SGPS Tax Benefits Under IRC: CAAD Arbitration on Corporate Tax Deductions (Case 581/2016-T)

ARBITRAL DECISION

The arbitrators Fernanda Maçãs (presiding arbitrator), António Martins and Américo Brás Carlos agree as follows:

I. REPORT

1. A… SGPS, S.A., a company with registered office at … …, no. …, …, in …, filed a request for constitution of a collective arbitral tribunal, pursuant to the combined provisions of Articles 2(1)(a) and 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as LFTM), in which the Tax and Customs Authority (hereinafter also TA) is the respondent.

2. The claim subject to arbitral review concerns the assessment of the legality of the assessment of Corporate Income Tax (CIT) No. 2016…, dated 27.04.2016, interest calculation statement and account settlement statement No. 2016…, dated 29.04.2016, all relating to the tax year 2011, in the amount of €518,691.66.

3. The claimant requests, following the granting of the claim, the annulment of the aforementioned tax act embodied in the CIT assessment 2011 referred to above, and respective interest calculation statement and account settlement statement.

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.

4.1. In the exercise of the option for arbitrator appointment provided in Article 6(2)(b) of the LFTM and in compliance with the provisions of Article 10(2)(g) and Article 11(2) of the same statute, the claimant appointed Prof. Doutor Martins as arbitrator.

4.2. Pursuant to Article 6(2)(b) and Article 11(3) of the LFTM, and within the deadline provided in Article 13(1) of the LFTM, the highest-ranking official of the Tax and Customs Authority ("TA") appointed Prof. Doutor Américo Brás Carlos as arbitrator.

4.3. In accordance with Articles 11(5) and (6) of the LFTM, the President of CAAD notified the claimant of the appointment of the arbitrator by the highest-ranking official of the Tax Administration on 05-12-2016 and notified the arbitrators appointed by the parties to appoint the third arbitrator who shall assume the position of presiding arbitrator, with the honourable arbitrators appointed by the parties agreeing, on 05-12-2016, to the appointment of Counsellor Maria Fernanda dos Santos Maçãs as presiding arbitrator.

4.4. On 05-12-2016, the President of CAAD informed the parties of this appointment, pursuant to the provisions of Article 11(7) of the LFTM.

4.5. In compliance with the provisions of Article 11(7) of the LFTM, the collective arbitral tribunal was constituted on 21-12-2016.

1. To support its claim, the claimant alleges that the granting of the claim is beyond question, as the tax acts in question are illegal, as they violate, in summary:

a) The provisions of Article 32(2) of the FBR by considering expenses for banking services and stamp tax on interest borne by the claimant – parent company of the group – as well as by B… – subsidiary company of the group – as not fiscally deductible;

b) The same norm of Article 32(2) of the FBR, when they consider the amount relating to "intra-group interest" as financially acceptable charges not accepted for tax purposes;

c) The provisions of Article 32(2) of the FBR by applying the indirect method contained in Circular 7/2004, not taking into account the elements provided by it;

d) The aforementioned legal provision, by applying the calculation provided in point 7 of Circular No. 7/2004 also to supplementary contributions and advances made, as well as to the increase in capital in kind in C…, LDA. (Brazil), and also to the incorporation therein of company D…;

e) The same Article 32(2) of the FBR, when it considered that B… incurred financial charges in relation to an amount of the participation held in C…, LDA. (Brazil) that it never actually paid;

f) The provision indicated above, when it subsumed within its regime the liabilities resulting from loans obtained from banking entities, used in the operational activity of the group;

g) The principle of legal certainty and the principle of prohibition of retroactivity in tax matters, by applying Article 32(2) of the FBR to financial charges relating to acquisitions of equity participations that occurred on a date prior to the entry into force of that norm;

h) The principles of legality, equality and contributory capacity, by interpreting the norm of Article 32(2) of the FBR in accordance with Circular No. 7/2004, and by establishing an irrebuttable presumption in respect of tax incidence.

The claimant also requests compensation relating to the bank guarantee provided for suspension of the fiscal execution proceedings instituted in the meantime.

