CAAD Case 571/2014-T: IRC Revenue Omission Corrections for 2008-2009 Tax Years

CAAD – Tax Arbitration

Case No. 571/2014-T

Subject: Omission of Income in the Fiscal Years 2008 and 2009

ARBITRAL DECISION

The arbitrators Jorge Lopes de Sousa (Arbitrator President), Ana Maria Rodrigues and José Pedroso de Melo, appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, agree on the following:

I. REPORT

On 29 July 2014, A... - COMMERCE AND INDUSTRY OF FOOD PRODUCTS, S.A. (hereinafter referred to as "A..." or "Claimant"), VAT No. ..., with headquarters in ..., ..., ..., filed a request for constitution of a collective arbitral tribunal, pursuant to the joint provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Tax Arbitration, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality and consequent annulment of the tax acts establishing additional assessments of Corporate Income Tax (IRC) for the fiscal years 2008 and 2009. This request is based on additional assessment No. 2013 ..., of 19 April 2013, as well as the respective account adjustment statement 2013 ..., of 22 April 2013 and the IRC assessment statement No. 2013 ..., of 19 April 2013, and the respective account adjustment statement No. 2013 ..., of 29 April 2013, in cumulation of requests, in a total amount of €275,068.71, referring to €177,790.40 of tax (IRC) and interest relating to 2008 and €97,278.31 of tax (IRC) and interest relating to 2009, on the grounds of a defect of violation of law, with AT – Tax and Customs Authority (hereinafter, Respondent or AT) being the party against which it is directed.

The present request for arbitral decision was preceded by the decision to reject the Amicable Claim by the Respondent, notified to the Claimant on 2 May 2014. The Amicable Claim was filed by the now Claimant on 9 August 2013 with the Finance Directorate of ..., and challenged the assessments previously identified. These were the result of an external inspection action of partial scope, relating to the procedures adopted in determining the IRC, within the scope of Service Orders No. OI2012... and No. OI2012..., of 1 August 2012. This inspection focused on the financial statements of the Claimant relating to the fiscal years 2008 and 2009, of partial scope, relating to the procedures adopted in determining IRC. Such corrections resulted in corrections to taxable income of €576,770.02 for the fiscal year 2008, and €307,000.02 for the fiscal year 2009, which led to assessment notes in a total amount of €275,068.71 (€177,790.40 relating to 2008 and €97,278.31 relating to 2009).

Because the Claimant accepted part of the corrections made in the context of the corrections promoted by the Tax Inspection of the Finance Directorate of ... within the scope of the inspection action, namely, those relating to the amortization of goodwill ("non-accepted amortizations"), in the amounts of €13,771.47 in 2008, and €13,771.47 in 2009, as well as tax shortfall in 2008, resulting from autonomous taxation relating to travel allowances, in the amount of €1,986.06, and also compensatory interest in 2009, in the amount of €7,789.32, the Claimant proceeded to regularize the tax shortfall resulting from these corrections. Thus, these facts are not challenged in this proceeding.

Therefore, from the corrections made by the Tax Inspection Services, only the amounts of €562,998.81 and €293,228.55 are challenged in the request for arbitral decision, relating to interest on loans, and which correspond to income omitted in 2008 and 2009, respectively.

These corrections, which are not accepted by the Claimant, relate to the omission of income corresponding to the remuneration of financing granted through the assignment of credits with onerous character in 2004, in the amount of €11,729,141.85. The AT understands that the Claimant will have omitted income in prior periods, associated with the remuneration of the credit resulting from the assignment by the Claimant to A... SGPS, S.A. ("A... SGPS"), of loans on various Group Companies.

The claimant seeks the respective annulment of the assessments referred to previously, and, consequently imputes, for this purpose, various defects to the respective assessments.

The Claimant attached 26 (twenty-six) documents and did not list any witnesses.

In essence and in brief summary, the Claimant alleged the following:

The Claimant was subject to an external inspection action, carried out by the Tax Inspection Services of the Finance Directorate of ..., which had as its objective, according to what is set out in the respective Tax Inspection Report, to analyze the financial statements for the periods of 2008 and 2009. According to the Tax Authority, the Claimant will have omitted income in prior periods, associated with the remuneration of the credit resulting from the assignment by the Claimant to A... SGPS, S.A. ("A... SGPS"), of loans on various Group Companies.

According to the Claimant, the correction in question was based on the assumption made by the AT, that the now Claimant will have omitted in the fiscal years 2008 and 2009, the income corresponding to the remuneration of the asset generated in the financial statements of A..., S.A. (interest), following the credit assignment agreement concluded in fiscal year 2004, between this company and A..., SGPS. These corrections to taxable income, which comprise omitted income, in the amounts of €562,998.81 in 2008 and €293,228.55 in 2009.

According to the Claimant, the interest on this agreement was, however, recorded in fiscal year 2012, in the amount of €2,463,120.00.

For this reason, the Claimant understands that, if the correction in question were to be accepted, one would be faced with a situation of double taxation.

Therefore, the Claimant understands that it cannot but disagree with the position adopted by the Tax Inspection services.

According to the Tax Inspection services, due to the onerous character of the credit assignment agreement concluded between A... and A... SGPS, the determination of these interest payments should have occurred from the moment of its conclusion, in the year 2004, and until the moment when the full amount owed was paid.

In this context, the interest accrued annually should have been calculated and recognized in the financial statements of the Claimant, from the year in which said assignment occurred, i.e., 2004.

The Tax Inspection services state that the annual interest corresponding to the remuneration of the financing in question should have been recorded and, as such, subject to IRC taxation, and therefore understands that the Claimant should have recognized the interest on such loans in the fiscal years 2008 and 2009. However, the taxpayer's accounting records did not show in the years in question income from interest related to the financing in question.

The correction in question is based on the assumption that the now Claimant will have omitted in the fiscal years 2008 and 2009 the income corresponding to the remuneration of the asset generated in the financial statements of A..., following the credit assignment agreement concluded in fiscal year 2004 between this company and A... SGPS.

Taking into account that the Claimant accepted some of the corrections suggested in the Inspection Report, the AT proposes that the value of the action be €266,459.98 (year 2008: €173,545.40; year 2009: €92,914.58), because the Claimant only challenges the assessment acts partially.

The Claimant did not exercise the right to prior hearing on the Inspection Report Project, so the proposed corrections were entirely maintained in the Final Tax Inspection Report ("Inspection Report"), of which the Claimant was notified on 20 March 2013.

On 23 April 2013, the Claimant was notified of the IRC assessment statement for the fiscal year 2008, having been notified of the IRC assessment statement for fiscal year 2009 on 1 May 2013, which are identified above and reflect the corrections resulting from the inspection action carried out.

The AT understood that A... S.A. did not record income relating to interest on a credit assignment agreement relating to a credit/loan assignment operation, a situation that has persisted over time, since the performance of that operation, which occurred in 2004.

The Claimant bases its request for constitution of an arbitral tribunal on the following grounds:

"The Tax Inspection services promoted a correction in the amounts of €562,998.81 and €293,228.55 relating, respectively, to 2008 and 2009, which results from the income that the Claimant allegedly should have recognized in those fiscal years, associated with the credit resulting from the assignment to A... SGPS, S.A. ("A... SGPS"), by the Claimant, of loans on various Group Companies.

According to the Tax Inspection services, due to the onerous character of the credit assignment agreement concluded between the Claimant and A... SGPS, the determination of these interest payments should have occurred from the moment of its conclusion, in the year 2004, and until the moment when the full amount owed was paid and, in this context, the interest accrued annually should have been calculated and recognized in the financial statements of the Claimant, from the year in which said assignment occurred, i.e., 2004, until the moment when it came to be paid.

