Summary
Full Decision
ARBITRAL AWARD
The arbitrators Counsel Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. Cristina Aragão Seia and Prof. Doctor António Martins (arbitrator members), appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 02-12-2016, agree as follows:
1. Report
A… SGPS, SA, with the sole registration number in the Commercial Registry Office of Lisbon and legal entity identification number…, with registered office at Av…, no.…, … - … Lisbon (hereinafter referred to as "Claimant"), by virtue of the provisions of articles 2, no. 1, paragraph a) and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters - RJAT), filed a request for arbitral pronouncement, with a view to assessing the legality and annulment of the corporate income tax (IRC) assessment no. 2016…, relating to the financial year 2011 and the payment of compensatory interest.
The AUTHORITY FOR TAX AND CUSTOMS is the Respondent.
The petition for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 30-09-2016.
Pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the appointment within the applicable period.
On 16-11-2016 the parties were duly notified of this appointment, and did not manifest a will to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.
Thus, in accordance with the provision of paragraph c) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 02-12-2016.
The Tax and Customs Authority responded by arguing that the petition should be dismissed.
By order of 16-01-2017 a hearing was dispensed with and it was decided that the case proceed with written arguments.
The parties submitted arguments.
The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2, no. 1, paragraph a), and 10, no. 1, of Decree-Law no. 10/2011, of 20 January, and is competent.
The parties are duly represented, possess legal personality and capacity, are legitimate and are represented (articles 4 and 10, no. 2, of the same decree and article 1 of Ordinance no. 112-A/2011, of 22 March).
The case is not affected by any nullities and there are no exceptions or any obstacle to the assessment of the merits of the case.
The Claimant, however, argues that "the assessment of the present action should, therefore, insofar as this issue is concerned, be suspended until the assessment of the legality of the corrections made by the Tax Authorities for the financial year 2010 of the now Claimant is concluded", which is the subject of case no. 392/2016-T (Document no. 4, attached with the petition for arbitral pronouncement) which is pending.
It is necessary to address this question of suspension of proceedings beforehand.
2. Question of Suspension of Proceedings
The contested assessment relates to corporate income tax for the financial year 2011 and the Claimant has pending in another Arbitral Tribunal an action intended to assess the legality of the assessment relating to the financial year 2010.
The Claimant argues, in summary, as follows:
– in discussing whether the correction of the loss declared in a given financial year was or was not correct, one will necessarily be, or we would say moreover, above all, discussing whether such amount can or cannot be deducted from the taxable profit of the subsequent financial year;
– the question of the legality of corrections relating to the determination of tax losses in a given financial year or to the alteration of the deduction of tax losses in a given financial year following corrections to the taxable matter relating to that same financial year, constitute prejudicial questions in relation to the assessment of the legality of the tax acts of assessment of taxes relating to subsequent financial years;
– given the foregoing, the assessment of the present action should, therefore, insofar as this issue is concerned, be suspended until the assessment of the legality of the corrections made by the Tax Authorities to the financial year 2010 of the now Claimant is concluded.
The Claimant does not cite the legal basis for its request to suspend proceedings, but, in the absence of a special rule that provides for it, it can only be decided in the situations provided for in the Code of Civil Procedure (CPC), subsidiarily applicable by virtue of the provision of article 29, no. 1, paragraph e), of the RJAT.
Of the situations in which suspension of proceedings is permitted, provided for in articles 269 and following of the CPC, only article 272 is potentially applicable, which provides that "the court may order suspension when the decision of the case is dependent on the judgment of another already filed or when another justified reason occurs".
In the present case, it is not a question of assessing the overall legality of the corporate income tax assessment relating to the financial year 2011, but only of one of the corrections made, relating to the increase by the TA to the Claimant's taxable profit of the amount of € 1,734,780.59, relating to 50% of losses by changes in fair value recognised in results relating to financial assets held for sale.
In case no. 392/2016-T one or more illegalities of the corporate income tax assessment relating to the financial year 2010 will be assessed, which are not referred to in the present case.
As ALBERTO DOS REIS teaches, "whenever in an action one attacks an act or legal fact which is a necessary prerequisite of another action, that one is prejudicial in relation to the other". ( [1] )
The relation of prejudice reduces to dependence between procedural objects.
A cause is prejudicial in relation to another when in it the subject of assessment is a question whose resolution can alter a legal situation that must be considered for the decision of another case.
In situations of this type, "the judge of the subordinate case may normally be competent to decide the prejudicial case; but as this is filed and the judgment of it can destroy the raison d'être of the other case, suspension of the subordinate proceedings is considered reasonable". ( [2] )
The assessment of the question of the illegality of the correction is absolutely autonomous from any other, and therefore does not depend on the assessment of any other question to be assessed in any other proceeding.
For this reason, a relation of prejudice cannot occur between the case and the said case no. 392/2016-T.
On the other hand, as regards the effects of the decision to be handed down on the legality of the assessment relating to the financial year 2010 that may have repercussions on the assessment relating to the financial year 2011, this is a matter of execution of judgments, to which article 24, no. 1 of the RJAT refers.
In fact, in this no. 1 of this article 24 the duties arising for the Tax Administration from the success of any arbitral action are established, among which is included the general duty to "restore the situation that would have existed if the tax act subject of the arbitral decision had not been taken, adopting the necessary acts and operations for that purpose" [paragraph b)] and, specifically, "to review the tax acts that are in a relation of prejudice or dependence with the tax acts subject to the arbitral decision, namely because they fall within the scope of the same tax legal relationship, even if corresponding to distinct periodic obligations, altering or replacing them, wholly or partly" [paragraph c)].