1. For its part, the respondent submitted the investigation file and defended itself by objection, alleging that the tax acts under analysis do not suffer from any illegality, having, in summary, invoked the following:

a) The claimant did not bring to the knowledge of the TA or the tribunal any elements that would allow a specific allocation of the loans obtained in order to identify those relating to the acquisition of equity participations;

b) In the impossibility of specific or direct allocation of the financial charges borne to the acquisition of equity participations, it is legitimate for the TA, in light of the letter and spirit of Article 32(2) of the FBR, to apply a method of indirect or non-specific allocation;

c) The method contained in circular No. 7/2004, in the impossibility of this specific allocation, only contemplates an interpretation that respects the said norm in light of the same impossibility;

d) There is no illegality in the application of Article 32(2) of the FBR, according to the formula contained in Circular No. 7/2004, even though it is not possible for the TA and the taxpayer to proceed with a specific or direct allocation, given that any method (direct or indirect) is acceptable, as long as the ratio legis of the norm is respected;

e) The increase that the claimant designates as inflation of the values of acquisition of equity participations was based on values submitted by the claimant, and in the concept of acquisition value all reinforcements of the capital of the associates should be included;

f) The tax act under analysis does not violate the principle of legality because it is not Circular No. 7/2004 that creates rules of incidence, but the law itself, interpreted as set out above;

g) There is no violation of the principle of taxation on real profit (Article 104(2) of the CRP) because the reason underlying the use of the method of allocation of financial charges to capital items, used in the case at hand, is that of taxation closer to real profit as possible, respecting the provisions of Article 32(2) of the FBR;

h) The CIT assessment under judgment does not violate the principle of contributory capacity and proportionality, nor the principles of legal certainty and prohibition of retroactivity in tax matters;

i) It makes no sense to speak of an irrebuttable presumption in the concrete case, noting that this is not a type of presumption that the claimant could not rebut;

j) The interpretation defended by the claimant, that the charges borne with the acquisition of equity participations are only those that are directly and unequivocally proven as such, is contrary to fundamental law, insofar as it violates the principles of equality, contributory capacity and taxation of real income;

k) The claim for compensation for undue guarantee should be entirely rejected, to the extent that the claimant's main claim will be rejected.

1. By order of 28-02-2017, the tribunal dispensed with the holding of the meeting provided for in Article 18 of the LFTM, which it did under the principles of autonomy in case management, and in order to promote celerity, simplification and informality. In the same order, 21 June 2017 was set as the deadline for pronouncement of the arbitral decision.

2. In their submissions, the parties reiterated, in essence, the arguments contained in the request for arbitral review.

II. PROCEDURAL MATTERS

1. The tribunal is regularly constituted and is materially competent to hear the present action, on declaratory grounds.

9.1. The parties have legal personality and capacity, show themselves to be properly interested and are regularly represented (Articles 4 and 10(2) of the LFTM and Article 1 of Ordinance No. 112-A/2011, of 22 March).

9.2. The proceedings do not suffer from any nullities.

9.3. There are no other circumstances that prevent examination of the merits of the case.

III. MERITS

III.1. FACTUAL MATTERS

1. Proven Facts

10.1. The following facts are considered proven as relevant to the decision:

a) The claimant is a joint-stock company engaged in the management of equity participations of the companies of the "Group E…";

b) In the tax year 2011, the claimant was taxed, for CIT purposes, under the special tax regime for groups of companies (STRGC), currently provided for in Articles 69 and following of the CIT Code;

c) The claimant is the parent company of the group within whose scope are the companies F…, S.A. (F…), G…, S.A. (G…), H…, Lda. (H…), I…, S.A. (I…), B… SGPS, S.A. (B…), N…, S.A. (N…), J…, LDA. (J…) and K… S.A. (K…), as subsidiary companies;

d) In the tax year 2011, as a result of the income tax returns of the companies in the group, a consolidated fiscal result of the group of €4,966,762.44 was reported;

e) For the purposes of the tax year 2011, actions of internal tax inspections were carried out by the tax inspection services of the Lisbon Finance Directorate to the accounting and tax elements contained in model 22 income tax returns of the claimant company, of the subsidiary company B…, SGPS, SA, as well as an external inspection action to the accounting and tax elements contained in the model 22 income tax return of the group, under service order No. OI2015…;

f) From the aforementioned inspection actions resulted a correction to the taxable income of the claimant, in the amount of €1,039,603.30, as well as a correction to the taxable income of the subsidiary company B…, in the amount of €893,368.86, both resulting from the disallowance as a cost of the fiscal year of financial charges allegedly borne with the acquisition of capital shares, under Article 32(2) of the Statute of Tax Benefits (STB);

g) The aforementioned corrections to the taxable income of the claimant and of the subsidiary company B… were based, in summary, on the understanding that the aforementioned amounts of €1,039,603.30 and €893,368.86 constitute financial charges non-deductible under Article 32(2) of the STB, according to the interpretation contained in Circular 7/2004, of 30 March, from the CIT Services Directorate;

h) In the determination of the amount of additional CIT of the group of €518,691.66, the deduction of tax losses from the years 2005 and 2006, in the amount of €34,814.39, was considered;

i) Due to the non-payment of the tax and corresponding interest additionally assessed, fiscal execution proceedings No. …2016… were instituted, in the context of which, in order to obtain suspension thereof pursuant to Article 169 of the TCPT, the now claimant submitted the bank guarantee No. …, issued by L…, S.A..