Thus, the annulment of the corrections was proposed, which resulted in an assessment in the total amount of €275,068.71 (€177,790.40 relating to 2008 and €97,278.31 relating to 2009), because parts of these values were regularized by the Claimant, as mentioned above, so that the total value of the assessments is now €266,459.98, of which €173,545.40 relate to 2008 and €92,914.58 relating to 2009.

For disagreeing with this understanding, which it considers illegal, unfounded and sustained in error of fact and law, the Claimant comes to request the declaration of illegality of the assessment acts in question and the consequent annulments of the IRC assessment, by understanding that it will not have omitted income in the periods of 2008 and 2009, associated with the credit resulting from the assignment to A... SGPS, S.A., by the now Claimant, of loans on various Group Companies and, consequently, the restitution of interest improperly collected, plus compensation for guarantees improperly granted, under the terms of Article 53 of the General Tax Law ("LGT").

In fiscal year 2012, the Claimant proceeded to record the said interest, in the total amount of €2,463,120 (as per the trial balance and respective account statement attached as Doc. 17 to the Petition).

The Claimant considers that, due to the fact previously invoked, the present assessments in question represent a clear case of double taxation, illegal under Articles 204 and 205 of the CPPT and unconstitutional, the assessments motivated by the Tax Inspection services lack legitimacy and legal foundation.

The request for constitution of the arbitral tribunal was accepted and automatically notified to the AT on 30 July 2014.

The Claimants did not make the appointment of an arbitrator, so, pursuant to the provisions of subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of the RJAT, the President of the Deontological Council of CAAD appointed as arbitrators of the collective arbitral tribunal Counselor Jorge Lino Alves de Sousa (arbitrator president), Prof. Dr. Ana Maria Rodrigues and Dr. José Pedroso de Melo (arbitrators members), who communicated their acceptance of the appointment within the applicable period.

On 16 September 2014, the parties were duly notified of this appointment, having not manifested their intention to refuse the appointment of the arbitrators, under the joint terms of Article 11, paragraph 1, subparagraphs a) and b) of the RJAT and Articles 6 and 7 of the Deontological Code of CAAD.

Thus, in accordance with the provision of subparagraph c) of paragraph 1 of Article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 1 October 2014.

On 5 November 2014, the Respondent, duly notified for this purpose, filed its Response in which it specifically challenges the arguments raised by the Claimant and concludes that the present action is unfounded, with its consequent dismissal of the request. The Respondent attached to the proceedings the respective administrative file (hereinafter, abbreviated as PA), without attaching any documents, nor having listed any witness.

In essence and also in brief manner, it is important to extract the most relevant arguments on which the Respondent based its defense:

On 13 December 2004, A... carried out a merger/spin-off process, through which it incorporated the companies A... - Services Provision Company, S.A. and B... – Group ..., Lda., through the global transfer of the assets of these companies, with the consequent extinction.

As a result of this transfer to A..., as the incorporating company, of the active and passive elements that made up the assets of A..., loans in the amount of €11,729,141.85 were transferred to the now claimant.

On 30 December 2004, an agreement was concluded between A... SA and A... SGPS, denominated by the parties as a credit assignment, whereby the first transferred to the second, the above-mentioned loans incorporated in its assets, in the amount of €11,729,141.85.

In accordance with the intention of the parties also expressed in the agreement in question, it was further established that the assignment of the loans had an onerous character, accruing interest.

And what the now claimant designated as a "grace period" was provided, which means that it was stipulated in the agreement that the remuneration of the capital be subordinated to the occurrence of one of the following two facts (whichever occurred first):

a) "Distribution of dividends by the subsidiaries in an amount equal to or greater than the value of the financing initially granted by A... S.A." (that is, in an amount greater than €11,729,141.85).

b) "Determination by A... SGPS of a "return on equity" ratio (hereinafter designated as "ROE") equal to or greater than 7.5%.

Thus, the payment of interest was conditioned to conditions of a financial nature of SGPS, being subordinated to conditions only controllable by it.

With regard to the rate of such interest, it was specified in the agreement that it would be defined on the date of verification of the conditions referred to above, "within the full competition interval, considering financings with identical level of risk and grace period".

Furthermore, the rate would be determined in accordance with transfer pricing rules, by reference to similar operations practiced by unrelated entities in which a similar grace period had been granted.

It was, therefore, an onerous agreement, a remunerated financing under conditions similar to those practiced in the market.

And that remuneration was contractually provided from the granting of the financing, that is, from 1 January 2005, since the agreement was concluded on 30 December 2004.

The terms and conditions underlying the financing in question respect transfer pricing rules, since the operation was carried out between related entities, for the purposes of the provision in Article 58 of the IRC Code (currently Article 63).

Given the constraints of the activity of A... SGPS associated with the economic downturn and the company's lack of capacity to generate cash flow, the financing agreement was successively and automatically renewed, given that none of the planned events occurred, so that the taxpayer's accounting did not show in the years 2008 and 2009 now in question, income related to financial income from interest related to the financing in question, because in these years the now claimant did not determine the interest corresponding to the remuneration of the financing in question.

The Respondent concludes that the assessment acts challenged by the now Claimant do not suffer from any illegality.

As there were no matters susceptible to discussion at the meeting referred to in Article 18 of the RJAT, the Arbitral Tribunal, by order issued by its President on 3 October 2014, dispensed with holding that same meeting. The Tribunal considered that the proceeding already contained all the factual elements for the solution of Law.

The Arbitral Tribunal dispensed with the presentation of any pleadings by the parties.

No written pleadings were produced, although an exception of untimeliness was raised.

The Tribunal understood that this same exception does not hold, because the request was filed within the period of 90 days counted from the notification of the rejection of the amicable claim. The parties thus maintained the positions assumed in the written documents (Petition/Response and defense/response).

By order of the President of the Deontological Council of CAAD, issued on 4 February 2015, the replacement of the arbitrator president of this collective Arbitral Tribunal, Counselor Jorge Lino Alves de Sousa, by Counselor Jorge Lopes de Sousa was determined, because he was unable, for reasons of health, to properly exercise his respective functions.

II. SCREENING

The Arbitral Tribunal was regularly constituted and is materially competent.

The proceeding does not suffer from any defects.

The parties have legal personality and capacity, are duly represented and have standing.

The Tax and Customs Authority raises the exception of untimeliness, which must be assessed as a priority.

II.1. Question of the untimeliness of the request for arbitral decision

The Tax and Customs Authority states that the Claimant indicates as the object of the request for arbitral decision the IRC assessment acts and the deadline for voluntary payment occurred on 19-06-2013 (2008) and 26-06-2013 (2009), so the filing of the request for arbitral decision on 29-07-2014 would be untimely.

As clearly results from the reference in Article 10, paragraph 1, of the RJAT, in cases where there is an amicable claim and hierarchical appeal, the period for presenting a request for arbitral decision is counted from the notification of the decision thereon.

And, as results from the competence attributed to the arbitral tribunals that function in CAAD to assess the legality of assessment acts, and not of decisions rejecting hierarchical appeals or amicable claims, when there is administrative challenge of assessment acts, these assessment acts are always challengeable within a period counted from the notification of the decision rejecting these acts of second or third degree, because Article 10, paragraph 1, indicates them as initial terms. For this reason, the party requesting arbitration does not have to challenge the acts of second or third degree and, even when challenging these, the object of the arbitral proceeding is always considered to be the mediate object that constitutes the assessment acts maintained by acts of second or third degree whenever the Claimant does not impute their own defects to these. But, obviously, if the party requesting arbitration only intends to have the illegality of assessment acts declared, which are the ones that, being susceptible to coercive execution, affect its legal sphere, does not have to challenge the acts of second or third degree, which lack autonomous injuriousness.