The only enforcement problems that can arise from the fact that two assessments are contested and the decision on the legality of one can influence the other can only occur if in both cases decisions are handed down favourable to the Claimant.
As follows from the said no. 1 of article 24 of the RJAT, following an arbitral decision favourable to the Claimant that is to be handed down in case no. 392/2016-T, the Tax and Customs Authority will have to review the consequential acts, namely the assessment relating to the financial year 2011, if losses relating to the financial year 2010 should be considered in this assessment.
However, the possibility that the decision to be handed down in case no. 392/2016-T has as a consequence that losses that were not in it should be considered in the assessment relating to the financial year 2011 does not conflict with the enforcement of a possible favourable decision in the present case, because, in the reconstitution of the "situation that would have existed if the tax act subject of the arbitral decision had not been taken", referred to in no. 1 of article 24 of the RJAT, the "necessary acts and operations for that purpose" must be taken, which implies that, in the case of two decisions favourable to the Claimant, both must be considered.
For the foregoing, no legal basis is found to suspend proceedings, and therefore the request for suspension is denied.
3. Material Facts
3.1. Established Facts
Based on the elements in the case file and documents attached with the petition for arbitral pronouncement, the following facts are considered established:
a) The Claimant A… SGPS, SA was incorporated on 26-12-2008, with the purpose of managing shareholdings in other companies, as an indirect form of exercising economic activities;
b) The shareholders of the Claimant in the financial year 2011 were B…, SA, NIPC … with 51% of the share capital and C… SGPS, SA, NIPC … with the remaining 49% of the share capital;
c) On 31-12-2011, the Claimant held the following financial participations:
– D…, SA 100.00%
– E… (E…) 19.00%
– F… 0.68%
– G… 33.01%
– H… 19.50%
– I… 5.00%
d) In the Declaration Model 22, relating to 2011, the Claimant did not make any increase to its taxable profit, in Field 737 of Table 07, as a result of considering only 50% of other losses relating to equity interests or other components of equity, in accordance with article 45, no. 3 of the IRC Code;
e) The Claimant was subject to an external multi-purpose tax audit for the year 2011 carried out by the Finance Directorate of Lisbon, in compliance with Service Order no. OI2014…;
f) In that tax audit, corrections were made to the Claimant's taxable profit relating to the financial year 2011, one of which, in the amount of €1,734,780.59, relating to losses by reduction in fair value relating to equity interests that integrate the item "Financial Assets Held for Trading" (AFDN) which the Tax and Customs Authority considered deductible only in 50% of the respective value, by application of the provision of no. 3 of article 45 of the IRC Code;
g) In the Tax Audit Report drawn up in that tax audit, the content of which is reproduced, the following is mentioned, among other things:
III - 1. IRC
III-1.1 - Other losses relating to equity interests (no. 3 of art. 45 of the CIRC) € 1,734,780.59
From the analysis carried out on the tax return Declaration Model 22 for the year 2011, it was found that the taxpayer did not make any increase to taxable profit, in field 737 of table 07, relating to 50% of other losses relating to equity interests or other components of equity, in accordance with the final part of no. 3 of article 45 of the CIRC.
From the analysis of the inventory of securities and shareholdings of A…, drawn up in accordance with instruction no. 35/2005 of the Bank of Portugal, the existence of equity interests, classified as "financial assets held for trading" and "financial assets available for sale", was verified, however only non-compliance with this normative was detected regarding financial assets held for trading.
a) Financial assets held for trading
In accordance with the Report and Accounts attached to the Financial Statements on 31 December 2011, on page 6 (annex 4), A… contracted with Caixa Investment Bank the management of a portfolio of 100 million euros, with the investments made within the scope of that contract classified under the item Financial Assets Held for Trading. These investments are recorded at fair value and gains or losses from their valuation directly affect the result of the financial year, this being also the accounting policy provided for in note 2.1.1 of the Notes to the financial statements as of 31 December 2011.
After initial recognition, gains and losses generated by the subsequent measurement of fair value of assets and financial liabilities are reflected in the results of the financial year, in accordance with the accounting movement detailed below.
(...)
Variation of Adjustment of a Certain Security in Results
In conclusion, the fair value variation of a certain asset in the trading portfolio influences results through three types of accounting recognition of the value adjustment:
– Potential gains or losses (resident/non-resident);
- Realised gains or losses (resident/non-resident);
– Cancellation of gains when the portfolio for a certain security is fully liquidated.
Tax Treatment
At the tax level, the financial instruments in question (only equity interests) follow the rule established in paragraph a) of no. 9 of article 18 of the CIRC, which stipulates that adjustments arising from the application of fair value do not contribute to the formation of taxable profit, being assigned as income or expenses in the tax period in which the elements or rights that gave rise to them are sold, exercised, terminated or liquidated, except when they relate to financial instruments recognised at fair value through results, provided that, in the case of equity instruments, they have a price formed on a regulated market and the taxpayer does not hold, directly or indirectly, a shareholding in the capital exceeding 5% of the respective share capital.
That is, they only contribute to the determination of taxable profit because they are equity instruments that have a price formed on a regulated market and the taxpayer does not hold, directly or indirectly, a shareholding in the capital exceeding 5% of the respective share capital.
In this sense, it is important to note that from the analysis carried out, no equity interests were detected that did not have a price formed on a regulated market, nor that the taxpayer held a shareholding exceeding 5% of the share capital, from which it is concluded that the equity interests classified as "financial assets held for trading" meet the requirements established in paragraph a) of no. 9 of article 18 of the CIRC, thus contributing to the formation of taxable profit.