10.2. Basis of Factual Matters

The proven facts were based on the position assumed by each of the parties and not contradicted by the other party, the critical analysis of the documents attached to the file by the claimant, whose authenticity and veracity were not disputed, as well as the content of the investigation file.

10.3. There are no other facts with relevance to the assessment of the merits of the case that have not been proven.

III.2. LEGAL MATTERS

As we have seen, in inspections carried out in 2011 to the companies "A… SGPS, SA" and "B… SGPS, SA", which are part of a fiscal group whose parent company is the first of the aforementioned entities, the TA disallowed, under Article 32(2) of the STB, then in force, the following amounts:

• financial charges in the amount of €1,039,603.20 in "A…";
• financial charges in the amount of €893,368.86 in "B…".

Article 32(2) of the STB, as worded in the tax year 2011, provided as follows (emphasis by the tribunal):

"2 - The capital gains and capital losses realised by SGPCs, SCRs and ICRs on equity participations of which they are holders, provided they are held for a period of not less than one year, and likewise the financial charges borne with their acquisition, do not contribute to the formation of the taxable income of these companies."

That provision was subject to development by Circular 7/2004, which established a method of allocation of financial charges to financing obtained by participating companies for the acquisition of equity participations in companies in which they hold interests. The application of this Circular has frequently been subject to controversy between taxpayers and the TA, the former invoking, allegedly, either deficiencies in its design, or its illegality, by virtue of establishing or quantifying the manner of determining deductible expenses, and thus taxable income, in a way that would violate constitutional principles of taxation. Whereas the TA has alleged that the said circular merely implements a legal rule of non-deductibility of financing costs expressed in Article 32 of the STB.

The central question to be decided is to ascertain whether the corrections to the financial charges of both companies suffer or not from the defects that the claimant attributes to them, namely:

i) From error of law resulting from violation of Article 32(2) of the STB;

ii) From the illegality of the determination of financial charges related to the acquisition of equity participations through the method provided in Circular No. 7/2004 – violation of Article 32(2) of the STB;

iii) From violation of law in the determination of charges incurred with the acquisition of social participations;

iv) From unconstitutionality due to violation of the principles of legality and contributory capacity.

The claimant also requests compensation for the provision of an undue guarantee.

Let us examine this.

III.2.1. The correction to the taxable income of "A…, SGPS"

In the case of A…, the tribunal will analyse hereinafter whether the correction made by the TA in the Tax Inspection Report (TIR), to which the claimant points in the Initial Petition (IP) defects in reasoning and calculation, is or is not legally sustainable.

In Articles 42 and following of the IP, it is stated that the group of companies dominated by A… adopts the "zero balance cash pooling" system. This means that the treasury surpluses of the participating companies are sent to the centralising entity, which also encompasses all payments and receipts (from customers and suppliers), by transmission of the respective credits. The centralised management of the treasury of a group (even if a bank does not participate in this process, whose involvement is customary, leads to economies of scale and better negotiation of conditions in operations with suppliers, customers and other entities).

That is to say: instead of each individual company, handling a smaller volume of monetary resources – financing needs or treasury surpluses – obtaining financing conditions, or funds placement, individually negotiated, the pooling of such amounts in a centralising entity, multiplying the resources at its disposal or the financing needs to be negotiated, produces financing conditions or remuneration of surpluses that benefit from the scale or volume factor. (It is a logic similar, although with its own contours, to that of purchasing centres, which obtain better conditions for the acquisition of goods or services based on aggregated and then negotiated volumes).

In the concrete case, in light of the documentary evidence available in the file, the calculation of interest carried out internally within the group with respect to said treasury operations does not imply an actual expenditure of those amounts relating to interest, given the nature of the cash pooling operations centralised in the management of treasury by A….

In the IP (Articles 30 et seq.) is described the logic of greater efficiency in treasury management that underlies the centralisation of the management of treasury flows of the group. Moreover, the literature relating to Financial Management treats the cash pooling mechanism as a normal form of treasury management, especially in the administration of entities (groups) with activities in multiple geographic locations. (See, in this sense, R. Brealey, S. Myers and F. Allen, Principles of Corporate Finance, 2014, p. 791, on "international cash management").

In the case of A…, the financial statements of the claimant, presented in the documents attached to the file (Document 4), is, as will be seen hereafter, elucidative with respect to interest charges therefrom credited and debited between the companies that make up the group.