Moreover, a hypothetical deficiency in the formulation of the request would not have as a corollary the dismissal of the case, only giving rise, if necessary, but whenever necessary, to a correction, as required by subparagraph c) of paragraph 1 of Article 18 of the RJAT, in harmony with the constitutional right to contention challenge of all acts of the Administration that injure the rights of taxpayers (Articles 20, paragraph 1, and 268, paragraph 4, of the CRP).

In the case in question, the decision rejecting the amicable claim was rendered by order of 24-04-2014, notified to the Claimant on 02-05-2014 (document No. 8 attached with the request for arbitral decision, whose content is reproduced).

The request for arbitral decision was filed on 29-07-2014, within the period of 90 days provided in Article 10, paragraph 1, subparagraph a), of the RJAT.

For this reason, the filing of the request for arbitral decision was timely.

Thus, the exception raised by the Tax and Customs Authority does not hold.

III. REASONING

III.1. PROVEN FACTS

With respect to the material facts, it is important, first of all, to point out that the Tribunal does not have to rule on everything that was alleged by the parties, but rather it has the duty to select the facts that matter for the decision and discriminate the proven facts from the unproven ones (cf. Article 123, paragraph 2, of the CPPT and Article 607, paragraphs 3 and 4, of the CPC, applicable ex vi Article 29, paragraph 1, subparagraphs a) and e), of the RJAT). In this way, the facts relevant to the judgment of the case are chosen and defined according to their legal relevance, which is established in light of the various plausible solutions of the legal question(s).

Within this framework, taking into account, in particular, the positions assumed by the parties, the documentary evidence produced and the PA attached to the proceedings, the following facts with relevance for the decision are considered proven:

1. The Claimant initiated its restructuring process in the year 2004. Within the scope of that process, on 13 December 2004, A... carried out a merger/spin-off process, through which it incorporated the companies A... - Services Provision Company, S.A. and B... – Group ..., Lda., through the global transfer of the assets of these companies, with the consequent extinction (Article 34 et seq. of the Petition and Article 39 of the Response).

2. Within the scope of the mentioned business restructuring, some parts of its assets were separated/spun off from A..., S.A., which were incorporated in the companies A... Real Estate, Lda. and A..., SGPS (cf. Article 36 of the Petition and Articles 43 et seq. of the Response).

3. The spin-off/merger was carried out through the separation of the assets constituted by shareholdings, owned by A..., S.A., a part of which was merged in the company A..., SGPS (cf. Articles 4 and 5 of the Petition, Article 43 of the Response; Document 3);

4. The said operation aimed at the reorganization of shareholdings, with the constitution of a structured group led by an SGPS, responsible for the management of the Group's shareholdings and the relationship thereof with financial institutions (pp. 75 of the PA, Article 44 of the Response and Article 40 of the Petition).

5. From these operations resulted the constitution of A... SGPS, as well as the implementation of the following operations:

"- Contributions in kind, for the realization of the capital of A... SGPS, through the delivery by the shareholders of shareholdings in A... SA (exchange of shares) in 2004 and 2005.

Merger by incorporation of companies A... - Services Provision Company, S.A. and ... – Group ..., Lda., in A..., S.A., in 2004.

Spin-off/merger of part of the assets of A..., S.A. to companies A... Real Estate, S.A. and A... SGPS, in the year 2004."

1. As a result of that transfer to A..., as the incorporating company, of the active and passive elements that made up the assets of A..., loans in the amount of €11,729,141.85 were transferred to the now claimant (Article 46 of the Response and Annex 9 of the Inspection Report attached to the PA).

2. On 30 December 2004, an agreement was concluded between A..., S.A. (Claimant) and A... SGPS, denominated by the parties as a credit assignment, whereby the first transferred to the second, the above-mentioned loans on various group companies and incorporated in its assets, which had been transferred to it as a result of the merger by incorporation of A..., at their respective nominal value, in the amount of €11,729,141.85 (Article 46 of the Response and Article 44 of the Petition and Annex 9 to the inspection report, attached to the PA).

3. Since A... SGPS did not have financial means to complete the payment of this loan, it remained a debtor of that amount to A....

4. It recorded the loans in the amount of €11,729,141.85, which it recorded in the account "2571 – Loans" (cf. p. 70 of the PA; and Article 41 of the Response).

5. The companies owing the loans in question are evidenced in the sub-accounts of account "25 – Shareholders" of the firm A... SGPS, S.A., of the year 2004 – cf. page of Annex 9 to the Inspection Report, attached to the PA.

6. The taxpayer explained, within the scope of the inspection action, the reason for the conclusion of the agreement sub judice:

"(...) given that A..., SGPS held majority stakes in the debtor entities (with the acquisition of the totality of these stakes from A..., S.A. being already under consideration in 2004 - which came to occur in the following year, 2005) it was considered that A..., SGPS would be the entity best qualified to manage intra-group financings, as well as the centralization of treasury management of the entities that compose it.

In fact, "being A..., S.A. an operational entity not vocational for a management activity, it would be inefficient from an organizational point of view that it would manage the payment of the financings granted (...). A... SGPS, for its part, possessed the structure, know-how and vocation to administer the financings" (cf. and email from the taxpayer, p. 75 of the PA).

1. Or, still in accordance with the information provided by the taxpayer in the course of the inspection procedure, for having been understood "that it would be more efficient that the SGPS company would manage the credits", "A... assigned the credits on the subsidiaries to A..., SGPS" (Cf. and email from the taxpayer and p. 74 of the PA).

2. In that so-called "credit assignment agreement", it was stipulated that A..., S.A. assigned to A..., SGPS the credit of €11,729,141.85 (p. 71 of the PA).

3. "To support this operation", "A... and A..., SGPS concluded a financing agreement", this given the "cash flow deficiencies of SGPS" "and "the fact that it had been recently incorporated" – cf. email from the taxpayer contained in p. 74 of the PA.

4. Under the terms of the credit assignment agreement, and considering the fact that, at the date, A... SGPS was a recently incorporated company, a grace period was established for the accrual of interest on said loan, so that A... SGPS would acquire financial robustness to allow it to support these charges.

5. It was contractually established that the accrual of interest would be subordinated to the occurrence of the following events:

a) "Distribution of dividends by the subsidiaries in an amount equal to or greater than the value of the financing initially granted by A... S.A." (that is, in an amount greater than €11,729,141.85).

b) "Determination by A... SGPS of a "return on equity" ratio (hereinafter designated as "ROE") equal to or greater than 7.5%.

1. Thus, with respect to the price to be paid by the assignee, it was determined that it would correspond to the value of the loans assigned (that is, €11,729,141.85), an amount that would be paid in a single installment, to be made on 31 December 2005, provided, however, that such deadline would be automatically extended for periods of one year.

2. Since A... SGPS did not have financial means to complete the payment of this asset, it remained a debtor of that amount to A....

3. It was the will of the parties, expressed in the agreement in question, that the assignment of the loans had an onerous character, accruing interest.

4. Thus, an obligation was stipulated for SGPS to remunerate the "capital object of this credit assignment".

5. The payment of interest was conditioned to conditions of a financial nature of SGPS, in conditions only controllable by itself.

6. SGPS is what came to manage the payment of the financings granted intra-group.

7. The rate of such interest that was specified in the agreement would depend on the rate defined on the date of verification of the conditions previously referred to, "within the full competition interval, considering financings with identical level of risk and grace period, based on information relating to credits contained in an international financial database".

8. And, clarifying what was contractually established, the taxpayer informed, at the time of the inspection action, that "the rate would be determined in accordance with transfer pricing rules, by reference to similar operations practiced by unrelated entities in which a similar grace period had been granted" (cf. email from the taxpayer, reverse of p. 75 of the PA).

