of no. 2 of article 38 of the LGT, "...legal acts or transactions essentially or primarily directed...to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose...."

The means element corresponds to the route chosen by the taxpayer to obtain the desired gain or tax advantage, that is the acts and or legal transactions entered into whose structure is determined as a function of a given fiscal result, which would not occur if these had not occurred with the contours in which they occurred.

In the case at hand, as will be described below, the shareholders of A…SGPS/G… resorted to a set of acts and legal transactions that had as a result transforming a financial flow subject to tax, under the terms of paragraph h) of no. 2 of article 5 of the Personal Income Tax Code (the payment of dividends to shareholders of A… SGPS), into another financial flow not subject (the payment of the price determined in the transaction of acquisition of G…).

We shall therefore, chronologically, describe the steps followed by the shareholders to achieve the desired fiscal result:

1. On 2008-05-19, the increase in capital was registered at the Commercial Registry Office of … the transformation of company G… into a joint-stock company and the corporate bodies were designated, the corporate object being maintained, as referred to above.

2. The shareholding management company A… SGPS was constituted by resolution of 2009-05-25, registered at the CRC on 2009-06-22 and commenced operations on 2009-06-30, with share capital of € 71,000.00 fully subscribed, according to table 1 of this Report, its 5 shareholders being common to G…;

3 On 30 September 2009, three months after the commencement of operations of A… SGPS, contracts were entered into for the purchase and sale of shares of G… S.A;

1. The global price defined was € 7,100,000.00;

2. The particular characteristics of this transaction were: the deferment of payment of the price "(...) to be paid in whole or in part within a maximum period of 10 (ten) years, as the parties may agree."

6 A… SGPS as a shareholding management company, intended for the exercise of management of shareholdings, did not have (nor does it have) the financial capacity to enter into a transaction of this magnitude;

1. Company G… did not distribute any results to its partners/shareholders before the 2009 financial year. Between 2009 and 2012, it distributed € 4,093,448.20 to company A… SGPS, and this company, at this moment, and in a similar amount, begins the payment to the capital holders, of the amount of the debt generated when the contract of alienation of the stakes was entered into.

2. By this means, the payments made to the capital holders of A… SGPS, in the amount of 3,262,500.00, are excluded from any taxation, because they "take on" the form of payment on account of the contract of alienation of the stakes instead of dividends.

It is manifest that the acts and legal transactions carried out by the taxpayers are not typical nor normal in the management of companies carried out on the basis of economic-financial rationality.

It is only possible to understand this succession of acts and legal transactions in the context of the search for a determined fiscal result (the non-taxation of the distribution of dividends).

The contractual conditions of the transaction determined when the alienation of the stakes took place, in particular, the value established as well as the deadline for payment, as well as all the acts practiced previously, namely the transformation of the alienated company into a joint-stock company and the creation of the SGPS company, are part of the logic of the scheme designed by the shareholders of G…, and had as their objective the transformation of the payment of dividends into the payment of the price of sale of the shares agreed upon, thus obtaining these capital holders, a remuneration without any

These contractual conditions were only possible because the shareholders/decision-makers are common to both companies (moreover their percentage of shareholding in A… SGPS is exactly the same as in G…) - see tables 1 and 2 of this Report.

In addition to being a succession of atypical transactions, in the context of economic and financial rationality as has been extensively mentioned, it is also noteworthy that this was not at all necessary to obtain the purposes desired by the shareholders/decision-makers. That is, as referred to by the administrators (Annex XVII), wanting these with the constitution of company A… SGPS to achieve the constitution of an economic group, which would allow them to face the challenges of a global economy, equipping the companies that comprise it with greater dynamism, assured by a company that would bring together the shareholdings, thus facilitating the conquest of new markets and the attraction of new investments, were there not other alternatives to this succession of transactions?

For the act or transaction carried out could not fall within the scope of the clause if the taxpayer could not effectively opt for another route, or if in the case of this other route existing the same is habitual or normally used.

As exemplified by GUSTAVO LOPES COURINHA, if for example a given taxpayer is forced into a determined action, because requirements of a certain nature determined it - for example, compliance with anti-trust law requirements, which may require divisions of companies, even though therefrom results a clear tax advantage, one cannot speak of a free or optional act. More than an economic-legal justification for the act(s) practiced, there is an effective lack of option, which is the sine qua non requirement of elusive action, as provided for in the general anti-abuse clause. The Author concludes that in these cases, the means element is not verified.

Well then, let us see:

(i) Could company A… SGPS, constituted for the reasons invoked, have acquired company G… Lda, before, or without the transformation into a joint-stock company having occurred?

Now, as article 3 of Decree-Law No. 495/88 of 30 December provides, SGPS's can acquire and hold quotas or shares of any national or foreign companies, in accordance with the law. In fact, company A… SGPS, in addition to holding 100% of the capital of company G… SA, still holds 100% of the capital of two other companies, with quotas: H… LDA and L… LDA (see table 7). It is thus concluded that there was no requirement to transform company G… Lda into a joint-stock company.

(ii) Was there another possibility for company G…S.A. to be held by company A…SGPS, without the transaction of alienation of stakes having occurred?

