CAAD Case 61/2014-T: IRS Anti-Abuse Clause Under Article 38 LGT – Tax Arbitration Ruling

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 61/2014 – T

Subject: Personal Income Tax (IRS) – General Anti-Abuse Clause; article 38 of the General Tax Code (LGT)

The arbitrators, Dr. Alexandra Coelho Martins (presiding arbitrator), Dr. Ricardo Rodrigues Pereira and Dr. Júlio Tormenta (member arbitrators), appointed by the Ethics Council of the Center for Administrative Arbitration ("CAAD"), in accordance with article 6, paragraph 2, subparagraph a) of Decree-Law No. 10/2011, of 20 January (hereinafter "RJAT"), to form the Arbitral Court, constituted on 28 March 2014, hereby agree as follows:

I. REPORT

"A", taxpayer No. …, with tax residence at Street …, No..., … , …, …-…, Sacavém, "B" and husband, "C", respectively taxpayers Nos. … and …, with tax residence at Street …, …,…, …, …-… Sacavém, and "D" and husband, "E", respectively taxpayers Nos. … and …, with tax residence in …, Plot …., …, …, …-… Lisbon, hereinafter the Claimants, requested the constitution of an Arbitral Court and submitted a petition for arbitral decision, pursuant to articles 2, paragraph 1, subparagraph a) and 10, paragraph 1, subparagraph a) and paragraph 2 of the RJAT, for appraisal of the legality of the tax acts regarding the assessment of Personal Income Tax (IRS) and the inherent compensatory interest, relating to the years 2009, 2010 and 2011, in the overall amount of € 137,466.37, as set out in the tables below:

The Claimants allege, in summary, that:

(a) The substantive legal requirements for the application of the general anti-abuse clause (also referred to as "GAAC") provided for in article 38, paragraph 2 of the General Tax Code ("GTC"), are not met, as the Tax and Customs Authority ("TCA") proceeds from the erroneous presumption that there is abuse whenever the taxpayer does not opt for the fiscally more onerous route to conduct its business;

(b) The various linked operations carried out are inserted in the objective of restructuring the structure of the corporate group in question – a small family group – and do not constitute acts or transactions that are foreign, anomalous or unusual, carried out with abuse of legal forms, therefore the means element is not present;

(c) With regard to the result element, the operations carried out provided a tax advantage to the Claimants, but such a finding is insufficient and irrelevant for the application of the GAAC. In this regard, the alternative conduct suggested by the TCA (that the Claimants had not sold the shareholdings and had remained with equivalent shareholdings in the acquiring company) would not have produced the intended tax effect – the taxation of dividends – because such conduct would not necessarily lead to the distribution of dividends by the companies whose shareholdings were disposed of, since nothing would obligate the companies to distribute dividends;

(d) Regarding the intellectual element, there was no proof of a will primarily aimed at avoiding the tax burden of the Claimants;

(e) Finally, with respect to the normative element, embodied in the condemnation by the legal system of the result obtained, in light of the intention or spirit of the law, the same is not present, because even if the sale of shares had an exclusively fiscal motivation, the act would not be reprehensible, since the fiscal legislator itself left that door open, not taxing gains arising from the sale of shares. In other words, it would be the lawful exploitation of a tax advantage consciously created by the legislator;

(f) The TCA artificially transforms valid and legitimate legal transactions regarding the sale of shares into disguised distributions of dividends, in order to recharacterize capital gains excluded from taxation as distributed dividends subject to taxation;

(g) Since the conduct of the Claimants does not violate any legal rules, there is no unlawfulness and non-contractual civil liability, therefore no compensatory interest is due.

The Claimants conclude by seeking the procedural success of the action, requesting the declaration of illegality and the annulment of the IRS assessments and compensatory interest assessments and compensation for the guarantees provided to suspend the tax enforcement proceedings pending the litigation.

With the petition, documents were submitted and two witnesses were listed.

The TCA presented a response and argues, by way of objection, that:

(i) The decision to apply the GAAC is well-founded, having adopted the proper procedure set forth in article 63 of the Tax Procedure and Process Code ("TPPC");

(ii) Business transactions involving the purchase and sale of shares of companies "F", "G" and "H" to "I" were inserted into the sequence, which proved to be artificial, because lacking economic substance, in a sequence of acts adopted by the Claimants to reach the merger operation by incorporation. The inspection services did not contest the validity of the economic reasons for the merger itself, but rather that of the said ordered sequence of acts leading to the share disposals carried out prior to the merger;

(iii) All substantive requirements for applying the GAAC are met, in accordance with article 38, paragraph 2 of the GTC, as it was proven that the execution of the sequence of acts culminating in the disposal of shares had as its main objective the exclusion of IRS taxation of the capital gains obtained, with the Claimants using this means to, in disguised form, effect the distribution of accumulated dividends which would otherwise be subject to taxation in their sphere. No economic justification was identified, even residual, for the share purchase and sale transactions that preceded the merger, and such merger could be carried out without those operations;

(iv) The economic equivalence of the acts or transactions carried out in relation to the alternative acts or transactions was determined, and the income from capital gains obtained from the sale of shares should become subject to taxation as distributed dividends, as a result of the disregard, for tax purposes, of the sale acts;

(v) The tax assessments and compensatory interest assessments are valid and due, and the requirements for the right to compensation for undue guarantee are not met.

It concludes that the action should be dismissed, absolving the Respondent of the claim(s).

The administrative file was attached to this record, and the Claimants were notified thereof.

On 23 September 2014, the first meeting of the Collective Arbitral Court took place at the headquarters of CAAD, in accordance with article 18 of the RJAT. No exceptions having been raised or identified, the witness "J", Chartered Accountant of "I" at the time of the facts, was examined, and the other witnesses were excused. Both parties were notified to submit written arguments and, pursuant to article 21, paragraph 2 of the RJAT, the deadline for issuing the arbitral decision was extended and set for 20 November 2014.

The parties submitted written arguments, maintaining, in substance, the positions previously stated, strengthened, in their view, by the evidence produced in the witness examination.

Upon review of the case file, it was found necessary to obtain essential financial information for establishing the material truth, so the proceedings were reopened, the submission of financial statements from the companies (acquiring and acquired) was requested, and the deadline for issuing the decision was extended by a further two months.

II. PRELIMINARY MATTERS

The Court was properly constituted and is competent ratione materiae, in accordance with article 2 of the RJAT.

The parties have legal personality and capacity, demonstrate legitimacy and are properly represented (cf. articles 4 and 10, paragraph 2 of the RJAT and article 1 of Order No. 112-A/2011, of 22 March).

The joinder of multiple plaintiffs and the cumulation of claims are admitted in view of the fact that the success of the claims depends essentially on the appraisal of the same factual circumstances, relating to a linked set of legal transactions involving the Claimants, and on the interpretation and application of the same principles or rules of law, in this case the general anti-abuse clause contained in article 38, paragraph 2 of the GTC (as provided for in article 3, paragraph 1 of the RJAT).