However, no. 3 of article 45 of the CIRC provides for a restriction on the deductibility of losses relating to equity interests, which contribute to the formation of taxable profit in only half their value, being included here both (i) the negative difference between realised gains and losses by onerous transmission of equity interests, including their redemption and amortisation with capital reduction, and (ii) other losses or negative patrimonial variations relating to equity interests or other components of equity, namely supplementary contributions.
In this way, all losses relating to equity interests are included in this rule, that is, both the negative difference between realised gains and losses, or whether it is other expenses/potential losses, such as, for example, expenses resulting from the application of fair value to equity instruments.
It should be noted that, with regard to this tax treatment, the following understanding was disclosed by the Tax Authority (case no. 39/2010 - Order of 2011-01-24 by the Director General):
"1. Article 18, no. 9, paragraph a) of the CIRC establishes that adjustments arising from the application of fair value contribute to the formation of taxable profit when they relate to financial instruments recognised at fair value through results, provided that, being equity instruments, they have a price formed on a regulated market and the taxpayer does not hold, directly or indirectly, a shareholding in the capital exceeding 5% of the respective share capital.
- Accountably and fiscally these adjustments resulting from the application of fair value are considered gains from increases in fair value or losses from reduction in fair value.
(...)
-
In case a loss is determined from reduction in fair value, article 45, no. 3 of the CIRC establishes that "...other losses... relating to equity interests, contribute to the formation of taxable profit in only half their value.
-
Being the reductions in fair value of these equity interests qualified as losses should be considered, in accordance with article 45, no. 3, of the CIRC in 50% of their value."
It should also be noted that this understanding was reiterated in information no. 1.706/12 of the Corporate Tax Directorate (case 2878/12 of 9 August) which received an assenting order from the deputy director general, as legal substitute for the Director General.
In light of the foregoing, and in order to comply with the provisions of no. 3 of article 45 of the CIRC, the taxpayer was requested to provide the necessary information (namely, the extracts from the gains and losses account previously referred to and the securities inventory file with details of fair value variations of the securities) to proceed with the determination of losses relevant for tax purposes, occurring in the financial year 2011, in equity interests.
(...)
Given the above, because the discipline provided for in paragraph a) of no. 9 of article 18 of the CIRC applies to it and the taxpayer did not proceed with any regularisation for the purposes of determining taxable profit, in compliance with the provision of no. 3 of article 45 of the CIRC, the respective correction is made in the amount of € 1,734,780.59, in accordance with the calculation in the schedule attached in annex 5, page 1/14.
h) Following the tax audit, corporate income tax assessment no. 2016 … and compensatory interest were issued, relating to the financial year 2011, in the total amount of € 1,470,322.5, in which, among others, the correction referred to was considered;
i) The Claimant filed a petition for arbitral pronouncement, relating to corrections to the taxable matter of corporate income tax for the financial year 2010, whose case has the number 392/2016-T (Document no. 4, attached with the petition for arbitral pronouncement, the content of which is reproduced), which is pending;
j) On 15-06-2016, the Claimant made the payment of the referred amount of € 1,470,322.51 (upper part of document no. 3 attached with the petition for arbitral pronouncement, the content of which is reproduced);
k) On 14-09-2016, the Claimant presented the petition for constitution of the arbitral tribunal that gave rise to the present case.
3.2. Unproven Facts
There are no facts relevant to the decision of the case that have not been proven.
3.3. Grounds for Determination of Material Facts
The established facts are based on the documents attached by the Claimant with the petition for arbitral pronouncement and with the Response.
4. Matter of Law
4.1. The Disputed Question
The Claimant is a shareholding management company that holds 100% of a credit institution (the financial leasing and factoring company D…, SA), and is therefore an entity subject to the supervision of the Bank of Portugal, as follows from articles 3, paragraph g), 11 and 117, no. 1, of the General Regime for Credit Institutions and Financial Companies (Decree-Law no. 298/92, of 31 December, in the wording resulting from the republication carried out by Decree-Law no. 1/2008, of 3 January), in force in 2011.
In a tax audit the Tax and Customs Authority made corrections to the Claimant's taxable profit relating to the financial year 2011, one of which, in the amount of € 1,734,780.59, relating to losses by reduction in fair value relating to equity interests that integrate the item "Financial Assets Held for Trading".
The Claimant considered these losses deductible from taxable profit in their entirety, while the Tax and Customs Authority considered them deductible only in 50% of their respective value, by application of the regime provided for in no. 3 of article 45 of the IRC Code, in force in the year 2011.
Only the legality of this correction is questioned in the present case.
Decree-Law no. 35/2005, of 17 February, transposed into the domestic legal order the Directive no. 2003/51/CE, of the European Parliament and of the Council, of 18 June, which amends Directives nos. 78/660/CEE, 83/349/CEE, 86/635/CEE and 91/674/CEE, of the Council, relating to the annual accounts and consolidated accounts of certain forms of companies, banks and other financial institutions and insurance companies, providing for the possibility of entities to which International Accounting Standards (IAS) do not apply opting for their application in accordance with Regulation (EC) no. 1606/2002, of the European Parliament and of the Council, of 19 July.
In its article 13, no. 1, paragraph a), Decree-Law no. 35/2005 conferred competence on the Bank of Portugal to define the subjective scope of application of International Accounting Standards, as well as the definition of accounting standards applicable to consolidated accounts, with respect to entities subject to its supervision, a regime that was maintained by article 5, no. 1, of Decree-Law no. 158/2009, of 13 July, which approved the Accounting Standards System (SNC).