Facing the company's net equity position, and bearing in mind the objectives desired by the shareholders through the constitution of this company, it would be economically far more reasonable to opt, in particular, to realize the capital of company A…SGPS, through contributions in kind (stakes in capital), or through exchange of shares, an operation that benefits from the privileges of the "fiscal neutrality regime" set forth in the Corporate Income Tax Code, precisely, because the legislator wanted to exempt from taxation operations of transformation, reorganization and restructuring, when we are faced with valid economic reasons. These two alternatives would have avoided the creation of a liability, which for the amount in question (€7,100,000.00), could distance investors.

(iii) Finally, what is the business logic of selling stakes in the shareholding to the taxpayer, creating artificially a debt that could prove to be an obstacle to a true business restructuring/reorganization, when they can exchange them?

There being no alteration to the corporate structure, no need is perceived in practice for legal transactions of purchase and sale of shareholdings with a view to corporate reorganization operations, when the legislator himself in article 73 of the Corporate Income Tax Code opens the door to reorganizations through the mechanism of exchanges of shareholdings that enjoy neutrality.

As article 73, no. 5 of the Corporate Income Tax Code states;

"(...) 5- Exchange of stakes is considered the transaction whereby a company (acquiring company) acquires a stake in the share capital of another (acquired company), which has the effect of conferring on it the majority of voting rights of the latter, or whereby a company, already holding such majority holding, acquires further stake in the acquired company, by granting to the shareholders thereof, in exchange for their securities, stakes representing the capital of the first company and, where applicable, a sum in cash not exceeding 10% of the nominal value or, in the absence of nominal value, of the accounting value equivalent to the nominal of the securities delivered in exchange."

Where, in turn, no. 10 of the same article states:

"(...) 10 - The special regime established does not apply, wholly or partially, when it is concluded that the operations covered by it had as principal objective or as one of the principal objectives the tax evasion, which may be considered verified, in particular, in cases where the companies involved do not have all their income subject to the same regime of taxation in Corporate Income Tax or when the operations have not been carried out for valid economic reasons, such as the restructuring or rationalization of the activities of the companies participating in them, with the corresponding additional tax assessments being made, if appropriate"

Therefore, it is not a substantively valid transaction, the alienation of intra-group shares. Now, what is the purpose of alienating the shareholdings, when they could exchange the shareholdings? For it does not pass any test of business logic for a subject to be acquiring shareholdings, when they can exchange them

That is, if A can trade with B, what is the purpose of A selling to B? What is the purpose of selling the shareholdings, when the entire corporate structure remains the same? Create artificially a debt? One is faced with a situation that distorts in light of fiscal and corporate law the reorganization operations.

It is, in truth, clear that the aforementioned purchase and sale of shares does not achieve the beneficial effect that constitutes the hallmark of reorganization operations. On the other hand, the typical function of the transaction of purchase and sale consists in the transfer of ownership of a thing.

It is unequivocal that the shareholders did not want to enter into the purchase and sale of shares, because this from a corporate law point of view is innocuous, bringing no contribution to the chain of value of the group.

Furthermore, observing the act of sale of the shareholdings in an isolated manner and there being subsequent operations, that is, equally capable (suitable) to achieve the same supposed purpose (legal-economic), the taxpayer chose that which is fiscally inefficient, to the extent that through the exchange of shareholdings they could benefit from fiscal neutrality in the intended operation.

With effect, only the purchase and sale of shareholdings is justified with the sole aim of obtaining, ultimately, a superior gain in fiscal terms.

On the other hand, it is evident that the question of the revaluation of shares and subsequent sale, does not appear to be an act of corporate management that has a valid economic or business motivation. That is, it makes no sense for the company to revalue and sell the shareholdings, when "buyers and sellers", are the same.

Hence, in these situations, even the neutrality of the exchange of shareholdings contained in article 73 of the Corporate Income Tax Code, allow the exchange of the shareholdings for their nominal value and not for market value, there being no need to revalue the shareholdings, which coincide with the amount of reimbursement or payment of the debt.

However, the truth is that, if the decision-makers had not opted to design this transaction, it would not be possible to create a credit against company A…SGPS, in order to allow obtaining remuneration away from any taxation. For, if the dividends distributed by the subsidiary companies to company SGPS benefited from the exclusion from taxation, provided for until the 2010 financial year, in article 32 of the Fiscal Benefits Framework, and from that date, subject to the requirements of article 51 of the Corporate Income Tax Code (wording at the time), the truth is that the distribution of dividends to the capital holders, whatever company, are always subject to taxation under the terms of paragraph h) of no. 2 of article 5 of the Personal Income Tax Code.

1. Result Element

As article 38, no. 2 of the LGT states, the legal acts or transactions "anomalous" should be "essentially or primarily directed to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, wholly or partially, without use of these means...".

In sum, the result element consists in the tax advantage achieved through the means element used by the taxpayer, which in the case under consideration consisted in the transformation of a financial flow - the distribution of dividends, subject to Personal Income Tax under the terms of paragraph h) of no 2 of article 5c of the Personal Income Tax Code, into another flow, the payment of the amount owed to each seller/shareholder relative to the price determined in the transaction of acquisition of the stakes in capital of G…, from which, once again it is noted, no taxation results.