III. ISSUES TO BE DECIDED

The principal issue to be appraised and decided concerns the determination, in the concrete case, of whether the four cumulative requirements for the application of the anti-abuse regime set forth in article 38, paragraph 2 of the GTC are met, embodied in (i) the artificial means, (ii) motivated exclusively by a fiscal purpose, (iii) of reduction, elimination or deferral of tax, (iv) the result achieved not being intended by the legislator and, for that reason, being subject to normative-systemic condemnation.

It is equally important to assess the grounds and extent of the claim for compensation for undue provision of guarantee filed by the Claimants.

IV. REASONING

1.    THE FACTS
   

1.1. Proven Facts

The following facts are considered established as relevant to the decision of the case:

A. Until 20 July 2009, women claimants "A", "B" and "D" were shareholders in the following companies:

(a) F – Machinery Sales and Lease, Inc. ("F");
(b) G – Transport and Cargo, Inc. ("G");
(c) H – National and International Transport, Inc. ("H"); and
(d) I – Transport, Representation and Equipment Lease, Inc. ("I");

– as certified by the corresponding permanent commercial registry certificates contained in the administrative file ("AF") in files AF2, AF5 and AF8.

REGARDING COMPANY "F"

B. "F" was established in 1988, with share capital of € 250,000.00 divided into five quota shares, with a nominal value of € 110,000.00 (two quota shares) belonging to "K" and "L" (parents of the women claimants), and € 10,000.00 (three quota shares) belonging to each of the three daughters of the couple: "A", "B" and "D" – cf. permanent certificate contained in files AF2, AF5 and AF8.

C. On 22 December 2008, a capital increase of "F" was registered, in the amount of € 350,000.00, raising the share capital to € 600,000.00, which was followed by the conversion of the company from a limited liability company to a joint-stock company, with its capital represented by 600,000 shares with a nominal value of € 1.00 each, distributed as follows:

(a) "K", 264,000 shares, valued at € 264,000.00, corresponding to 44% of the share capital;
(b) "L", 264,000 shares, valued at € 264,000.00, corresponding to 44% of the share capital;
(c) "A", 24,000 shares, valued at € 24,000.00, corresponding to 4% of the share capital;
(d) "B", 24,000 shares, valued at € 24,000.00, corresponding to 4% of the share capital;
(e) "D", 24,000 shares, valued at € 24,000.00, corresponding to 4% of the share capital;

– cf. permanent certificate contained in files AF2, AF5 and AF8 and Documents 28 to 20 submitted with the arbitral petition.

D. In accordance with the financial information as of May 2009, "F" recorded at that date brought-forward results in the amount of € 21,557.56 and net results for the fiscal year (2009) valued at € 173,217.86 – cf. Financial information submitted by the Claimants, in particular the file_Balance_"F"_May 2009, using, for the calculation of net results (Class 7 Income – Class 6 Expenses), a nominal CIT rate of 12.5% up to € 12,500 (taxable profit) and 25% for the remaining amount, subsequently applying the municipal levy and assuming the absence of reportable tax losses.

REGARDING COMPANY "G"

E. "G" was established in 1993 with share capital of € 750,000.00 divided into two quota shares, with a nominal value of € 375,000.00 each, belonging to "K" and "L" (parents of the women claimants) – cf. permanent certificate contained in files AF2, AF5 and AF8 and Documents 28 to 20 submitted with the arbitral petition.

F. On 22 December 2008, the share capital of "G" was increased in the amount of € 450,000.00, realized by the incorporation of brought-forward results (€ 444,478.22) and by the incorporation of legal reserves (€ 5,521.38), raising the share capital to € 1,200,000.00, divided into two quota shares of € 600,000.00 each, belonging to the above-mentioned shareholders – cf. permanent certificate contained in files AF2, AF5 and AF8 and Documents 28 to 20 submitted with the arbitral petition.

G. On the same date (22.12.2008) "K" divided its quota share into three and ceded two of its quota shares to two of its daughters, "A" and "D", valued at € 60,000.00 and € 120,000.00 respectively – cf. permanent certificate contained in files AF2, AF5 and AF8 and Documents 28 to 20 submitted with the arbitral petition.

H. Also on the same date (22.12.2008) "L" divided its quota share into three and ceded two of its quota shares to two of its daughters, "A" and "B", valued at € 60,000.00 and € 120,000.00 respectively, with the two quota shares valued at € 60,000.00 held by "A" being consolidated into one quota share valued at € 120,000.00 – cf. permanent certificate contained in files AF2, AF5 and AF8 and Documents 28 to 20 submitted with the arbitral petition.

I. The conversion of "G" from a limited liability company to a joint-stock company followed, with its share capital of € 1,200,000.00 represented by 1,200,000 shares with a nominal value of € 1.00 each, distributed as follows:

(a) "K", 420,000 shares valued at € 420,000.00, corresponding to 35% of the share capital;
(b) "L", 420,000 shares valued at € 420,000.00, corresponding to 35% of the share capital;
(c) "A", 120,000 shares valued at € 120,000.00, corresponding to 10% of the share capital;
(d) "B", 120,000 shares valued at € 120,000.00, corresponding to 10% of the share capital;
(e) "D", 120,000 shares valued at € 120,000.00, corresponding to 10% of the share capital;

– cf. permanent certificate contained in files AF2, AF5 and AF8 and Documents 28 to 20 submitted with the arbitral petition.

J. In accordance with the financial information as of May 2009, "G" recorded at that date brought-forward results in the amount of € 8,816.02 and net results for the fiscal year (2009) valued at € 277,281.08 – cf. Financial information submitted by the Claimants, in particular the file_Balance_"G"_May 2009, using, for the calculation of net results (Class 7 Income – Class 6 Expenses), a nominal CIT rate of 12.5% up to € 12,500 (taxable profit) and 25% for the remaining amount, subsequently applying the municipal levy and assuming the absence of reportable tax losses.

REGARDING COMPANY "H"

K. "H" was established on 14 May 1990 with share capital of € 249,400.00 divided into four quota shares: one in the amount of € 49,880.00, held by "M"; another in the amount of € 49,880.00, held by "D", and two quota shares of € 99,760.00 and € 49,880.00, both belonging to "E" – cf. permanent certificate contained in files AF2, AF5 and AF8 and Documents 28 to 30 submitted with the arbitral petition.

L. On 21 December 2007, shareholder "M" divided the quota share held by it, valued at € 49,880.00, into two new quota shares of € 24,940.00 each, which it ceded to "L" and "A". Shareholder "D" also divided her quota share of € 49,880.00 into two quota shares of € 24,940.00 each, having ceded one of them to "B". Finally, "E" ceded its quota share of € 49,880.00 to "K" and divided the quota share of € 99,760.00 into two, of € 62,350.00, which it ceded to "L" and of € 37,410.00, which it ceded to "K" – cf. permanent certificate contained in files AF2, AF5 and AF8 and Documents 28 to 30 submitted with the arbitral petition.