Thus, in light of a certain operation included in the cash pooling of A…, there is recorded the calculation of an intra-group interest, debited in one company and credited in another of the same group. Let us illustrate this situation with the elements that appear attached to the file.

In the TIR (point III.2.1.2), to ascertain the basis of financial charges, which were then disallowed, via Article 32 of the STB and Circular 7/2004, the following table is presented, which shows the accounting entries in account 69 – "Financing costs" of A…:

[Table showing accounting entries]

And it is commented in the TIR as follows:

"a) Account 69183 – Intra-group interest shows in the trial balance the value of €309,187.20. From the consultation of the extract of the aforementioned account it was found that it only presented the entry of the balance in the amount of €309,187.20.

Clarification was requested from S.P., which sent auxiliary accounting documentation where it was found that account 69183 is debited by financing costs obtained from subsidiaries, in the amount of €1,653,918.86, and credited by financing gains granted to subsidiaries in the amount of €1,344,731.66, resulting in a balance of €309,187.20. (see summary document sent by S.P. attached fs 2 front and back):

For purposes of calculating non-deductible financial charges and relating to account 69183 – intra-group interest, the debit movements in the total amount of €1,653,918.86 were considered."

The reference in the TIR text to "intra-group interest" and to "financing obtained from subsidiaries" should have led the TA to a more thorough and case-specific analysis, in light of the information about the existence of a cash pooling system. Such a system, by definition, produces intra-group interest that is generally associated with the centralised management of treasury surpluses and deficits, and not with the acquisition of equity participations. That is to say, companies with operational treasury surpluses that "provide" them to the cash pooling receive interest, and those with treasury deficits resort to financing through cash pooling and pay interest. Thus, the tribunal considers that the documentary evidence attached to the file leads to the conclusion that the claimant has proven that such interest is not related to the acquisition of social shares and is therefore outside the scope of Article 32 of the STB.

If in A… SGPS there is an account ("69 – Financing costs") that, in a cash pooling context, includes interest received and interest paid, the TA would have had to do something more to show that the value of financial charges it considered as non-deductible was directly related to the acquisition of equity participations and was outside the documented reality of centralised treasury management of the group.

Moreover, in the TIR, it is explicitly stated that the value of the debit balance of intra-group interest was used, not taking into account the credit amount, which appears to the tribunal as inappropriate, in the context of more detailed investigation into the true nature of the amounts involved.

In a hypothetical example of cash pooling, if the managing company obtains financing from subsidiaries, which emerges from operational activity, and pays them 100 of interest, and also provides financing to subsidiaries for their normal activity, and receives 90 of interest, then from the perspective of the taxable profit of the group such operations have no impact. Being financial movements that are not associated with the financing of acquisitions of social shares, but rather with the centralised management of the group's treasury, and the fiscal profit of the group being the mere algebraic sum of individual taxable results, the values offset each other. (Tax questions that might possibly be raised here would be those of transfer pricing, to ascertain whether the rates of active and passive remuneration respected the principle of full competition; and also whether the interest would pass the general deductibility test contained in Article 23 of the CIT Code).

This analysis, according to which the interest disallowed by the TA is not directly related to the acquisition of equity participations, is further validated by the elements found in Document 4 attached to the file (Financial Statements of the claimant) where on page 15 is mentioned the cash pooling agreement which, in April 2011, the group initiated, centralising in A… the active and passive operations. On pages 18 and 19 of that same report (in its section 5.2 "Transactions between related parties") is found the table that is transcribed below:

[Table showing transactions with related parties]

The value that the TA disallows derives from a basis that results from the sum of the positive values (in the column titled "interest and similar charges" – between related entities) that appear in the table above and which are: (65,592 + 882,737 + 696,926 + 8,238 + 425) = €1,653,918, precisely the value that, in the transcription of the TIR, already mentioned above, is calculated.

The claimant shows that the correction made by the TA is based on intra-group charges paid to subsidiaries (ignoring this correction the values in the same column of the table above with negative values, relating to interest received), having thus nothing to do with financing for the acquisition of equity participations, but rather with the normal debit and credit in the operation of cash pooling, the modus operandi of which comes documented in the annual report of the company for 2011, and whose interest rate (7%) is described in section 10.2 of that same report.

In light of what has been described, it can therefore be concluded that the amount of €1,653,918.86, accountably recognised in the account relating to intra-group interest, does not constitute, for the purposes of Article 32(2) of the STB, an amount of financial charges incurred with financing for the acquisition of equity participations of subsidiaries, and which would have even contributed to the formation of the taxable income calculated by the claimant, given the balance between debits and credits of interest that, in the said account of financing costs, results from the operation of cash pooling.