Equivalence of the result of acts and transactions entered into with normal acts and transactions of equivalent economic effect

If the shareholders intended to carry out the acts and transactions for their economic purpose, resulting from the gains in competitiveness, efficiency and critical mass obtained, whether by the constitution of the SGPS, or by the concentration of the shareholdings in its sphere, they would have at their disposal normal acts and transactions of equivalent economic effect and/but endowed with economic rationality. Thus, it would be normal, for example, to constitute for this purpose a company with own capital of an amount sufficient to proceed with the acquisition of shareholdings of this amount, or the obtaining of financing with outside capital for the purpose, or the subscription of the initial share capital through contributions in kind embodied in the shareholdings, or even the exchange of shares, but instead it was decided to acquire the shares for a value 142 times higher than their balance sheet value, creating a credit of €7,100,000.00.

Verifying that the SGPS does not possess physical, financial and human structure, capable of providing the purposes for which it was constituted, it is legitimate to conclude that the reason for its existence is nothing more than purely instrumental. The activity of G… in no way altered with this interposition of an SGPS between it and its shareholders, previously direct and now indirect, what did alter is the form of distribution of dividends, made to A… SGPS (which benefits from the elimination of double economic taxation under the terms of paragraph c) of no.1 of article 51 of the Corporate Income Tax Code and until the 2010 financial year inclusive, under the terms of article 32 of the Fiscal Benefits Framework), instead of directly to individual shareholders taxed under the provisions of paragraph h) of no. 2 of article 5 of the Personal Income Tax Code.

It is stressed that the economic reasons for the constitution of the SGPS are not in question, but rather its instrumental character with a view to the remuneration of the shareholders and consequently the increase of their tax capacity without any taxation.

In the specific case the artificiality of the constitution of the SGPS, of the revaluation of the shares, of the financing of the SGPS (through deferred payment and absence of funds) and of the purchase and sale of the shareholdings, constitute the set of acts that lead to the inefficacy of the act of payment of the price for tax purposes, and should be characterized as a distribution of dividends.

That is, if the capital holders had not opted to carry out such transaction of alienation of stakes in capital, for the value and in the conditions defined, it would not be possible to create a credit in company A… SGPS, which would allow "simulating" the payment of dividends through the payment of the price of alienated shares.

Had the acts and transactions been entered into under typical and normal forms, A… SGPS would make the distribution of these dividends to its shareholders, who moreover, in typical and normal conditions would expect to obtain this result - the remuneration of the capital invested - from their investments, with these capital income being subject to Personal Income Tax in the terms of paragraph h) of no.2 of article 5, of the Personal Income Tax Code.

On the Result - the tax advantage obtained

Thus, during the financial years 2009 to 2012, amounts of € 3,262,500.00 were transferred from A… SGPS to its shareholders, free from any taxation. The distribution of these dividends is indicative of the intention to eliminate taxation, the objective of the shareholders of A… SGPS /G…, achieved through the legal acts and transactions described above.

It is therefore evident the intended result - to receive dividends from A... SGPS, as if it were another reality (payment of amount owed), with a view to the removal from taxation of the "real business/act"

It is stressed once more, in order to prove that this succession of transactions was directed to the elimination of taxation of the remuneration of the capital holders, that:

(i) The capital holders only began to be remunerated, after the credit was constituted in company A… SGPS. From this moment on the results generated in the subsidiary companies of this, including carried-over results, began to be distributed to the capital holders, by way of company A… SGPS, in the guise of payment of the price of the shares acquired;

(ii) There is a coincidence between the moment of receipt of the dividends distributed by the subsidiaries to company A… SGPS and the subsequent payment to the capital holders, in some situations as demonstrated in table 11, the date is coincident;

(iii) Sometimes, to ensure remuneration to the shareholders, recourse is had to the deliberation of the distribution of anticipated dividends.

In light of the foregoing, we can conclude that the shareholders of A… SGPS received in fact from it, profits and advances on account of profits, without any tax burden impending on them, in the following amounts:

As a result of the proposed correction, by effect of the application of the anti-abuse norm, the amounts received, as payment of the debt, are considered capital income (Cat. E). In light of the foregoing, the fiscal classification, the moment in which its taxation should occur and the taxation of the dividends and advances on account of profits received are as follows:

a. They are subject to Personal Income Tax under the terms of paragraph h) of no. 2 of article 5 of the Personal Income Tax Code;

b. Under the terms of article 7, no. 3, paragraph a), point 2 of the Personal Income Tax Code, withholding at source should occur at the moment "when they are placed at the disposal of their beneficiaries".

c. Profits and advances on account of profits received by natural persons are subject to withholding at source, as final tax, at the liberatory rate of 20% - article 71, no. 3, paragraph c) of the Personal Income Tax Code, (wording in force until March 2010), 21.5% - article 71, no. 1, paragraph c) of the Personal Income Tax Code (wording in force until December 2011), 25% - article 71, no. 1, paragraph c) of the Personal Income Tax Code (wording in force until October 2012) and 26.5%- article 71, no. 1, paragraph c) of the Personal Income Tax Code (wording in force until December 2012), at the moment they are paid, or placed at the disposal, whereby they shall not be taxed in the sphere of their beneficiaries (in this case the shareholders who received them).

d. The entity retains the tax due which must be remitted to the State by the 20th day of the month following that in which it was deducted, as provided for in article 13 of Decree-Law No. 42/91, of 22 January, no. 3 of article 98 and paragraph a) of no. 2 of article 101 of the Personal Income Tax Code.