By virtue of Notice of the Bank of Portugal no. 1/2005, published in the Official Gazette no. 41/2005, Series I-B of 28 February, the scope of application of International Accounting Standards (IAS) - International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) was defined, as well as the accounting standards applicable to the consolidated and individual accounts of entities subject to the supervision of the Bank of Portugal.
In no. 2 of this Notice no. 1/2005 it is stated that "without prejudice to the provisions of the following numbers, the institutions to which this notice applies must prepare financial statements on an individual and consolidated basis in accordance with international accounting standards (IAS), as adopted, at each moment, by regulation of the European Union and, as well, with the conceptual framework for the presentation and preparation of financial statements that frames those standards".
In addition to the regime provided for in the following numbers, the Bank of Portugal, in the exercise of its regulatory power, has issued notices and instructions that impose on entities subject to its supervision the application of Adjusted Accounting Standards (NCA), which generically correspond to International Accounting Standards (IAS) and Financial Reporting (IAS/IFRS), with the exceptions specially provided for.
In the case in question, it is not disputed between the parties that the Claimant was subject in 2011 to the application of the NCA resulting from the notices of the Bank of Portugal and the IAS.
As the Tax and Customs Authority correctly notes in its Response, and is referred to in the Tax Audit Report, the correction in question relates to amounts accounted for as "Financial Assets Held for Trading" (AFDN), relating to investments made within the contract concluded by the Claimant with J… for the management of a portfolio of 100 million euros, which were recorded at fair value and gains or losses from their valuation directly affected the result of the financial year.
This accounting classification is in line with the provision of IAS 39 which establishes, among other things, that "a financial asset or financial liability at fair value through profit or loss is a financial asset or a financial liability that meets any of the following conditions" among which is included that "it is classified as held for trading", considering that "a financial asset or a financial liability is classified as held for trading if it is: (i) acquired or incurred principally for the purpose of selling or repurchasing in the short term; (ii) part of a portfolio of financial instruments identified that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking".
Article 18, no. 9, of the CIRC, in the wording in force in 2011, establishes the rule that "adjustments arising from the application of fair value do not contribute to the formation of taxable profit, being assigned as income or expenses in the tax period in which the elements or rights that gave rise to them are sold, exercised, terminated or liquidated", but admits exceptions, in specially provided cases and, in general, when "they relate to financial instruments recognised at fair value through profit or loss, provided that, in the case of equity instruments, they have a price formed on a regulated market and the taxpayer does not hold, directly or indirectly, a shareholding in the capital exceeding 5% of the respective share capital".
In the case in question, it is an entity subject to the supervision of the Bank of Portugal, to which the specific regulation for these entities applies, but, in any case, it is not disputed by the parties, and should therefore be considered established, that the financial instruments in question are relevant to the formation of the Claimant's taxable profit, in accordance with article 23, no. 1, paragraph g), of the CIRC, which establishes that "expenses are considered to be those that are demonstrably indispensable for the realisation of income subject to tax or for the maintenance of the income-generating source, namely (...) expenses resulting from the application of fair value to financial instruments".
The essential disagreement between the parties is limited to the application of article 45, no. 3, of the CIRC (in force in 2011), summarised as follows:
– the Claimant understands that this no. of article 45 does not apply to adjustments arising from the application of fair value, and therefore they are relevant in their entirety as a negative component of taxable profit;
– the Tax and Customs Authority understands that this rule is applicable to those adjustments and therefore they contribute to the formation of taxable profit in only half their value.
4.2. Decision on the Question
The question of the application or not of article 45, no. 3, of the CIRC to adjustments arising from the application of fair value to financial instruments recognised through profit or loss, has been assessed in various arbitral decisions, following the judgment of 25-11-2013, handed down in case no. 108/2013-T, whose jurisprudence was followed, in essence, in the arbitral judgments of 09-06-2015 (case no. 58/2015-T), of 18-06-2015 (case no. 776/2014-T), of 25-09-2015 (case no. 208/2015-T), of 14-12-2015 (case no. 473/2015-T), of 17-06-2016 (case no. 738/2015-T) and of 14-12-2016 (case no. 393/2016-T).
The said article 45, no. 3, of the CIRC results from the renumbering of the former article 42, no. 3, carried out by Decree-Law 159/2009.
This no. 3 of article 42 in question was, in turn, introduced by Law 32-B/2002, of 30 December (State Budget for 2003), with the following wording:
"The negative difference between realised gains and losses by onerous transmission of equity interests, including their redemption and amortisation with capital reduction, contributes to the formation of taxable profit in only half its value."
Law 60-A/2005 of 30 December (State Budget for 2006) gave to the said no. 3 of article 42 the following wording:
"The negative difference between realised gains and losses by onerous transmission of equity interests, including their redemption and amortisation with capital reduction, as well as other losses or negative patrimonial variations relating to equity interests or other components of equity, namely supplementary contributions, contribute to the formation of taxable profit in only half their value".
At the time these rules were issued and until the entry into force of paragraph a) of no. 9 of article 18 of the CIRC, introduced by Decree-Law no. 159/2009, of 13 July, the fair value adjustments that were made in accounting were, in general, irrelevant to the formation of taxable profit ( [3] ), as article 21, no. 1, paragraph b), of the CIRC, established that they did not contribute to the formation of taxable profit "potential or latent gains, even if expressed in accounting, including revaluation reserves legally authorised". Only at the moment of realisation of the gain or loss did it become relevant.
As mentioned in the cited arbitral judgments, this tax framework, which centred on a single taxation (occurring only once during the entire period of holding the financial instruments), dependent on a voluntary action by the taxpayer (insofar as the transaction of the instruments generating the patrimonial variation, the condition for tax relevance thereof, would only occur if and when the taxpayer sold the assets) and in which the measurement of the patrimonial variation was fixed according to the specific transaction that triggered its tax relevance provided fertile ground for accounting and tax manipulation, since the taxpayer could choose to trigger the tax relevance at the moment and on the terms most fiscally advantageous to it.