The claimant further alleges that the TA does not demonstrate that the financial charges disallowed have anything to do with the acquisition of equity participations. It merely applies Circular 7/2004 to the balance of a sub-account of account 69. Without the tax inspection having thoroughly examined how that balance is formed, its operational, financial or mixed nature, and its relationship with the form of treasury management adopted in the group, the correction made proceeds from an inapplicable presupposition to the case at hand.

Additionally, it is found that, in its response, the TA does not address this important point, raising no counter-argument, qualitative and quantitative, that could invalidate the analysis presented by the claimant in the IP with respect to the effect of cash pooling on the quantification and qualification of the interest recorded.

The claimant also alleges that the TA does not show, in the TIR, an investigation or verification of a nexus between interest paid and financing obtained for the acquisition of equity participations. And indeed, no such effort is evident in the TIR. Without the tax administration demonstrating the impossibility of proceeding with a direct allocation of the financial charges related to the acquisition of equity participations, it cannot resort to the indirect method provided for in Circular No. 7/2004. Abundant case law has already pronounced itself in this sense, namely in the decisions handed down in the course of proceedings No. 24/2013-T, 738/2014-T, 269/2015-T, 292/2015-T, 295/2015-T, 326/2015-T, 663/2015-T and 679/2015-T, as well as the Northern Central Administrative Court, in the judgment of 15.01.2015, handed down in the course of proceedings No. 00946/09.0BEPRT.

For all that has been stated, the tribunal considers that the arbitral request proceeds as to this correction to the taxable income of A… SGPS.

III.2.2. The correction to the taxable income of "B…, SGPS"

The essential question that now needs to be examined concerns the fact that B… considered as the acquisition value of the social participations the amount of €4,869,154.00, and the tax administration noted the importance of €22,389,865.00, the difference corresponding to supplementary contributions (€4,984,439.00) and advances (€10,643,129.00) made by the former, and also to the capital increase in kind in C…, LDA. (Brazil) (€1,543,921.00) and also to the value of incorporation thereof of company D… (€349,221.00).

The following table, extracted from the TIR relating to B…, shows the line of reasoning of the TA. Indeed, to the initial value of 4.8 million euros, supplementary contributions, capital contributions in kind and advances are added in the various columns of the table, reaching a total of 22.3 million euros.

[Table showing composition of acquisition value]

The TA relies on various sources to sustain that supplementary contributions, capital contributions in kind and incorporated advances are capital shares. Thus, Article 45(3) of the CIT Code in force at the date of the facts is invoked in the TIR and in the response. That provision stated (emphasis by the tribunal):

"3 — The negative difference between capital gains and capital losses realised through the onerous transmission of equity participations, including their redemption and amortisation with capital reduction, as well as other losses or negative equity variations relating to equity participations or other components of own capital, namely supplementary contributions, contribute to the formation of taxable income in only half their value."

Additionally, the TIR cites an opinion of the CEF to sustain that supplementary contributions and accessory contributions should be considered capital shares. And also information from the DSIRC, according to which supplementary contributions are included in the capital shares referred to in Article 32(2) of the STB.

Finally, in the part of the response that follows and is highlighted below, the TA also relies on an understanding of the STA (emphasis by the tribunal):

"In this sense, it is better admitted that, after the acquisition (by business transaction or formation) of a social participation, (…), the SGPCs recapitalise the associated/participating companies, or, in another perspective, first they provide financing to them (via advances) to solve their treasury/allow their operational cycle, and, in a second moment, they recapitalise them with the integration of advances in the capital, via its increase.

With respect to supplementary contributions (…) the argument expended enters into contradiction with the understanding established in the Judgment of the Supreme Administrative Court, of 26-10-2010, proc. 357/1999.P1.S1, […] Supplementary contributions – which are always in cash and do not earn interest – are justified by the fact that it is not always possible to foresee what capital is necessary for the development of the company's business and, also, by the fact that, not constituting a capital increase, they are equivalent to it"

In the same sense, it is not understood how the claimant can argue that the notion of acquisition, inscribed in Article 32(2) of the STB, is circumscribed to the traditional meaning of purchase and sale. Once more, following Professor João Batista Machado, "if the law explicitly contemplates certain situations, in order to establish a given regime, it must necessarily intend to encompass also another or others that, with stronger reasons, demand or justify that regime".

Concomitantly, in the concept of acquisition value should be included all reinforcements of the capital of the associates."

We will begin the analysis first with the thesis that supplementary contributions, accessory contributions and advances shall have the meaning of "capital shares" contained in Article 32 of the STB.

Let us examine this.

