CAAD 577/2016-T: Elimination of Double Taxation on Dividends from Tunisia and Lebanon Under EU Free Movement of Capital

ARBITRAL DECISION[1]

The arbitrators Counselor Fernanda Maçãs (arbitrator president), Prof. Dr. João Sérgio Ribeiro and Prof. Dr. Ana Maria Rodrigues (arbitrator members), designated by the Deontological Council of the Center for Administrative Arbitration to form the Arbitral Tribunal, agree as follows:

I. REPORT

1. The Claimant, A…, S.A., filed, on 22-09-2016, a request for constitution of the Arbitral Tribunal in view of (…) the act of rejection of the application for official revision as well as the act of self-assessment of Corporate Income Tax (IRC) relating to the fiscal year 2012.

2. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 10-10-2016.

3. The Claimant did not proceed to the appointment of an arbitrator, and therefore, 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 appointed Counselor Maria Fernanda Maçãs, Prof. Dr. João Sérgio Ribeiro and Prof. Dr. Ana Maria Rodrigues, as arbitrators of the collective arbitral tribunal, who communicated their acceptance of appointment within the prescribed period.

3.1. On 23-11-2016, the parties were notified of the appointment of the arbitrators and raised no objections.

3.2. In accordance with the provisions of subparagraph c) of paragraph 11 of the RJAT, the collective arbitral tribunal was constituted on 12-12-2016.

3.3. Accordingly, the Arbitral Tribunal is properly constituted to consider and decide on the subject matter of the proceedings.

1. To support the request for arbitral pronouncement, the Claimant alleges, in summary, the following:

a) It is unlawful the taxation that was applied to the dividends received from shareholdings held in B…– a company with tax residence in Tunisia – and in E…– a company with tax residence in Lebanon – in the fiscal year 2012, since the dividends in question could not benefit from the rules for elimination of economic double taxation provided for in domestic law;

b) The taxation in question is already violating the Euro-Mediterranean Agreement establishing an association between the European Communities and their Member States, on the one hand, and the Republic of Tunisia, on the other;

c) Both the freedom of establishment and the freedom of movement of capital enshrined in that agreement impose the application of the rules for elimination of economic double taxation provided for in domestic law to dividends originating from profits distributed by companies resident in Tunisia;

d) The same occurs in relation to the Euro-Mediterranean Agreement establishing an association between the European Community and its Member States, on the one hand, and the Republic of Lebanon, on the other;

e) All of this while also violating, in either case, the freedom of movement of capital provided for in the Treaty on the Functioning of the European Union ("TFEU");

f) A freedom that enjoys, as is known, a universal scope of application, thus comprising third countries (i.e. countries that are not members of the European Union);

g) To that extent, the Arbitral and Judicial Courts in Portugal have also already decided that regarding dividends distributed to the Claimant in other fiscal years, as well as the Advocate General of the CJEU in the proceedings pending before it regarding the subject matter under dispute;

h) The Arbitral Tribunal pronounced itself negatively on the invocation by the Tax Authority (i) of the "Tax Carve-Out" clauses of article 89 of the Agreement with Tunisia (ii) reasons of general interest to justify the restriction imposed by the current article 51 of the CIRC on the freedom of movement of capital based on article 65 of the TFEU; (iii) absence of information exchange mechanisms, having in all cases considered that none of these arguments are applicable in the present case;

i) The interpretation reached by that Arbitral Tribunal was subsequently supported at the level of the CJEU in the Conclusions of Advocate General Melchior Wathelet, in a case in which the dividends distributed in 2009 to the Claimant are discussed (cf. Doc. No. 4), which also concluded to the total merit of this party's arguments;

j) More recently, in the judgment delivered on 15 July 2016 in the context of proceedings No. 567/2015-T (cf. Doc. No. 5), the Arbitral Tribunal reiterated its previous case law, having once again concluded that "there is merit in the defect of violation of law alleged by the Claimant, due to the incompatibility of paragraph 1 of article 46 of the CIRC [current article 51, paragraph 1 of the CIRC] with article 63 of the TFEU, insofar as it restricts the elimination of economic double taxation through the exemption of dividends for taxpayers resident in Portugal, Member States of the European Union or States of the EEA, with the consequent annulment of the tax acts subject to arbitral pronouncement";

k) Also the Tax Court of Lisbon in the judgment delivered on 31 October 2015 in the judicial challenge in Proc. …/11… BEALM "endorsed in its entirety" the aforementioned arbitral decision delivered in proceedings No. 22/2013-T, and gave "as our own the reasoning of the identified arbitral decision, based on the principle of congruity of decisions in justice" (cf. pp. 22 and 23 Doc. No. 6);

l) Therefore, it is today unequivocal to conclude that, in the present case, the regime for integral elimination – 100% – of economic double taxation provided for in the then article 51, paragraph 1 of the Corporate Income Tax Code ("CIRC") should have been applied to the Claimant;

m) In summary, whether through conventional law – the Euro-Mediterranean agreements concluded with Tunisia and Lebanon – or through European primary law – the TFEU – there are no reasons not to apply to profits originating in Tunisia and Lebanon the regime for elimination of economic double taxation provided for in domestic law as of the date of the facts;

n) During the fiscal year 2012, the Claimant held a shareholding in the subsidiary in Tunisia – B…– of 98.72%, as evidenced by the Report of the Board of Directors and, in particular, the Consolidated Financial Statements – of the fiscal year 2012 of the Group C… and D…, (documents which are now attached as Docs. Nos. 7 and 8);

o) And which yielded to it, in the year 2012, dividends of €621,921.32, as evidenced by the periodic income statement of the Claimant which is now attached as Doc. No. 2;

p) In turn, and in the same fiscal year 2012, the Claimant also held significant shareholdings in its subsidiary in Lebanon – E… – which corresponded to a total of 50.67% of the respective capital, with 28.64% held directly, and 22.03% held indirectly, that is, through other companies dominated by the Claimant (see Report of the Board of Directors and, in particular, the Consolidated Financial Statements – pp. 171 and pp. 76– of the fiscal year 2012 of the Group C… and D… already attached as Docs. Nos. 7 and 8);

q) And which secured to it, in the year 2012, a dividend of €3,300,209.37, as evidenced by the periodic income statement of the Claimant;

r) Now, both the dividends distributed by the Tunisian company and by the Lebanese company were subject, according to the letter of domestic law, to ordinary taxation in Portugal at the normal IRC rate, thus contributing to the determination of the Claimant's taxable profit;

s) In fact, the Claimant received a total of €112,286,830.69 in dividends in 2012, and only benefited from the elimination of economic double taxation in the amount of €108,364,700.00 (cf. Table 07 – Field 771 of Form 22 Individual of A… of Doc. No. 2);

t) Now, the difference between the dividends that would have benefited from the elimination of economic double taxation and the total dividends received by A… in that fiscal year is €3,922,130.69, that is, precisely the dividends received from the Tunisian and Lebanese company;

u) Which means that they did not benefit, pure and simple, from either the rules for elimination of economic double taxation provided for in the CIRC;

v) Or from the rules on this matter provided for in the Tax Benefits Statute ("EBF");

w) This when such profits were actually subject to taxation in Tunisia, at the rate of 30%;

x) And actually subject to taxation in Lebanon, at a rate not less than 60% of the Portuguese rate, in this case a tax rate of 15%;

y) On the other hand, according to the Claimant, the tax carve-out contained in article 89 of the Agreement with Tunisia is not, in these terms, capable of prejudicing the Claimant's right to integral elimination of double taxation that affected the dividends it received from its Tunisian subsidiary, in accordance with the case law (arbitral judgment, already mentioned, of 12 September 2013 delivered in the context of proceedings No. 22/2013-T, which was also reaffirmed in the judgment of CAAD of 15 July 2016 in the context of proceedings No. 567/2015-T and also in the judgment of the Tax Court of Lisbon on 31 October 2015 in the judicial challenge in Proc. …/11…BEALM, which subscribed in its entirety to the reasoning of the first arbitral judgment);

z) Also the tax carve-out contained in article 103 of the Agreement with Lebanon is not capable of prejudicing the Claimant's right to integral elimination of double taxation that affected the dividends it received from its subsidiary in Lebanon;

aa) In summary, the Court of Justice made it unequivocal, once and for all, that "Union law must be interpreted to the effect that a company resident in a Member State and holding a shareholding in a company resident in a third country that confers on it a certain influence in the decisions of the latter company and allows it to determine its activities may rely on article 63 TFEU to challenge the consistency with this provision of legislation of the aforementioned Member State relating to the fiscal treatment of dividends originating from that third country, not exclusively applicable to situations in which the parent company exercises decisive influence in the company that proceeds to the distribution of the dividends"[2] (emphasis by the Claimant);

bb) It is a matter of good faith – article 31, paragraph 1 of the Vienna Convention on the Law of Treaties – which prevents Member States from invoking the safeguard clause of EU primary law in the face of non-compliance with the commitments assumed in the Euro-Mediterranean agreements[3];

cc) Whereby, in summary, the effectiveness of tax control cannot serve here as a cause for justifying the restrictions;

dd) Finally, it also does not appear reasonable to sustain that the impossibility of deducting the income, included in the tax base, corresponding to the profits distributed by the subsidiaries in Tunisia and Lebanon could constitute, not even indirectly, a form of preventing tax evasion, fraud or abuse.

