General Anti-Abuse Clause in IRS: CAAD Arbitration on Additional Tax Assessments

Case No. 62/2014-T

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. José Poças Falcão and Dr. Pedro Pais de Almeida, designated by the Deontological Council of the Center for Administrative Arbitration to form the Arbitral Tribunal, constituted on 28-03-2014, agree as follows:

1. Report

A and B, married to each other, respectively TIN … and TIN …, with tax domicile at …, -…, came pursuant to articles 2, no. 1, paragraph a), 10, no. 1, paragraph a) and 10, no. 2, of Decree-Law No. 10/2011 of 20 January (hereinafter "RJAT") to submit to the appreciation of an Arbitral Tribunal the legality of the following assessments:

(i) additional assessment no. 2013 ..., of 02.11.2013, concerning IRS of 2009, in the amount of € 172,457.76, corresponding compensatory interest assessment no. 2013 ..., of 06.11.2013, in the amount of € 19,727.88, and account reconciliation statement no. 2013 ..., relating to the offset no. 2013 ..., of 06.11.2013, with the balance ascertained of € 165,020.08;

(ii) additional assessment no. 2013 ..., of 02.11.2013, concerning IRS of 2010, in the amount of € 434,927.88, corresponding compensatory interest assessment no. 2013 ..., of 06.11.2013, in the amount of € 37,289.03, and account reconciliation statement no. 2013 ..., relating to the offset no. 2013 ..., of 06.11.2013, with the balance ascertained of € 429,296.49;

(iii) additional assessment no. 2013 ..., of 02.11.2013, concerning IRS of 2011, in the amount of € 271,396.75, corresponding compensatory interest assessment no. 2013 ..., of 06.11.2013, in the amount of € 14,021.38, and account reconciliation statement no. 2013 ..., relating to the offset no. 2013 ..., of 06.11.2013, with the balance ascertained of € 267,378.09.

The Applicants further request that the Tax and Customs Authority be ordered to pay compensation for the guarantee provided to suspend the tax enforcement proceedings pending this litigation.

The Tax and Customs Authority is the respondent.

The Applicants opted for non-appointment of an arbitrator.

Pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal Dr. Jorge Lopes de Sousa, Dr. José Poças Falcão and Dr. Pedro Pais de Almeida, who communicated acceptance of the assignment within the applicable period.

The Parties were notified of this appointment and did not express any intention to refuse the appointment of the arbitrators, pursuant to the combined provisions of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provision of paragraph c) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 28-03-2014.

The Tax and Customs Authority submitted a response in which it defended the inadmissibility of the claims.

At a meeting on 30-06-2014, witness evidence was produced.

At the same meeting, the Parties were notified for successive written submissions.

The Applicants presented the following conclusions:

A. The essential facts in this case are easily described: a company acquired from its shareholders (individuals) equity interests held by them in other companies, at a time when capital gains resulting from the alienation of shares held for more than 12 months were excluded from taxation under IRS.

B. The AT considers that the aforementioned operations of purchase and sale of equity interests are abusive, in that they intended to disguise dividend distributions. Accordingly, it understood that the general anti-abuse clause provided for in no. 2 of article 38 of the LGT should be applied and the non-taxed capital gains converted into taxed dividends.

C. In truth, the assessments in question result from an abusive application of the CGAA, which is based on the AT's administrative understanding that there is abuse whenever a taxpayer does not opt for the fiscally more burdensome path to conduct their business.

D. Specifically, in the year 2009, the following operations took place:

(i) Sale of equity interests in C:

• on 20.07.2009, B sold the 420,000 shares held by him in C to D, at the unit price of € 2.4286, totaling € 1,020,000.00. The price was paid as follows: (i) € 84,000 at the time of execution of the purchase and sale contract; (ii) € 120,000.00 on 31.12.2009; (iii) € 306,000 on 30.06.2010; (iv) € 204,000 on 31.12.2010; (v) € 306,000 on 30.06.2011;

• On 20.07.2009, A sold the 420,000 shares held by him in C to D, at the unit price of € 2.4286, totaling € 1,020,000.00. The price was paid as follows: (i) € 84,000 at the time of execution of the purchase and sale contract; (ii) € 120,000.00 on 31.12.2009; (iii) € 306,000 on 30.06.2010; (iv) € 204,000 on 31.12.2010; (v) € 306,000 on 30.06.2011;

(ii) Sale of equity interests in E:

• on 20.07.2009, B sold the 100,450 shares held by him in E to D, at the unit price of € 2.00, totaling € 200,900.00, paid as follows: (i) € 20,090 at the time of execution of the purchase and sale contract; (ii) € 20,090.00 on 31.12.2009; (iii) € 60,270.00 on 30.06.2010; (iv) € 40,180 on 31.12.2010; (v) € 60,270 on 30.06.2011.

• on 20.07.2009, A sold the 100,450 shares held by him in E to D, at the unit price of € 2.00, totaling € 200,900.00. The total price was paid as follows: (i) € 20,090 at the time of execution of the purchase and sale contract; (ii) € 20,090.00 on 31.12.2009; (iii) € 60,270.00 on 30.06.2010; (iv) € 40,180 on 31.12.2010; (v) € 60,270 on 30.06.2011.

(iii) Sale of equity interests in F:

• on 20.07.2009, B sold the 264,000 shares held by him in F to D, at the unit price of € 2.00, totaling € 528,000.00. The total price was paid as follows: (i) € 52,800.00 at the time of execution of the purchase and sale contract; (ii) € 52,800.00 on 31.12.2009; (iii) € 158,400 on 30.06.2010; (iv) € 105,600 on 31.12.2010; (v) € 158,400 on 30.06.2011.

• on 20.07.2009, A sold the 264,000 shares held by him in F to D, at the unit price of € 2.00, totaling € 528,000.00. The total price was paid as follows: (i) € 52,800.00 at the time of execution of the purchase and sale contract; (ii) € 52,800.00 on 31.12.2009; (iii) € 158,400 on 30.06.2010; (iv) € 105,600 on 31.12.2010; (v) € 158,400 on 30.06.2011.

E. On 07.08.2009 the merger plan was registered, by way of global transfer of assets, between D (as the absorbing company) and F, C and E as the absorbed companies, this operation representing the culmination of a process of business reorganization of the four companies in question that began to be considered at the first signs of the economic and financial crisis initiated in 2008.

F. In 2008, the growth cycle that had been observed in the markets in which the aforementioned companies operated since the early nineties ended, initiating a phase of reduction in the activity of the four companies; in 2009 there was a sharp decline in demand for their respective services due to constraints in the civil construction and public works market, which resulted in a decline in service revenue.