As for the invoked Article 45(3) of the CIT Code, as legal support for supplementary contributions to be, for this purpose, qualified as capital shares, the tribunal adheres to the thesis of the claimant. Indeed, supplementary contributions are parts of own capital, but from Article 45(3) results the opposite of the thesis that the TA propounds.

The provision in question mentions two categories of financial instruments (bold by the tribunal):

• Capital shares in the sense of social participations (quotas or shares) – by making reference to capital gains and capital losses by "onerous transmission of equity participations, including their redemption and amortisation with capital reduction"

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

It is considered clear that, for the legislator, supplementary contributions do not fall within the concept of "capital shares", constituting a different category; otherwise there would be no need to autonomise them so distinctly in the wording of Article 45(3). They are own capital in a legal and accounting sense, but not "capital shares" in the sense given to them by Article 32 of the STB.

As for the fact that the STA qualifies supplementary contributions as own capital, the tribunal follows that thesis, since both the provisions of the Commercial Companies Code and accounting rules lead to that conclusion. It is also understood that, on a plane of financing strategy, supplementary contributions are equivalent, or have effects similar to, the reinforcement of capital, as they increase financial autonomy.

However, what is discussed here is whether they are capital shares in the sense expressed by Article 32 of the STB. And we cannot fail to respond negatively. Capital shares are financial instruments (such as shares and quotas) that determine, in essence, the rights and duties of shareholders. As such, they are not confused with other components of own capital, such as supplementary contributions or accessory contributions.[1]

In this way, we adhere to the case law set forth in Arbitral Decision (Case 12/2013-T), in which this question was addressed, and where it was concluded as follows:

"(…) the financial charges borne by the claimant with the completion of supplementary and accessory contributions without interest are deductible in fiscal terms, due to the non-fulfilment of the provisions of Article 32 of the STB. In the application of Circular 7/2004, the claimant can include supplementary and accessory contributions (without interest) as charges (costs) not attributable to capital shares, thus contributing to taxable income

(…)".

Arbitral decisions pronounced in the course of cases No. 69/2012-T, No. 24/2013-T and No. 326/2015-T pronounced themselves in the same sense.

Still in the sense of distinguishing "capital shares" from supplementary contributions, accessory contributions and advances, see the doctrine set forth in F. Gonçalves da Silva and J. Esteves Pereira, "Accounting of Companies", Plátano Publisher, 1999, which on p. 38 state: "In the capital of a company participate various shareholders with shares (shares, quotas, portions, contributions)…". On p. 103 they further state that: "…supplementary contributions correspond to a specific share of own capital"."(emphasis by the tribunal).

That is, for these authors it offers no doubt that supplementary contributions are not capital shares, although, as is consensual, they are part of the broader concept of own capital.

Also Alexandre Mota Pinto, in "The presentation of accounts and the financing of commercial companies"[2] states: "These contributions (supplementary) also constitute own capital of the company, as they are linked to the protection of capital".

Once again supplementary contributions are distinguished from social shares (that is, from the portion of capital that is represented by instruments such as shares or quotas).

Also in the doctrine, Joaquim S. Fernandes[3] in "Investments in associates and joint ventures", 2009, states (p.14) that:

"The capital shares of the parent company held by itself or by companies comprised in the consolidation must be considered in the consolidated accounts as own shares or quotas."

That is, the concept of capital shares becomes assimilated to that of social participations tout court (e.g., shares and quotas), leaving out other instruments of own capital.

Finally, Paulo Olavo Cunha, "Corporate Law", Almedina, 2014, states on p. 180-181: "…by virtue of the regime to which they are subject, supplementary contributions are usually referred to as 'quasi-capital'. This author also rejects a supposed legal identity between capital shares and supplementary contributions. The latter are close to the figure of capital, particularly by strengthening the protection of creditors, but do not merge with the values of social participation or social shares which, as the name indicates, confer "positions of sociality" (corporate rights and duties). And Paulo Olavo Cunha further adds that "the legal regime of supplementary contributions (…) allows them to be framed in the concept of own capital…", a thesis which, as we have already seen, is consensual on the legal-accounting plane.

In sum, the legal assimilation made by the TA of "capital shares" to a set of instruments that encompasses capital, accessory contributions, supplementary contributions and advances corresponds to an erroneous interpretation of the concepts contained in Article 32 of the STB, as has been demonstrated.

Under these terms, the present request should be granted and, in consequence, the assessment of CIT, relating to the tax year 2011, No. 2016…, respective interest calculation statement and account settlement statement No. 2016…, relating to the tax year 2011, in the amount of €518,691.66, should be annulled.

III.2.3. Barred Questions

Proceeding the request for arbitral review on the basis of the defect of illegality through error of law as to the meaning and scope of Article 32(2) of the STB, which ensures effective and stable protection of the rights of the claimant, the examination of the other defects attributed to the tax act in question is barred.