9. The operations carried out between the Claimant and A... SGPS are part of an operation carried out between related entities, for the purposes of the provision in Article 58 of the IRC Code (Article 83 of the r.i. and Article 92 of the Response, cf. in particular, p. 30 of the PA).

10. The accounting of the Claimant did not determine the interest corresponding to the remuneration of this financing, during fiscal years 2008 and 2009.

11. In fiscal year 2012, the Claimant proceeded to record the said interest, in the total amount of €2,463,120 (as per the trial balance and respective account statement attached as Documents 4, 5 and 17 and Form 22 Declaration, cf. Document 6).

12. The accounting record of the interest in question was made following the cancellation of the balance owed between A... SGPS and the Claimant, promoted as a result of the acquisition, by the Claimant, of the stake held by A... SGPS in D... – Commerce and Industry of ..., S.A. ("D..."), carried out in fiscal year 2012 within a business restructuring project that A... SGPS carried out.

13. The "reimbursement" of this loan came to occur in fiscal year 2012, by A... SGPS to A..., S.A. (Document 4 and 5).

14. The cancellation of the balance owed between A... SGPS and A..., S.A. was the result of the acquisition by A... of the stake held by A... SGPS in D... – Commerce and Industry of ..., S.A., carried out in fiscal year 2012, within a business restructuring project that A... SGPS was carrying out.

15. In fact, within the scope of said operation, it was agreed between the parties that part of the respective realization value would be paid through compensation of the balance owed by A... SGPS to the Claimant, resulting from the credit assignment agreement, allowing A... SGPS to cancel this balance without the movement of financial means it did not have.

16. For the determination of the amount of interest due, the Claimant requested an independent transfer pricing study, produced by the consultant ... & Associates – Company of Accountants, S.A. (Doc. 18).

17. The said study was produced in order to determine intervals of interest rates considered at arm's length for operations comparable to the said financing in question.

18. Based on the report of the said consultant, the Claimant used the rate of 2.8% for the calculation of interest from 01/01/2005 to 30/06/2012, recorded in fiscal year 2012.

19. Ribeiralves opted for the minimum value of the interest rate calculated by the .... The Claimant used the rate of 2.8% for the calculation of interest from 01/01/2005 to 30/06/2012, recorded in fiscal year 2012.

20. However, taking into account other financial commitments held by A..., SGPS, S.A., of similar amounts, in the periods of 2007 to 2009, with financial institutions, the rate of 2.8% is not considered adequate by the AT, taking into account the existence of special relationships between the two contracting parties.

21. The accounting of the Claimant, in the years 2008 and 2009, evidenced, in the loans account "25297 – A... SGPS (commercial paper) a financing of "opposite sense" to the one that has been analyzed (Cf. PA, Annex 10 to the Inspection Report – reverse of p. 84 and reverse of p. 86).

22. That is, a financing obtained by A... S.A. from the company A... SGPS, S.A., in the amount of €12,845,000.00, a value similar to the credits assigned in 2004 (cf. email of 8 February 2013, attached to the PA, reverse of p. 75 and p. 76).

23. SGPS also contracted for the payment of interest in this case (cf. email of 8 February 2013, attached to the PA, reverse of p. 75 and p. 76).

24. These loans obtained by the now claimant resulted, in the years 2008 and 2009, in debit of interest by A... SGPS, recorded in account "6813 - Other Loans Interest", in the total of €621,458.00 and €320,245.00, respectively (cf. documents attached in the mentioned Annex 10 to the Inspection Report) (cf. email of 8 February 2013, attached to the PA, reverse of p. 75 and p. 76).

25. As results from these elements, the interest rate associated with this financing obtained by A... SA from A... SGPS, in the years 2008 and 2009, was, respectively, of 4.8% and 2.5% (as can be concluded from the following formulas: 621,458.00/12,845,000.00100 = 4.8; and that 320,245.00/12,845,000.00100 = 2.5) (cf. email of 8 February 2013, attached to the PA, reverse of p. 75 and p. 76).

26. These would be the interest that A..., S.A. would have to pay in the financial market if it borrowed directly.

27. Not having determined the remuneration of the loans of €11,729,141.85, but being determinable, "it should be determined taking into consideration the amounts owed throughout the years 2008 and 2009, in the value, and the interest rates applied by the AT to the financing obtained from A... SGPS that were 4.8% in 2008 and 2.5% in 2009, similarly to what was provided in the opinion of the....

28. In this way, the income corresponding to the interest provided for in the credit assignment agreement in question was subject to IRC taxation, having contributed to the formation of taxable income for fiscal year 2012 (Form 22 Declaration - Doc. 19).

29. Within the scope of Service Orders No. 0I2012... and No. OI2012..., of 1 August 2012 (cf.: Doc. 7), an external inspection action was carried out on the financial statements of the Claimant relating to fiscal years 2008 and 2009, of partial scope, relating to the procedures adopted in determining IRC.

30. On 27 February 2013, the Claimant was notified of the Project Conclusions of the Tax Inspection ("Inspection Report Project" — Doc. 14), through which the Tax Authority services proposed the following corrections to IRC:

2008:

2009:

1. The Tax Inspection services promote a correction in the amounts of €562,998.81 and €293,228.55 relating, respectively, to 2008 and 2009, which results from the income that the Claimant allegedly should have recognized in those fiscal years, associated with the credit resulting from the assignment to A... SGPS, S.A. ("A... SGPS"), by the Claimant, of loans on various Group Companies (section III.6.6 of the Inspection Report).

2. From the said inspection action resulted corrections, regarding IRC not paid into the State Treasury by the Claimant, relating to the taxation period of 2009 and 2010, embodied in the following table [cf. p. 22 of the Tax Inspection Report].

3. The correction promoted by the Tax Inspection services was based on the interest rate applied to the balance owed by A... SGPS to A..., as a result of the credit assignment agreement, in fiscal years 2008 and 2009, to which was applied the interest rate agreed in the financings obtained in 2007 by A... SGPS from financial institutions.

4. The Claimant did not exercise the right to prior hearing on the Inspection Report Project, so the proposed corrections were entirely maintained in the Final Tax Inspection Report, of which the Claimant was notified on 20 March 2013 (Doc. 1).

5. On 23 April 2013, the Claimant was notified of the IRC assessment statement for fiscal year 2008, having been notified of the IRC assessment statement for fiscal year 2009 on 1 May 2013, and they reflect the corrections resulting from the inspection action carried out (vide Doc. 2).

6. The Claimant accepted the corrections relating to goodwill amortization, the subjection to autonomous taxation of travel allowances and the payment of compensatory interest, having proceeded to regularize the tax shortfall resulting from the same (vide Doc. 3).

7. For disagreeing with the remaining corrections promoted by the Tax Inspection services, on 9 August 2013 the now Claimant filed, as already mentioned, an Amicable Claim in order to contest the corrections in question, and which are intended to be the omission of omitted income in fiscal years 2008 and 2009 related to the remuneration of the financing granted by the Claimant to A... SGPS.

8. However, that Claim was rejected by the AT.

9. The grounds for annulment of the tax acts raised by the now Claimant in the Amicable Claim were not accepted by the Tax Authority and, on 2 May 2014, the Claimant was notified of the final decision rejecting the Amicable Claim filed (Doc. 8), in which the Administrative Justice Division ("DJA") maintained all the corrections promoted by the Tax Inspection services.

10. On 24 January 2014, the AT issued the assessments challenged, in the amount of €177,790.40 relating to 2008 and €97,278.31 relating to 2009, with the deadline for voluntary payment being the 19.06.2013 and 26.06.2013 days (cf. document No. 1 attached with the Petition).