On the other hand, and given the relevance of the taxpayer's will in the mechanism of tax relevance of patrimonial variation, the system established was well-suited to the adoption of mechanisms conditioning that will, in order to conform it to economically more desirable behaviours, which, in this case, pass through the preference for realising gains, over the realisation of losses.
It is in this context that the emergence of the rule of the former article 42, no. 3, of the CIRC, which precedes the current article 45, no. 3, of the same, is explained.
Such a rule, whether in its original wording, resulting from Law 32-B/2002, of 30 December, or in the wording given to it by Law 60-A/2005 of 30 December, is explained objectively and subjectively (that is, in view of the motivation expressed by the legislator) by needs linked to the fight against tax fraud and evasion and to the broadening of the tax base, directed at the desired consolidation of budgetary accounts.
In fact, in accordance with the Report of the Ministry of Finance for the State Budget of 2003 ( [4] ), the legislative intervention in the area in question (IRC) was guided by "two priorities, namely the fight against tax fraud and evasion and the broadening of the tax base" (page 33), with the alteration of interest here falling within the scope of "Broadening the tax base and moralization and neutrality measures" (page 53).
In the Report of the said Budget for 2006 ( [5] ) it is stated that the measure in question fell within the scope of "FIGHT AGAINST EVASION AND TAX FRAUD AND OTHER MEASURES DIRECTED AT BUDGETARY CONSOLIDATION" (page 31).
It is thus clear that, as concluded in the judgment of the Supreme Administrative Court of 17-02-2016, case no. 01401/14, "the rule, in any of its versions, integrates an anti-abuse measure, in so far as the legislator will have intended (in addition to the broadening of the tax base) to prevent the manipulation of fiscal results".
The limited acceptance of the application of the fair value model to financial instruments, which came to be regulated in general terms by Decree-Law 159/2009, of 13 July [and which, as has been said, already occurred before, from 01-01-2006, for entities subject to supervision of the Bank of Portugal, by virtue of the provision of articles 57, no. 2, paragraph a), and 59 of Law no. 53-A/2006, of 29 December], constitutes, in the part covered, a radically different model, both in terms of valuation and of tax relevance of the patrimonial variations relating to the holding of those instruments.
In this way, where previously we had a single tax relevance, upon the transaction of those instruments, we now have a continuous tax relevance. That is, in view of the new rules comprising the regime of tax relevance of the accounting by fair value of financial instruments, income or expenses resulting from the application of fair value to these now become directly relevant to the formation of taxable profit [article 20, no. 1, paragraph f), and article 23, no. 1, paragraph i), of the CIRC] of the same year in which they occur, provided that certain conditions are met, with patrimonial variations being accounted for as gains or losses [article 46, no. 1, paragraph b), of the CIRC].
In this framework, there are no longer any needs relating to the fight against tax fraud and evasion, both because the tax relevance of patrimonial variations no longer depends on an act of will by the taxpayer, and also because the measurement is objectively fixed.
On the other hand, and for the same reasons, any measure conditioning the taxpayer's will equally lacks sense, in order to favour economically more "desirable" behaviours and, as such, in line with the interests of broadening the tax base and budgetary consolidation.
Thus, it must be concluded, in the wake of the referred arbitral jurisprudence, that article 42, no. 3, of the CIRC (in the wording prior to Decree-Law no. 159/2009), which was not originally applicable to adjustments from fair value of financial instruments, did not come to encompass them as a corollary of the innovative relevance of these adjustments that came to be recognised by paragraph a) of no. 2 of article 57 of Law no. 53-A/2006, of 29 December (for entities subject to supervision of the Bank of Portugal), by paragraph a) of no. 2 of article 2 of Decree-Law no. 237/2008, of 15 December (for entities that are obligated to apply the Chart of Accounts for Insurance Companies, approved by the Portuguese Insurance Institute) and, in general, by the wording of the CIRC introduced by Decree-Law no. 159/2009.
In fact, if the raison d'être of the restriction on the relevance of losses and negative patrimonial variations provided for in article 42, no. 3, of the CIRC does not hold in relation to these adjustments, there is no foundation to conclude that the maintenance of the rule constitutes a manifestation of a legislative intent to unjustifiably expand its field of application.
For this reason, if the letter of article 42, no. 3, of the CIRC could be interpreted, literally, as encompassing these adjustments, it would have to be interpreted restrictively, as it would have to be concluded that the legislator had adopted a text that belied its intent, insofar as it said more than it intended to say. In situations of this type "the ratio legis will have a decisive word. The interpreter must not be carried away by the apparent reach of the text, but must restrict this in order to make it compatible with legislative thinking, that is, with that ratio. The argument on which this type of interpretation rests is usually expressed thus: cessante ratione legis cessat eius dispositio (where the raison d'être of the law ends, so does its reach)". ( [6] )
"The teleological method has been increasingly coming to the fore in relation to literal interpretation. According to the long-known principle: cessante ratione legis, cessat lex ipsa, the end and raison d'être should matter more than the literal meaning. The ratio should prevail, not only within the limits of often ambiguous literal wording, but also breaking the shackles of that literal wording or restricting a legal formula with too broad a reach". ( [7] )
In this way, and in obedience to the hermeneutic imperatives of article 9 of the Civil Code, according to which "interpretation must not confine itself to the letter of the law, but must reconstitute from the texts the legislative thinking, taking especially into account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied" (no. 1), and "in fixing the meaning and reach of the law, the interpreter will presume that the legislator consecrated the most accurate solutions and knew how to express its thinking in adequate terms." (no. 3), article 42, no. 3, of the CIRC (later, article 45, no. 3) is to be interpreted in the sense that its provision does not include expenses resulting from the application of fair value to financial instruments, which are relevant to the formation of taxable profit.