G. Seeking to respond to the constraints caused by the marked reduction in activity, in 2009, the shareholders of the four companies opted to implement a business reorganization plan that resulted in the merger of the companies, through the incorporation of C, F and E by D.

H. Having taken the decision to carry out the merger and defined its modality (merger by incorporation), it had to be decided how the operation would be conducted. At that time, the Commercial Companies Code (CSC) provided two ways of carrying out a merger by incorporation:

(i) the standard form, referred to in article 97 of the CSC, which involves the attribution of shares of the absorbing company to the shareholders of the absorbed companies and which follows a complex implementation process provided for in articles 98 et seq. of the CSC;

(ii) the simplified form, provided for in article 116 of the CSC, which had been subject to certain amendments through the corporate law reform undertaken in 2006 (through Decree-Law No. 76-A/2006, of 29 March), which further simplified the process previously provided for in that legal provision.

I. Faced with the legal scenario described, it appeared to the shareholders of the companies in question, two of whom are the present Applicants, as well as to the members of their respective management bodies that, as the merger could be carried out through a more simplified form and as the shareholders of the absorbed companies did not intend to acquire new equity interests in the absorbing company, the simplified merger would be an advantage in terms of time and costs associated with the process, allowing for the dispensation of:

(i) the exchange of equity interests and consequently, the preparation of equity interest exchange schedules and determination of any cash amounts to be attributed to shareholders of the absorbed companies (provided for in paragraph e) of no. 1 of article 98 of the CSC, applicable to the standard merger process), which meant that the plan would not have to indicate the valuation criteria adopted and the basis of that exchange ratio (as provided for in no. 3 of article 98 of the CSC for the standard merger process);

(ii) the submission of the merger plan to the supervisory body of the companies involved in the merger and the issuance of opinions by them (as provided for in no. 1 of article 99 of the CSC for the standard merger process);

(iii) the examination of the merger plan by a statutory auditor or by an independent audit company of all companies involved (as provided for in no. 2 of article 99 of the CSC for the standard merger process);

(iv) the preparation of reports by the auditors with their reasoned opinion on the adequacy and reasonableness of the equity interest exchange ratio, indicating, at least, the methods followed in determining the proposed exchange ratio and the justification for the application in the specific case of the methods used by the management body of the companies or by the auditors themselves, the values found through each of those methods, the relative importance conferred on them in determining the proposed values and the special difficulties encountered in the appraisals they conducted (as provided for in no. 4 of article 99 of the CSC for the standard merger process); and, further, that (v) the merger could be registered without prior deliberation of the general assemblies, it being sufficient, therefore, to prepare the merger plan and make the necessary communications in accordance with no. 2 of article 116 of the CSC.

J. For the simplified merger process to take place, it was only necessary, pursuant to the provisions of article 116 of the CSC, that D (the absorbing company) be the owner of the share capital of the absorbed companies when the merger implementation process began; for this to occur, it was necessary that the shareholders of the latter sell their equity interests to the former prior to the start of the merger process.

K. Given that the companies in question were family businesses, belonging, albeit in different proportions, to the present Applicants and their three daughters, the solution of the simplified merger with prior acquisition of equity interests in F, C and E by D seemed to be the most advantageous solution, precisely because it was the simplest in terms of compliance with legal requirements and formalities and because the shareholders of the absorbed companies did not have as their objective the acquisition of new equity interests in the absorbing company.

L. The intended simplification of the process was, moreover, described by one of the witnesses presented (the accountant of D) as the reason why the acquisition of the equity interests from the shareholders of the absorbed companies by the absorbing company occurred – a reason entirely legitimate and expressly permitted by law.

M. There was no, contrary to what the AT argues, any intention to carry out the distribution of dividends from the absorbed companies through a "false" sale of equity interests. Furthermore, as mentioned by the two witnesses presented by the Applicants and as is acknowledged by the AT itself throughout the inspection report and in this proceeding, the companies in question never had a dividend distribution policy, following instead a policy of internal reinvestment which, moreover, is also the policy that has been followed by D, the absorbing company, before and after the merger.

N. This consistency of the policy of non-distribution of dividends reveals that this is a solid business choice on the part of the shareholders, which is connected with the fact that the companies in question (now only D) have high investment needs in fixed assets and cannot depend solely on external financing for this purpose.

O. This being true, it is not the intention here to obscure the fact that the sale of the equity interests allowed the Applicants and other shareholders of the absorbed companies to realize capital gains – a fact that, moreover, was never denied by them.

P. It is also true that the fact that the income thus obtained was not, at that time, subject to taxation was a factor considered when deciding whether or not to proceed with the sale of the equity interests before the merger. Indeed, how could it be otherwise, as any person who considers alternative decisions weighs their respective pros and cons.

Q. However, there is a fundamental difference between considering this factor in a decision between alternatives and electing it as the leitmotiv of the path that follows and which is thus constituted by acts and operations functionalized to the achievement of that objective. This is the difference that lies at the root of the distinction between legitimate and illegitimate tax planning. In the words of SALDANHA SANCHES, in "The Limits of Tax Planning", Coimbra Publisher, 2006, p. 21, legitimate tax planning "consists of a technique of reducing the tax burden by which the taxpayer renounces certain conduct linked to a tax obligation or chooses, among the various solutions provided by the legal system, the one which, by intentional action or omission of the tax legislator, is accompanied by fewer tax burdens". On the other hand, illegitimate tax planning "consists of any conduct of improper reduction, by contravening principles or rules of the tax legal system, of the tax burden of a given taxpayer".

R. In the specific case, the decision of the subjects, the present Applicants, was determined by an essential positive reason: the simplification of the merger process and the dispensation of the equity interest exchange that a standard merger process would entail. Naturally, before implementing that solution, its respective pros and cons were weighed, and in that analysis the question of the income that would be generated for the shareholders and its tax exemption was included. Is this not what any informed economic subject does before taking a decision with patrimonial implications?

S. What did not happen at all was the shareholders of the absorbed companies wanting to distribute dividends to themselves and subjecting the manner in which the merger would be carried out to that objective – which never existed – by proceeding to the prior sale of their respective equity interests to the absorbing company. Indeed, if the shareholders' intention was to take advantage of the moment to withdraw financial means from the companies in question, why would they have waited three years to receive the full price of the equity interests? Note that the consideration for the shares of the absorbed companies was paid over the years 2009, 2010 and 2011 and that, at the time of the merger, a very small portion of that amount was paid.