In fact, it follows from the establishment of an order of examination of defects, in Article 124 of the TCPT, that when one defect is judged to prevent the renewal of the challenged act, there is no need to examine the others that are attributed to it. If it were always necessary to examine all defects, the order in which the examination takes place would be indifferent.

III.2.4. Compensation for Undue Guarantee

As is proven, having not made the voluntary payment of the tax in question, the claimant was summoned for fiscal execution proceedings No. …2016…, with a view to the coercive collection thereof. In order to obtain suspension of this fiscal execution proceedings, the claimant, as results from the facts given as proven, presented a bank guarantee, in the amount of €657,920.39.

Thus, by understanding that, in the concrete case, there was an error attributable to the TA, the claimant formulates a request for compensation for guarantee indevidly provided, in order to be reimbursed for the damages resulting from the provision of that guarantee.

This must be examined.

In accordance with the provisions of Article 24(b) of the LFTM, the arbitral decision on the merits of the claim which is not subject to appeal or objection binds the tax administration from the end of the deadline provided for appeal or objection, such administration being required, in the exact terms of the granting of the arbitral decision in favour of the taxable person and until the end of the deadline for voluntary execution of decisions of the tax judicial tribunals, to "restore the situation that would have existed if the tax act subject to the arbitral decision had not been enacted, adopting the acts and operations necessary for such purpose".

In the legislative authorisation on which the Government based itself to approve the LFTM, granted by Article 124 of Law No. 3-B/2010, of 28 April, it is proclaimed, as the primary directive of the institution of arbitration as an alternative form of jurisdictional resolution of disputes in tax matters, that "the tax arbitration process must constitute an alternative procedural means to the judicial challenge process and to the action for recognition of a right or legitimate interest in tax matters".

Although Article 2(1)(a) and (b) of the LFTM uses the expression "declaration of illegality" to define the competence of arbitral tribunals operating at CAAD and does not refer to constitutive (annulling) and condemnatory decisions, it should be understood, in harmony with the said legislative authorisation, that the competences include the powers that in judicial challenge proceedings are attributed to tax tribunals in relation to acts whose assessment of legality falls within their competences.

The judicial challenge process is a procedural means that has as its object an act in tax matters, aiming to assess its legality and decide whether it should be annulled or its nullity or non-existence declared, as results from Article 124 of the TCPT.

From the analysis of Articles 2 and 10 of the LFTM, it is found that only issues of legality of assessment acts or acts of determination of the taxable base and second-level acts that have as their object the assessment of legality of acts of those types were included in the competences of arbitral tribunals operating at CAAD, acts the assessment of which falls within the scope of judicial challenge proceedings, as results from paragraphs (a) to (d) of Article 97(1) of the TCPT.

That is, it is found that the legislator did not implement in the legislative authorisation with respect to the part in which it provided for the extension of the competences of arbitral tribunals to questions that are assessed in tax tribunals through action for recognition of a right or legitimate interest.

But, in harmony with the intention underlying the legislative authorisation to create an alternative means to the judicial challenge process, it should be understood that, as to requests for declaration of illegality of acts of the types referred to in its Article 2, arbitral tribunals operating at CAAD have the same competences as those had by tribunals in judicial challenge proceedings, within the limits defined by the binding that the Tax and Customs Authority made through Ordinance No. 112-A/2011, of 22 March, pursuant to Article 4(1) of the LFTM.

Although the judicial challenge process primarily has for its object the declaration of nullity or non-existence or the annulment of acts of the types referred to, it has been understood pacifically that in it condemnations of the Tax Administration to pay indemnificatory interest and compensation for undue guarantee can be pronounced.

In fact, despite the absence of any express provision to that effect, it has been pacifically understood in tax tribunals, since the entry into force of the codes of the 1958-1965 tax reform, that a request for condemnation for payment of indemnificatory interest can be cumulated in judicial challenge proceedings with a request for annulment or declaration of nullity or non-existence of the act, because in those codes it is provided that the right to indemnificatory interest arises when, in administrative complaint or judicial process, the administration is convinced that there was error of fact attributable to the services. This regime was subsequently generalised in the Tax Code of Procedure, which established in Article 24(1) thereof that "there shall be a right to indemnificatory interest in favour of the taxpayer when, in administrative complaint or judicial process, it is determined that there was error attributable to the services", later, in the LGT, in whose Article 43(1) it is established that "indemnificatory interest is due when it is determined, in administrative complaint or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount superior to that legally due" and, finally, in the TCPT in which it was established, in Article 61(2) (corresponding to Article 61(4) as reworded by Law No. 55-A/2010, of 31 December), that "if the decision recognising the right to indemnificatory interest is judicial, the deadline for payment is counted from the start of the deadline for its voluntary execution".