ee) The Claimant concludes by requesting: that the income included in the tax base, corresponding to the profits distributed by B… and E…, to the claimant in the amount of €3,922,130.69, be fully deducted, under the same conditions as provided for profits distributed by companies resident in Portugal, based on the two Euro-Mediterranean Agreements which establish, each one of them, an Association between the European Communities and their Member States, on the one hand, and the Republic of Tunisia and Lebanon, on the other;

Subsidiarily: i) that the income included in the tax base, corresponding to the profits distributed by B… and E…, to the claimant in the amount of €3,922,130.69, be fully deducted, under the same conditions as provided for profits distributed by companies resident in Portugal, based on article 63, paragraph 1, of the TFEU, former article 56, paragraph 1, of the Treaty establishing the European Community;

Subsidiarily to the aforementioned requests, that the income included in the tax base, corresponding to the profits distributed by B… and E…, to the claimant in the amount of €3,922,130.69, be fully deducted, under the same conditions as provided for profits distributed by companies resident in PALOP and East Timor, based on article 63, paragraph 1, of the TFUE, former article 56, paragraph 1, of the Treaty establishing the European Community, with the corresponding tax consequences.

1. The Tax and Customs Authority submitted a response and attached the administrative file, invoking, in summary, the following:

5.1. By way of Exception

A) The lack of material jurisdiction of the Arbitral Tribunal to consider decisions rejecting applications for official revision

a) Article 2, subparagraph a) of Ordinance 112-A/2011 provides that the binding of the Tax Authority to the jurisdiction referred to has as its object the consideration of claims relating to taxes whose administration is entrusted to it, referred to in paragraph 1 of article 2 of the RJAT, "with the exception of claims relating to the declaration of illegality of self-assessment acts, withholding at source and payment on account acts that have not been preceded by recourse to the administrative procedure in accordance with articles 131 to 133 of the Tax Procedure and Process Code" (emphasis ours);

b) In this circumstance, it results that in the situation sub judice, for this Arbitral Tribunal to be able to pronounce itself, the mandatory precedence of a gracious claim would always be required in accordance with the provisions of paragraph 1 of article 131 of the TCPP;

c) In fact, the case law has supported the understanding, which is not questioned, that, given the administrative nature of the official revision procedure, it is susceptible to being equated with the provisions of article 131, paragraph 1 of the TCPP for the purpose of subsequent challenge of the respective decision of rejection;

d) However, such equivalence is legally forbidden in arbitral proceedings, being excluded from the material jurisdiction of arbitral tribunals the consideration of claims relating to the declaration of illegality of self-assessment acts that have not been preceded by recourse to the administrative procedure in accordance with articles 131 of the TCPP, but only of official revision in accordance with article 78 of the LGT;

e) In summary, this interpretation, besides being that which results from the literal expression "(…), the aforementioned understanding, that the disputes which have as their object the declaration of illegality of self-assessment acts, as is the case in the situation sub judice, are excluded from the material jurisdiction of arbitral tribunals, if not preceded by a gracious claim in accordance with article 131 of the TCPP, is required by force of the constitutional principles of the rule of law and separation of powers (cf. articles 2 and 111, both of the CRP), as well as the right of access to justice (article 20 of the CRP) and legality [cf. articles 3, paragraph 2, 202 and 203 of the CRP and also article 266, paragraph 2, of the CRP, in its corollary of the principle of indisposability of tax credits inherent in article 30, paragraph 2 of the LGT, which bind the legislator and all activities of the Tax Authority;

f) Whereby, also in these terms, in light of all the above, article 2, subparagraph a) of Ordinance No. 112-A/2011 appears to be unconstitutional, in the normative interpretation according to which "Claims relating to the declaration of illegality of self-assessment acts, withholding at source and payment on account acts that have not been preceded by recourse to the administrative procedure in accordance with articles 131 to 133 of the Tax Procedure and Process Code" includes the application for official revision, when the letter and spirit of the norm do not permit it (the latter is also constructed under the necessary identity of the procedural mechanisms specifically listed therein).

B) Of the non-reviewability of the Claimant's request in the context of the gracious procedure of official revision

a) The Claimant deduced, in accordance with article 78, paragraph 2 of the LGT, a request for official revision of a tax act of "self-assessment" in the matter of Corporate Income Tax (IRC) relating to the taxation period corresponding to the civil year 2012, for error in self-assessment, invoking, for that purpose, as the sole ground, a defect of violation of law, due to alleged incompatibility of article 51 of the IRC Code with Community law and international public law;

b) According to the Respondent "it should not be incumbent upon the Administration to disapply or refuse to apply a norm contained in the domestic legal order on the mere ground of its incompatibility with Community law", since "the competence relating to the interpretation of Community law falls exclusively to the Court of Justice";

c) "(…) given the cause of action underlying the application for official revision and, there not being, at the time of the request and the pronouncement of the decision by the Tax Authority, even a clear act in the sense of the interpretation of national law in light of the provisions of Community law, the Tax Authority could not disapply domestic law, given the observance of the principle of legality (cf. article 266 of the CRP, article 3 of the CPA and article 55 of the LGT);

d) Consequently, if the Tax Authority cannot officially revise a tax act on the ground of violation of Community law, obviously, at least in the absence of a legal norm that unequivocally permits it, it also cannot do so at the request of the taxpayer, now the Claimant;

e) Thus, in light of the non-reviewability of the Claimant's request in the context of the gracious official revision procedure, the Respondent should consequently be dismissed from the request, in accordance with the provisions of article 576, paragraphs 1 and 3 of the Code of Civil Procedure, by virtue of article 29 of the RJAT.

5.2. By way of Challenge on the Merits

a) "It is important to note that "as stated in that judgment of the CJEU, judgment of the CJEU", delivered in case C-446/14 "«no mutual assistance convention was concluded between the Portuguese Republic and the Lebanese Republic» (cf. paragraph 69 of the judgment in case C-446/14, emphasis ours);

b) Thus, as the CJEU rightly concluded, Lebanon is not bound with the Portuguese State to administrative cooperation in the field of taxation;

c) Thus, it is important that it be established as proved that, as of the date of the facts (as well as to date), there is no Convention between Portugal and Lebanon to avoid Double Taxation[4], nor an Agreement for Exchange of Information in Tax Matters[5], nor is that Country a signatory to a Protocol with Portugal on Mutual Administrative Assistance[6];

d) It is also important to note that, it is not established in the file what was alleged by the Claimant in articles 106 and 107 of the arbitral request, that is, that the profits distributed to the Claimant by the Tunisian and Lebanese companies were actually subject to taxation in their respective countries of residence (nor even that the companies are subject to taxation there);

e) For although the Claimant alleges that the profits distributed to it by the Tunisian and Lebanese companies were actually subject to taxation in these countries, the truth is that it merely attaches, in arbitral proceedings, the financial reports of those companies (mere private documents, therefore), without, however, attaching any document issued by the respective tax authorities of those countries;

f) Especially since, with regard to Lebanon, even if such proof by private document could, in some way be relieved (which is admitted for mere caution and duty of representation), the truth is that it appears impossible, both for the Tax Authority and for this Tribunal, to verify the value of the proof produced by the Claimant for the purpose of fulfilling the requirements relating to the subjection to taxation and actual taxation (article 51, paragraphs 1 and 10 of the IRC Code);

g) For the Respondent, the burden of proof incumbent upon the taxpayer was not met (cfr. Judgment of the Central Administrative Court of the South, of 02-02-2010 (case No. 01959/07);

h) In summary, the Respondent relying on the Judgment of the CJEU in case C-446/14 argues that "the refusal to grant an integral deduction of income corresponding to profits distributed by Tunisian and Lebanese companies (because the partial deduction is no longer provided for in 2012), is, in principle, prohibited by article 63 of the TFEU, however can be justified by imperative reasons of general interest relating to the need to ensure the effectiveness of tax controls";

i) (…) it is reiterated, therefore, the conclusion that, contrary to what was argued by the Claimant in the arbitral request, the CJEU has already concluded that «the refusal to grant an integral deduction… can be justified by imperative reasons of general interest relating to the need to ensure the effectiveness of tax controls», by force of the application of the provisions of article 65 of the TFEU;

j) Thus, the request by the Claimant as regards the integral deduction of income, included in the tax base, corresponding to the profits distributed by E…, with residence in Lebanon, under the same conditions as provided for profits distributed by companies resident in Portugal, falls away, whatever the ground invoked by the Claimant.