M. On 22 December 2008, "H" was converted into a joint-stock company and its share capital was increased in the amount of € 37,600.00, raising it to € 287,000.00, divided into 287,000 shares with a nominal value of € 1.00 each, distributed as follows:

(a) "K", 100,450 shares, valued at € 100,450.00, corresponding to 35% of the share capital;
(b) "L", 100,450 shares, valued at € 100,450.00, corresponding to 35% of the share capital;
(c) "A", 28,700 shares, valued at € 28,700.00, corresponding to 10% of the share capital;
(d) "B", 28,700 shares, valued at € 28,700.00, corresponding to 10% of the share capital;
(e) "D", 28,700 shares, valued at € 28,700.00, corresponding to 10% of the share capital;

– cf. permanent certificate contained in files AF2, AF5 and AF8 and Documents 28 to 30 submitted with the arbitral petition.

N. In accordance with the financial information as of May 2009, "H" recorded at that date brought-forward results in the amount of € 6,474.00 and net results for the fiscal year (2009) valued at € 53,034.06 – cf. Financial information submitted by the Claimants, in particular the file_Balance_"H"_May 2009, using, for the calculation of net results (Class 7 Income – Class 6 Expenses), a nominal CIT rate of 12.5% up to € 12,500 (taxable profit) and 25% for the remaining amount, subsequently applying the municipal levy and assuming the absence of reportable tax losses.

REGARDING COMPANY "I" AND THE SALE OF SHAREHOLDINGS

O. "I" was established on 8 October 1973, in the form of a limited liability company. It initially engaged in crane rentals and subsequently expanded the scope of services provided to include rentals of prefabricated modules, trucks equipped with loading arms, aerial platforms, forklifts and multifunctional equipment, wheel loaders, excavators, rigid and compact excavators and cylinders – cf. Document 31 submitted with the arbitral petition and permanent certificate contained in files AF2, AF5 and AF8.

P. On 4 October 1989, the F… family entered "I" through the cession of quota shares to "L" – cf. Document 32 submitted with the arbitral petition.

Q. On 9 November 1990, J… F… strengthened its position in "I", acquiring 29,950,000$00 (€ 149,389.97) of the 30,000,000$00 (€ 149,639.37) of share capital of this company – cf. Document 33 submitted with the arbitral petition.

R. In 2005, "I" began to have as its corporate purpose the business of representation, purchase, sale and lease of cranes, assembly of metal and machinery structures, and its share capital was € 1,500,000.00, divided into four quota shares:

(a) one quota share of € 249.40, belonging to "N";
(b) three quota shares of € 299,875.30; € 299,875.30 and € 900,000.00 all belonging to "K";

– cf. permanent certificate contained in files AF2, AF5 and AF8.

S. The value of brought-forward results of "I", as of 31 December 2008, was € 4,345,257.00 – cf. Tax Inspection Reports ("TIR") attached to the AF, files AF1, AF4 and AF7.

T. The shareholders of "I" decided to implement a plan of rationalization and reorganization of the companies that were an integral part of the family group – in accordance with the testimony of the examined witness.

U. The reason for and objective of the restructuring was the rationalization of costs and the simplification of the corporate structure belonging to the family …, which held several companies with activities similar to those of "I" and which competed with each other (namely "F", "G" and "H") – in accordance with the testimony of the examined witness.

V. With the restructuring, it was aimed at combining the various existing companies into one ["I"] and it was intended that this be accomplished through a practical, simple and economical process – in accordance with the testimony of the examined witness.

W. It was the policy of "I" and, likewise, of "F", "G" and "H", not to distribute results/dividends, with a view to maintaining in the companies the capital that would allow them to carry out investments, that is, to capitalize the companies – in accordance with the TIR contained in AF1, AF4 and AF7 and with the testimony of the examined witness.

X. On 29 June 2009, the share capital of "I" was increased in the amount of € 4,000.00, subscribed in full in cash by the new shareholders "L", "D", "B" and "A", each in the amount of € 1,000.00, leaving the company with share capital of € 1,504,000.00 – cf. permanent certificate contained in files AF2, AF5 and AF8.

Y. On the same date (29.06.2009), "I" converted itself into a joint-stock company adopting the corporate name "I – Transport, Representation and Equipment Lease, Inc.", and its corporate purpose became the business of representation, purchase, sale and lease of cranes, assembly of metal and machinery structures and the industry of transport of goods under a lease regime – cf. permanent certificate contained in files AF2, AF5 and AF8.

Z. On 20 July 2009, the Claimants transferred to "I", already converted into a joint-stock company (on 22.12.2008), all the shares they held in companies "F", "G" and "H". The acquisition by "I" received a favorable opinion from the Sole Auditor of this company – cf. permanent certificate contained in files AF2, AF5 and AF8 and Documents 34 and 35 submitted with the arbitral petition.

AA. The shares of the Claimants in companies "F", "G" and "H" were sold to "I" for a total price of € 676,200.00 – in accordance with the TIR contained in AF1, AF4 and AF7.

BB. For the acquisition of the shares of companies "F", "G" and "H" from the Claimants and, as well, from the parents of the women claimants, "K" and "L", "I" spent a total of € 4,174,257.00, with the value of brought-forward results recorded in "I" as of 31 August 2008 being € 4,345,257.00 – cf. TIR contained in AF1 AF4 and AF7.

CC. On 7 August 2009, the merger project by incorporation in "I" was registered, by way of global transfer of assets of companies "F", "G" and "H" – cf. merger project, opinion of the independent auditor and permanent certificate contained in files AF2, AF5 and AF8 and Documents 28 to 30 submitted with the arbitral petition.

DD. On 16 September 2009, the merger by incorporation was registered in the manner projected, with "I" merging with "F", "G" and "H", with the former being the acquiring company. The three latter companies were incorporated and, by virtue of the merger, were dissolved – cf. merger project, opinion of the independent auditor and permanent certificate contained in files AF2, AF5 and AF8.

EE. On 15 September 2010, the share capital of "I" was reduced by € 249.40, as a consequence of the redemption of shares of shareholder "N", the share capital becoming € 1,503,750.60 – cf. permanent certificate contained in files AF2, AF5 and AF8 and Documents 28 to 30 submitted with the arbitral petition.

FF. On 14 October 2010, the share capital of "I" was increased in the amount of € 249.40, returning to the value registered before the aforementioned redemption of shares, i.e., € 1,504,000.00 – cf. permanent certificate contained in files AF2, AF5 and AF8 and Documents 28 to 30 submitted with the arbitral petition.

GG. On 18 October 2010, "I" once again increased its share capital, in the amount of € 1,499,000.00, fully subscribed in cash by shareholder "L", corresponding to the issuance of 299,800 shares with a nominal value of € 5.00 each. The share capital, after this increase, was set at € 3,003,000.00, represented by 600,600 shares – cf. permanent certificate contained in files AF2, AF5 and AF8 and Documents 28 to 30 submitted with the arbitral petition.

HH. At the time of this capital increase, the Balance Sheet of "I" showed negative equity capital in the amount of € 1,504,000.00 – cf. TIR contained in AF1 AF4 and AF7 and proven by agreement.