T. In the AT's understanding, the legal transactions of the sale of the equity interests were unnecessary for the merger plan to be implemented, in that this could equally have occurred if the subjects remained owners of the equity interests in the absorbed companies, in which case they would be left with equivalent equity interests in the absorbing company.

U. Indeed, the merger operation could have taken place if the absorbed companies were still held by the subjects and not by the absorbing company.

However, that situation would not have allowed the application of the simplified merger regime and would have required the exchange of equity interests so that the shareholders of the absorbed companies would come to hold equity interests in the absorbing company, which was not intended by them. It is entirely legitimate and does not constitute any kind of fraud or abuse that the subjects adopted the solution they adopted and that they did not want to adopt the solution that the AT considers they should have adopted (the standard merger, without prior acquisition of equity interests by the absorbing company).

V. The interest they achieved is legitimate and had no purpose or intention of manipulation of the tax base and tax burden, although it allowed, collaterally, the realization of income not taxed by the legal system then in force. "Indeed, one thing is the unwarranted obtaining of a tax advantage and the assembly of chained acts in such a way as to achieve it; another, completely different, is the mere coincidence of events, resulting from the normal activity of the subject or the company, from which tax advantages may result." (cf. GUSTAVO LOPES COURINHA, op. cit., p. 170).

W. The issue that troubles the AT is the fact that, at the time the subjects did so, the capital gain generated with the sale was not taxed under IRS; however, the fact that, at that time, the tax legislator did not tax capital gains realized from the sale of shares held for more than 12 months cannot, naturally, be used by the AT against the subjects, the present Applicants: if the legislator opened that door, the behavior of the subjects who legitimately used it cannot be considered abusive.

X. In conclusion, in the specific case the means element, a prerequisite of the general anti-abuse clause, is not present, in that the transactions in question did not take an anomalous, unusual, artificial, complex or even contradictory form, having regard to the ends they were intended to achieve; rather, the legal means used were typical transactions that the law provides for the realization of the intended ends, and therefore, in the Applicants' understanding, the general anti-abuse clause provided for in article 38, no. 2 of the LGT is not applicable to the situation in question.

Y. As for the result element, it is evident that the alienation of the shares under the conditions verified provided the subjects with a tax advantage. However, although that finding is sufficient to fulfill that requirement, its fulfillment is, by itself, irrelevant to the application of the CGAA as "in no case shall a tax advantage or benefit indicate by itself any idea of legal abuse" (cf. LEITE DE CAMPOS, DIOGO, and COSTA ANDRADE, JOÃO, Contractual Autonomy and Tax Law, The general anti-evasion norm, Coimbra, Almedina, 2008, p. 82.).

Z. ALBERTO XAVIER emphasizes, to this same effect, that the CGAAs are norms aimed at the taxation of "legal acts or transactions not subsumable to the tax legal type, but which produce economic effects equivalent to those of typical legal acts or transactions, without, however, producing their respective tax consequences." (cf. Typicality of Taxation, Simulation and Anti-evasion Norm, Dialetics, São Paulo, 2001, p. 85).

AA. Now, that equivalence of non-fiscal (economic, practical, material or financial) results between the acts or legal transactions practiced and the normal taxed acts or transactions exists only when those can be substituted in the effects of these. Only if this substitution of effects is proven will we be dealing with censurable situations.

BB. Completing that argument, GUSTAVO LOPES COURINHA clarifies: "the equivalence of results must, therefore, accepting such terms of performance (e.g. contract clauses), be sought in the legal terms of the acts or transactions adopted by the taxpayer, in order to infer the legal position (obligations and duties) that derives from it and its comparison or otherwise with the legal position that would result if he had opted for the 'normal' transaction". From the analysis of those obligations and rights established, conclusions are drawn about the aforementioned equivalence of non-fiscal results." (cf. op. cit., p. 175).

CC. Thus, as to the result element, the AT not only has to prove that the taxpayer achieved, through the acts or legal transactions practiced, the realization of a certain tax advantage, but also the equivalence of the economic effects with those of the normal taxed act. Now, the alternative conduct suggested by the AT – that the subjects had not sold the equity interests – would not only not produce the same economic, financial and material effects, in that the subjects would be obliged to carry out the merger through the standard process, with all the requirements it entails, including the exchange of equity interests, but would not produce the tax effect that the AT intends – the taxation of dividends – in that such alternative conduct would not necessarily lead to the distribution of dividends by the companies whose equity interests were alienated (which, as already noted, had a consistent policy of non-distribution of dividends).

DD. Note that it is precisely on this point that the whole basis of the AT's reliance on the CGAA rests: the fact that the share sale operations intended to avoid the taxation of dividends that would otherwise be distributed.

However, the AT does not know whether dividends would have been distributed had the equity interests not been sold and cannot, under penalty of illegal application of the norm provided for in no. 2 of article 38 of the LGT, "assume" that this situation would have occurred.

EE. When the AT states that "without the practice of such legal transaction, i.e., without the aforementioned legal manipulation, the amounts received as 'consideration' for the transmission of the equity interests, that is, the 'price', would be taxed, but under another heading, that is, as dividends" the AT is clearly extrapolating a situation that it does not know would have occurred if the equity interests had not been sold, simply because nothing obliges companies to distribute dividends.

FF. And that inevitable conclusion is not altered by the fact that the "payment" of the equity interests acquired by D was made, as the AT says, "with the carried-forward results of "D" (the absorbing company), to whose total amount the carried-forward results of the absorbed companies "F", "C" and "E" also contributed, since as emerges from the analysis of these companies' balance sheets, it was not the policy of the companies, whether absorbed or absorbing, to distribute dividends to shareholders, a fact confirmed by the administrator of "D, SA" in her statements (Annex VIII)."

GG. The fact that the price amount is similar to the amount of carried-forward results does not in any way allow the conclusion that, if the sale had not taken place, the results of the absorbed companies would have been distributed - at most, the AT could discuss whether the share price was adequate, but that is not what is at issue in the application of the CGAA. Indeed, if the AT considered that the share sale value was not adequate, why did it not resort to the transfer pricing regime provided for in the IRC Code precisely to allow correction of situations such as this?

HH. With respect to the intellectual element, it is necessary to demonstrate that the taxpayer adopted an act or legal transaction – and not another with the same non-fiscal effects – only in view of obtaining the tax advantage it provided.