1. The Claimant responded to the matter of exception, invoking, in summary, the following:

Regarding the alleged lack of material jurisdiction of Arbitral Tribunals to consider acts of express rejection of applications for official revision, the Claimant alleges that it is today fully resolved and peacefully decided by arbitral case law and its invocation only illustrates a certain desperation of the Tax Authority in this matter after the decision of the Court of Justice of the European Union.

From early on, against the Tax Authority's claim to restrict beyond what the law provides the competencies of Arbitral Tribunals, to which it has bound itself, case law was established to the effect that "article 2, subparagraph a) of Ordinance No. 112-A/2011, properly interpreted based on the criteria for interpretation of law provided for in article 9 of the Civil Code and applicable to substantive and adjective tax norms, by force of the provisions of article 11, paragraph 1, of the LGT, enables the presentation of requests for arbitral pronouncement regarding self-assessment acts that have been preceded by a request for official revision" (cf. Arbitral Decision of 17.05.2013, delivered in Proc. No. 117/2013-T by Judge-Counselor Jorge Lopes de Sousa (Arbitrator-President), Prof. Dr. Diogo Leite Campos and Dr. Victor Simões).

In fact, it is today settled case law that "The jurisdiction of arbitral tribunals in tax matters is doubly limited, both by the RJAT (article 2, paragraph 1), and by Ordinance No. 112-A/2011, of 22 March. Analyzing the legal provisions of both diplomas, there is no limitation to the jurisdiction of the Tribunal to "consider claims relating to decisions of the revision procedure". But more so, from the Legislative Authorization Law (Law 3-B/2010, of 28 April), which underlies the RJAT, results an equalization of competencies between the judicial challenge process and the arbitral process. This equalization is evident in article 124, paragraph 2 of the referred Legislative Authorization Law in which it is determined that "The arbitral tax process must constitute an alternative judicial means to the judicial challenge process and to the action for the recognition of a right or legitimate interest in tax matters." Now, if there are no doubts that judicial challenge is a procedural means suitable for knowledge of the legality of tax assessment acts following the pronouncement of a decision in an official revision procedure, so will it be the request for arbitral pronouncement, by force of said equalization" (cf. Arbitral Decision of 29.01.2016, delivered in Proc. 322/2015-T by Judge-Counselor Fernanda Maças (Arbitrator-President), Dr. Hélder Faustino and Dr. Francisco Furtado Carvalho).

Already as to the exception arising from an alleged "non-reviewability" of the Claimant's request in the context of official revision, it is important first to recall that the official revision of self-assessment acts is not a faculty of the Tax Authority for, in the words of the STA, we are dealing with a true "legal duty of official revision" (cf. Judgment of the STA of 11.05.2005, Proc. No. 0319/05, in which was delivered by Judge-Counselors Brandão de Pinho (rapporteur), Vítor Meira and Jorge Lopes de Sousa).

Moreover, that this "legal duty of official revision" includes precisely those cases of "error attributable to the services" in which are included those cases in which "there being error of law in the assessment, by application of national norms that violate Community law and it being effected by the services, it is to the tax administration that this error is attributable" (cf. Judgment of the STA of 12.12.2001, Proc. No. 0319/05, in which was rapporteur the Judge-Counselor Jorge Lopes de Sousa).

In fact, "the possibilities of reaction of individuals against unlawful acts of tax assessment, when there is a question of violation of norms of Community law, do not end with judicial challenge" (cf. cited Judgment of the STA of 12.12.2001, Proc. No. 0319/05).

1. Since there were no reasons justifying it, the tribunal waived the holding of the first meeting provided for in article 18 of the RJAT, which it did pursuant to the principles of tribunal autonomy in the conduct of the proceedings. The Tribunal set 12 June 2017 for the purpose of delivery of the judgment.

2. After the Parties were notified to submit arguments, the Claimant submitted a request for attachment of documents to the present file, and the Respondent pronounced itself on the inadmissibility of such attachment. The documentary evidence whose attachment was requested had as its purpose facts alleged by the Taxpayer in its initial request, verifying that, the Taxpayer not having annexed the documents in question to its pleading, also did not proceed to attach such proof to the file, in accordance with the provisions of article 423 of the CPC, applicable with due application. By order of 21 March, which is reproduced for the proper effect, the tribunal did not admit the referred attachment, and "the documents improperly attached, at this instance, by the Taxpayer, must be extracted from the file".

3. The Claimant and the Respondent submitted arguments, with the former alleging that the response constitutes, in almost its entirety, a posteriori reasoning.

II. SANEAMENTO [ISSUE CLARIFICATION]

1. The parties have legal personality and capacity, show themselves to be legitimate and are duly represented (articles 4 and 10, paragraph 2, of the RJAT and article 1 of Ordinance No. 112-A/2011, of 22 March).

2. The tribunal is competent and properly constituted.

3. The proceedings do not suffer from any nullities.

4. The Tax Authority raises the following exceptions:

4.1. Regarding the lack of material jurisdiction of the Arbitral Tribunal to consider decisions rejecting applications for official revision.

The Tax Authority sustains, in summary, that art. 2, al. a) of ordinance 112-A/2011, of 22/3, by which it bound itself to arbitral jurisdiction, excludes claims relating to the declaration of illegality of self-assessment acts that have not been preceded by recourse to the administrative procedure, in accordance with the provisions of art. 131 to 133 of the TCPP. An understanding that, for the Tax Authority, besides the literal element, is required "by force of the constitutional principles of the rule of law and separation of powers (cfr. articles 2 and 111, both of the CRP), as well as the right of access to justice (article 20 of the CRP) and legality (cfr. articles 3, paragraph 2, and 266, paragraph 2, both of the CRP), in its corollary of the principle of indisposability of tax credits inherent in article 30, paragraph 2 of the LGT, which bind the legislator and all activities of the Tax Authority" (38th Response). "In fact, the binding of the Tax Authority to the arbitral protection necessary, in which the principle of irrevocability of decisions prevails, presupposes a limitation of the situations in which it can fully decide whether or not to lodge an appeal against an unfavorable judicial decision, that is, the power to choose between definitively waiving the collection of the tax credit or adopting the behavior potentially suitable to seek its effectiveness" (40th Response).

The Claimant, in exercise of the right of contradiction granted to it regarding the exception, defended the dismissal of the exception invoked by relying on case law of CAAD in a sense different from that sustained by the Tax Authority.

Let us see:

The jurisdiction of the arbitral tribunals functioning in CAAD is, in the first place, marked out by the matters indicated in art. 2, paragraph 1, of decree-law No. 10/2011, of 20/1 (RJAT). In a second place, the jurisdiction of the arbitral tribunals functioning in CAAD is also limited by the terms in which the Tax Authority was bound to that jurisdiction by ordinance No. 112-A/2011, of 22/3, since art. 4 of the RJAT establishes that "the binding of the tax administration to the jurisdiction of the tribunals constituted in accordance with this law depends on an ordinance of the members of the Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of the disputes covered".

In light of this second limitation on the jurisdiction of the arbitral tribunals functioning in CAAD, the resolution of the question of jurisdiction depends essentially on the terms and nature of this binding, for, even if one is dealing with a situation that can be framed in that art. 2 of the RJAT, if it is not covered by the binding, the possibility of the dispute being jurisdictionally decided by this Arbitral Tribunal will be excluded. That is, "the scope (…) of arbitral proceedings is restricted to questions of the legality of acts of the types referred to in article 2 [of the RJAT] that are covered by the binding that was made in Ordinance No. 112-A/2011 (…)", cfr. Judgment TCAS of 28/4/2016 (proc. 09286/16, rapporteur: Anabela Russo).

It happens that in subparagraph a) of art. 2 of ordinance No. 112-A/2011 are expressly excluded from the scope of the binding of the Tax Authority to the jurisdiction of the arbitral tribunals functioning in CAAD the "claims relating to the declaration of illegality of self-assessment acts, withholding at source and payment on account acts that have not been preceded by recourse to the administrative procedure in accordance with articles 131 to 133 of the Tax Procedure and Process Code". That is, comparing the binding ordinance with the RJAT, that is more demanding than this, by adding a requirement to abstractly delimit the object of the binding of the Tax Authority to arbitral jurisdiction.