II. Based on Service Orders Nos. O…, O… and O… (regarding Claimant "A"), O…, O… and O… (regarding Claimant "D") and O…, O… and O… (regarding Claimant "B"), issued by the Chief of Division on 10 May 2013, a tax inspection procedure was initiated against the Claimants, covering the fiscal years 2009 to 2011 – cf. AF and Documents 28 to 30 submitted with the arbitral petition.

JJ. The Tax Inspection Services concluded that the case analyzed was subsumed in the hypothesis of the rule set forth in article 38, paragraph 2 of the GTC and in the proper procedure provided for in article 63 of the TPPC – cf. AF1, AF4 and AF7 and Documents 28 to 30 submitted with the arbitral petition.

KK. The draft decisions for application of the GAAC were notified to the Claimants on 5 July 2013 – cf. AF1, AF4 and AF7.

LL. The Claimants exercised the right of prior hearing, arguing for the non-verification of the requirements for applying the GAAC – cf. AF1, AF4 and AF7 and Documents 28 to 30 submitted with the arbitral petition.

MM. On 24 October 2013, the Claimants were notified of the final decision of the GAAC application procedure and of the Tax Inspection Reports ("TIR") containing the respective grounds – cf. AF1, AF4 and AF7 and Documents 28 to 30 submitted with the arbitral petition.

NN. The grounds set forth below are contained in the TIR – cf. AF1, AF4 and AF7:

"The operation of sale of shares of "F", "G" and "H" that preceded the operation of merger of these companies with "I" constitutes a transaction which, with abuse of legal forms, had as its fundamental objective the elimination of tax burdens that would be due if, instead of the transfer of all shares of the first three companies, the merger had occurred without such operation, as, under the guise of payment of the corresponding price, the legal entity (…) benefited from amounts that would otherwise be subject to taxation as distributed dividends, in accordance with subparagraph h) of paragraph 2 of article 52 of the Personal Income Tax Code.

Indeed, without the practice of such legal transaction, i.e., without the mentioned business manipulation, the amounts received as "consideration" for the transfer of the corporate interests, that is, the "price", would be subject to taxation, but under a different heading, namely as dividends, because [… illegible] "payment" was made with the brought-forward results in "I" (acquiring company) to whose overall amount there also contributed, incidentally, the brought-forward results of the acquired companies "F", "G" and "H", since, as emerges from the analysis of the balance sheets of these companies, it was not the policy of the companies, whether acquired or acquiring, to distribute dividends [… illegible] a fact confirmed by the administrator of "I, Inc." (…) in statement terms (Annex VIII).

That is, as can be seen, all the brought-forward results in "I" (sum of the results of the acquired companies with those of the acquiring company) were used up to their exhaustion in the "payment of the price" of the shares acquired by "I". Results accumulated over several fiscal years, given, as mentioned above, the policy of non-distribution of results of the companies in question.

On the other hand, given the existence of special relationships between the parties, when questioned, the administrator of "I Inc.", "D" (…) stated that: "There was no economic analysis study, with the capital shares being sold at the price stipulated in the contract, in accordance with the will of the parties." (…) it is concluded that the operation of transfer of shares of companies "F, Inc.", "G, Inc." and "H Inc." to company "I, Inc." was not designed by it with an economic sense, having failed to ensure the engagement of an objective price, with acceptance between independent entities.

Recall that the unit price of shares was set at € 2.00 for companies "F, Inc." and "H, Inc." and € 1.00 for companies "G, Inc.", such that for the latter company the unit price for the remaining shareholders was set at €2.4286. It follows that, instead of the economic value of the companies being determined objectively in order to determine the fair value of the companies, the value that company "G, Inc." would have to remunerate the sellers (and shareholders, a value influenced by a policy of non-distribution of profits over the fiscal years) was instead defined.

Conclusive proof that there was no economic evaluation of the companies for purposes of determining the unit value of the shares and that the price was fixed according to the remuneration capacity that "I" had (as happens, moreover, in the decision to distribute dividends) is the fact that for one of the companies, in share purchase and sale contracts executed on the same day (20.07.2009), different per-share prices were set, depending on the percentage held in the share capital by the respective shareholders.

In light of the foregoing, we conclude from now on that: [(i) the shareholders of companies "F, Inc.", "G, Inc." and "H, Inc.", among which is included the legal entity inspected, as holder of a percentage of the capital of these companies, decided on 20.07.2009 to sell its shareholdings in the capital of these companies to "I, Inc.", whose capital is equally held by the same shareholders and in the same proportion, as already described in this report; (ii) the price agreed by the parties (sellers and buyers coinciding, as indirectly "I, Inc." [… illegible] by the sellers) is defined based on the capacity that "I, Inc." would have to remunerate its shareholders resulting from this operation and following a subjective criterion in this same [… illegible] that even leads to the setting of different per-share sale prices; (iii) (…) remuneration stems from the fact that this company never distributed results over its economic life; (iv) finally, more than 90% of the amount paid occurs after the merger of the company. The remuneration of the shareholders is also accomplished through recourse to capital of the acquired companies, which also never distributed results over their economic life.

It is worth emphasizing, in addition and finally, that the transfer of shareholdings did not in itself have a character indispensable, neither to the implementation of the subsequent operation of merger by incorporation, nor to the achievement, in fiscal terms, of the regime of fiscal neutrality that article 74 of the Corporate Income Tax Code associates, notably with the merger, provided that certain conditions are met.

(…)

Namely, instead of transferring to "I, Inc." the entirety of the shareholdings held in the acquired companies, the entire assets of the acquired companies could have been transferred to "I, Inc.", with the allocation to the legal entity of shares of the beneficiary company, i.e., of "I, Inc., with the consequent capital increase.

In not proceeding in this latter manner, the legal entity had as its fundamental objective to obtain, by this means, "dividends" not subject to taxation, since the amounts already paid (over the years 2009, 2010 and 2011), in the amounts, repeat, of €45,080.00; €112,700.00 and €67,620.00, respectively, were, having as a justifying cause the "payment of price" of the transferred shares that preceded the operation of merger by incorporation of the companies to which reference has been made throughout the present project of application of the anti-abuse clause.

It was thereby clothed, consequently, such legal transaction, that is, the sale of shareholdings (shares), with an artificial nature, and its practice was determined solely by fiscal reasons.

For all of the foregoing, it becomes necessary to conclude that the motivation underlying the acts practiced was exclusively fiscal, which does not rest on any criterion said to be economic rationality, in that, instead of the practice of a merger operation (with allocation of new shareholdings to the shareholders of the beneficiary company), a sale of the shareholdings prior to the merger was carried out, thereby generating, as an effect of the same, a credit in the sphere of the here taxpayer satisfied at the cost of the brought-forward results of "I" and the merged companies.