II. Now, as already clarified, the reasons why the subjects wished to sell the equity interests in question are related to the need for the absorbing company to own 100% of the absorbed companies so that the simplified merger regime could be applied, which would also allow avoiding the attribution of equity interests to the shareholders of the absorbed companies in the absorbing company (in which they were not interested), and that, collaterally, this sale allowed them to realize a capital gain that they would not otherwise realize, which, by legislative decision, was not taxed as the shares were held for more than 12 months.

JJ. There was, therefore, no intention to artificially distribute dividends through the sale of the equity interests, nor were these carried out with that purpose.

KK. In conclusion, the AT failed to demonstrate the verification of the intellectual element provided for in the norm contained in no. 2 of article 38 of the LGT – nor could it have done so, in that that element was not present in the conduct of the subjects.

LL. As to the normative element, as GUSTAVO LOPES COURINHA emphasizes (cfr. The General Anti-Abuse Clause in Tax Law – Contributions to its Understanding, Almedina, Coimbra, 2004, pp. 186-187) "there is disapproval of a certain result obtained or intended, when compared with the intention or spirit of the law, of the Tax Code in question or of the Tax System itself. The fraudulent act is configured in terms of the disapproval by law of its true and substantial nature – the effects obtained. Effects that are not desired, foreseen or promoted by Law, but rather rejected". In these terms, the determination of the "boundaries of the evasive act" depends on the "requirement of condemnation by the Tax System of the result obtained".

MM. Now, faced with the tax legislator's choice to exclude from taxation the capital gains obtained from the sale of shares held for more than 12 months, it was certainly not "forbidden to the taxpayer to take advantage of that regime that appears most favorable to him, in the context of non-abusive tax planning, and it would not be for the law enforcer to substitute the tax legislator's choices of whether to tax or not tax certain realities" (cfr. SALDANHA SANCHES, in "The Limits of Tax Planning", Coimbra Publisher, Coimbra, 2006, p. 180).

NN. By way of example, the transformation of a limited liability company into a stock corporation, with the subsequent sale of shares without subjection to taxation (in light of the regime in force prior to the revocation of article 10, no. 2 of the CIRS), was classified by SALDANHA SANCHES as a "conscious gap in taxation". For the author, this would not be a situation susceptible to application of the general anti-abuse clause, since "if the legislator, while taxing capital gains from the alienation of quotas, leaves untaxed the capital gains from shares or taxes them at a lower rate, cannot but accept that the transformation of a commercial company into a stock company is fiscally valid even if the transformation is motivated by exclusively fiscal reasons" (cfr. SALDANHA SANCHES, in "The Limits of Tax Planning", Coimbra Publisher, Coimbra, 2006, p. 182).

OO. Thus, even if the sale of the shares had had an exclusively fiscal motivation, the act would not be considered reprehensible by the legal system since the tax legislator itself had left that door open, not taxing gains resulting from the sale of shares. Consequently, the absence of the normative element – that is, of disapproval by the legal system of the conduct of the subjects – would prevent the application of the CGAA.

PP. In conclusion, the prerequisites for the application of the CGAA, whose cumulative verification is required, are not fulfilled in the specific case, nor has the AT succeeded in making the proof that fell to it under the terms of article 63, no. 3 of the CPPT.

QQ. As for the payment of compensatory interest requested by the AT, as these have their basis in the institute of tort liability and in casu there has been no unlawful act (violation of legal norms), culpable (by fraud or negligence), damage (to the treasury) and an adequate causal nexus between the unlawful act and the damage, there is no legal basis for its attribution to the Applicants.

RR. On the contrary, the Applicants are entitled to compensation for the bank guarantee provided to suspend the enforcement proceedings instituted by the AT for coercive collection of tax assessed through the assessments that are the subject of this proceeding, in accordance with the provisions of no. 1 and 2 of article 53 of the LGT (cf. the copy of the bank guarantee presented at the meeting held on 30.06.2014 pursuant to article 18 of the RJAT).

SS. Indeed, as it is ascertained in this proceeding that there was error attributable to the services in the assessment of the tax (in accordance with no. 2 of article 53 of the LGT), and given that the guarantee provided is a bank guarantee (expressly provided for in no. 1 of article 53 of the LGT), the legal prerequisites for the attribution of compensation to the Applicants are met.

TT. In the specific case, the Applicants incurred expenses in the amount of € 11,124.30 (as per the document issued by Bank … and which they protest to join to the case within 30 days).

In these terms, and in accordance with applicable law, the present arbitration decision request should be ruled in favor, as proven, and consequently, the IRS additional assessments, as well as those relating to compensatory interest, should be annulled, with the other legal consequences, and the AT should be ordered to pay compensation for the guarantee provided to suspend the tax enforcement proceedings pending this litigation.

The Tax and Customs Authority did not present conclusions in its submission, ending by requesting that the action be ruled against, absolving the respondent of the claims.

The Arbitral Tribunal was regularly constituted and is competent.

The parties have legal personality and capacity and are legitimate (arts. 4 and 10, no. 2, of the same enactment and art. 1 of Order No. 112-A/2011, of 22 March).

The proceeding does not suffer from nullities.

1. Factual Matters

2.1. Proven Facts

The following facts are considered proven:

a) An inspection procedure was carried out on the present Applicants pursuant to Service Orders Nos. ...09, ...10 and ...11, issued by the Head of Division on 2013-05-10, with a view to ascertaining facts relating to the tax periods of 2009, 2010 and 2011 (Tax Inspection Report which forms part of the administrative file, the content of which is hereby reproduced);

b) Following the analysis of the results obtained with that project, it was found that the Applicants had not declared the transfer of equity interests carried out in 2009, specifically, they did not file the annex G, or G1, of Form 3 Declaration relating to income obtained in 2009, a situation that was subsequently regularized voluntarily (Tax Inspection Report);

c) The Tax Administration considered that from the analysis of the declaration filed by the Applicants the situation could be subsumed under the hypothesis of the norm contained in no. 2 of article 38 of the LGT (general anti-abuse clause), with the grounds set out in the Tax Inspection Report, the content of which is hereby reproduced, which includes the following:

The means element corresponds to the path chosen by the taxpayer to obtain the desired tax gain or advantage, i.e., the act(s) or legal transaction(s) whose structure is determined in function of a given fiscal result.

The operation of sale of the shares of "F", "C" and "E" that preceded the operation of merger of these companies with "D" 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 transmission of all shares of the first three companies, the merger had taken place without such operation, since covered by the payment of the corresponding price, benefited the taxpayers A and B from amounts that would otherwise be taxed as dividends distributed, in accordance with paragraph h) of no. 2 of article 52 of the CIRS.