In accordance with the foregoing the total tax not withheld at source and not remitted was € 760,950.00, as shown in the following table:

1. Intellectual Element

Still according to no. 2 of article 38 of the General Tax Law: "(...) Legal acts or transactions are ineffective within the scope of taxation when essentially or primarily directed, through artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, wholly or partially, without the use of these means, with taxation then being carried out in accordance with the applicable norms in their absence and the aforementioned tax advantages not being produced."

Under the terms of the transcribed norm, it is required that the choice and form adopted by the taxpayer be fiscally directed (tax driven) to the obtaining of the tax advantage.

Thus, it shall next be demonstrated that the choice of form made by the taxpayer, through its administrators, was motivated by tax reasons, that is, only tax reasons explain the option followed by these. To demonstrate this we will prove that the acts and transactions carried out that led to the illegitimate tax advantage, are not usual among independent economic agents, did not follow the forms and conditions usually utilized, nor had a result in line with that intended in similar transactions.

In the context of European integration, through Decree-Law No.495/88 of 30 December (legal regime of SGPS), the legal regime of Shareholding Management Companies was created, in order to develop conditions that would facilitate and encourage the constitution of more capable economic groups to face the competition that resulted from entry into the Single Market.

In its preamble it is stated that this regime "aims, in accordance, to provide entrepreneurs with a legal framework that allows them to gather in a company their shareholdings, in order to their centralized and specialized management."

We have then that in the genesis of the creation of a shareholding management company is the creation of an economic group and its more efficient and effective management, thus allowing, for example, the financing of the group as a whole and the provision of support services to the subsidiaries that make the group more agile and with better conditions to face increasing competition, at the internal and European level.

It would then make sense, would be typical and normal, the creation of a shareholding management company to (i) acquire for €7,100,000.00, (ii) without financial means to do so, (iii) shareholdings representative of only one company, (iv) with the shareholders and their respective quotas being exactly the same as those of the company to be acquired, (v) without providing the SGPS with physical and human means for the management of the shareholdings it acquired?

Did the shareholders of G… intend, through the creation of A… SGPS and subsequent acquisition of G…, to create and equip an economic group with conditions of financing and provision of services capable of increasing the competitiveness of the group companies?

The facts indicate the contrary, as is understood from what is hereinafter stated:

A… SGPS created an economic group by centralizing the stakes in entities G…, H… and L…, these two already created after the constitution of company A… SGPS SA.

However, it did not centralize in itself the financing and provision of services to it. It did not create economic-financial conditions to carry out that financing, nor did it create the operational structure capable of centralizing and providing services to its subsidiaries.

But rather, that company, as is apparent from the analysis of the Financial Statements, and specifically the Cash Flow Statement, merely limits itself to managing the dividends generated by the subsidiaries and distributing the same, free from taxation to its capital holders.

On the other hand, let us look at the transaction of alienation of stakes in capital of company G… to company A… SGPS SA.

Although the price of the transaction coincides with the valuation of company G… by the consultant K…, with reference to 2008-12-31 and concluded on 2009-05-12, the truth is that company A… SGPS, constituted with only € 50,000.00 of capital (minimum value for constitution of an SGPS), acquires on 2009-09-30, G…, for a value that exceeds by 142 times its share capital (€7,100,000.00), not defining any concrete payment conditions, beyond a deferment over a period of 10 years and the registration of the credit relative to each shareholder as a debt of company A… SGPS.

Would that be possible between independent entities, regulated by the market and not by the stimulus of remuneration without taxation?

However, given the way the transaction was designed, the credit was created, by the acquisition of a company of which they were already direct owners. On the other hand, the administration and shareholders of G… radically altered the policy of distribution of profits to shareholders - until the 2008 financial year G… had not proceeded to any distribution of profits, from that date and until the end of the 2012 financial year, it distributed €4,093,448.20 (2009 through 2012).

Of these profits, €3,262,500.00, during the financial years 2010 to 2012, were subsequently transferred to the shareholders of G… / A… SGPS, as consideration for the credit they had created in A… SGPS, free from any taxation.

It is thus understood that with this succession of legal transactions, A… SGPS was instrumentalized, with a view to the transformation of a flow - the dividends - into another - the payment of a debt - created with the sole purpose of allowing the elimination of the fiscal burden associated with the receipt of dividends. Moreover, the costs associated with the constitution and existence of the SGPS (e.g. share capital, fees, taxes, payment of services to auditors, tax advisors), are only compensated by the presumption of the tax advantage obtained, because no other purpose is perceived.