Truly, as of 31.12.2008, as shown in the table below, the value of the brought-forward results of company "I" was approximate to the overall value agreed for the transfer of shares:

(…)

It is not superfluous to note that the taxpayer in the capacity of seller and indirectly also buyer, decides to sell at the price that the same shareholders determined would be equal to the capacity that the purchasing entity would have to remunerate them, with the particularity that for contracts executed on the same day, for one of the situations, different per-share prices were set based on the percentage that the taxpayers hold in the capital of the company. Seventeen days thereafter (the number of days between the sale of shares and the signing of the merger project) the outlines of a merger operation are defined, which, as the set of acts and legal transactions practiced evidence, it is concluded was the ultimate objective of the entire sequence of facts listed.

Thus it is that, as emerges from the share purchase and sale contracts analyzed by these Services (Annex II), the value for the transfer of shares was set at double the nominal value that the shares of "F" and "H" had at the date on which their respective sale was agreed, while for the shares of "G" the agreed per-share sale price was €1.00, or rather, as shown in the table below:

And, finally, the sequence of acts described above, beginning, namely with the conversion of companies "F", "G" and "H" from limited liability companies into joint-stock companies, in the month of December of the year 2008, followed by the conversion, already in June 2009, also of "I" from the limited liability company type to the joint-stock company type, with the broadening of its corporate purpose (so as to encompass the activities that parceled the three companies pursued individually), the purchase of all shares by "I, Inc." from the shareholders of "F Inc.", "H, Inc." and "G, Inc." in July 2009.

Finally, the merger in September 2009 (with the Merger Project being signed in August of that year), demonstrate a connected set of acts/legal transactions whose ultimate end was the merger by incorporation, but, as described above, regarding the purchase of shares, a transaction inserted in this sequence, was the same determined by exclusively fiscal reasons, since the mentioned transaction was unnecessary for the merger process to be effected (See table showing the chronology of acts and legal transactions)·

(…)

It is thus reinforced that the results obtained with the disposal of the corporate interests are only fully achieved because a coordinated succession of acts and legal transactions was designed that permitted, in addition, with the corporate conversions effected (from the limited liability type to the joint-stock type), the exclusion, also, of the taxation of capital gains which, but for such procedure, would be shown to be due."

OO. The Claimants were notified of the IRS assessments and compensatory interest assessments identified above in section I. Report, which are hereby reproduced, whose payment deadlines ended on 16 December 2013 and 6 January 2014 – cf. AF and Documents 1 to 27 submitted with the arbitral petition.

PP. The Claimants provided bank guarantees to suspend the tax enforcement proceedings relating to the IRS assessments and compensatory interest assessments contested here, having incurred costs with the same that totaled, in September 2014, the overall amount of € 3,724.50 – cf. applications and documents submitted by the Claimants to the file.

QQ. On 24 January 2013, the Claimants submitted a request for the constitution of a Collective Arbitral Court to CAAD – cf. electronic application in the CAAD system.

1.2. Unproven Facts

Other facts with relevance to the decision of the case were not proven.

1.3. Justification of the Factual Decision

The determination of the facts was made on the basis of the examination of the documents and information attached to the file above mentioned regarding each of the evidentiary items, whose authenticity and truthfulness was not questioned by the parties, as well as on the evidence produced in the witness examination.

The witness Dr. José Duarte Martins, Chartered Accountant of "G" at the time of the facts, was also heard, who visited the facilities of this company weekly and who followed the restructuring process. The witness testified transparently and with impartiality.

1.     THE LAW
   

2.1. Introduction

The question is whether the legal transactions involving the disposal of shareholdings in companies "F", "G" and "H" by the Claimants, framed in a structured sequence of acts that culminated in the merger by incorporation of those companies into company "I", from which a tax advantage resulted, constitute abusive conduct in light of article 38, paragraph 2 of the GTC.

It is important to determine whether, as the TCA argues, the mentioned transactions merit the qualification of artificial and abusive, for tax purposes, because they are not founded on reasons of economic rationality and are unnecessary for the accomplishment of the merger and its objectives, representing only a way of recharacterizing or re-qualifying the income obtained by the Claimants.

In this regard, the TCA asserts that the sole purpose of these share sale transactions was the artificial transformation of dividends, subject to taxation, in accordance with article 5, paragraph 2, subparagraph h) of the Personal Income Tax Code, into capital gains excluded from taxation under article 10, paragraph 2, subparagraph a)[1] of the said statute, representing a disguised distribution of dividends under the guise of price.

2.2. The General Anti-Abuse Clause Regime provided for in article 38, paragraph 2 of the GTC

Article 38, paragraph 2 of the GTC established a general anti-avoidance rule in tax matters[2], which cumulatively combines the criterion of the purpose pursued, underlying the doctrine of fraud on the law, and the criterion of the means employed, developed by the doctrine of "abuse of legal forms", which delimits its scope of application[3].

The cited rule provides as follows:

"2 - Acts or legal transactions that are essentially or principally directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be attained, in whole or in part, without the use of such means, are ineffective for tax purposes, and taxation shall then be carried out in accordance with the applicable rules in their absence and the aforementioned tax advantages shall not be produced"[4].

As recognized by both the Claimants and the TCA, the rule breaks down into five elements, of which four form its respective tax operative fact, constituting the cumulative requirements for applying the GAAC – the means, result, intellectual and normative elements[5] –, with the fifth element, the so-called sanctioning element, corresponding to its enactment.

The avoidance phenomenon reveals itself to be contrary to the ends of the rule(s) circumvented and of the legal system itself[6], although it is a deviation perpetrated by lawful means, when considered in isolation. It presents a lower degree of reproach when compared with evasion, which justifies a mitigated reaction on the part of the legal system. This reaction, without putting in question the validity of the legal acts, necessarily passes through disregarding the tax effects typically arising from them. The ineffectiveness affecting the legal acts must be merely tax-related.

This doctrine is accompanied by the idea that if unusual or artificial means are used to achieve a given economic result, translating into situations of non-tax incidence that are not in conformity with the ends of the tax rule, the legal system should subject them to taxation identical to that which would fall on the normal or typical ways of achieving that result.

Our jurisprudence pronounces itself in identical sense by considering that the provision of article 38, paragraph 2 of the GTC "establishes four requirements for its application, which are: 1 - The means element - which is concerned with the form used, therefore with the practice of certain acts or transactions directed, essentially or principally, to the reduction, elimination or temporal deferral of taxes; 2 - The result element - which aims at the tax advantage as the end of the taxpayer's activity, therefore the reduction, elimination or temporal deferral of taxes; 3 - The intellectual element - which is concerned with the tax motivation of the taxpayer, therefore with the fact that the acts or transactions practiced by it are essentially or principally directed to the result which is the tax advantage; 4 - [The] Normative element - which is concerned with the normative-systemic reprobation of the obtained advantage, therefore the taxpayer acts with manifest abuse of legal forms" – cf. Judgments of 15 February 2011, of the Central Administrative Court South ("CAC South"), case No. 4255/10, and 14 February 2012, case No. 5104/11.

In the concrete case, the parties diverge as to the verification of the aforementioned requirements, whereby each of them is separately appraised below, without prejudice to its "relationship of connection and interdependence", as J.L. Saldanha Sanches refers[7], or, in the words of Gustavo Lopes Courinha, its relationship of mutual assistance[8].