As was noted in the Arbitral Decision, case No. 143/2016-T, "With respect to the nature of the ordinance, there are those who understand that therein resides fundamentally a decision act of the Administration, of voluntary manifestation of consent to binding to the RJAT, and in the restrictions to the object a "concrete limitation", albeit "manifested in terms of a generic disposition" (cfr. was the majority understanding in Judgment 236/2013 of 22/4/2014, or 364/2014 of 19/12/2014, both of CAAD). On the other hand, there are those who reveal a more regulatory (normative) understanding of the ordinance (majority case law). "Notwithstanding that there are suggestive elements for both positions, we consider that the regulatory character of the ordinance stands out, especially as to the object of the binding, which projects itself in all disputes to be resolved through tax arbitration. And to that extent, that part of the ordinance configures itself as an administrative regulation, which is integrated into the RJAT.

"What was said before serves to parameterize the selection of interpretive criteria. Given the nature of the ordinance, a subjectivist orientation should be adopted, with the meaning of the normative text that best corresponds to the real thinking of the "legislator" being prevalent, in which the teleological element, the purpose of the established disposition, is privileged.

"Now what requires special interpretive labor is the requirement of "administrative procedure" necessary (prior), "in accordance with articles 131 to 133 of the Tax Procedure and Process Code".

"From the start, in obedience to those same "terms", provided for in art. 131 TCPP, the requirement of prior administrative procedure will only be applicable to cases in which such recourse is obligatory, through a gracious claim. In fact, in the case of self-assessments, a gracious claim is required, but only in cases of errors that are not founded exclusively on matters of law, and in which the self-assessments have been carried out in accordance with generic guidance issued by the tax administration (cfr. paragraph 1 and paragraph 3 of art. 131 TCPP)[7].

"The useful meaning of the ordinance, in light of what is established in the RJAT, the will of the legislator, was to ensure that the taxpayer does not resort to the Tribunal "(…) before any position by the administration on the situation created with the act of the taxpayer (…) since no dispute is yet detectable"[8] [9]. Thus it is understood that the cases provided for in art. 131, paragraph 3 TCPP are excluded from the requirement of a claim, given that in those the Tax Authority has already pronounced itself, a priori, through "generic guidance".

"Returning to the request for arbitral pronouncement, it should be recalled that it arises as the culmination of a process initiated with a request for official revision, expressly rejected. The Claimant did not resort, therefore, to a "gracious claim", but rather resorted directly to the request for revision, and did so more than two years after the declaration of self-assessment.

"However, what truly matters is that, in cases in which a request for official revision of a tax assessment act is formulated, the Tax Authority is equally provided, with that request, with an opportunity to pronounce itself on the merit of the taxpayer's claim, before the latter resorts to the judicial proceeding. Therefore, "in coherence with the solutions adopted in paragraphs 1 and 3 of art. 131 of the TCPP, it cannot be required that, cumulatively with the possibility of administrative consideration within that official revision procedure, a new administrative consideration through a gracious claim be required. On the other hand, it is unequivocal that the legislator did not intend to prevent taxpayers from formulating applications for official revision in the case of self-assessment acts, for these are expressly mentioned in paragraph 2 of article 78 of the LGT. In this context, as the law expressly permits taxpayers to opt for the gracious claim or for the official revision of self-assessment acts and the request for official revision formulated within the period for gracious claim being perfectly equivalent to a gracious claim[10] (…) there can be no reason that can explain why a taxpayer who has opted for the revision of the tax act instead of the gracious claim cannot access the arbitral proceeding".

In light of the above, it is concluded[12] that ordinance No. 112-A/2011, in expressly referring to article 131 of the TCPP regarding applications for declaration of illegality of self-assessment acts, said imperfectly what it intended. Wishing to impose the administrative consideration necessary for contentious challenge of self-assessment acts, it ended up making express reference to article 131, forgetting that this procedure does not exhaust the possibilities for administrative consideration of such acts. The interpretation upheld is the interpretation that best translates the will of the "legislator" and that does not conflict with any constitutional principles, nor brings the "indisposability of tax credits" into crisis.

Moreover, the invocation of the principle of indisposability of tax credits will possibly be a lapse, since in deciding on its jurisdiction, relevant only as a procedural prerequisite, the Arbitral Tribunal is surely not practicing any act of disposition of a tax credit, in the sense of the invoked art. 30, paragraph 2 LGT.

On the other hand, excluding arbitral jurisdiction solely because the means used should have been a prior gracious claim would violate the principles of access to law and effective judicial protection.

In fact, the rule, both for judicial challenge and for arbitration, is that all those acts relative to which this entity either has not yet pronounced itself or has had no intervention whatsoever, should be submitted to the scrutiny of the Tax Authority, for which reason it must be given the opportunity to pronounce itself before the judicial or arbitral tribunal pronounces itself as to its legality.

It is, thus, manifest the equivalence between the request for revision of the tax act and the gracious claim regarding self-assessment acts, withholding at source and payment on account acts. In fact, as was noted in the Judgment of the Supreme Administrative Court (Plenary of the tax law section, case No. 0793/2014), of 3 June 2015, "(…) the procedural means of revision of the tax act cannot be considered as an exceptional means to react against the consequences of a tax assessment act, but rather as an alternative means of administrative and contentious challenge means (when used at a time in which these can still be utilized) or complementary to them (when the periods for use of means of challenge of the tax assessment act have already been exhausted)…".

Following the mentioned Judgment, the Supreme Administrative Court decided that "the Rejection, tacit or express, of the revision request is susceptible to judicial control [cfr. art. 95, paragraphs 1 and 2, subparagraph d), of the LGT]".

It is, today, settled case law that, being able the Tax Authority, on its own initiative, to proceed with the official revision of the tax act, within the period of four years after the assessment or at any time if the tax has not yet been paid, on the ground of error attributable to the services (art. 78, paragraph 1, of the General Tax Law), the taxpayer can also, within that period for official revision, request this same revision with that ground.

In summary, the request for official revision of the tax act is a mechanism for opening the contentious proceeding perfectly equivalent to the necessary gracious claim, insofar as it serves the purpose of allowing the Tax Authority to pronounce itself on the self-assessment acts.

For the reasons set out, the Tax Authority's argument regarding the unconstitutionality of art. 2, subparagraph a), of Ordinance No. 112-A/2011 in the interpretation upheld by this tribunal is without merit.

Therefore, this exception of lack of jurisdiction is without merit.

1. Regarding the non-reviewability of the Claimant's request in the context of the gracious official revision procedure.

As to this exception, the Respondent invokes, in summary, that it is not incumbent upon the Tax Authority to officially revise a tax act on the ground of violation of Community law, in the absence of a legal norm that permits it. Now, the Respondent enters into manifest contradiction because, in fact, at the stage of rejection, the Tax Authority truly considered whether or not such a violation existed, concluding that such a violation did not exist. Now, it is that very same interpretation that ultimately grounds the act of rejection of the request for official revision that the Claimant here impugns.

Thus being, should the Respondent's thesis proceed, the tribunals would also be prevented from reconsidering the Tax Authority's decisions on that ground, which would result in an offense to the principle of effective judicial protection of the rights and legally protected interests of taxpayers.

Therefore, this exception raised by the Respondent is also without merit.

1. There are no other circumstances that prevent the consideration of the merits of the case.

III. MERITS

III.1. Factual Matters

With relevance for the consideration and decision of the questions raised, prior and on the merits, the following facts are established and proven:

a) The Claimant was in 2012 the parent company of a group of companies (the Group D…) subject to the special regime for taxation of groups of companies (RETGS) provided for and regulated in article 69 and following of the IRC Code;

b) During the fiscal year 2012, the Claimant held a shareholding in the subsidiary in Tunisia – B…– of 98.72%, as evidenced by the Report of the Board of Directors and, in particular, the Consolidated Financial Statements – of the fiscal year 2012 of the Group C… and D…, (documents which are now attached as Docs. Nos. 7 and 8);

c) A shareholding that it has held since 2000 (see pp. 171 and 76 of the Consolidated Financial Statements);

d) And which yielded to it, in the year 2012, dividends of €621,921.32, as evidenced by the periodic income statement of the Claimant which is now attached as Doc. No. 2;

e) Tunisian subsidiary which, like the Claimant, is engaged in the production and marketing of … and which in the fiscal year in question – 2012 – presented a turnover of 117,391 thousand Tunisian dinars (approximately 61.9 million euros), while counting, at that date, 290 employees on its staff (as can be verified from the report and financial statements of the company in question which are now attached as Doc. No. 9);

f) In the same fiscal year 2012, the Claimant also held significant shareholdings in its subsidiary in Lebanon – E…– which corresponded to a total of 50.67% of the respective capital, with 28.64% held directly, and 22.03% held indirectly, that is, through other companies dominated by the Claimant (see Report of the Board of Directors and, in particular, the Consolidated Financial Statements – pp. 171 and pp. 76– of the fiscal year 2012 of the Group C… and D… already attached as Docs. Nos. 7 and 8);

g) Shareholdings that it has held, substantially in these percentages, since 2007 (see pp. 171 and 76 of the Consolidated Financial Statements);