With respect to the request for condemnation for payment of compensation for provision of guarantee, Article 171 of the TCPT establishes that "compensation in case of bank guarantee or equivalent indevidly provided shall be requested in the proceedings in which the legality of the enforceable debt is contested" and that "compensation must be requested in the administrative complaint, challenge, appeal or in case its basis is subsequent within 30 days after its occurrence".

Thus, it is unequivocal that the judicial challenge process encompasses the possibility of condemnation for payment of undue guarantee and it is even, in principle, the appropriate procedural means to formulate such a request, which is justified by evident reasons of procedural economy, since the right to compensation for undue guarantee depends on what is decided on the legality or illegality of the assessment act.

The request for constitution of an arbitral tribunal has as its corollary that it be in the arbitral process that the "legality of the enforceable debt" is to be discussed, whereby, as results from the express wording of Article 171(1) of the said TCPT, it is also the arbitral process that is appropriate to examine the request for compensation for undue guarantee.

Moreover, the cumulation of requests relating to the same tax act is implicitly presupposed in Article 3 of the LFTM, when it speaks of "cumulation of requests even if relating to different acts", which makes it possible to perceive that the cumulation of requests is also possible with respect to the same tax act and the requests for compensation for indemnificatory interest and condemnation for undue guarantee are susceptible to being encompassed by that formula, whereby an interpretation in this sense has, at least, the minimum of verbal correspondence required by Article 9(2) of the Civil Code.

The regime of the right to compensation for undue guarantee is contained in Article 53 of the LGT, which establishes the following:

"Article 53

Guarantee in case of undue provision

1. The debtor who, to suspend execution, offers bank guarantee or equivalent shall be compensated totally or partially for the damages resulting from its provision, if maintained for a period exceeding three years in proportion to the accrual in administrative appeal, judicial challenge or opposition to execution that have as their object the guaranteed debt.

2. The deadline referred to in the preceding number does not apply when it is determined, in administrative complaint or judicial challenge, that there was error attributable to the services in the assessment of the tax.

3. The compensation referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of indemnificatory interest provided in this law and can be requested in the very proceedings of administrative complaint or judicial challenge, or autonomously.

4. Compensation for provision of undue guarantee shall be paid by deduction from the revenue of the tax of the year in which the payment was made."

In the case at hand, the acts of assessment of CIT and respective interest calculation statements and account settlement statements suffer, as we have already seen, from the defect of violation of law, through error on the legal presuppositions, namely as to the meaning and scope of the provisions of Article 32(2) of the STB, which wholly invalidates those tax acts.

Moreover, the said acts of tax assessment were entirely at the initiative of the Tax Administration, and the claimant in no way contributed to their being carried out and, much less, in the terms in which they were.

In this framework, the provision of the aforementioned bank guarantee, by the claimant, with a view to obtaining suspension of the said fiscal execution proceedings, appears to be undue, whereby the claimant has the right to be compensated for the damages that it has actually suffered with the provision of that bank guarantee, which, as the claimant itself states, "can only, evidently, be ascertained at the moment when it becomes possible to lift the guarantee, since its amount depends on the duration of the guarantee"; that is, it will be in the proceedings for execution of the judgment that such damages will be ascertained and the compensation due to the claimant fixed.

IV. DECISION

This arbitral tribunal agrees to:

1. Judge that the request for declaration of illegality of the CIT assessment 2011 No. 2016…, interest calculation statement and account settlement statement No. 2016…, in the amount of €518,691.66, is well-grounded and, in consequence, annul the challenged assessment, with all legal consequences; and

2. Condemn the Tax and Customs Authority to pay compensation to the claimant for provision of undue guarantee, in the amount to be fixed in execution of the judgment;

V. VALUE OF THE PROCEEDINGS

In accordance with the provisions of Articles 306(2) and 297(2) of the C.P.C., Article 97-A(1)(a) of the C.P.P.T., and Article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the proceedings are assigned a value of €518,691.66.

Lisbon, 26 April 2017

The arbitrators,

Fernanda Maçãs

António Martins

Américo Brás Carlos

[1] Note that the latter, if they bear interest and have a finite life, must be recorded as liabilities and not as own capital.

[2] In J.L. Saldanha Sanches (org) "The Law of the Balance Sheet and International Financial Reporting Standards", Coimbra Publisher, Coimbra, 2007; p. 108

[3] See https://www.occ.pt/fotos/editor2/InvestimentosAssociadasDis1009.pdf