11. The Claimant did not make payment of the tax assessed in the part relating to the corrections now challenged in this Request, by understanding that it is not due (Article 118 of the Petition).

12. As a consequence, enforcement proceedings No. ...2013... were instituted regarding IRC for 2008 (Doc. 21) and No. ...2013... relating to IRC for 2009 (Doc. 22).

13. The Claimant, under the terms and for the purposes of Article 169 of the CPPT, and to guarantee the debts of IRC for 2008 and 2009, constituted mortgages in favor of the Public Treasury / Tax and Customs Authority (Documents 23 and 24).

14. On 29 July 2014, the Claimant filed the request for arbitral decision that gave rise to the present proceeding (cf. process management IT system of CAAD).

III.1.2. UNPROVEN FACTS

The Claimant understands that during the spin-off/merger of A..., the loans were not transferred together with the financial stakes to A... SGPS, a situation that was due to a mere oversight and which made the later credit assignment agreement necessary from A... to A... SGPS.

However, it was not proven that there was an oversight in the non-transfer of the value of the loans granted to various Group companies by A... to A..., SGPS, so that this credit remained on the balance sheet of the claimant.

It was not proven that the interest rate applied by the Claimant was the market interest rate at the date that would be important to consider for the purposes of determining interest income, in light of transfer pricing rules.

III.1.3. REASONING REGARDING MATERIAL FACTS

With respect to the proven material facts, the Tribunal's conviction was based on the statements made in the pleadings, in the points indicated, in which the respective adherence to reality was not questioned, and on the documents attached to the proceedings, referenced in relation to each of the points, whose correspondence to reality was not challenged.

With respect to the unprovenfactuality, this was thus considered as a result of the absence of any probative elements capable of, unequivocally, proving it.

IV. REGARDING THE LAW

As results from the material facts established, a tax inspection was carried out, following Service Orders Nos. OI2012... and OI2012..., of 1 August 2002 with a view to the financial statements of the claimant, relating to fiscal years 2008 and 2009, relating to procedures adopted in determining IRC. In the items declared by the Claimant, it will have omitted in fiscal years 2008 and 2009, the income corresponding to the remuneration of the asset generated in the financial statements of A..., S.A., following the credit assignment agreement concluded in fiscal year 2004, between this company and A... SGPS.

The income that the tax inspection services allege that the Claimant did not subject to taxation in fiscal years 2008 and 2009 were recognized and taxed in fiscal year 2012, which is why the Claimant understands that, if the correction in question were accepted, one would be faced with a situation of double taxation, given that it affects the same taxable reality and identical period of time.

The Claimant also considers that the eventual taxation of the income in question in fiscal years 2008 and 2009, and of the assessment of any compensatory interest, is not in accord with the principle of partial dependence of the IRC Code on Accounting.

In accordance with the provision of Article 124 of the CPPT, subsidiarily applicable by force of the provision of Article 29, paragraph 1, of the RJAT, as long as no defects leading to the declaration of non-existence or nullity are attributed to the IRC assessment, nor is a relationship of subsidiarity indicated, the order of assessment of the defects should be the one that, according to the prudent criterion of the judge, provides more stable or effective protection of the injured interests.

In the case in question, the defects imputed by the Claimant to the acts challenged that provide more stable and effective protection of its interests are those referred to in sections III.b) of the request for arbitral decision, relating to the non-verification of the requirements underlying the recognition of the income, which allegedly was not recorded by the Claimant in fiscal years 2008 and 2009.

Among these, given that an accounting question of omission of income generated by a credit assignment agreement is raised, the consideration or not of the interest as income in fiscal years 2008 and 2009 relating to that agreement, or the non-existence of a tax rule that obliges the periodization of said income, if a defect exists, it will definitively prevent the possibility of imposing on the Claimant any IRC taxation under the terms in which it was applied to the situation in question.

Then, to the extent necessary to assess the other defects, which prove to be essential for the proper judgment of the case, shall be proceeded.

IV.1. Determination of Taxable Income

Among the classical objectives of annual financial reporting by entities is to provide information that is useful for investment and financing decisions, to provide information about the sources of the entity's funds, their degree of obligation and their respective changes, to provide information useful for the measurement of expected cash flows. In addition to this information function of Accounting, it is important to consider its performative function, for purposes of taxation.

Thus, within the scope of this function, Article 17 provides, under the heading "Determination of Taxable Income":

"1 - The taxable income of legal entities and other entities mentioned in subparagraph a) of paragraph 1 of Article 3 is constituted by the algebraic sum of the net result of the period and the positive and negative patrimonial variations verified in the same period and not reflected in that result, determined on the basis of accounting and possibly corrected under the terms of this Code.

2 – (...).

3 - In order to allow the determination referred to in paragraph 1, the accounting must:

a) Be organized in accordance with accounting normalization and other legal provisions in force for the respective sector of activity, without prejudice to the observance of the provisions provided in this Code;

b) Reflect all the operations carried out by the taxpayer and be organized in such a way that the results of the operations and patrimonial variations subject to the general regime of IRC can clearly be distinguished from those of the remainder."

If an entity omits income/revenues or expenses/costs in one or several accounting periods, the accounting information can never achieve its informative and/or performative objectives.

IV.2. Partial Dependence of the IRC Code on Accounting

The Corporate Income Tax Code (hereinafter, IRC Code or CIRC) enshrines a model of partial dependence between taxation and accounting, according to which taxable income is determined from the accounting result and patrimonial variations not reflected in it, with positive or negative extra-accounting adjustments being made as provided by tax legislation.

Thus, the treatment resulting from accounting regulations is applicable (and accepted) for tax purposes whenever the IRC Code and any supplementary legislation do not establish their own rules determining the contrary.

The model of partial dependence between Accounting and Tax Law was adopted long ago in the Portuguese tax regime. In the preamble to Decree-Law No. 442-B/88, of 30 November, it is stated that: "whenever established tax rules do not exist, the treatment resulting from accounting standards is adopted."

Respect for the principle of partial dependence of the IRC Code on accounting requires that, in the absence of a prior provision of the tax legislator, what is established in the accounting standards in force at the date be followed for purposes of determining taxable income.

With respect to the accounting treatment of this issue, it is important to note what is provided in Chapter 4 – Accounting Principles, it is clearly stated that "in order to obtain a true and fair image of the financial situation and the results of the company's operations (...) it is necessary to respect the accounting principles listed in that same chapter, and one of them (subparagraph c) of chapter 4) is the principle of specialization (or accrual), where it is clearly provided that: "income and expenses are recognized when earned or incurred, regardless of their receipt or payment, and should be included in the financial statements of the periods to which they relate." In accounting, it is evident that the accrual or economic periodization principle underlies the determination of accounting result, and appears to be essential for obtaining a true and fair image of financial position, performance and changes in financial position.

The principle of accrual or specialization of fiscal years (periods) leads to the effects of transactions and other events being recognized when they occur (and not when cash or equivalents are received or paid), being recorded in accounting and reported in the financial statements of the periods with which they are related. The performance and situation of an entity are measured according to an economic competence regime, in which the accounting result corresponds to the difference between all income and expenses generated or incurred in the period.

However, in the case at hand, there is a clear tax provision in the CIRC regarding the issue under analysis. See the provision of Article 18 of the CIRC, under the heading "Periodization of Taxable Income":

"1 - Income and expenses, as well as other positive or negative components of taxable income, are attributable to the taxation period in which they are earned or incurred, regardless of their receipt or payment, in accordance with the economic periodization regime.

2 - The positive or negative components considered as relating to prior periods are only attributable to the taxation period when, on the date of closure of accounts of the period to which they should have been attributed, they were unforeseen or clearly unknown.