h) And which secured to it, in the year 2012, a dividend of €3,300,209.37, as evidenced by the periodic income statement of the Claimant;

i) In turn, this subsidiary also engages in the production and marketing of …, having presented in the fiscal year 2012 a turnover of 160,471,843 Lebanese pounds (approximately 82.9 million euros) while counting, at that date, 430 employees (as can also be verified from the report and financial statements of the company which is now attached as Doc. No. 10);

j) The dividends distributed both by the Tunisian company and by the Lebanese company were subject, in accordance with the letter of domestic law, to ordinary taxation in Portugal at the normal IRC rate, thus contributing to the determination of the Claimant's taxable profit;

k) The Claimant received a total of €112,286,830.69 in dividends in 2012, and only benefited from the elimination of economic double taxation in the amount of €108,364,700.00 (cf. Table 07 – Field 771 of Form 22 Individual of A… of Doc. No. 2);

l) The difference between the dividends that would have benefited from the elimination of economic double taxation and the total dividends received by A… in that fiscal year is €3,922,130.69, that is, precisely the dividends received from the Tunisian and Lebanese company;

m) The dividends in question were not granted any possibility of benefiting from a regime of elimination of economic double taxation;

n) The Claimant submitted on 31 May 2013 its consolidated IRC statement Form 22 relating to the fiscal year 2012, having at that moment proceeded with the self-assessment of the referred tax (including the consequent municipal surtax), and on 29 May 2014 also submitted amendments to that self-assessment through the submission of a replacement statement;

o) The amount of the IRC, including autonomous taxes, and the consequent municipal surtax, self-assessed, is paid;

p) On 30-03-2016, the Claimant submitted a request for official revision of the tax act of "self-assessment" in the matter of IRC relating to the taxation period corresponding to the civil year 2012, embodied in the "Assessment" No. 2013…, of 11-06-2013;

q) By Official Letter No. …, of 19-05-2016, the Claimant was notified of the draft rejection of the application for official revision (cf. fls. 126 and following of the administrative file). In the referred information it can be read, from the outset, among other things, that "(...) the matter in issue is of an exclusively legal nature and concerns the legal and tax classification to be applied to the dividends received by "A…" in the fiscal year 2012, relating to its subsidiaries with tax residence in Tunisia and Lebanon"". Having concluded that national legislation is directly opposed to the application of article 51 of the CIRC when the entity distributing the profits is resident in a third State. In summary, in that draft decision, after explaining the regime for elimination of economic double taxation of profits distributed, and after enumerating the prerequisites provided for in article 51 of the IRC Code, the conclusion is reached: "that the requirements for the Claimant to benefit from the application of art. 51 of the CIRC are not met.", because "in providing these terms, national legislation is directly opposed to the application of the same regime, when the entity distributing the profits is resident in a third State."

r) Additionally and, referring to Opinion No. 79/09 of 14-10-2009, of the Center for Tax Studies, whose conclusions in that draft rejection are transcribed, the conclusion is reached that: "In summary, in light of the factual and legal framework as of the date in force regarding the elimination of economic double taxation of profits distributed arising from articles 51 of the CIRC and 42 of the EBF as well as the administrative doctrine established in the cited Opinion No. 79/09, whose content is hereby fully reproduced, it appears that the application for Official Revision of the self-assessment act, submitted by the taxpayer "A…" concerning the IRC of the fiscal year 2012 should be rejected";

s) A final decision of rejection was issued, in accordance with the order, of 23-06-2016, of the Head of the Management and Tax Assistance Division of the Large Taxpayers Unit (by delegation of competencies);

t) By Official Letter No. …, of 23-06-2016, the Claimant was notified of this final decision rejecting the application for official revision and, not conforming to it, deduced the present arbitral request;

u) There is no Agreement between Portugal and Lebanon for Exchange of Information in Tax Matters (http//:info. portaldasfinanças.gov.pt/fiscal_information/ATIF).

Facts Not Proved

No judgment is rendered regarding the fact that the Claimant did not prove payment of tax on the dividends received in Tunisia and Lebanon, since this matter was not considered in the decision on the application for official revision that is the immediate object of the proceedings and whose content limits the Tribunal's powers of cognition in annulment contentious proceedings.

Grounds for Establishment of Factual Matters

The established factuality was based on the conviction formed based on the position assumed by the parties and on the documentary evidence attached to the file by the Claimant with the arbitral request and by the Tax and Customs Authority and in those that are part of the administrative file attached to the file.

3.1. Legal Matters

3.1.1. Determination of the Object of the Request for Arbitral Pronouncement

The Claimant, in its arguments, invoked, among other things, that "the Response of the Tax Authority is, with all due respect, practically entirely inadmissible and irrelevant to this matter in that it constitutes in its almost entirety a posteriori reasoning of the act of rejection impugned by A…."

In cases in which, following a self-assessment, an express decision of rejection of an application for official revision has been issued, it is this decision that remains in the legal order as the act that defines the position of the Tax and Customs Authority before the taxpayer.

As was noted in the Arbitral Decision, delivered in case No. 628/2014-T, "the question that arises for the Arbitral Tribunal in a contentious proceeding of mere annulment in which a decision of a gracious claim was issued, which considered the legality of a self-assessment act, is whether the grounds invoked in that decision ensure or do not ensure such legality.

"In fact, as it is settled case law, a posteriori reasoning is irrelevant".

"In a contentious proceeding of mere annulment, as exists in the judicial challenge process and in the arbitral processes, which are its alternative (article 124, paragraph 2, of Law No. 3-B/2010, of 28 April), the legality of the impugned act must be appraised as it occurred, with the reasoning that was used in it, with other possible reasoning that could serve as support for other acts, of total or partially coincident decisional content with the act practiced, being irrelevant.

Thus, the Tribunal cannot, upon the finding of the invocation of an illegal ground as support for the decision to reject the gracious claim, consider whether it should be rejected for other reasons (), although the Tax Administration is not prevented from, in a new act, being able to invoke other grounds.

Therefore, it is in light of the reasoning of the gracious claim decision that the question of its legality must be considered and, indirectly, that of its self-assessment, which in the present case comes down to knowing whether the grounds invoked in that decision justify that the self-assessment was effected as it was".

Applying to the case at hand the aforementioned case law, it is verified that the Claimant argued in the application for official revision that the dividends distributed by the Tunisian company as well as the Lebanese company "did not benefit, pure and simple, from either the rules for elimination of economic double taxation provided for in the CIRC, or from the rules on this matter provided for in the Tax Benefits Statute ("EBF")". When "such profits", according to the now Claimant "were actually subject to taxation in Tunisia, at the rate of 30%" and "[w]ere actually subject to taxation in Lebanon, at a rate not less than 60% of the Portuguese rate, in this case a tax rate of 15%".

The Tax and Customs Authority, as we have seen, rejected the application for official revision, essentially with the following reasoning: "«the matter in issue is of an exclusively legal nature and concerns the legal and tax classification to be applied to the dividends received by "A…" in the fiscal year 2012, concerning its subsidiaries with tax residence in Tunisia and Lebanon»" (cfr. pp. 4 of Information No. 104-AIR2/2016 which grounds the act of rejection attached to the File with the Administrative File).

Further on, after enumerating the prerequisites provided for in article 51 of the IRC Code, it can be read: «that the requirements for the Claimant to benefit from the application of art. 51 of the CIRC are not met.», because «in providing these terms, national legislation is directly opposed to the application of the same regime, when the entity distributing the profits is resident in a third State.»; (…) «the intention of the legislator is clearer when the same regime was expanded to States of the "EFTA"; Norway, Iceland and Liechtenstein which took place already in 2010 […] when it further added that in these cases, it only applies if the State in question is bound to administrative cooperation in the field of taxation equivalent to that established within the European Union and provided that both the participating entity and the participated company meet conditions comparable to those established in article 2 of Directive No. 90/43 5/CEE […] thus reinforcing the idea that the legislator intended to impose safeguard clauses so as to restrict the application of this regime even to these States, whose application is specifically provided for in law, and, incongruously, in the perspective of the Claimant, this same regime should be a completely open regime to third States, such as Tunisia and Lebanon, without provision or typification in Portuguese tax law, but with direct application without any safeguard clauses or restrictions.[…]; Nor are the prerequisites for the application to the present case of article 42 of the Tax Benefits Statute (EBF) met, since neither Tunisia nor Lebanon are included in the provision of the referred norm, which provides for the elimination of economic double taxation of profits distributed by companies resident in African countries of official Portuguese language and in the Democratic Republic of East Timor.

By this reasoning, it is found that the Tax and Customs Authority did not question that the Tunisian and Lebanese companies held by A… are effectively taxed in Tunisia and Lebanon nor the lack of proof regarding payment of tax on the dividends received. On the contrary, it is to be emphasized that the reasoning of the act rejecting the official revision is in the sense that the question of the file "is of an exclusively legal nature".