An operation with these characteristics: the creation of an SGPS that predisposes itself to acquire shareholdings in the value of €7,100,000.00, without possessing either liquidity or own capital for the purpose and not resorting to any means of financing to effect the payment of the amount owed, could not have any other objective or consequence than fiscal and could not have been practiced by any other company than one created by the same shareholders of the company to be acquired, with the same percentage of shareholding in the capital of the acquired company and with a precise and instrumental objective: to allow the transformation of a taxed monetary flow, into another untaxed monetary flow.

1. Normative Element

No. 2 of article 38 of the General Tax Law also refers to:

"...through artificial or fraudulent means and with abuse of legal forms... (essentially or primarily directed) to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose"

Underlying this element is the disconformity of the result obtained with the ratio legis, the spirit or purpose of the law, the principles of the Code in question or of the Tax System.

In sum, it is a matter of, in a reflective exercise, demonstrating that, despite the letter of the law allowing the act or transaction carried out to provide the desired fiscal effects, the intention of the law and/or of the Law rejects its obtaining, and as such, the result obtained. Also as to this element, there is no doubt that the same is verified in the case under analysis, since the Constitution and tax law presuppose taxation according to tax capacity.

Taxes in accordance with no. 1 of the General Tax Law "rest essentially on tax capacity, revealed, in accordance with the law, through income or its use and patrimony", it cannot therefore be the mere redenomination of income obtained, proceeding from the activity exercised by a company of which they are shareholders, not to be treated as such ~ an income. The shareholders of G…/A… SGPS received dividends proceeding from G… channeled to company A…SGPS (which through artificial means "transformed" into payment of a debt), without any tax burden impending on them.

The principles underlying the tax system set forth in articles 103 and 104 of the Constitution of the Portuguese Republic (CRP), as well as the incidence norms provided for specifically in the Personal Income Tax Code, intend the taxation of income actually obtained. In the specific case it is evident the increase of the tax capacity of the capital holders, and with recourse to artificial means, such increases are removed from taxation.

It seems clear to us that being the Tax Law a corollary of the CRP, as concerns equity and fiscal justice, it was not the intent of the legislator, whether with the exclusion from taxation of capital gains in the alienation of shares held for more than 12 months, provided for in article 10, no. 2 of the Personal Income Tax Code, only revoked by Law 15/2010, of 26/07, whether with the benefits attributed to SGPS in force at the time of the facts, to allow the benefit by economic agents, in the sense of the reduction of taxation due.

Regarding income from category E - capital income - article 5, no. 1 of the Personal Income Tax Code provides that "capital income is considered the fruits and other economic advantages, whatever their nature or denomination, whether pecuniary or in kind, proceeding, directly or indirectly, from patrimonial elements, assets, rights or legal situations, of a movable nature, as well as from the respective modification, transmission or cessation, with the exception of gains and other income taxed in other categories."

Now in the case at hand, the taxpayers obtained income, received from A… SGPS, proceeding from profits obtained by company G… distributed to A… SGPS, but which they denominated "payment of debt" in order to avoid its taxation, as has been demonstrated.

It is to be noted that the subsumption of the specific case to the norm was carried out based on a critical and combined analysis, according to judgments of common experience and of social, economic and financial normality of the facts and elements gathered which, with reasonable certainty, show the abusive nature of the taxpayer's tax planning.

III.3 Justification for the Application of the Anti-Abuse Norm

In the definitions elaborated by SALDANHA SANCHES, "The Limits of Tax Planning", Coimbra publisher, 2006, page 21, legitimate tax planning "consists of a technique for reduction of the tax burden by which the taxpayer renounces a certain behavior because it is linked to a tax obligation or chooses, among the various solutions provided to it by the legal order that which, by intentional action or omission of the tax legislator, is accompanied by fewer tax burdens". On the other hand, illegitimate tax planning "consists in any behavior of undue reduction, by contravening principles or rules of the tax-legal order, of the tax burdens of a determined taxpayer".

Now,

In accordance with the Judgment of the South Central Administrative Court, Proceedings No. 04255/10, of 15 February 2011:

(...) The anti-abuse norms find their "raison d'être" in the evasive and fraudulent behavior of taxpayers in tax matters ... and in the need to establish adequate means of reaction in order to guarantee compliance with the principle of equality in the distribution of the tax burden and in the pursuit of satisfaction of the financial needs of the State and other public entities (cfr. article 103, no.1, of the Portuguese Constitution).

... Because it is inherent to economic rationality the minimization of the taxes to be borne, and various routes may be used to achieve such goal, although the distinction frontier between them is not always easy to perceive and in that sense the routes of management or tax planning of evasion or tax avoidance and of tax fraud are normally followed.

(...) Tax evasion or avoidance occurs through the practice of acts or transactions lawful but which tax law qualifies as not being in conformity with the substance of the economic reality that underlies it, thus having to be qualified as anomalous, abnormal or abusive ... and from the behaviors of evasive taxpayers results a serious impediment to business competition, a notorious erosion of tax revenues, the distortion of the principle of equity and a clear disregard for compliance with the rules of citizenship, situations that are based on causes of a political, economic, psychological and technical character. And the forms used revolve around atypical or abnormal acts and contracts aimed at circumventing the law... or interpreting it with purposes different from those which the legislator had in mind (...)