Indeed, without the practice of such legal transaction, i.e., without the aforementioned legal manipulation, the amounts received as "consideration" for the transmission of the equity interests, that is, the "price", would be taxed, but under another heading, that is, as dividends, in that their "payment" was made with the carried-forward results in "D" (the absorbing company), to whose total amount the results, also, carried forward from the absorbed companies "F", "C" and "E" contributed, since as emerges from the analysis of the balance sheets of these companies, it was not the policy of the companies, whether absorbed or absorbing, to distribute dividends to shareholders, a fact confirmed by the administrator of "D, SA" in her statements (Annex VIII).

That is, as can be verified, the totality of the carried-forward results in "D" (the sum of the results of the absorbed companies with those of the absorbing company) were used to the point of near depletion in the "payment of the price" of the shares acquired by "D". Results accumulated over several fiscal years, given, as stated 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 the administrator of "D, SA" was questioned about the determination of the price, it was stated that: "There was no economic analysis study, the shares of capital having been alienated at the price stipulated in the contract, in accordance with the will of the parties." (Annex IX), from which it is concluded that the operation of transmission of the shares of companies "F, SA", "C, SA" and "E, SA" to company "D, SA", was not designed by the latter with an economic sense, having failed to ensure the contracting of an objective price, with acceptance between independent parties.

It is recalled that a unit price of € 2.00 was set for the shares of companies "F, SA" and "E, SA" and € 2.4286 for company "C, SA", whereas in the latter company, the unit sale price set for the remaining shareholders was € 1.00. It follows that, instead of determining objectively the economic value of the companies with a view to determining the fair value of the companies, the value that company "D" would have to remunerate the sellers (and shareholders, value influenced by a policy of non-distribution of profits over fiscal years) was instead set.

Conclusive proof that there was no economic appraisal of the companies for the purpose of determining the unit value of the shares and that the price was set according to the capacity for remuneration that "D" had available (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 unit prices were set according to the percentage held in the company's capital by the respective shareholders.

In light of the above, we conclude from now on that: (i) the shareholders of companies "F, SA, "C, SA" and "E, SA", among whom are included the taxpayers inspected, as holders of the majority percentage of the share capital of these companies, decided on 20.07.2009 to sell their equity interests in the capital of these companies to "D, SA", 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, in that indirectly "D, S.A. is held by the sellers) is defined in function of the capacity that "D, SA" would have to remunerate its shareholders resulting from this operation and following a subjective criterion in that same definition, which even leads to the fixing of different share sale prices according to the percentage that the taxpayers hold in the company's capital. (iii) that capacity for remuneration comes from the fact that this company never distributed results throughout its economic life; (iv) finally, more than 90% of the amount paid occurs after the company merger. The remuneration of shareholders is also carried out using capital of the absorbed companies, which also did not distribute results throughout their economic life.

It is worth noting, in addition and finally, that the transmission of the equity interests did not in itself have an indispensable character, neither for the subsequent implementation of the merger by incorporation operation, nor for obtaining, in tax terms, the neutral tax treatment that article 74 of the CIRC associates with mergers, when certain conditions are met.

Indeed, from a tax perspective, there are three types of merger operations which, under the applicable tax legislation, may benefit from the neutral tax treatment regime:

• Operations by which the global assets of one or more companies (merged companies) are transmitted to another already existing company (receiving company) and the attribution occurs to the shareholders of those companies of parts representing the share capital of the receiving company and, possibly, cash amounts not exceeding 10% of the nominal value or, in the absence of a nominal value, of the accounting value equivalent to the nominal of the equity interests attributed to them;

• Operations by which a new company (receiving company) is created by means of the global transmission of the assets of one or more companies (merged companies), with the shareholders of those companies being attributed parts representing the share capital of the receiving company and, possibly, cash amounts not exceeding 10% of the nominal value or, in the absence of a nominal value, of the accounting value equivalent to the nominal of the equity interests attributed to them;

• Operations by which a company (merged company) transfers the entirety of the assets and liabilities constituting its assets to the company holding all of the parts representing its share capital (receiving company).

That is, although the merger operation, preceded by the transmission by the taxpayers here of all shares held in companies "F, S.A.", "C, S.A." and "E, S.A." to "D, S.A.", allowed the subsequent merger operation they carried out to come within the last of the aforementioned types, to thus achieve the applicability of the "benefit" of the neutral tax treatment regime, such transmission was not, nevertheless, a sine qua non condition for that objective, given, in particular, the alternative that the taxpayers had available.

Namely, instead of transmitting to "D, S.A." all equity interests they held in the absorbed companies, the entirety of the assets of the absorbed companies could have been transmitted to "D, S.A.", with the attribution to the taxpayers of shares in the Receiving company, i.e., "D, S.A.", with the consequent capital increase.

By not proceeding in that latter manner, faced with the framework of circumstances of the share sale created by the shareholders of companies "F, SA", "C, SA" and " E, SA"' (it is important again to note the practical coincidence between sellers and buyers) the taxpayers had as their fundamental objective to obtain, through this means, "dividends" not subject to taxation, in that the amounts already paid to each of the taxpayers (over the years 2009, 2010 and 2011), in the amounts, it is repeated, of €349,780.00€; €874,450.00 and €524,670.00, respectively, were so paid, having as their justifying cause the "payment of price" of the shares transmitted that preceded the merger by incorporation operation of the companies to which reference has been made throughout this project of application of the anti-abuse clause.

Such legal transaction was therefore characterized, that is, the sale of the equity interests (shares), by an artificial nature, the practice of the same being determined solely by fiscal reasons,

In light of all of the above, it is necessary to conclude that the motivation underlying the acts practiced was exclusively fiscal, not based on any criterion of economic rationality, in which, instead of practicing a merger operation (with attribution of new equity interests to the shareholders of the receiving company), a sale of the equity interests was carried out prior to the merger, thus generating, as a result of the same, a credit in the sphere of the taxpayers here satisfied at the cost of the carried-forward results of "D" (and of the merged companies).

(...)

It should be noted in addition that not only was there no economic study leading to an explanation of the reasons that dictated the fixing of the price attributed to the shares of "F", "C" and "E" subject to sale to "D" (Cfr. Statement of the administrator of "D", G in annex), in the year 2009, but from the reading of the documents that incorporate the merger project and the merger (final), no economic reasons are discerned that justify the transmission of the shares that preceded the merger.