It is important, moreover, to note that it is expressly referred to by the Respondent in the file (both in the Response and more extensively in the arguments), that "in the decision on the application for official revision, from the outset the application of the regime provided for in article 51 of the IRC Code was ruled out, consequently the analysis of the concrete application of this regime was not carried out, as the knowledge of this question was, necessarily, prejudiced by the solution given to the first". "Hence, inevitably, the reference that the question related to a matter of an exclusively legal nature. Whereby, given, (…) it is not known how better to explain that the analysis of the concrete prerequisites for application of the regime provided for in article 51 of the IRC Code was prohibited, as useless, given the conclusion in the decision rejecting the application for official revision that the regime was, from the outset, not applicable to the situation under analysis" (points 84 to 86 of the arguments).

In light of the above, interpreting the decision rejecting the application for official revision, it is concluded that the Tax Authority limited itself to rejecting the application by invoking norms in the abstract without arguing any facts relative to the present case demonstrating the non-satisfaction of the prerequisites contained in art. 51 of the CIRC. According to that reasoning, the matter rests on the mere "legal and tax classification" of the situation in question, exclusively asking whether the domestic rules in force in 2012 relating to the taxation of profits received by a Portuguese company from its subsidiaries in Tunisia and Lebanon are in conformity with International Public Law and with the Law of the European Union to which Portugal was – and still is – bound.

It is, therefore, in light of the reasoning that accompanies it that the legality of the impugned tax act must be considered, which makes irrelevant, for this purpose, the a posteriori reasoning that the Tax and Customs Authority came to place in its Response.

3.1.2. Consideration of the Legality of the Impugned Tax Act

Entering into the analysis of the merits of the case, the principal requests will be considered first, only proceeding to consider the subsidiary requests if those are without merit. In fact, subsidiary requests should only be taken into account in case a previous request does not have merit [article 554, paragraph 1, of the Code of Civil Procedure, applicable by force of the provisions of article 29, paragraph 1, subparagraph e), of the RJAT].

There exists an arbitral decision on a question in every way identical to that on which it is important to decide, contained in the judgment of CAAD delivered on 12 September 2013, in the context of case No. 22/2013-T. Given the entire soundness of the grounds of that decision, this tribunal will adhere completely to them, transcribing them, to a large extent, with very small alterations. The adoption of the legal reasoning of judgment No. 22/2013-T will be punctuated by various references to judgment C-446/14 … against the Tax Authority, of 24 November 2016, including the conclusions of 27 January 2016 of Advocate General Melchior Wathelet (hereinafter Advocate General), given that in that case the very same issues on which this tribunal will have to deliver a decision are discussed, with the only difference truly relevant being the year to which the dividends to be considered relate.

3.1.2.1. Question of the Full Deductibility of Income Included in the Tax Base Corresponding to Profits Distributed by B… and E… to the Claimant

The main question to be decided in these arbitral proceedings is whether the differentiation, established by national legislation, between the treatment of profits when these are distributed by a company not resident in Portugal or in a Member State of the European Union is (in)compatible with the freedom of movement of capital provided for in article 63 of the Treaty on the Functioning of the European Union (TFEU), by virtue of the fact that it results in a less favorable tax treatment for non-residents.

3.1.2.1.1. Framework

In accordance with the Portuguese legislation applicable to the assessment being challenged, generally, whenever a company participates in the capital of another company and, in this context, benefits from a distribution of profits by the investee company, such profits are included in its tax base. That is, they are considered as forming part of the income of the company that benefits from them. The incorporation of such profits into the taxable profit of the beneficiary company gives rise to economic double taxation, since the same profit is taxed in the sphere of two distinct legal persons. In order to remedy this double taxation and the negative effects it has on economic activity, the tax legislator created some mechanisms.

The mechanism of article 51, paragraph 1, of the CIRC, which the claimant seeks to have applied to it, eliminates economic double taxation by permitting the deduction from the income included in the tax base of the profits distributed, provided that various requirements are met. It requires for this that (i) the company distributing the profits has its seat and effective management in Portugal or in a Member State of the European Union (51, paragraph 5), (ii) is subject to income tax; (iii) the beneficiary company is not covered by the fiscal transparency regime and (iv) holds directly a shareholding in the capital of the company distributing the profits not less than 10%, having been maintained in the ownership of the beneficiary, uninterruptedly, during the year prior to the date of the placing at disposal of the profits, or if held for less time, provided that the shareholding is maintained during the time necessary to complete that period.

The mechanism described and of which the claimant seeks to benefit, as results from the letter of the law, can only be applied to companies that meet the described requirements, in particular (i) that which concerns the amount and duration of the shareholding held in the companies distributing the profits, (ii) that concerning the subjection to taxation of the companies: B… (hereinafter Tunisian company) and E… (hereinafter Lebanese company)] and (iii) that concerning the fact that the Claimant is not subject to fiscal transparency ─ the Tunisian company and the Lebanese company do not have residence in Portugal or in a Member State.

3.1.2.1.2. Law of the European Union

Notwithstanding the limitation resulting from the letter of the law, it is possible to conceive that, through European Union Law, it is possible to expand, at the abstract level, without concerning itself with whether the requirements of 51 of the CIRC will or will not be met, the scope of application of the mechanism of article 51 of the CIRC. For, as is known, although only the Member States have competence in the matter of direct taxes, the Court of Justice (CJ) has sustained, through its decisions, that those States must exercise that competence in conformity with European Union law[13]. Thus avoiding violations of the five fundamental economic freedoms, namely: (i) the free movement of goods (articles 28 and following of the TFEU); (ii) the free movement of workers (articles 45 and following of the TFEU); (iii) the freedom of establishment (article 49 and following of the TFEU); (iv) the freedom to provide services (article 56 and following of the TFEU) and (v) the free movement of capital (article 63 and following of the TFEU). Now, it is precisely through the protection of each one of these freedoms, which are directly applicable, that a true harmonization occurs through case law that translates into the obligation for national legislations to conform to each one of these freedoms.

3.1.2.1.3. Freedom of Movement of Capital

Taking as a basis the circumstances of the situation under analysis, in particular the scope of the mechanism for elimination of double taxation contained in article 51 of the CIRC, it is found that the application of that article, solely to companies with residence in the European Union or in Portugal that distribute profits, represents, at first sight, a violation of the freedom of movement of capital (article 63 of the TFEU). This freedom is, moreover, the only one that also applies in relation to third States, and it is now settled that its content is exactly the same when Member States and third States are at issue. Consequently, restrictions on this freedom are prohibited regardless of whether Member States or third States are at issue[14], exactly the same way, with situations being perfectly comparable. In other words, all restrictions relating to the movement of capital and payments between the Member States and between them and third countries are prohibited[15].

The assertion that, in fact, the non-application of the regime of article 51, paragraph 1, of the CIRC to the dividends distributed by the Tunisian and Lebanese companies corresponds to a situation of intolerable discrimination against the free movement of capital (by dissuading taxpayers taxed in Portugal from investing their capital in Tunisia and Lebanon) presupposes, consequently, on the one hand that article 63 of the TFEU is applicable to these situations and on the other that, this being the case, and there being therefore discrimination, the reservation clause is not applicable or there is no valid justification for that discrimination.

In order to answer the first question, that is, to know whether article 51 is or is not covered by the scope of the freedom of movement of capital (article 63 of the TFEU), it is necessary to clarify from the outset whether both the acquisition of shareholdings in a company and the payment of dividends resulting from that operation fit or do not fit within that freedom.

There is no definition of "movement of capital" in the Treaty. It is important to note, however, that the CJ confirmed in various judgments, in drawing up a non-exhaustive list of capital movements, that the terminology applied to those movements in Annex I to Council Directive 88/361/CEE, of 24 June 1988, for the implementation of the former article 67 of the TEC, now repealed, still has some relevance. In this context, the CJ decided that capital movements can be included in the context of article 63, in particular, the so-called "direct" investments, namely investments in the form of participation in an enterprise through the holding of shares that confers the possibility of effectively participating in its management and control, as well as the so-called "portfolio" investments, that is, investments in the form of acquisition of securities on the capital market with the sole objective of making a financial investment without intention of influencing the management and control of the enterprise[16].

According to the CJ, the restrictions on capital movements referred to cover "not only national measures which, when applied to capital movements with destination to third countries or coming from them, restrict the establishment or investments but also those that restrict the payment of dividends resulting from them"[17].

It follows, as a consequence of the above, in the words of the CJ itself that "a company resident in a Member State and holding a shareholding in a company resident in a third country that confers on it a certain influence in the decisions of the latter company and allows it to determine its activities may rely on article 63 TFEU to challenge the consistency with this provision of legislation of the referred Member State relating to the fiscal treatment of dividends originating from that third country, not exclusively applicable to situations in which the parent company exercises decisive influence in the company that proceeds to the distribution of the dividends"[18].