Beyond this decisive relevance of the ratio legis for delimiting the field of application of article 42, no. 3, of the CIRC (later, article 45, no. 3), there is not even textual support in the wording of the CIRC in force in 2011 for an interpretation in the sense of encompassing adjustments resulting from the application of fair value to financial instruments, as it refers to "losses or negative patrimonial variations relating to equity interests or other components of equity" and, in the terminology of the same Decree-Law no. 159/2009, with respect to decreases in value of financial instruments it is referred to, in paragraph i) of no. 1 of article 23 of the CIRC, as "expenses resulting from the application of fair value to financial instruments".
That is, if the legislator, upon the entry into force of Decree-Law 159/2009 of 13 December, intended to encompass the situations listed in article 18, no. 9, paragraph a), of the CIRC, within the scope of article 45, no. 3, of the same, it would have referred to such situations in paragraph i) of no. 1 of article 23, as "losses resulting from the application of fair value to financial instruments" and not as "expenses". ( [8] )
Furthermore, the interpretation here adopted is the one which clearly appears to be most correct (and, consequently, should be presumed to have been legislatively adopted, by virtue of the provision of no. 3 of article 9 of the Civil Code), as mentioned in the cited judgment of case no. 108/2013-T:
Already the regime resulting from the combination of articles 45, no. 3, and 46 of the CIRC, only makes sense in the perspective of the admissibility of the patrimonial variations in question under the prism of the said principle of realisation.
That is, being at issue, in the light of such principle, the measurement of patrimonial variation according to a transaction, there will always be a voluntary factor in relation to it.
That is, in the regime for which the rule of article 45, no. 3 was thought and instituted, the realisation of losses, and other situations listed was dependent on a voluntary action corresponding to their realisation. Now, in this framework, it will be understandable that the legislator institute mechanisms of disincentive to an action susceptible to being considered as undesirable, in this case the realisation of losses or other negative patrimonial variations. By providing that such situations will only be relevant in 50% of the amount accounted for, the tax legislator is, objectively, conditioning the actions covered by the legal provision, imposing a negative incentive to the same.
On the other hand, and being at issue financial instruments of value not objectively quantifiable, the disregard of 50% of the negative patrimonial variations verified would also have a function of "compensating for" the natural tendency of economic operators to, at the tax level, inflate losses.
However, those aspects will no longer be verified in the situations covered by article 18, no. 9, paragraph a). Here, being at issue adjustments resulting from accounting fair value, determined by objective criteria (with "a price formed on a regulated market"), there is no doubt or intervention of the taxpayer's will in the occurrence of the negative or positive patrimonial adjustment. That is, these will occur or not, regardless of the action and will of the taxpayer.
Now, penalising, in these cases, the taxpayer with a disregard of 50% of the expense incurred, would be altogether unjustified, both from an economic and legal point of view.
That is, it should be remembered, this situation of contingent (random, even) unjustified penalty would only occur by virtue of the exception of situations covered by article 18, no. 9, paragraph a), of the CIRC to the regime of the principle of realisation. That is, if with respect to these situations the general regime of the body of article 18, no. 9 applied, according to which the same would not contribute "to the formation of taxable profit, being assigned as income or expenses in the tax period in which the elements or rights that gave rise to them are sold, exercised, terminated or liquidated", the noted incoherence would not be verified, since the fact that would trigger the contribution to the formation of taxable profit would only occur by will of the taxpayer, and it would be up to the latter to choose to realise the negative patrimonial variation, with the consequent fiscal penalty, or to defer this to a time when it was less voluminous or even positive, reducing or eliminating the penalty resulting from the operation for itself and for the Public Treasury. It is the exception in paragraph a), by withdrawing the situations provided for therein from the scope of the principle of realisation, that justifies the new regime of relevance to taxable profit, which was instituted.
Evidence of all that has been said is presented in the schedule prepared below, which demonstrates the unreasonableness of applying the rule of article 45, no. 3, to the situations covered by article 18, no. 9, paragraph a):
| Year | Value of Financial Investment | Patrimonial Variation | Application of article 45/3 of the CIRC |
|---|---|---|---|
| 0 | Value of acquisition (V.A.) | 0 | 0 |
| 1 | V.A.+ 40 | + 40 | +40 |
| 2 | V.A.+ 20 | -20 | -10 |
| 3 | V.A | -20 | -10 |
| 4 | V.A.-40 | -40 | -20 |
| 5 | V.A. | +40 | +40 |
| 6 | V.A. -20 | -20 | -10 |
The non-application of the rule of article 45, no. 3, of the CIRC to expenses, and specifically to "Expenses resulting from the application of fair value to financial instruments", with full consideration of the patrimonial repercussions verified, whether positive or negative, leads to a coherence of taxation regardless of when the sale of the financial instrument occurs. That is, at whatever time it is chosen to proceed with the sale of the financial instrument, the positive and negative patrimonial changes offset one another, so that, ultimately, the taxpayer will have only increased or decreased its taxable profit by the difference between the acquisition value and the sale value.