1.1.

1.2.

2.3. Concrete Application

The Claimants allege that the substantive requirements for the application of the GAAC are not met in the case sub judice, which, in their view, also prevented compliance with the duties of substantiation by the TCA.

First and foremost, it is necessary to distinguish material defects, consisting of violation of law due to error in the operative facts, whether of fact or law, from the defect of lack of substantiation, the latter being of a formal nature.

In the situation at hand, the TCA extensively and intelligibly substantiated the application of the GAAC, as emerges from the factual material. Thus, regardless of whether we agree with the reasons invoked, the defect of lack of substantiation of the assessments alleged by the Claimants does not occur.

Having surpassed the appraisal of the formal defects, it is necessary, regarding the material conditions for applying the GAAC, to confirm the cumulative verification of the four elements indicated: result; means; intellectual and normative-systemic.

Result Element

It is indispensable for the qualification of abusive tax conduct that it embodies a tax advantage, which is understood as "any situation by which, by virtue of the practice of certain acts, one obtains a tax burden more favorable to the taxpayer than that which would result from the practice of normal acts of equivalent economic effect, subject to taxation" in the definition proposed by Gustavo Lopes Courinha[9].

The disposal of the shares of "F", "G" and "H", under the conditions verified, did indeed provide a tax advantage to the Claimants. In fact, the tax incidence on the receipt of the amounts in question (price received from the sale of shares) as dividends would result in their taxation in IRS. By carrying out the share sale transaction, the Claimants came under the regime of exclusion from taxation of capital gains, applicable to shares held for more than twelve months, under article 10, paragraph 2, subparagraph a) of the Personal Income Tax Code, in effect at the date (2009)[10].

Thus, by virtue of the sale of shares, the Claimants benefited from an asset inflow to their sphere that was not subject to taxation, whereas if such inflow had occurred through the distribution of dividends, it would always be subject to taxation in IRS.

However, the existence of a tax advantage considered in the abstract is not sufficient to characterize abusive conduct.

As the TCA itself acknowledges, at the heart of the GAAC is indeed an operation of comparison of the acts and transactions to be disregarded with those that represent the normal and coherent way to achieve a given economic-legal result.

"It is therefore required, as part of the result element (…) that the special characteristic of equivalence of non-tax results be proven, to which there does not correspond an equivalent tax burden"[11], that is, that the avoidance acts produce equivalent effects, without, however, producing the respective tax consequences. (emphasis added)

Alberto Xavier emphasizes that the GAAC aims at the taxation of "acts or legal transactions not subsumed under the tax legal type, but which produce economic effects equivalent to those of typical acts or legal transactions, without, however, producing the respective tax consequences." [12].

In the concrete case, it is recalled that on 20 July 2009, the Claimants transferred to "I", a company in which they were also shareholders, the shareholdings they held in companies "F", "G" and "H".

This transaction was inserted in a linked sequence of acts of reorganization of corporate structures, with the objective of bringing together in a single company various entities that developed activities identical to, and even competing with, those of "I", in obedience to criteria of simplification and cost rationalization. It was intended that the restructuring be effected in the most practical, simple and economical manner.

In this context, it could be said, following the TCA, that introducing a step, prior to the merger, of sale to the acquiring entity of the shareholdings of the companies to be acquired held by the Claimants, added nothing to the projected merger (this latter having undeniable objectives of economic rationality), such that this intermediate step (embodied in the sale of the shareholdings) would aim only at a result equivalent to that of distribution of profits, only without taxation.

However, this argument cannot be accepted.

First, because a merger by absorption of fully-owned companies is simpler and more straightforward than a merger by incorporation that does not observe such a requirement (that of full ownership of the absorbed companies), as it is not necessary to establish an exchange relationship and therefore dispensing with an economic study for valuing the shareholdings.

Thus, objectives of practicality and simplicity, which unquestionably governed the corporate reorganization, may also have presided over the decision to dispose of the shareholdings to "I" prior to the merger of the companies therein, it not being demonstrated, as the TCA intends, that the sale of the shareholdings was pursued with a fiscal design.

But more important and decisive, however, is the conclusion that the very premise of result equivalence is erroneous, which is readily drawn from a detailed analysis of the facts, vitiating and invalidating the reasoning of the TCA.

In fact, in the concrete case, the economic effects of the share sales transactions that enabled the Claimants to receive € 672,200.00 could never be equivalent to the economic effects of the distribution of dividends from the said companies, allegedly as a successor (in the TCA's thesis) thereto.

Indeed, looking at the financial information of the companies whose shares were sold by the Claimants, on a date close to the respective sale (extracted from the balancetes as of May 2009), it can be seen that the total value of profits hypothetically distributable by these companies totaled € 515,203.94, as illustrated in the following table:

• Assumption made in light of article 295, paragraph 1 of the Commercial Companies Code

Of this value of distributable dividends, totaling € 515,203.94, it would be due to the Claimants (in case such dividends were distributed) the amount of € 121,060.57[13], taking into account the participation percentages they held in those companies by application of the criterion set forth in article 22, paragraph 1 of the Commercial Companies Code, according to which "in the absence of special provision or contrary agreement, the shareholders participate in the profits and losses of the company in proportion to the value of their respective participations in capital."

This is what is shown in the summary table below:

Recalling the position of the TCA, it considered that the sale, by the Claimants, of the shareholdings of those companies to "I" artificially disguised a distribution of dividends to them in the amount of € 672,200.00 (share sale price), on which it imposed IRS, issuing additional assessments.

Now, neither did the companies whose shares were sold by the Claimants have such an amount of distributable dividends (the total distributable dividends was € 515,203.94), nor would the value due to the Claimants as profits be even close, as it totaled € 121,060.56, far short of the amount considered by the TCA, of € 672,200.00.

In these factual circumstances, the proposition, which supports the tax acts under appraisal, that the sale of shareholdings constituted an artificial transaction for abusive recharacterization of income, disguising dividends in the amount of € 672,200.00 under the guise of capital gains, cannot be accepted, because, seen the facts, these hypothetical dividends did not exist in that order of magnitude (nor approximate…), nor could they as such be distributed.

Thus, the legal-economic result of a distribution of dividends by companies "F", "H" and "G" to the Claimants would not be comparable to that which resulted from the sale of the shareholdings (the said "transactions to be disregarded" referred to by the TCA), as the maximum distributable dividends to the Claimants was € 121,060.56 and through the sale of the shares they achieved an actual financial inflow in the amount of € 672,200.00, much superior to the dividends to which they would be entitled.

In these circumstances, it is concluded that the condition of equivalence of the economic effects of the share sale to those of a dividend distribution (hypothetically disguised) is not met, as it would not be possible through the route of dividend distribution to produce inflows to the assets of the Claimants in amounts even approximate to those they received from the sale of the shareholdings.