(...)"

Thus, both from the accounting point of view and from the tax point of view, it is concluded that for the determination of the net result of each of the periods, all costs/revenues generated in each of the periods should contribute. Indeed, also from the tax point of view, it is established that for the determination of taxable income, the accrual regime should be complied with.

The recognition of income/revenues, on the basis of accrual, should be made in the period to which the effects of the transactions relate, and not in the period in which income occurs or in the period in which collections occur.

One cannot confuse the moment of generation of income with the moment of its receipt, because the generation of income will generate a right to receive that amount at the same moment or at a different moment in time. With respect for that principle, one ensures, from the accounting point of view, a true and fair image of the patrimony or of the financial situation, performance and changes in financial position. From the tax point of view, the obligation to consider costs and revenues in the fiscal year in which they are generated/incurred also prevents taxpayers from deferring costs and revenues with purposes of fiscal management different from those that the tax legislator understood fit to privilege in the Portuguese tax system.

For this reason, from an accounting point of view, the recording of the interest resulting from the asset associated with the assignment of credits by the Claimant to A... SGPS was required, since there is no rule in the IRC Code or other supplementary tax legislation that imposes a different tax treatment from the accounting regime, on the contrary, it is confirmed by the principle contained in Article 18 of the CIRC.

Thus, and in obedience to the accrual/specialization principle, it is clearly that income should be recognized when earned and not when received. Thus and regardless of the conditions contained in the agreement concluded between A... and A..., SGPS for the payment of such interest, what is relevant from the accounting point of view is the moment of generation of the income/revenue, and this is necessarily the accounting period in which the capital generated interest.

The claimant states that "(...) in light of the principles enshrined in the Official Accounting Plan (hereinafter,"POC") then in force as the accounting standard applicable in Portugal, namely to the Claimant, there was no income to record in accounting in the taxation periods of 2008 and 2009, since it was not possible to anticipate whether and when any of the facts on which the accrual of interest depended would occur".

This position of the claimant does not fit within the sound principles of accounting at the date (POC), and which are wholly maintained in the current Accounting Normalization System (SNC), because the principle of accrual or specialization is a guarantee for obtaining the true and fair image of the financial situation, performance and changes in financial position in the entity in each of the accounting periods. Therefore, the Claimant should not and could not determine the accounting result of each of the periods without estimating the income and expenses of each of those periods in light of the specialization principle contained in chapter 4 of the POC, whether or not of their receipt.

Therefore, the Claimant did not determine the interest corresponding to the remuneration of this financing, but had to do so in light of the accrual principle that governed the accounting system at the date of the facts.

To the accrual regime, the heart of the entire accounting structure, is opposed another regime based on cash, and thus what matters is the moment when the financial or monetary facts occur. Expenses/costs and income/revenues on a cash basis are recognized in the period in which payments and receipts occur. However, this is not the accounting regime that is in force in Portugal. There is a clear conceptual confusion in the position defended by the Claimant between the accrual regime and the cash regime.

From the accounting point of view, there is a confusion in the Claimant's argument between remuneration payable and income.

A fairly specific contract was established between the Claimant and A..., with a long-term logic, given that it was not expected, at the date of signing of the same agreement, when the interest and capital of the loan in question would be paid. However, these special conditions associated with the payment of interest are assumed by the AT and by the Claimant as a consequence of the special relationships linking the two contracting entities.

Thus and taking into account the conditions contractually established between the Claimant and A... Ribeiralves, the accrual of interest would be subordinated to the occurrence of one of the following events:

a) the distribution of dividends by the subsidiaries of A... SGPS in an amount equal to or greater than the amount owed to A...;

b) the determination by A... SGPS of a return on equity ("ROE") ratio equal to or greater than 7.5%.

The Claimant informed the AT, in November 2012, that "given the constraints of the activity of A..., SGPS (associated with the economic downturn) and the lack of capacity of the company to generate cash flow, the financing agreement has been automatically renewed, without any of the planned events having yet occurred". In February 2013 it further informed that:

-"Given the financial crisis in place, with consequences at the level of the economic and financial performance of A..., SGPS, it still has not achieved the ratio in question, not allowing it to support interest".

-"In this way, A... SGPS would only have the capacity to repay the credits assigned by A..., S.A. in the event that the debtor entities of the Group repay it itself, which did not occur".

However, this issue does not reveal for the consideration of the income/revenue in each of the periods under analysis. The conditions contractually established are related to the accrual of the interest incurred over the different periods, however, the revenue is generated insofar as the capital is used and its accounting does not depend on financial conditions in the borrowing entity.

There is a confusion on the part of the Claimant about the moment of verification of economic flows and financial and monetary flows. The interest associated with the assignment of the loans would accrue from the date of assignment of the credit until the date of occurrence of the first of these two events as a financial obligation, however, they were generated insofar as the borrowing party could benefit from that capital.

From the accounting point of view, the Claimant was obliged by the accounting order in force, at the date of the facts, to recognize in account "2711 - Accrual of income – interest receivable" with the counterpart of account "781 - Interest Obtained".

When the contracted financial conditions were verified, account 27.11 would be settled by counterpart to a third party account or cash, by the assumption of a financial responsibility by A... SGPS to A....

The omission of such income over the period in which it was generated results in the financial statements not giving a true and fair image of the financial situation, because it omits rights (in the entity that has the right to receive the interest), and obligations in the entity that has the commitment to pay this debt of interest. Also, the results of the 2 entities do not reflect the true performance of the entity, because the expenses and income of the two entities appear undervalued in materially relevant amounts, because the financial statements should show all elements that are relevant and that may affect valuations or decisions by interested users.

The accounting record of the interest was therefore necessary. Therefore, one cannot assert, as the Claimant did, that the accounting record of the interest was not necessary. It was necessary in accordance with the requirements provided in Accounting and in tax law. The Claimant's assertion that there is no rule in the CIRC that imposed a different tax treatment from the accounting regime does not appear adequate, because in this case, the tax treatment coincides exactly with the accounting treatment.

Even if a determined rate was not established for the calculation of such interest, this was determinable, and therefore, the interest could be estimated. If a difference were to occur in the estimation compared to what occurred, this would be corrected at the moment that such rate was definitively determined.

Thus, invoking that it did not calculate/estimate the revenue because the interest rate was not determined except at the moment when A..., SGPS had conditions to settle this obligation does not hold in the accounting structure in force at the date of the facts. If the interest rate was not clearly defined at the date of each of the periods, 2008 and 2009, A..., S.A. could and should have made an estimate of such revenues under the provision of the POC and the CIRC. As the interest rate was not determined, but was determinable, it should estimate the flow of revenues generated by that financing, because it could not be unaware of the generation of that income.

The Claimant also asserts that the accrual of the interest resulting from the credit assignment agreement in question did not occur, given that none of the events on which its accrual depended occurred. However, the issue here is not related to the accrual of the obligation generated by the responsibility assumed by A..., SGPS, but rather to the moment of generation of the income. And that occurs throughout the various periods in which A... has the right to that income.

The accounting of the taxpayer does not, however, evidence, in the years 2008 and 2009, income related to the financing in question. However, the accrual principle obliges to recognize income and expenses when they occur, regardless of the moment when financial or monetary flows come to occur (POC, chapter 4).

These are the interest by the assignment of the loans by the Claimant to A... SGPS, which are at issue in the present proceedings and which motivated the corrections that are at the origin of the assessments of 2008 and 2009 challenged in the present arbitral procedure, as they result in omission of income in the periods considered.