Already if the rule of article 45, no. 3, of the CIRC were applied, as the Tax and Customs Authority wishes, from the moment in which a negative patrimonial change occurs, there will be a discrepancy between the fiscal relevance of negative and positive patrimonial variations, without any justification, as has been said, since those variations occur in an objective manner and independently of the action or will of the taxpayer. So, if at the end of the second year the taxpayer in the above example proceeded to realise the financial instrument in question, despite having realised a gain of only 20 (which would be taxed as such under the principle of realisation), would, in fact, have paid tax on 30 (40-10). Similarly, if that realisation were proceeded with at the end of the third year, would have paid tax on 20, despite not having had any patrimonial increase from the operation. And if that realisation were proceeded with at the end of the sixth year, would have paid tax as if there had been a patrimonial increase of 30 (80-50), despite having had an actual patrimonial variation of -20, which, under the principle of realisation enshrined in the CIRC, would be admissible, albeit in only 50% of the respective value (-10)!
It seems clear that such results, merely random and without any substantial justification that supports them, could not have been intended by a reasonable legislator, which, by the imperative of article 104, no. 2, of the CRP, must base the taxation of companies fundamentally on their actual income.
Thus, it must be concluded that situations in which its raison d'être does not hold must be excluded from the field of application of this article 45, no. 3, of the CIRC.
In fact, the obsolete principle that the Tax and Customs Authority invokes in article 66 of the Response ("where the law does not distinguish, it is not for the interpreter to do so") has long been surpassed.
"The old maxim that ubi lex non distinguit nec nos distinguere debemus, of very precarious value, only holds, as everyone knows, if and insofar as, in accordance with other elements of interpretation, there are no serious reasons for distinguishing (See, by all, PIRES DE LIMA and ANTUNES VARELA, Fundamental notions of civil law, 6th ed., reprint, I, Coimbra, 1973, pages 171 et seq., and MANUEL ANDRADE, Essay on the theory of interpretation of laws, and F. FERREIRA, Interpretation and application of laws, 3rd ed., 1978, page 149 – where it is categorically stated that "it is false, therefore, in its absoluteness, the saying: Ubi lex non distinguit, nec nobis distinguere licet"). ( [9] )
In the case in question, by all that has been referred, it is manifest that there are reasons to distinguish between situations in which patrimonial decreases depend on the will of the Taxpayer, from those that result directly from the imposition of the law, which leads to the conclusion that only in those was there place, in 2011, to the application of the regime of article 45, no. 3, of the CIRC.
Consequently, the correction made by the Tax and Customs Authority whose legality is questioned in the present case is affected by a defect of violation of law, by incorrect interpretation of article 45, no. 3, of the CIRC, and therefore its illegality may be declared.
5. Request for Total Annulment of the Assessment
The Claimant requests the total annulment of the contested assessment, but only imputes illegality to the correction in the amount of € 1,734,780.59, relating to the relevance of fair value adjustments.
Taxation acts are naturally divisible, being also legally so, and partial annulment being admissible when the ground for annulment applies only to part of the act. ( [10] )
In the case in question, illegality is only imputed to the contested assessment relating to the correction referred to, and therefore only in relation to the part of the assessment that has as a prerequisite the referred correction in the amount of € 1,734,780.59 is annulment justified, both of the IRC and of compensatory interest.
Thus, without prejudice to what may be decided in execution of the judgment, following the decision that may be handed down in case no. 392/2016-T, only in the part relating to that correction can the petition for arbitral pronouncement be judged to be well-founded.
6. Compensatory Interest
The Claimant paid the liquidated amount and requests compensatory interest.
In accordance with the provision of paragraph b) of article 24 of the RJAT, the arbitral decision on the merits of the request of which no appeal or challenge is available binds the Tax Administration from the end of the period provided for appeal or challenge, and this must, in the exact terms of the success of the arbitral decision in favour of the taxpayer and until the end of the period provided for spontaneous execution of sentences of the tax courts, "restore the situation that would have existed if the tax act subject of the arbitral decision had not been taken, adopting the necessary acts and operations for that purpose", which is in harmony with the provision of article 100 of the General Tax Law [applicable by virtue of the provision of paragraph a) of no. 1 of article 29 of the RJAT] which establishes that "the tax administration is obligated, in case of total or partial success of a claim, judicial challenge or appeal in favour of the taxpayer, to the immediate and full restoration of the legality of the act or situation subject to the dispute, comprising the payment of compensatory interest, if applicable, from the end of the period of execution of the decision".
Although article 2, no. 1, paragraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral courts that function in the CAAD, making no reference to condemnatory decisions, it should be understood that their competences include the powers that in judicial challenge proceedings are attributed to the tax courts, and this is the interpretation that is in harmony with the meaning of the legislative authorisation on which the Government based itself to approve the RJAT, in which it is proclaimed, as the first guideline, that "the tax arbitral process must constitute an alternative procedural means to the process of judicial challenge and to the action for recognition of a right or legitimate interest in tax matters".
The judicial challenge process, despite being essentially a process of annulment of tax acts, admits condemnation of the Tax Administration to payment of compensatory interest, as is inferred from article 43, no. 1, of the General Tax Law, which establishes that "compensatory interest is due when it is determined, in a gracious claim or judicial challenge, that there was an error attributable to the services from which it results that the tax debt is paid in an amount greater than legally due" and from article 61, no. 4 of the Code of Tax Procedure and Process (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original wording), that "if the decision that recognised the right to compensatory interest is judicial, the period for payment is counted from the beginning of the period of its spontaneous execution".
Thus, no. 5 of article 24 of the RJAT, in saying that "payment of interest is due, regardless of its nature, under the terms provided in the general tax law and in the Code of Tax Procedure and Process", should be understood as permitting recognition of the right to compensatory interest in the arbitral process.