Accordingly, the TCA's position is without merit, failing an essential requirement for the application of the anti-abuse regime set forth in article 38, paragraph 2 of the GTC, whereby the additional IRS assessments and the corresponding compensatory interest assessments are voidable for violation of law.

Intellectual Element

The obtaining of the tax advantage must be predetermined, with the acts or transactions practiced being directed to that end. It is required that the means utilized was chosen with the main purpose of "reduction, elimination or temporal deferral of taxes", as only transactions in which the objective of fiscal economy is manifestly the principal should be regarded as avoidance ("tax driven transaction").

Similarly to what was noted above regarding the result element, the TCA did not meet its burden of proof of demonstrating facts indicative of a preponderant fiscal intent underlying the sale of the shareholdings by the Claimants, with the alleged purpose of disguising a distribution of dividends under the guise of price.

In fact, the sale of the shareholdings was inserted in a corporate reorganization operation motivated by valid economic reasons, in which it was framed as an intermediate step, allowing an important financial inflow to the sphere of the Claimants, in return for the disinvestment realized by them, and facilitating the restructuring, as through the transfer of ownership of the shareholdings to "I" a merger-absorption could be accomplished.

The result achieved, namely the financial inflow to the sphere of the Claimants, would have no parallel in the case of the hypothetical alternative conduct of distribution of taxed dividends, advocated by the TCA, such that, without prejudice to the income derived from the sale of the shareholdings having benefited from the exclusion from taxation of capital gains, applicable to shares held for more than twelve months, under article 10, paragraph 2, subparagraph a)[14] of the Personal Income Tax Code, in effect at the date (2009)[15], it is not demonstrated, as the TCA intends, that that share sale was primarily in accordance with a fiscal design ("tax driven transaction"), and it must be concluded that the intellectual element is not verified.

Also for this reason, the tax acts in controversy suffer from a substantive defect and must be annulled.

Means Element

As Gustavo Lopes Courinha emphasizes, the means element "corresponds to the route chosen by the taxpayer to obtain the desired gain or tax advantage"[16].

In accordance with article 38, paragraph 2 of the GTC, the tax advantage, to be considered abusive, must be achieved through acts or legal transactions "by artificial or fraudulent means and with abuse of legal forms".

It is taking into account the purposes pursued by the taxpayer that the transaction may appear endowed with an anomalous, artificial or even contradictory form, revealing "a level of incoherence between the form or structure chosen and the practical-economic purpose of the taxpayer, between the end for which this form is concretely employed and the cause that is proper to it"[17].

Indeed, in the words of António Fernandes de Oliveira, situations subsumed under the GAAC are those in which "the taxpayer wants nothing, expects nothing, intends nothing, with its conduct, except to obtain this or that tax advantage, without any other objective being associated with it"[18].

According to Sérgio Vasques, what is at issue is "a fraud against the principles of the system, in which the taxpayer carries out a transaction that is directly in conformity with the law but whose contours escape all and any economic rationality, being explainable only by the intent to obviate taxation"[19].

In light of the foregoing, it follows that, in the concrete situation, the sale of shareholdings was not only inserted in a corporate restructuring process guided by valid substantive motives of cost rationalization and elimination of dispersion, with the objective of gathering in a single legal entity the human and patrimonial means dispersed across the different companies (which, moreover, competed with each other), but also enabled the Claimants to achieve a significant financial inflow that could not be attained through the alleged remuneration via dividends.

We are not faced with an anomalous and unusual option or an "indirect transaction", with the sale acts being suitable for the achievement of the objectives of the restructuring in which the Claimants insert them. This alone is sufficient to conclude for the adequacy of the means employed by the Claimants in a context of normality and consequent invalidity of the additional assessments.

Normative Element

The verification of this requirement aims to distinguish cases of tax avoidance (extra legem) from cases of tax planning intra legem, underlying the former being the non-conformity of the result obtained with the ratio legis, the spirit of the law, and the concern to achieve tax equality and justice.

The delimitation of the boundaries of the avoidance act depends on the "requirement of condemnation by the Tax System of the result obtained"[20] through comparison of the result aimed at with the intention or spirit of the law, the Code of the tax in question or the tax legal system itself as a system of tax burden sharing.

In the case at hand, we are in the field of the purported recharacterization of a certain type of income (namely dividends) into income of a different nature (capital gains), with the TCA alleging that the benefit of exclusion from taxation of capital gains was applied to income that formally falls within that category and nature, but which, in normal circumstances and purged of unusual or abusive acts or transactions, would be characterized as dividends.

This concealment is recognized as the field of application par excellence of the GAAC. As Bruno Santiago & António Queiroz Martins state: "for cases in which the administration concludes that the sale of shareholdings conceals, in whole or in part, another transaction between the parties (it has color, but different substance) (…) there exists in the legal system a specific legal element – the GAAC"[21].

Except that, in this case, it was not demonstrated that the income obtained by the Claimants from the sale of shareholdings corresponded to an indirect transaction, with the recharacterization of income that would typically correspond to the category of dividends (these, subject to taxation). On the contrary, there were evidenced in the case file both the lack of equivalent economic effects between the share sale operation and the alternative conduct advocated by the TCA (the distribution of dividends) and the existence of valid economic reasons that framed the said sale.

In this manner, it is not appropriate to make a judgment of condemnation or of illegality, since the IRS legislator excluded capital gains from the sale of shares from taxation, when guaranteed a minimum holding period corresponding to 12 months, a situation in which the Claimants find themselves.

Consequently, it is concluded that the normative element (of disapproval) constituting an essential requirement for the application of the GAAC regime is not verified, again confirming the substantive defect that vitiates the acts of additional assessment under review.

Sanctioning Element

The conditions for the application of the GAAC not having been demonstrated, there is no place for the application of the enactment of the rule contained in article 38, paragraph 2 of the GTC, leading to the ineffectiveness of the legal transactions for tax purposes, contrary to the position defended by the TCA.

In conclusion,

The tax acts of IRS assessment are voidable for violation of law due to error in the operative facts, as they derive from the application of the regime of article 38, paragraph 2 of the GTC without the conditions provided therein being met. The substantive defect extends to the compensatory interest assessments, which are accessorial, given the non-verification of the requirements of article 35, paragraph 1 of the GTC, with no delay in the assessment of tax owed being attributable to the Claimants.

The regime of voidability is provided for in article 135 of the Administrative Procedure Code, of subsidiary application, taking into account the provisions of articles 2, subparagraph d) of the TPPC and 29, paragraph 1, subparagraphs a) and d) of the RJAT.

2.4. On Compensation for Undue Provision of Guarantee

The Claimants further submit a claim for a judgment condemning them to the payment of compensation for the provision of an undue bank guarantee, on the basis of error attributable to the services in the assessment of the tax, under the provisions of article 53 of the GTC, according to which:

"Article 53 Guarantee in case of undue payment

1 - The debtor who, to suspend enforcement, offers a bank guarantee or equivalent shall be compensated in whole or in part for the loss resulting from its provision, should it maintain it for a period exceeding three years in proportion to the maturity in administrative recourse, challenge or opposition to enforcement that have as their object the secured debt.