The reimbursement of this loan came to occur in fiscal year 2012, by A... SGPS to A..., S.A., and in that same fiscal year, the Claimant proceeded to record the said interest, in the total amount of €2,463,120. However, the Claimant clearly violated the provision of the accounting framework, as well as the provision in Article 18 of the CIRC, in fiscal years 2008 and 2009. The interest income should have come to be estimated, year by year, from the date of the credit assignment agreement concluded, given that those estimates could and should be corrected at the moment when the interest was effectively paid. The eventual need for correction of values cannot and should not be considered a reason for not considering the revenues in the different periods in which the interest was generated.

Even if that interest rate effectively used was only defined at the moment of settlement of the loans agreement, still the Claimant could and should have estimated the interest to compete in each year for the net results of the period.

There is a violation of the economic periodization regime, deferring the recognition of interest as income/expense for the moments in which they are received or paid.

In the specific case, the Claimant, in addition to not determining its accounting result in accordance with the accounting principles in force, violates the tax provision provided in Article 18 of the CIRC.

Thus, the interest in question should have been recorded and subject to taxation by the Claimant from the moment of assignment of the loans, and even though the AT is prevented from assessing the accrued interest from 2005 to 2007, it can and should do so for the years 2008 and 2009.

It is easily inferred that the delay in collection was due to a fact imputable to the taxpayer, which did not comply with what was provided in the accounting order - POC, as well as in Articles 17 and 18 of the IRC Code.

Thus, it can be concluded that the Claimant omitted income/revenues in its financial statements and, therefore, in the determination of taxable income in the fiscal years in question.

The Claimant recognizes exactly this circumstance when it states that "under the terms of the credit assignment agreement, and taking into account the fact that, at the date, A... SGPS was a recently incorporated company, a grace period was established for the accrual of interest on said loan, so that A... SGPS would acquire financial robustness to allow it to support these charges".

The grace period for the accrual of interest is, however, only motivated by financial issues, that is, by impossibility of financial compliance with such interest. Another is the central issue in this proceeding: the moment of recognition by A..., S.A. of the income from interest associated with the loans agreement. These, in obedience to the accrual or specialization principle, could and should have been recognized as income in the accounts of A..., S.A. in the years in which they were generated, regardless of the moment when the financial obligation associated with them come to be enforceable.

The Claimant recognizes this fact when it states that this financial compliance was conditioned by the level of adequate liquidity and financial solidity, translated in the receipt of dividends from its subsidiaries, or in an ROE of 7.5%. The interest associated with the assignment of the loans would accrue from the date of assignment until the date of occurrence of the first of these two events.

Notwithstanding this, the Claimant chose not to determine the interest corresponding to the remuneration of this financing, in each of the fiscal years that it should have done.

Therefore, there is no illegality of the IRC assessment. The correction proposed by the Tax Authority allows compliance with the provision in Article 18 of the CIRC.

If the Claimant's position were accepted, it would violate the principle of specialization of fiscal years, provided for in the accounting system, as well as in that tax provision.

IV.3. Double Taxation with respect to the Interest Allegedly Omitted

The Claimant subsequently calculated, after the fiscal years 2008 and 2009, the interest throughout the entire period that preceded the settlement of the financing, using as a basis the report of the consultant …, for the calculation of interest from 01/01/2005 to 30/06/2012, recorded in fiscal year 2012.

Thus, the Claimant recognized that the financing in question generated revenues throughout the entire period, in each of the fiscal years 2004 to 2012.

The accounting record of the interest in question was made following the cancellation of the balance owed between A... SGPS and the Claimant, promoted as a result of the acquisition, by this one (Claimant), of the stake held by A... SGPS in D... – Commerce and Industry of ..., S.A. ("D..."), carried out in fiscal year 2012 within a business restructuring project that A... SGPS was carrying out at the date.

The claimant understands that in this way, the income corresponding to the interest provided for in the credit assignment agreement in question was subject to IRC taxation, having contributed to the formation of taxable income for fiscal year 2012, so it should not be a reason for correction to the taxable amount determined in 2008 and 2009, within the scope of the inspection action.

Thus, it invokes that there is double taxation regarding the interest allegedly omitted.

It appeals to support its position on paragraph 1 of Article 205 of the CPPT, which provides that there will be double taxation "when, having fully paid one tax, another of equal nature is required of the same or different person, relating to the same taxable fact and to the same period of time".

The Claimant states that at the date of the present assessment now in question, the correction promoted was already (self)assessed and taxed, so the demands of the Tax Inspection services affect identical consideration, over the same taxable reality and identical "period of time".

However, the tax in question (IRC for 2012) was not paid at the date of the final tax inspection report, of which the Claimant was notified on 20 March 2013, and nor even of the IRC assessment statement for the fiscal year 2008, which was notified on 23 April 2013. It was also notified of the IRC assessment statement for 2009 on 1 May 2013. Thus, and taking into account the date of filing and self-assessment of IRC for 2012, performed on 31 May 2013, only 30 days after the last notification of IRC of which it had been notified.

Therefore, it is concluded that the duplication of payment is the exclusive responsibility of the taxpayer, because at the moment of the determination of the collection regarding 2012, the assessment of IRC now in question was already known.

In light of the above, if double taxation exists, it occurs in 2012 and not in the periods of 2008 and 2009, because it is not required of them by the Tax and Customs Authority the IRC due in them derived from the interest in question which was already paid regarding those same years.

On the other hand, based on what was said regarding the correct accounting of the interest, the error may be in accounting for 2012 the interest that should have been recorded in the years 2008 and 2009, so it is in the self-assessment relating to the year 2012 and not in those relating to the years 2008 and 2009 that there may have been an error. In any case, the self-assessment relating to the year 2012 is not the object of the present proceeding, so it does not fall within the powers of cognition of this Arbitral Tribunal to assess whether or not there was an error in that self-assessment.

Moreover, the tax paid in 2012 does not refer to the years 2008 and 2009, so it does not refer "to the same period of time", for purposes of Article 205 of the CPPT. There would only be double taxation if the tax that should be paid regarding the years 2008 and 2009, in the part corresponding to the interest referred to, had already been paid.

Thus, the correction promoted by the Tax Inspection services to the taxable income of fiscal years 2008 and 2009 does not suffer from the defect of double taxation.

IV.4. The Principle of Arm's Length

The Tax Inspection Report states the following, among other things:

"6.2 - Agreement for assignment of loans to company A... SGPS, SA, dated 30 December 2004.

On 30 December 2004, an agreement was concluded between A... SA and A... SGPS, denominated by the parties as a credit assignment, whereby the first transfers to the second, the loans incorporated in its assets, by incorporation (by merger) of the assets and liabilities of company A..., SA, in the amount of €11,729,141.85. Annex 9.

The companies owing the loans in question are evidenced in the sub-accounts of account "25 Shareholders" of the firm A... SGPS, SA, of the year 2004, representing the loans owed by A... Real Estate in the total of €11,291,982.14. Annex 9.

From the reading of this credit assignment agreement, in particular regarding the value of the credit assigned, conditions of price and payment and remuneration to which clauses one, two and three refer, the following stands out:

• A... SA assigned A... SGPS, the credit of eleven million seven hundred and twenty-nine thousand one hundred and forty-one euros and eighty-five cents (€11,729,141.85).

• The price to be paid by the assignee corresponds to the value of the loans (€11,729,141.85).

This amount will be reimbursed in a single installment to be made on 31 December 2005. This deadline will be automatically extended for periods of one year, except manifestation of intention to the contrary by the assigning A..., SA.

Regarding the remuneration of the loans, this was subordinated to the verification of the fact that, among the two, which are to be mentioned, occurs first:

a) Distribution of dividends by the subsidiaries in an amount equal to or greater than the value of the financing initially granted by A... SA.

b) Determination by A... SGPS of a "return on equity" ratio, commonly known as "ROE" (net results/net worth) equal to or greater than 7.5%.