(...) It is in view of such situations that States are concerned with taking measures aimed at combating the evasive and fraudulent behaviors of taxpayers through the so-called specific anti-abuse clauses ...and general anti-abuse clauses (of which an example is the norm contained in art. 38, no. 2, of the General Tax Law)."

In light of all the foregoing and aiming at a normatively rationalized practice of law, it is understood that the conditions are met so that one can resort to the mechanism provided for in no. 2 of article 38 of the LGT, above transcribed.

It results therefore from the present report that the procedural requirements provided for in no. 3 of article 63 of the Tax Procedure and Process Code are met for application of the provision provided for in no. 2 of article 38 of the LGT, specifically:

a) Description of the legal transaction entered into or legal act performed and of the transactions or acts of identical economic purpose, as well as indication of the incidence norms applicable to them.

b) The demonstration that the succession of legal transactions entered into or the practice of legal acts was essentially or primarily directed to the reduction, elimination or temporal deferment of taxes that would be due in the case of a transaction or legal act with identical economic purpose, or to the obtaining of tax advantages.

qq. On 10-12-2014, the Director-General of the Tax Authority and Customs Authority issued a directive authorizing the assessment of taxes to the Claimant with application of the provisions of article 38, no. 2, of the LGT, based on the Inspection Report (page 27 of the Administrative Proceedings, part 1);

rr. The Claimant was notified to exercise the right to a hearing based on the draft Inspection Report, but did not exercise it;

ss. As a result of the inspection, the Tax Authority and Customs Authority issued the following Personal Income Tax assessments and compensatory interest, which were annulled on 22-04-2015:

– through document No.…, in the amounts of € 178,450.00 and € 30,890.71, of Personal Income Tax and compensatory interest, respectively, relative to the year 2010;

– through document No.…, in the amounts of € 163,400.00 and € 22,689.62, of Personal Income Tax and compensatory interest, respectively, relative to the year 2011;

– through document No.…, in the amounts of € 419,100.00 and € 37,438.69, of Personal Income Tax and compensatory interest, respectively, relative to the year 2012; (document No. VI attached with the request for arbitral decision, whose contents are hereby reproduced);

tt. On 24-04-2015, the Tax Authority and Customs Authority issued the certificate whose copy is contained in document VII attached with the request for arbitral decision, whose contents are hereby reproduced, in which it is stated, among other matters, that «in light of the elements available in the informatic system of management and control of fiscal enforcement proceedings, which A…- SGPS SA, NIF…, has its tax situation regularized, since it is not a debtor to the Public Treasury of any taxes, tax payments or legal accruals»;

uu. Subsequently, the Tax Authority and Customs Authority issued the following Personal Income Tax assessments (withholdings at source), which were notified to the Claimant on 02-05-2015:

– relative to the year 2010, Personal Income Tax assessment No. 2014…, dated 29-04-2015, in the amount of € 178,450.00, and compensatory interest assessments Nos. 2015…, 2015… and 2015…, in the global amount of € 30,890.71, from which resulted the total amount to be paid of € 209,340.71 (identification of document No. 2015…);

– relative to the year 2011, Personal Income Tax assessment No. 2014…, dated 29-04-2015, in the amount of € 163,400.00, and compensatory interest assessments Nos. 2015… and 2015…, in the global amount of € 22,589.62, from which resulted the total amount to be paid of € 186,089.62 (document No. 2015…);

– relative to the year 2012, Personal Income Tax assessment No. 2014…, dated 29-04-2015, in the amount of € 419,100.00, and compensatory interest assessments Nos. 2015…, 2015… and 2015…, in the global amount of € 37,438.69, from which resulted the total amount to be paid of € 456,538.69 (document No. 2015…, attached by the Claimant on 24-03-2016);

vv. In 2010, company M…, SA, undertook efforts with the Claimant, during a period of 6 months, for the acquisition of part of its capital, with a view to holding G…, which was the main company held by the Claimant, efforts that materialized, in late 2010, in its valuation at € 13,500,000.00 and in the agreement contained in document No. XIII attached with the request for arbitral decision, whose contents are hereby reproduced, with the acquisition not being finalized only due to the political and financial crisis generated which culminated in the troika intervention and diminishment of the degree of confidence in investment, which had as a consequence that it was not interesting for that company to hold shares in Portuguese companies in its portfolio (testimony of witnesses N… and O…);

ww. The M…, SA group is one of the largest Polish groups that has expanded internationally, having interest in the type of software created by G… and interest in holding a company in Portugal for access to the Lusophone market (testimony of witness N…);

xx. Company P…, around 2008 or 2009 was interested in the acquisition of G…, which suggested the creation of an SGPS (testimony of witness Q…);

yy. The creation of the SGPS was motivated essentially by it being normal in the type of technology companies to create groups, for growth with new acquisitions, by being beneficial in terms of image as a sign of organization in the structuring and by allowing the segmentation of businesses, diluting risks with the creation of specialized companies, as occurred with the creation of two companies by the Claimant, as sole shareholder (H… in 2009 and L…, LDA in 2012) (testimony of witnesses O… and R…);

zz. Since 2009, there have been several attempts by the Claimant to acquire shareholdings in an Angolan company and to enter the Brazilian market which ended up not being realized due to the Portuguese crisis situation (testimony of witnesses O… and S…);