2 - The period referred to in the preceding paragraph does not apply when it is verified, in friendly dispute resolution or judicial challenge, that there was error attributable to the services in the assessment of the tax.

4 – The compensation referred to in paragraph 1 has as its maximum limit the amount resulting from the application to the amount secured of the rate of indemnity interest provided in this law and can be requested in the same process of dispute or judicial challenge, or autonomously.

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

Article 171 of the TPPC further provides, under the heading "Compensation in case of undue guarantee", that:

"1 - Compensation in case of a bank guarantee or equivalent unduly provided shall be requested in the process in which the legality of the debt subject to enforcement is contested.

2 - Compensation should be requested in the dispute, challenge or recourse or in case its basis is subsequent within 30 days after its occurrence."

In this regard, it is clear that the tax arbitration process has as its object the appraisal of the legality of the tax acts.

It is further worth noting that the tax arbitration process was configured as an alternative procedural means to the judicial challenge process, as can be inferred from the provision of article 124 of Law No. 3-B/2010, of 28 April, which authorized the Government to legislate "in order to establish arbitration as an alternative form of jurisdictional conflict resolution in tax matters". This legislative authorization came to be implemented by Decree-Law No. 10/2011, of 20 January (RJAT), with the arbitration process encompassing the appraisal of claims directed to the declaration of illegality of acts of assessment of taxes.

Considering that compensation for undue provision of guarantee should be requested in the process in which the legality of the debt is discussed, and that it can be the object of a claim filed through the procedural means of judicial challenge, of which the arbitration process is a substitute, without prejudice to the restrictions and limitations contained in the Binding Order (Order No. 112-A/2011, of 22 March), it appears clear that such a claim for compensation (for undue provision of guarantee) is appropriate in the arbitration process, similarly to what occurs with the claim for indemnity interest.

Accordingly, as expressly results from article 171, paragraph 1 of the TPPC, the arbitration process is adequate for the knowledge and appraisal of the claim for compensation for undue provision of guarantee.

In the situation at hand, the IRS and compensatory interest assessments derive from error (in the operative facts) attributable to the Tax and Customs Authority that incorrectly interpreted and applied article 38, paragraph 2 of the GTC, without the Claimant having contributed to this error being made, with the constitutive requirements of the right to compensation for undue provision of guarantee being met, thereby rendering the Claimants' arguments correct.

Thus, the Claimants have the right to be compensated for the loss resulting from the provision of the guarantee, which, according to the elements attached to the case file, totals € 3,724.50.

V. DECISION

Accordingly, for the reasons stated, this panel of arbitrators concludes for the complete success of the claim for declaration of illegality and consequent annulment of the IRS assessments and compensatory interest assessments subject to this action and, further, for the success of the claim for compensation for undue provision of guarantee, in the amount of € 3,724.50.

The value of the case is set at € 137,466.37, in accordance with articles 3, paragraph 2 of the Regulation of Costs in Tax Arbitration Proceedings ("RCAP"), 97-A, paragraph 1, subparagraph a) of the TPPC and 306, paragraphs 1 and 2 of the Code of Civil Procedure.

The amount of costs is set at € 3,060.00, at the charge of the Tax and Customs Authority, in accordance with articles 12, paragraph 2 of the RJAT and 4, paragraph 4 of the RCAP and with the general rules regarding costs contained in article 527, paragraphs 1 and 2 of the Code of Civil Procedure.

Notify.

Lisbon, 7 January 2015

The preparation of the present arbitral decision is governed by the old orthography.

The arbitrators,

Alexandra Coelho Martins

Ricardo Rodrigues Pereira

Júlio Tormenta

Document prepared on computer, pursuant to paragraph 5 of article 131 of the Code of Civil Procedure, applicable by referral from subparagraph e) of paragraph 1 of article 29 of Decree-Law No. 10/2011, of 20/01.

The preparation of this decision is governed by the old orthography.

[1] Subparagraph meanwhile repealed, but in effect at the time of the facts.

[2] Supplemented by article 63 of the TPPC which contains the procedural regime for application of the GAAC.

[3] On this subject see J.L. Saldanha Sanches, Manual of Tax Law, 2nd edition, Coimbra Publisher, 2002, pp. 120-123; José Casalta Nabais, Tax Law, 2nd edition, Almedina, Coimbra, 2003, pp. 207-223 and M.H. de Freitas Pereira, Taxation, Almedina, September 2005. The latter emphasizes that "we are before an application in the tax field of the so-called doctrine of abuse of legal forms. Accordingly, tax law, intending to reach with the tax a certain taxable capacity, resorts for this purpose to the acts or legal transactions that are normally used to achieve the aim or economic result associated with that capacity. If the taxpayer achieves this same aim or result using acts or transactions, although lawful, unusual or artificial in the situation at hand, should be subject to identical tax burden. This is the true reason for being of the anti-abuse rule", pp. 415-416.

[4] Wording introduced by Law No. 30-G/2000 of 29 December.

[5] See Gustavo Lopes Courinha, in The General Anti-Abuse Clause in Tax Law Contributions to its Understanding, Almedina, 2004, p. 165.

[6] In this sense, João Taborda da Gama, "Avoidance Act …", pp. 294, 313 and 314, and J. L. Saldanha Sanches, The Limits …, pp. 102-104 and, by this Professor, "The Abuse of Right in Tax Law: nature, scope and limits", in Science and Tax Technique No. 398, Center for Tax Studies, Lisbon, Apr.-Jun. 2000.

[7] Cf. The Limits of Tax Planning, Coimbra Publisher, 2006, p. 170.

[8] Cf. The General …, p. 165.

[9] Cf. "The General Anti-Abuse …", p. 172.

[10] Introduced by Decree-Law No. 228/2002, of 31 October.

[11] Cf. Gustavo Lopes Courinha, "The General Anti-Abuse …", p. 173.

[12] Cf. Typicality of Taxation, Simulation and Anti-Avoidance Rule, Dialética, São Paulo, 2001, p. 85.

[13] The remainder (the majority) of the distributable dividends would be due to the parents of the women claimants, majority shareholders in the three companies, who are not parties to this action and whose situation is beyond its scope.

[14] Subparagraph meanwhile repealed, but in effect at the time of the facts.

[15] Introduced by Decree-Law No. 228/2002, of 31 October.

[16] Cf. "The General Anti-Abuse …", p. 165.

[17] Cf. Gustavo Lopes Courinha, "The General Anti-Abuse …", p. 166. Also in this sense António Lima Guerreiro, General Annotated Tax Code, Publishing House Kings of Books, 2000, p. 186.

[18] Cf. The Legitimacy of Tax Planning – General Anti-Abuse Clauses and Conflicts of Interest, 2009, p. 163.

[19] Cf. Manual of Tax Law, Almedina, 2011, p. 313.

[20] Cf. "The Limits …", pp. 182-183.

[21] "Transfer Prices in the Purchase and Sale of Shareholdings between Related Entities", Transfer Prices Notebooks, Almedina, 2013.