Regarding the applicable interest rate, it is stated that it will be defined on the date of verification of the conditions referred to in the previous paragraph, within the full competition interval, considering financings with identical risk level and grace period.

The verification of any of the facts to which the remuneration of the loans was subordinated implies the accrual of the amount of interest calculated for the period from the date of assignment to the date when that fact occurs.

Under the terms of the agreement, the amount of accrued interest should be paid by the assignee, A... SGPS SA, to the assigning company, A... SA, by the end of the fiscal year following the date of its accrual, provided that, if none of the facts established in the agreement for the determination of the remuneration of the assigned credits occurs, the accrual thereof will remain suspended.

6.3 - Clarifications provided by the taxpayer on the loans granted, in the year 2004, to A... SGPS, SA.

In the course of this Inspection procedure, we requested from the persons responsible for A... SA clarifications regarding the amount recorded in account 2571 as loans assigned. The taxpayer provided the clarifications in writing, having remitted two emails for this purpose, which are attached and whose content we now summarize, transcribing some of the statements produced (See Annex 9):

• The value of the loans is associated with the assignment of credits, in the year 2004, from A..., SA to A... SGPS.

• The assignment of credits fits into a merger-spin-off operation, dated 2004, which aimed at the reorganization of the shareholdings that the shareholders of A... SGPS held in various companies, which resulted in the establishment of A... SGPS, as well as in the implementation of the following operations: ". Contributions in kind, for the realization of the capital of A... SGPS, through the delivery by the shareholders of shareholdings in A... SA (exchange of shares) in 2004 and 2005.

• Merger by incorporation of companies A... - Services Provision Company, SA and B... - Group …, Lda, in A... SA, in 2004.

• Spin-off/merger of part of the assets of A..., S.A. to companies A... Real Estate, SA and A... SGPS, in the year 2004."

The objective of this set of operations aimed to individualize the various activities developed by the A... Group in different entities, placing them under the domain of A... SGPS, which became responsible for the administration of the Group's shareholdings, as well as for the management of their relationship with Financial Institutions, intra-group financing and also for the treasury management of the entities that compose it. In this context, it was considered from an organizational point of view that it would be more efficient that the A... SGPS company would also manage the intra-group financing. Thus, in the year 2004, A... SA assigned credits obtained following the merger by incorporation of company C…, SA, related to loans, which it held on the original debtors, to A... SGPS. The amount assigned of €11,729,141.85, remained, necessarily, as a credit on A... SGPS of equal amount.

The persons responsible for A..., in the body of the exposition remitted on the assignment of the loans in question, further state that the conditions agreed and practiced, established in the concluded agreement, are related to the specific character of the operation and the intervening entities, and with respect to the remuneration conditions, in particular the mechanism of grace period for the accrual of interest, allows them to conclude that the financing in question is duly remunerated under conditions entirely similar to those practiced in the market.

Regarding the mechanism of grace period for the accrual of interest, established in the agreed clause, it was stated that the same results from the fact that A... SGPS is a recently created company, so it was considered economically and financially efficient to ensure a grace period, until it presented financial robustness to allow it to support the charges associated with the loans. In this way, the taxpayer considers that it was contractually established that when A... SGPS achieved a level of significant financial solidity - Return on Equity (ROE) of 7.5% or receipt of dividends from subsidiaries - the interest associated with the loans would accrue at rates that considered that same grace period. And that the rate would be determined in accordance with transfer pricing rules, by reference to similar operations practiced by unrelated entities in which a similar grace period had been granted. In this sense, A... SA would be compensated at market prices, for the grace period for accrual of interest granted to A..., with no loss whatsoever in its sphere. It was also stated, by the taxpayer, that, given the financial crisis in place, with consequences at the level of the economic and financial performance of A... SGPS, it has not yet achieved the liquidity ratio, which allows it to support the interest on the financing in question.

In these terms, it was concluded that the financing in question is duly remunerated under conditions similar to those practiced in the market.

However, the taxpayer considers that "the assignment of credits did not represent any movement of effective values, representing instead an accounting movement, by which the assets of A... SA over companies of the Group came to appear in the accounting of A... SGPS, as it is the entity qualified, within the Group, to manage intra-group financings. In fact, through this operation, there was no entry of capital from A... SA into A... SGPS, only the contractual and formal assignment of the credits held by the first from the second." They further state that, taking into account the financial situation of A... SGPS, SA, which presents very low liquidity ratios, it cannot repay the loans assigned by A... SA, a situation that could only have occurred in the event that the debtor entities of the Group repay it itself, which, as stated by the taxpayer, did not occur.

In these terms, A... SA in the years 2008 and 2009, as well as in prior years, did not determine and consequently did not pass on to A... SGPS, SA the interest corresponding to the remuneration of this financing. This means that, the accounting of A... SA does not evidence, at least in the years 2008 and 2009, income related to the financing in question.

6.4 - Loans made in 2007, by A... SGPS SA to A..., with a permanent character. Clarifications from the taxpayer related to these loans.

In the years 2008 and 2009, the accounting of the taxpayer evidences, in the loans account "25297 -A... SGPS (commercial paper)", financing obtained by A... SA from the company A... SGPS, SA, in the amount of €12,845,000.00, a value similar to the credits assigned in 2004, which, at the date, had not been reimbursed, nor had given rise to the payment of any remuneration. Annex 10. In addition, the loans obtained by A... SA and recorded in account 25297, originated the debit by A... SGPS, SA of interest, in the years 2008 and 2009, recorded in account "6813 -Other Loans Interest", in the total of €621,458.00 and €320,245.00, respectively, according to documentation contained in annex 10. The interest was recorded on the basis of monthly estimates, which were adjusted at the end of each of the years, based on a note of interest charged by A... SGPS, SA, which note made it possible to determine the value of the interest actually borne in each of the years.

We can thus determine that the interest rate associated with the financing obtained from A... SGPS, SA in the years 2008 and 2009 was of 4.8% (621,458.00/12,845,000.00100) and 2.5% (320,245.00/12,845,000.00100), respectively.

The taxpayer was questioned about the existence of reciprocal financing between the entities in question, referred to above, in the years 2008 and 2009, in which one had interest accrued and the other did not, having provided clarifications on the matter that we now summarize. Annex 9. In the year 2007, there was a lack of liquidity in the sphere of A... SA, making it necessary to contract credit from banks.

In this context, in the pursuit of its corporate purpose and its function within the Group, A... SGPS, SA financed itself with financial institutions, specifically with Caixa Geral de Depósitos and Banco Popular, having assigned part of the financing, "via loans", to its subsidiary A... SA.

The taxpayer alleged regarding the financing granted that:

• As would be required in this type of operation, A... SGPS, SA contracted for the payment of interest.

• A... SA, despite the temporary lack of liquidity, had sufficient financial maturity to meet the periodic charges associated with the financing, which it would have to pay anyway if it borrowed directly. -Despite the "value of the loans granted to A... SA, in 2007, being approximately the value of the credits assigned by it to A... SGPS, in 2004, in the particular context in question there was no way to avoid borrowing from the banks".

• It also took care to emphasize that the assignment of credits to A... SGPS, SA did not represent entry of capital into its sphere and that, at the date, this company did not present a robust financial situation, given that it had very low liquidity ratios. In this way, the taxpayer considers that A... SGPS, SA would only have the capacity to repay the loans assigned by A... SA in the event that the debtor entities of the Group repay it itself, which did not occur.

6.5 - Framework of the loans granted as remunerated financing at transfer prices.

In our opinion, regarding the framework of the loans granted and the consequent effects in the accounting [document truncated]