With respect to the latter part of the quoted passage, it should be emphasized that despite, in historical terms, given its relationship with the Parent-Subsidiary Directive, it being conceivable that article 51, paragraph 1 of the CIRC would have originally had in view situations of control or effective influence, today, however, notwithstanding that there may be such preponderance, it emerges as clear that it does not refer exclusively to such situations. From the outset because 10% of capital, depending on the greater or lesser dispersion thereof, does not guarantee effective control. It cannot, therefore, in any way be said that article 51, paragraph 1 of the CIRC applies exclusively to situations in which the parent company exercises decisive influence in the company that proceeds to the distribution of dividends. In fact, the CJ has already declared that a shareholding of this magnitude does not necessarily imply that the holder of that shareholding exercises effective influence in the decisions of the company of which it is a shareholder[19].

It is therefore clear that article 51 of the CIRC is clearly covered by the movement of capital, whereby the refusal of a State to grant elimination of double taxation to dividends originating in Tunisia and Lebanon, when that elimination is permitted in favor of dividends of domestic origin, constitutes a discrimination[20]. For, as is obvious, that provision limits the acquisition of shares in companies in those countries, which cannot be permitted. In this sense the CJ affirmed: "Legislation such as that at issue in the main proceedings, whereby a company resident in a Member State may make an integral or partial deduction of dividends from its tax base when these are distributed by a company resident in the same Member State, but cannot make that deduction when the distributing company is resident in a third country, constitutes a restriction on capital movements between the Member States and third countries, which, in principle, is prohibited by article 63° TFEU"[21].

To this regard, the Advocate General emphasizes that "…the Portuguese legislation at issue in the main proceedings does not distinguish dividends received by a resident company based on a shareholding that confers on it a certain influence on the decisions of the company that proceeds to the distribution of those dividends, and allows it to determine its activities, from dividends received on the basis of a shareholding that does not confer such influence"[22] and that "consequently, with respect to the TFEU Treaty, the present case is covered by the free movement of capital"[23]. Ideas corroborated by the CJ in saying:

"Since the legislation at issue in the main proceedings is not intended to apply exclusively to situations in which the beneficiary company exercises decisive influence in the company distributing the dividends, it must be considered that a situation such as that at issue in the main proceedings is covered by article 63° TFEU, relating to the free movement of capital"[24].

"Therefore, in a situation such as that at issue in the main proceedings, a company established in Portugal that receives dividends from companies established, respectively, in Tunisia and Lebanon may rely on article 63° TFEU to challenge the fiscal treatment reserved for those dividends in the referred Member State on the basis of legislation that is not intended to apply exclusively to situations in which the beneficiary company exercises decisive influence over the distributing company"[25].

3.1.2.1.4. Safeguard Clause

Having verified the susceptibility of application of article 63 of the TFEU, it is necessary, however, before drawing full consequences therefrom, to verify still whether it is susceptible to the application of the safeguard clause of article 64 of the TFEU. This article allows that, where restrictions exist in force on 31 December 1993 pursuant to national legislation or Union legislation adopted in relation to certain capital movements with third countries that involve, among other operations, direct investment (situation of which we are concerned), it is possible to prevent the free movement of capital. This is because "the objective and legal context of the liberalization of capital movements are different depending on whether it is a matter of relations between Member States and third countries or free movement of capital between Member States, [so] they considered it necessary to provide for safeguard clauses and exceptions that apply specifically to capital movements with destination or coming from third countries"[26]. The safeguard clause aims, ultimately, at allowing some control on the part of the States, given that the freedom of movement of capital is normally ensured unilaterally and without reciprocity.

Independently of whether the Portuguese rule that excludes dividends distributed by companies of third States from the mechanism of economic double taxation constitutes or does not constitute a provision in conformity with the requirements of article 64 of the TFEU, the existence and content of the Euro-Mediterranean Agreements concluded with Tunisia and Lebanon would always prevent the application of that safeguard clause to situations involving Tunisian and Lebanese companies. It is worth recalling that Portuguese law enshrines a clause of full automatic reception of international conventional law, once the formalities of approval, ratification and publication are met (article 8, paragraph 2 of the CRP). From this it follows that treaties are immediate sources of rights and obligations for their addressees and can be invoked before the courts.

Treaties are hierarchically superior to ordinary law. This superiority results not only from articles 26 and 27 of the Vienna Convention on the Law of Treaties, but also from article 8, paragraphs 1 and 2 of the CRP. It is thus clear that, for the convention to be in force in the domestic order, subsequent ordinary law cannot revoke it. That is, international conventional law cannot be set aside by ordinary laws, emerging as superior to them. Whether such subsequent laws, which will be materially unconstitutional if they conflict with it; or prior ones, which will have to be suspended if they are in conflict with that international conventional law, only resuming force in case of suspension or cessation of the international convention in question.

Moreover, the agreements concluded with Tunisia and Lebanon, as mixed treaties, that is, treaties concluded jointly by the European Union (at the time the European Community) and the Member States, is a source of Law by two routes, as European Union Law[27] and as International Law with automatic incorporation in our legal system.

Notwithstanding that these agreements have essentially aimed at liberalization at the level of fundamental economic freedoms and avoiding discrimination, inherent in them, given the breadth of those freedoms, is the tax question due to its impact on them. The fact that agreements with Tunisia and Lebanon incorporate clauses that specifically make reference to taxes attests to this very fact. Examples are those that permit the parties, in particular, the right to distinguish residents and non-residents for purposes of taxation. Now, it only makes obvious sense to include clauses of this type if agreements such as those concluded with Tunisia and Lebanon have an impact on the tax legislation of the signatory States. The fact that they were signed by the various Member States, and therefore also by Portugal, ensures that they are based on an indisputable and full exercise of fiscal sovereignty, which reinforces their direct effect.

It is important to emphasize that, prior to the signing of these agreements, the free movement of capital from Tunisia and Lebanon to Portugal and other Member States was already ensured; with the possible application of the safeguard clause, to be sure, but it already existed. Whereby we are forced to conclude that the objective of the agreements with Tunisia and Lebanon, like what happened with other countries with respect to which the same model of agreement was followed, was essentially to ensure the reciprocity of this freedom. Specifically, as regards direct investments from the European Union.

Article 34° of the agreement with Tunisia, contained in Chapter I, with the heading "Current transactions and movement of capital", of the respective Title IV, entitled "Payments, capital, competition and other provisions on economic matters", provides:

"1. As regards capital balance transactions, [the Union] and Tunisia shall ensure, from the date of entry into force of this agreement, the free movement of capital relating to direct investments in Tunisia, made in companies constituted in accordance with the legislation in force, as well as the liquidation or repatriation of such investments and of any profits resulting therefrom.

1. The parties shall consult in order to facilitate the movement of capital between [the Union] and Tunisia and to fully liberalize it when the necessary conditions are met."

The provision transcribed did not limit itself, it is to be emphasized, to referring to direct investments in Tunisia, ensuring as regards them free movement. It further enshrined, expressly, that "the Community and Tunisia shall ensure…the liquidation or repatriation of such [direct] investments and of any profits resulting therefrom".

In turn, article 31° of the EC-Lebanon agreement, contained in Chapter 1, with the heading "Current transactions and movement of capital", of the respective Title IV, entitled "Payments, capital, competition and other provisions on economic matters", provides:

"Within the framework of this agreement and subject to the provisions of articles 33° and 34°, no restrictions shall be imposed on the movement of capital between [the Union], on the one hand, and Lebanon, on the other, nor shall discriminations be made based on the nationality or place of residence of their respective nationals or the place of investment of the referred capital."

Providing, in turn, article 33°, contained in the same Chapter 1 of that agreement:

"1. Subject to other provisions of this agreement and other international obligations of [the Union] and Lebanon, the provisions of articles 31° and 32° do not affect the application of any restriction existing between the parties on the date of entry into force of this agreement, relating to the movement of capital between them that involves direct investment, including in real estate, establishment, provision of financial services or admission of securities to capital markets.

1. However, the transfer abroad of investments made in Lebanon by residents [in the Union] or in [the Union] by Lebanese residents or of profits resulting therefrom shall not be affected."

Notwithstanding there being differences at the level of the wording of the provisions governing direct investments and repatriation of profits resulting therefrom, the solution that they propound is the same. This is because, although article 31° of the EC-Lebanon Agreement ensures the free movement of capital "subject to [article] 33° […]", which provides, in its paragraph 1, that:

"[article] 31° […] does not affect the application of any restriction existing between the parties on the date of entry into force of this agreement, relating to the movement of capital between them that involves direct investment, including in real estate, establishment, provision of financial services or admission of securities to capital markets".