aaa. The Claimant, by the businesses in which it was involved had the capacity to contract a loan and receive the totality of the sum it needed to acquire the shareholdings it acquired and pay the totality to the shareholders, already in 2009 (testimony of witness O…);

bbb. Despite the fact that, by choice of the shareholders, the Claimant has no employees and its administrators are remunerated by G…, services were provided by the Claimant, without value being assigned to them, which resulted in the good results obtained by G... and by H… (testimony of witness O…);

ccc. The Claimant was constituted through contribution in kind (exchange of shares) as to 1% of the capital (testimony of witness O…);

ddd. The valuation of G… was carried out by the audit company K…, based on profit forecasts for the following five years that were much lower than those that actually occurred in those five (testimony of witness O…);

eee. Presently the Claimant has approximately € 7,000,000.00 of own capital which in the majority constitute amounts distributable to the shareholders (testimony of witnesses O… and R…);

fff. The distributable amounts of G… to shareholders/shareholders before the 2009 financial year represented the amount of € 383,698.02 (Document No. 9 attached with the request for arbitral decision, whose contents are hereby reproduced);

ggg. The payments of the debts of the Claimant to its shareholders were made in accordance with table 13 of the Inspection Report, whose contents are hereby reproduced;

hhh. On 12-10-2015, the Claimant submitted the request for arbitral decision that gave rise to the present proceedings.

2.2. Unproven Facts

It was not proven that the Claimant made payment of the assessed amounts.

2.3. Justification for the Fixing of Matters of Fact

The established facts are based on the documents of the administrative proceedings and those attached by the Claimant, as well as the witnesses heard, at the points mentioned.

The witnesses appeared to testify with impartiality and with personal knowledge of the facts on which they testified.

3. Matters of Law

The tax arbitration process, as an alternative means to the judicial challenge process (no. 2 of article 124 of Law No. 3-B/2010, of 28 April), is, like the latter, a procedural means of mere legality, in which it is intended to declare the illegality of acts of the types indicated in article 2 of the RJAT and to eliminate the legal effects produced by them, annulling them or declaring their nullity or non-existence [articles 99 and 124 of the Tax Procedure and Process Code, applicable by force of the provisions of article 29, no. 1, paragraph a), thereof].

Therefore, being the act of assessment practiced by the Tax Administration the object of the process, its legality must be assessed against the precise terms of the same, as it occurred, with the justification used in it, other possible justifications that could serve as support to other acts, of decisional content wholly or partially coincident with the act practiced, being irrelevant. Justifications invoked a posteriori, after the end of the tax procedure in which the act whose declaration of illegality is requested was practiced, are thus irrelevant.

In the case at hand, the Tax Authority and Customs Authority, in the Inspection Report underlying the impugned assessment, decided to apply the general anti-abuse clause to the Claimant, for the following reasons, in summary:

a. On 19-05-2008, company G… LDA was transformed from a private company into a joint-stock company, allowing that in the alienation the capital gain obtained from the realization of stakes in capital of this company to company A… SGPS, regardless of the value assigned, remained excluded from taxation;

b. On 30-09-2009, the Claimant, an SGPS, was created, «in order that, through the alienation of stakes in capital of company G… to company A… SGPS SA, a debt to the capital holders would be created in the amount of € 7,100,000.00, guaranteeing their remuneration, without any taxation»;

c. «The instrumental use of company A… SGPS S.A., for the remuneration of capital holders through the receipt of dividends in the guise of payment of the price of shares».

According to what is stated in the Inspection Report, the Tax Authority and Customs Authority understands «in this specific case, the alterations did not occur that could motivate/justify the burden of transforming a private company into a joint-stock company, which are moreover pointed out by the taxpayer», occurring in 2008, which later allowed, in 2009, the alienation of shares without any taxation as capital gains.

Furthermore, the Tax Authority and Customs Authority understood that there is no business logic in the sale of the shareholdings to the Claimant «without a true corporate alteration, creating a debt that could prove to be an obstacle to a true business restructuring/reorganization, when other alternatives can be chosen, namely the exchange of shares», «benefiting from the regime of tax neutrality, provided for in article 73, no. 5 and no. 10 of the Corporate Income Tax Code».

The Tax Authority and Customs Authority further questions the high value of this transaction, when «the acquired entity and the acquiring entity have in common the same capital holders» and concluded that «this transaction aimed to artificially create a debt, which allows remuneration of capital holders up to the limit of €7,100,000.00, without any taxation».

The Tax Authority and Customs Authority further states, «in order to prove that this succession of transactions was directed to the elimination of taxation of the remuneration of capital holders», that «the capital holders only began to be remunerated, after the credit was constituted in company A… SGPS», that «there is a coincidence between the moment of receipt of dividends distributed by the subsidiaries to company A… SGPS and the subsequent payment to capital holders» and that «sometimes, to ensure remuneration to the shareholders, recourse is had to the deliberation of the distribution of anticipated dividends».

Thus, the Tax Authority and Customs Authority understood to make a correction which resulted in «by effect of the application of the anti-abuse norm, the amounts received, as payment of the debt, are considered capital income (Cat. E)», at «the moment in which its taxation should occur and the taxation of the dividends and advances on account of profits».