In the case in question, it is manifest that, following the illegality of the assessment act, compensatory interest is due, as the assessment is attributable to the Tax Administration, which, on its own initiative, performed it without legal support.
Consequently, the Claimant is entitled to compensatory interest, in accordance with articles 24, no. 5, of the RJAT, 43, no. 1, of the General Tax Law and 61 of the Code of Tax Procedure and Process, to be determined by the Tax and Customs Authority in execution of the present judgment, following what may also be decided in case no. 392/2016-T.
7. Decision
In these terms, this Arbitral Tribunal agrees on:
a) To deny the request for suspension of proceedings;
b) To judge the petition for arbitral pronouncement well-founded in the part in which it has as a prerequisite the correction in the amount of € 1,734,780.59, relating to fair value adjustments;
c) To annul the assessment of corporate income tax and compensatory interest no. 2016…, relating to the period 2011 in the part corresponding to the correction in the amount of €1,734,780.59, relating to the relevance of fair value adjustments;
d) To judge the petition for arbitral pronouncement not well-founded as to the part of the said assessment of corporate income tax and compensatory interest that has as a prerequisite other corrections, without prejudice to what may be decided in execution of the arbitral decision that may be handed down in case no. 392/2016-T;
e) To condemn the Tax and Customs Authority to pay to the Claimant compensatory interest, in accordance with articles 24, no. 5, of the RJAT, 43, no. 1, of the General Tax Law and 61 of the Code of Tax Procedure and Process, to be determined in execution of the judgment.
6. Value of the Case
In accordance with the provision of article 306, no. 2, of the Code of Civil Procedure and 97-A, no. 1, paragraph a), of the Code of Tax Procedure and Process and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 1,470,322.51.
7. Costs
Pursuant to article 22, no. 4, of the RJAT, the amount of costs is fixed at € 19,584.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent.
Lisbon, 08-03-2017
The Arbitrators
(Jorge Manuel Lopes de Sousa)
(Cristina Aragão Seia)
(António Martins)
[1] Commentary on the Code of Civil Procedure, volume 3, 1946, page 206.
[2] ALBERTO DOS REIS, Commentary on the Code of Civil Procedure, volume 3, 1946, page 268.
[3] However, for entities subject to supervision of the Bank of Portugal, by virtue of the provision of articles 57, no. 2, paragraph a) and 59 of Law no. 53-A/2006, of 29 December, a regime identical to that provided for in that article 18, no. 9, paragraph a), which was established in the following terms, was already applicable from 01-01-2006:
2 - Until the necessary adaptations to the IAS are introduced in the IRC Code, entities subject to supervision of the Bank of Portugal that are obligated to prepare their individual accounts in accordance with adjusted accounting standards (NCA) must observe the rules established in that code and complementary legislation for the calculation of taxable profit, with the following adaptations:
a) Fair value variations of financial instruments classified as "financial assets or liabilities at fair value through profit or loss" contribute to the formation of taxable profit, except when they relate to equity interests exceeding 5% of share capital or equity instruments not admitted to trading on a regulated market;
An identical regime was introduced by paragraph a) of no. 2 of article 2 of Decree-Law no. 237/2008, of 15 December, for entities that are obligated to apply the Chart of Accounts for Insurance Companies, approved by the Portuguese Insurance Institute).
Different from the fiscal relevance of fair value adjustments of accounting relating to financial instruments was the relevance that could arise from the constitution of provisions for losses on investments, in accordance with article 35-A, no. 3, of the CIRC, added by Law no. 53-A/2006, of 29 December, which is not the case in the present proceedings.
[4] Available at:
[5] Available at
[6] BAPTISTA MACHADO, Introduction to Law and to Legitimating Discourse, page 186.
[7] KARL ENGISCH, Introduction to Legal Thinking, page 120.
[8] Regarding the lack of textual support in article 45, no. 3, of the CIRC for encompassing adjustments of the application of fair value to financial instruments, reference is made to the grounds of the arbitral judgment handed down in case no. 108/2013-T, available at https://caad.org.pt/tributario/decisoes/, which was extensively cited in the judgment of the Supreme Administrative Court of 17-02-2016, handed down in case no. 01401/14.
It is true that, already after that arbitral judgment was handed down, Law no. 2/2014, of 16 January, in harmony with the SNC, came to make reference to "losses from reductions in fair value of financial instruments", in the new paragraph j) of no. 2 of article 23 of the CIRC, while eliminating no. 3 of article 45.
However, in addition to the new wording not being applicable to the financial year 2011 and the literal content being an interpretative element of secondary nature, the designation of "losses" is considered appropriate by accounting doctrine to reference decreases in economic benefits that have a nature peripheral to the normal or regular activity of an entity, which is not the case of fair value adjustments to financial instruments, held by a SGPS in the financial sector (on this point, reference is made to the grounds of the arbitral judgment of 17-06-2016, handed down in case no. 738/2015-T).
[9] ANTUNES VARELA, Journal of Legislation and Jurisprudence, year 124, page 39.
In the same line, emphasising the very limited value and giving it no more weight than should not distinguish if there are no reasons, founded in the system constituted, to conclude for the application of different regimes can be seen the same Author in Journal of Legislation and Jurisprudence, year 123, page 30.
[10] In this sense, can be seen the judgment of the Supreme Administrative Court of 28-10-1998, handed down in case no. 022603, published in Appendix to the Official Gazette of 06-04-2001, page 351.
In the same sense, can be seen the judgments of the Supreme Administrative Court of 12-1-2012, case no. 0965/10, of 12-2-2015, case no. 0716/14, and of 18-11-2015, case no. 0699/15.
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