Paragraph 2 of the referred article adds that:

"[h]owever, the transfer abroad of investments made in Lebanon by residents [in the Union] or in [the Union] by Lebanese residents or of profits resulting therefrom shall not be affected"[28].

Now, taking into account that the solution resulting from the provisions transcribed already resulted, in the abstract, from the freedom of movement of capital ensured to third States (without prejudice to the application of legislation that can be framed in the safeguard clause or other accepted restrictions), it must be inferred from this reference, starting from the presupposition that agreements as a rule are not redundant, the following conclusion. At least as regards the movement of capital relating to direct investments involving Tunisia and Lebanon, the provisions susceptible to being validated by the safeguard clause, that is, those that were in force on 31 December 1993, cease to be applied. It is clear that one of the implications that results both from article 34° paragraph 1 of the agreement with Tunisia, which entered into force on 1 March 1998, and from article 31° of the agreement with Lebanon, which entered into force on 1 April 2006, must be this, representing these articles suggestive clarifications in this regard. As norms subsequent to the norms in force in 1993, which are of higher nature and which besides assume special nature, necessarily overlap them, whereby they displace any possible safeguard clause that could prevent the full application of the freedom of movement of capital relating to direct investments in Tunisia and Lebanon.

The Advocate General stated in this regard that "[i]n fact, article 64° TFEU permits, but does not impose, the application between Member States and third countries of restrictions on capital movements in force on 31 December 1993. Consequently, nothing prevents Member States from renouncing such restrictions unilaterally or … within the framework of an international agreement, either in their entirety (as in the EC-Tunisia Agreement) or partially (as in the EC-Lebanon agreement)"[29]. Positioning entirely confirmed by the CJ in the decision of the case in saying that "a Member State waives the faculty provided for in article 64°, paragraph 1, TFEU, when, without formally repealing or altering existing legislation, it concludes an international agreement, such as an association agreement, which provides, in a provision with direct effect, the liberalization of a category of capital referred to in that article 64°, paragraph 1; consequently, this change in the legal framework must be equated, as to its effects on the possibility of invoking article 64°, paragraph 1, TFEU, with the introduction of new legislation, which is based on a logic different from existing legislation"[30].

Moreover, no other could be the consequence, at the risk of the agreements with Tunisia and Lebanon seeing their objectives completely frustrated as regards the freedom of movement of capital when direct investments are at issue. It is important not to forget that one of the reasons for the establishment of the safeguard clause contained in article 64° of the TFEU was certainly the non-existence of reciprocity on the part of third States as regards the freedom of movement of capital, whereby the establishment of the agreements with these countries, in providing for the liberalization of direct investments without reciprocity, fully confirms that the Member States have renounced the application of article 64° in relation to investments from the Union in these countries.

As such, the conclusion is that the safeguard clause of article 64° of the TFEU does not apply to the restrictions on the movement of capital relating to direct investments and the profits derived therefrom in the case of Tunisia and Lebanon by reason of the waiver made by the Member States, as evidenced by the respective association agreements.

As it has been established that article 63° of the TFEU is applicable to the situation and that the safeguard clause does not apply, it is necessary to determine, now, whether there is any other justification capable of justifying the restriction.

According to the case law of the CJ, a restriction to the freedom of movement of capital can be justified by imperative reasons of general interest, provided that it is appropriate to ensure the realization of the objective pursued and does not go beyond what is necessary for that purpose (proportionality test).

Imperative reasons of general interest that the CJ has recognized as capable of justifying restrictions on the freedom of movement of capital include the following: (i) the effectiveness of fiscal supervision and tax control; (ii) the prevention of tax evasion and tax avoidance; (iii) the coherence of the tax system; (iv) the effectiveness of the repression of fraud; and (v) the preservation of the balanced allocation of the power to tax between Member States. The Respondent, relying on the CJEU decision in case C-446/14, argues that the refusal to grant an integral deduction of income corresponding to profits distributed by Tunisian and Lebanese companies can be justified by "imperative reasons of general interest relating to the need to ensure the effectiveness of fiscal controls".

Let us now analyze this justification based on the decision in case C-446/14.

It is necessary to first understand the circumstances of that case in order to properly evaluate the content of the CJ's ruling.

In that case, a Portuguese company (Autores) appealed the decision of the tax authorities refusing the application of the double taxation relief mechanism provided for in the former article 51, paragraph 1 of the CIRC, as regards dividends received from a company resident in Lebanon. This was precisely the type of situation at issue in the present proceedings. The Portuguese tax authorities relied, among other things, on the following arguments:

(a) The absence of a bilateral agreement for the exchange of tax information with Lebanon, as well as absence of a mutual legal assistance convention to help prevent fraud and tax evasion;

(b) The specific restrictions imposed by the tax carve-out clauses contained in article 103 of the EC-Lebanon Agreement;

(c) The lack of adequate mechanisms to exchange information with Lebanon;

(d) The absence of an agreement to prevent double taxation with Lebanon.

On this basis, the Portuguese tax authorities sought to justify the limitation on the application of the mechanism by imperative reasons of general interest concerning the effectiveness of fiscal controls. This was the very same reasoning underlying the rejection of the application for official revision in the proceedings at hand.

In the case C-446/14, the CJ was called upon to determine whether the non-application of the mechanism could be justified by the absence of information exchange mechanisms, or on the grounds of the need to ensure effectiveness of fiscal controls, which the Portuguese State had invoked.

In its decision, the CJ held that it is true that the effectiveness of fiscal controls may, in principle, constitute an imperative reason of general interest capable of justifying a restriction on the freedom of movement of capital. However, the CJ then goes on to specify that this justification is only valid when it is supported by the existence of specific facts that demonstrate that, in the absence of the mechanism, the effectiveness of fiscal controls would indeed be compromised.

Specifically, the CJ stated that:

"It should be noted, nevertheless, that the reason relating to the effectiveness of fiscal supervision cannot, by itself, justify a general and absolute restriction applicable to all dividends distributed to Portuguese companies by non-resident companies, such as that laid down by the provision at issue in the proceedings" and further: "… such a justification would be conditional upon the existence of real and specific risks, the existence of which must be established in the context of the proceedings before the referring court and, consequently, cannot be assumed in general terms."

The CJ further clarified that there must be an examination of whether such information can be obtained from the non-resident company itself, or through the mechanisms provided by EU law (such as the DAC6 provisions concerning automatic information exchange), or through specific agreements between States.

Furthermore, the CJ explicitly stated in case C-446/14 that:

"… a general and absolute prohibition could not be justified on the basis that no bilateral agreement for the exchange of tax information, or no mutual legal assistance convention, or no equivalent mechanism for administrative cooperation exists between the Member State in question and the third country concerned."

The CJ also stated: "… the absence of a mechanism of information exchange cannot serve as a basis for establishing a rule applicable to all dividend distributions as a means of preventing tax evasion. Such absence cannot be equated with a general risk of tax evasion."

Based on this reasoning, the CJ concluded that the Portuguese rules were incompatible with article 63° TFEU, since they constituted a general and absolute prohibition that could not be justified even by the imperative reason of effectiveness of fiscal controls, in the absence of specific facts demonstrating a real risk to the effectiveness of such controls in the given circumstances.

The CJ explicitly stated: "It must therefore be concluded that… a general and absolute restriction to the granting of a deduction in respect of dividends distributed to a resident company by non-resident companies, such as that at issue in the main proceedings, cannot be justified by the imperative reason relating to the effectiveness of fiscal supervision."

As a matter of fact, what is crucial in this respect is that the CJ, in case C-446/14, found that the Portuguese rules operating as a categorical exclusion of the mechanism (article 51 of the CIRC) for all dividends from non-resident sources were incompatible with article 63° TFEU. The reason is that such a categorical ban cannot be justified, even by the most compelling imperative reasons of general interest, without specific supporting facts. A general rule cannot be justified when it excludes in its entirety the application of a favorable treatment merely on the basis of the residence of the non-resident company distributing the dividends.

The CJ made clear that, although the imperative reason concerning the effectiveness of fiscal controls may be invoked as a justification, it requires the identification of real and specific risks, the identification of which must be made in the context of the particular proceedings and cannot be assumed in general terms.

Regarding the specific circumstances of the case at hand, the Respondent has provided no evidence of any real and specific risk that the effectiveness of fiscal controls would be compromised if the mechanism of article 51, paragraph 1 of the CIRC were to be applied to dividends distributed by the Tunisian and Lebanese companies.

Moreover, as the CJ noted, the fact that there is no bilateral agreement on exchange of tax information with Lebanon cannot, by itself, serve as justification for a general and absolute restriction such as that contained in article 51 of the CIRC.

As to the argument based on the tax carve-out clauses of the agreements, this is addressed below in the context of the analysis of those agreements.

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