4. Questions of Statute of Limitations

The Claimant raises two questions of statute of limitations: one relative to the 2010 assessment; the other relative to the application of the general anti-abuse clause itself.

4.1. Statute of Limitations of the Right of Assessment for the Year 2010

The first question posed is that of the statute of limitations of the right of assessment as regards the assessment for the year 2010, which was carried out on 29-04-2015.

The Tax Authority and Customs Authority argues that «there is no statute of limitations as regards the application of the general anti-abuse clause», because «since the preparatory or instrumental acts do not give rise to the start of counting the statute of limitations period for assessment».

This argument of the Tax Authority and Customs Authority refers to the question of statute of limitations of the general anti-abuse clause and not to the question of statute of limitations of the right of assessment for the year 2010.

Article 45, no. 1, of the LGT establishes that «the right of assessment of taxes becomes statute-barred if the assessment is not validly notified to the taxpayer within a period of four years, when the law does not establish another».

Under no. 4 of the same article, the statute of limitations period is counted, in income taxes when taxation is carried out by withholding at source as final tax, from the beginning of the civil year following that in which the tax fact occurred.

This is the initial term of the statute of limitations period and not the practice of any acts.

On the other hand, «the statute of limitations period is suspended with the notification to the taxpayer, in accordance with the law, of the service order or directive at the beginning of the external inspection action, ceasing, however, this effect, with the statute of limitations period being counted from its beginning, if the duration of the external inspection has exceeded the period of six months after the notification» (article 46, no. 1, of the LGT).

No other cause of suspension of statute of limitations is verified.

According to the jurisprudence of the Supreme Administrative Court adopted in the judgment of 03-04-2013, Proceedings 0103/12, the statute of limitations period «is suspended with the notification to the taxpayer of the beginning of an external inspection action, but this suspensive effect ceases if it exceeds the period of six months counted from that notification» and «if the external inspection action is concluded before six months have elapsed, the suspensive effect of the statute of limitations period is maintained until notification to the taxpayer of the conclusion of the inspection procedure, through preparation of the final report».

The notification of the Inspection Report occurred on 23-12-2014, whereby the period of suspension of the statute of limitations is 155 days, between 21-07-2014 and 23-12-2014 (dates of beginning of inspection and notification of the Inspection Report).

Thus, the statute of limitations period for the right of assessment relative to the year 2010 ended on 03-06-2015, whereby, having the assessment been notified on 02-05-2015 [paragraph uu) of the matters of fact fixed], it must be concluded that it was carried out within the statute of limitations period.

Thus, the request for arbitral decision is unfounded as to this question of statute of limitations of the right of assessment relative to the year 2010.

4.2. Question of Statute of Limitations of the Right to Apply the General Anti-Abuse Clause

Article 63, no. 3 of the Tax Procedure and Process Code, in its original form, provided that the procedure for application of the general anti-abuse clause could only be opened "within three years after the carrying out of the act or entering into of the legal transaction subject to the application of the anti-abuse provisions".

In the wording introduced by Law No. 64-A/2008, of 31 December, which came into force on 1-1-2009, that article 63, no. 3, came to establish that the procedure for application of anti-abuse norms "may be opened within three years counting from the beginning of the civil year following that of the carrying out of the legal transaction subject to the anti-abuse provisions".

With the wording given to this article 63 by Law No. 64-B/2011, of 30 December, no special period was any longer provided for the beginning of the procedure for application of the general anti-abuse clause.

The Claimant argues, in summary, that

– «the opening of the inspection procedure of the legal-tax figure of the general anti-abuse clause, in view of the moment of carrying out the transaction or legal act underlying it»;

– that to the succession of wordings of those norms the regime of article 12, no. 3, of the LGT should be applied and that, in the case at hand, the Tax Authority and Customs Authority considered as acts underlying the application of the general anti-abuse clause the creation of the Claimant, on 22-06-2009, and the subsequent entering into of the contracts of purchase and sale of shares in G… SA, on 30-09-2009;

– that under the terms of articles 12, no. 3 and 55, both of the LGT, 63 no. 3 of the Tax Procedure and Process Code (at the time of the facts, acts and legal transactions under analysis, according to the configuration and framing given by the Tax Authority itself), as well as, the Principles of fiscal predictability and stability (article 1 and 103 of the Constitution) and principle of justice and security in the tax procedure (article 266 and 268 of the Constitution), the competent services of the Tax Authority and Customs Authority, should have raised and initiated the procedure for application of the general anti-abuse clause in the time period of three years, that is, up to the date of 22-06-2012 (registration in company A… SGPS, SA) or up to the date of 30-09-2012 (entering into of the contract of purchase and sale of shares);

– the competent services of the Tax Authority and Customs Authority, only initiated the inspection procedure for application of the general anti-abuse clause, on the date of 21-07-2014.

As results from the express contents of that no. 3 of article 63 of the Tax Procedure and Process Code, the period referred to in it is counted on the basis of the «carrying out of the legal transaction subject to the anti-abuse provisions» and not of the material acts subsequent to that necessary to ensure patrimonial advantage. Therefore, it does not have to do with this

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