It is not unnecessary to note that the taxpayers, in the capacity of sellers and indirectly, also buyers, decided to sell at the price that they themselves determined would be equal to the capacity that the buying entity would have to remunerate them, with the particularity that for contracts executed on the same day, in one of the situations, different unit sale prices were set according to the percentage that the taxpayers hold in the company's capital. Conclusive proof that the sole objective of the share sale transaction would be the remuneration of shareholders, removing taxation as a distribution of profits. After seventeen days (the number of days between the share sale and the signing of the merger plan) the outlines of a merger operation are defined, which, as the set of acts and legal transactions practiced demonstrate, is concluded to have been the ultimate objective of all the factual sequence listed.

Thus, as emerges from the share purchase and sale contracts analyzed by these Services (Annex II), the value for the transmission of the shares was set at double the nominal value held by the shares of "F" and "E" on the date the sale was agreed, whereas for shares of C the unit sale price agreed was € 2.4286 € (...)

And finally, the sequence of acts described above, beginning, in particular, with the transformation of companies "F", "C" and "E" from limited liability companies into stock corporations, in December of the year 2008, followed by the transformation, already in June 2009, also of "D" from quota type to anonymous type, with the expansion of its corporate purpose (so as to encompass the activities that the three companies pursued individually), the purchase of all shares by "D, S.A." from the shareholders of "F, SA", "E, SA" and "C, SA" in July 2009.

Finally the merger in September 2009 (with the Merger Plan being signed in August of that year), demonstrate a concatenated set of acts/legal transactions whose ultimate end was the merger by incorporation, but as described above, with respect to the share purchase, a transaction inserted in this sequence, the same was determined by exclusively fiscal reasons, since the aforementioned transaction was unnecessary for the merger process to be implemented (Cfr. demonstrative table of the chronology of the acts and legal transactions).

(...)

It is reinforced, therefore, that the results obtained from the alienation of the equity interests are fully achieved only because a coordinated succession of acts and legal transactions was designed that allowed, in addition, with the corporate transformations carried out (from quota type to anonymous type) the exclusion, also, of the taxation of capital gains that, were it not for such procedure, would be shown to be due.

(...)

With the "metamorphosis" of profit distribution under the guise of "payment of price", the taxpayers achieved the intended fiscal result embodied in the elimination of the taxation that would be due with respect to income from capital obtained, since with the transmission of the equity interests carried out, there was no taxable matter (...)

In the case in question, given all the circumstantiality described above, it is easily concluded that the motivation of the taxpayers is only comprehensible in light of the fiscal advantage obtained with the alienation of the equity interests operated. Indeed, the economic result would always have been the same had the sale of those same equity interests taken place or not two months before the merger, it should be noted.

For which reason it is concluded that such act is dispensable in light of the objective shown to be the ultimate, that is, the incorporation merger of "F", "C" and "E" into "D", as emerges, moreover, from the reasons inherent in the documents that title the Merger Plan and Merger (final), that is, the merger operation is justified by the fact that, and we quote: "(. ..) from the moment that D became the sole shareholder of companies C, F and Lauretrans, there is no further justification. economic, business, market or other to continue operating autonomously, companies C, F and E. And, on the other hand, from D's perspective, the logic of its financial investment in acquiring all shares of companies C, F and E will only be fully realized with the absorption of all available means and the consequent intervention in the market in a unitary fashion and not dispersed."

(...)

Now, in the present case the taxpayers transformed the three absorbed companies, through the merger process, from quotas to stock corporations. They transformed the absorbing company, also from quotas to stock corporation and transmitted in an act that preceded the merger, only two months, the entirety of the shares of which they then became holders in the three companies to the absorbing company without such act, beyond being dispensable, constituting "normal" conduct, appearing as an illogical act, conceived exclusively, in an "ingenious" manner to only circumvent the birth of the tax obligation.

Thus being, from a perspective of rational fairness, normatively grounded, the conditions are met to defend the fiscal unacceptability of the act of sale of the equity interests (shares) which economically dispensable, contributed only to illegitimately evade taxation of income from capital that under the guise of price the taxpayers obtained.

d) In 2009, the Applicants were shareholders of the following companies:

a) F, S.A. (hereinafter "F")

b) C, S.A (hereinafter "C")

c) E, SA " (hereinafter "E")

d) D, S.A. (hereinafter "D");

e) On 20-07-2009 the Applicants transmitted to the stock corporation "D, SA", all shares held by them in the companies, also stock corporations "F", "C" and" E" (annex II to the Tax Inspection Report, the content of which is hereby reproduced);

f) The merger was preceded by the plan which constitutes document no. 10 attached with the request for arbitration decision, the content of which is hereby reproduced, which includes, among other things, the following:

"The companies involved operate in the markets for the rental and marketing of machines and equipment and in particular in ..., for the civil construction industry and public works and for industry in general and also in the transport of goods.

They have therefore been competitors in the market sectors in which they operate and because of that, the fact that D has acquired all shares representing the share capital of companies C, F and E, being at this date the sole shareholder of these companies, immediately made evident the need to alter the manner of operation and intervention in the market of the four companies.

Indeed, from the moment D became the sole shareholder of companies C, F and E, there is no further justification economic, business, market or other to continue operating autonomously, companies C, F and E.

And, on the other hand, from D's perspective, the logic of its financial investment, by acquiring all shares of companies C, F and E, will only be fully realized with the absorption of all available means and the consequent intervention in the market in a unitary fashion and not dispersed.

The merger now intended to be carried out aims, therefore, to give greater business solidity and strengthen around D the position in the market that, individually, the four companies held.

In parallel, it is also intended, with the merger, the realization of synergies in the domains of revenues and cost containment, in the rationalization of the management of human resources, technical means, equipment and facilities, with a view to obtaining better operational results and consequently greater return on invested capital."

g) The "F", "C" and "E" were originally limited liability companies, having been transformed into stock corporations in the year 2008, on the same day and month (Annex III to the Tax Inspection Report);

h) The "D" transformed from a limited liability company into a stock corporation on 29-06-2009, its corporate purpose being expanded to include, among other things, the activity of equipment transport (Annex IV to the Tax Inspection Report, the content of which is hereby reproduced);

i) On 16-09-2009, through a merger by incorporation process, companies "F", "C" and "E" (absorbed companies) merged with "D" (absorbing company), in the terms set out in the documents incorporating the merger plan and merger (final) (Annex V to the Tax Inspection Report);

j) F was incorporated in 1988 with the company name "F, Lda" and with share capital of 250,000.00 divided into five quotas, with a nominal value of €110,000.00 (two quotas) owned by A and B (husband and wife), respectively and € 10,000.00 (three quotas) belonging, respectively, to each of the three daughters of the couple: G; H and I (Tax Inspection Report);

k) In the year 2008, a capital increase of that company "F, Lda" was registered in the amount of € 350,000.00 (three hundred and fifty thousand euros), raising the share capital of this company to € 600,000.00 (six hundred thousand euros), which was followed by the transformation of this company from a limited liability company to a stock corporation, thus the respective capital being represented by 600,000 shares with a nominal value of € 1.00 each, distributed as follows:

[Shareholder distribution table for F]

l) The "C" was incorporated in 1993 with the company name "C Lda" and with share capital of € 750,000.00 divided into two quotas, with a nominal value of € 375,000.00 (two quotas) owned by A and B (husband and wife), respectively (Tax Inspection Report);

m) On 22-12-2008, the share capital of this company was increased in the amount of € 450,000.00, which thus increased to € 1,200,000.00, divided into two quotas of € 600,000.00 each, owned by the previous partners (Tax Inspection Report);

n) Each of these two quotas was divided into three new quotas;

o) On the same date of 22-12-2008, applicant A further ceded to his daughters, G and I, two quotas, valued at € 120,000.00 and € 60,000.00, respectively (Tax Inspection Report);

p) Also on the same date, applicant B ceded to her daughters, H and I, two quotas, valued at € 120,000 and € 60,000.00, respectively (Tax Inspection Report);

q) Still on 22-12-2008, the two quotas of € 60,000.00 owned by I were unified into a quota of € 120,000.00 (Tax Inspection Report);

r) After the capital increase, division, cession and unification of quotas, the limited liability company "C" was transformed into a stock corporation with the company name "C, S.A" and with share capital of € 1,200,000.00 divided into 1,200,000.00 shares with a nominal value of € 1.00 each, thus distributed: (Tax Inspection Report)

[Shareholder distribution table for C]

s) The "E" was incorporated on 14-05-1990 with share capital of € 249,400.00 divided into four quotas: one in the amount of € 49,880.00 owned by J, another in the amount of € 49,880.00 owned by G and two quotas of € 99,760.00 and € 49,880.00, both belonging to K (Tax Inspection Report);

t) On 21-12-2007, J divided the quota held by him in "E" with a nominal value of € 49,880.00 into two new quotas of € 24,940.00 each, which he ceded, respectively, to B and I (Tax Inspection Report);

u) On the same date, shareholder G also divided her respective quota in the amount of € 49,880.00, into two quotas of € 24,940.00 each, having ceded one of these quotas to H (Tax Inspection Report);

v) The quota in the amount of € 49,880.00 owned by K was ceded to A and the quota of € 99,760.00 also owned by K was divided into two, one of € 62,350.00 which was ceded to B and another of € 37,410.00 which was ceded to A (Tax Inspection Report);

w) With the divisions and cessions of quotas above mentioned, the share capital of "E" came to be owned by A, with a quota of € 87,290.00, B, with a quota of € 87,290.00 and G, H and I, each with a quota of € 24,940.00 (Tax Inspection Report);

x) On 22-12-2008, the share capital of "E" was increased in the amount of € 37,600.00 thus increasing to € 287,000.00, divided into 287,000 shares with a nominal value of € 1.00 each and distributed as follows: (Tax Inspection Report)

[Shareholder distribution table for E]

y) The "D" was incorporated in 2005 in the form of a limited liability company and with the company name "D, Lda", with initial capital of € 1,500,000.00 divided into four quotas: one quota of €249.40 owned by L and three other quotas, all owned by A in the amounts, respectively, of € 299,875.30; € 299,875.30 and € 900,000.00 (Tax Inspection Report);

z) On 29-06-2009, the share capital of this company was increased by €4,000.00, fully subscribed by new partners; B, G, H and I, with the amount of € 1,000.00 each;

aa) Following the entry of the new partners, company "D" was transformed into a stock corporation adopting the company name of "D, S.A with share capital of € 1,504,000.00 (Tax Inspection Report);

bb) On 15-09-2010, the share capital was reduced in the amount of € 249.40 as a result of the amortization of shares of shareholder L, thus the share capital of D becoming € 1,503,750.60 (Tax Inspection Report);

cc) On 14-10-2010 the share capital was increased in the amount of € 249.40 subscribed by a shareholder and thus the share capital of "D" returned to the value it had before the amortization of the shares, that is, being equal to € 1,504,000.00 (Tax Inspection Report);

dd) On 18-10-2010 to a new increase in share capital in the amount of € 1,499,000.00 fully subscribed in cash by shareholder B, corresponding to the issuance of 299,800 shares with a nominal value equal to € 5.00 each, thus the share capital becoming € 3,003,000.00 (Tax Inspection Report);

ee) On 20-07-2009, shareholders, individuals, A and B proceeded to sell all equity interests (of companies "F, S.A.", "C, S.A." and "E, S.A.") to the company "D S.A.", as declared by them, in particular in Annex G1 to Form 3 Declaration relating to income obtained in 2009, filed, for the following values, according to the table: (Tax Inspection Report)

Value of sale of A's shares

[Table of share sale values for A]

Value of sale of B's shares

[Table of share sale values for B]

ff)

[Details of shareholder A regarding payments]

The price due for the shares transmitted to D S.A. was paid in five installments, pursuant to the schedules that follow: (Tax Inspection Report)

[Payment schedules for A and B by company]

gg) Thus, in the years 2009, 2010 and 2011 each of the taxpayers received, as consideration for the sale of shares of F, SA, C, SA and E, SA the following amounts, respectively: € 349,780.00, € 874,450.00 and € 524,670.00 (Tax Inspection Report);

hh) Following the inspection and the application of the general anti-abuse clause, the Tax Administration made corrections to the taxable income of the Applicants for the years 2009, 2010 and 2011 "with the declaration of ineffectiveness for tax purposes of the legal transactions of purchase and sale of shares by the taxpayers to "D" and the consequent taxation of income earned by the taxpayers, in accordance with the provisions of paragraph h) of no. 2 of art. 5 and art. 40-A, both of the CIRS", pursuant to the following table:

[Correction details table]

ii) By dispatch of 02-10-2013, the Director-General of the Tax and Customs Authority authorized the application of the general anti-abuse clause (dispatch at p. 4 of the document "PA1.pdf");

jj) Following the aforementioned corrections to the Applicants' income, the following assessments were formalized:

(i) additional assessment no. 2013 ..., of 02.11.2013, concerning IRS of 2009, in the amount of € 172,457.76, corresponding compensatory interest assessment no. 2013 ..., of 06.11.2013, in the amount of € 19,727.88, and account reconciliation statement no. 2013 ..., relating to the offset no. 2013 ..., of 06.11.2013, with the balance ascertained of € 165,020.08;

(ii) additional assessment no. 2013 ..., of 02.11.2013, concerning IRS of 2010, in the amount of € 434,927.88, corresponding compensatory interest assessment no. 2013 ..., of 06.11.2013, in the amount of € 37,289.03, and account reconciliation statement no. 2013 ..., relating to the offset no. 2013 ..., of 06.11.2013, with the balance ascertained of € 429,296.49;

(iii) additional assessment no. 2013 ..., of 02.11.2013, concerning IRS of 2011, in the amount of € 271,396.75, corresponding compensatory interest assessment no. 2013 ..., of 06.11.2013, in the amount of € 14,021.38, and account reconciliation statement no. 2013 ..., relating to the offset no. 2013 ..., of 06.11.2013, with the balance ascertained of € 267,378.09 (documents nos. 1 to 9 attached with the request for arbitration decision, the contents of which are hereby reproduced);

kk) There was never any distribution of dividends in any of the aforementioned companies, with profits being invested (testimony of witnesses … and …);

ll) The Applicants opted for the sale to D S.A, prior to the merger, of their equity interests in companies F, SA, C, SA and E, SA because it allowed the use of a simplified merger procedure (testimony of witness …);

mm) The companies in question were engaged in the same line of business (testimony of witness …);

nn) D S.A., after the merger, improved operational costs, reducing expenses, this being the objective aimed at with the merger (testimony of witnesses ... and ...);

oo) The Applicants provided bank guarantee to suspend a tax enforcement proceeding instituted for collection of the amounts assessed by the acts that are the subject of this proceeding and spent on 17-06-2014 the amount of € 11,124.30 (documents attached by the Applicants on 18-07-2014, which were not disputed by the Tax and Customs Authority);

pp) On 24-01-2014, the Applicants filed the request for constitution of the arbitral tribunal that gave rise to this proceeding.

2.2. Unproven Facts

It was not proven that the Applicants opted for the sale of their equity interests to D S.A. with the intent to obtain tax advantages, in particular at the level of IRS taxation.

2.3. Rationale for the Decision on Factual Matters

The facts were found proven based on the Tax Inspection Report, the documents contained in the investigative file and the witness evidence.

Witnesses … and … appeared to testify with impartiality and with direct knowledge of the facts on which they testified.

1. Legal Matters

Article 38, no. 2 of the General Tax Law establishes a general anti-abuse clause, under the terms of which "acts or legal transactions essentially or mainly 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 transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, in whole or in part, without the use of those means, are ineffective within the tax sphere, and taxation shall then be carried out in accordance with the norms applicable in their absence and the aforementioned tax advantages shall not be produced"

In the case in question, the Tax Administration decided the application of the general anti-abuse clause considering that the legal transactions that should be disregarded for IRS taxation purposes are the sales carried out by the Applicants to D SA of the equity interests held in companies F, SA, C, SA and E, SA, before the incorporation of these into D S.A., as summarized in the following excerpt from the Tax Inspection Report:

The operation of sale of the shares of "F", "C" and "E" that preceded the operation of merger of these companies with "D" 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 transmission of all shares of the first three companies, the merger had taken place without such operation, since covered by the payment of the corresponding price, benefited the taxpayers A and B from amounts that would otherwise be taxed as dividends distributed, in accordance with paragraph h) of no. 2 of article 52 of the CIRS.

That is, the Tax and Customs Authority considered that the aforementioned share sale operations are abusive, in that they intended to disguise dividend distributions, and therefore decided to apply the general anti-abuse clause and consider the amounts received as if they were dividends.

3.1. Legitimate and Illegitimate Tax Planning

In the definitions elaborated by Saldanha Sanches: legitimate tax planning "consists of a technique of reducing the tax burden by which the taxpayer renounces certain conduct linked to a tax obligation or chooses, among the various solutions provided by the legal system, that which, by intentional action or omission of the tax legislator, is accompanied by less tax burden"; while illegitimate tax planning "consists of any conduct of improper reduction, by contravening principles or rules of the tax legal system, of the tax burden of a given taxpayer".

Within the framework of tax planning we can thus distinguish situations where the taxpayer acts against legem, extra legem and intra legem.

When the taxpayer acts against legem, the conduct is frontal and unequivocally illicit, as it directly violates tax law, and constitutes tax fraud, which may even be subject to administrative or criminal sanctions.

The conduct extra legem occurs when the taxpayer abusively takes advantage of law to achieve a more favorable fiscal result, although this does not directly violate it. This person adopts "a conduct which has as its exclusive or main purpose to circumvent one or more tax legal norms, in order to achieve the reduction or suppression of the tax burden". Being that from such norm(s) an attempt to circumvent "a clear intention to tax stated by the structuring principles of the system" must be detected. This type of conduct is commonly designated as "fraud of tax law" but, as Saldanha Sanches warns, intending to better illustrate and distinguish these situations from those of tax fraud, also designated as "abusive avoidance of tax burdens", "abusive tax avoidance" or even "tax evasion".

Only conduct intra legem appears legitimate – and thus legitimate tax planning or non-abusive – applies. Indeed, obtaining a fiscal saving does not constitute conduct prohibited by law, provided that the conduct does not fall within the aforementioned conduct extra legem.

Doctrine and case law have been deconstructing the letter of the norm pointing out five elements present in it. Corresponding one of the elements to the statutory provision, the remaining four appear as cumulative prerequisites that make it possible to assess – as if it were a test – as to the verification of an activity characterizable as abusive tax planning.

These elements, around which both parties moreover construct their arguments, consist of:

– the means element, which concerns the path freely chosen – act or legal transaction, isolated or part of a structure of sequential, logical and planned acts or legal transactions, organized in a unitary manner – by the taxpayer to obtain the desired tax gain or advantage;

– the result element, which deals with the obtaining of a tax advantage, by virtue of the choice of that means, when compared with the tax burden that would result from the practice of the "normal" acts or transactions with equivalent economic effect;

– the intellectual element, which requires that the choice of that means be "essentially or mainly directed [...] to the reduction, elimination or temporal deferral of taxes" (article 38, no. 2 of the LGT), or that it requires not merely the verification of a tax advantage, but rather that it be objectively ascertained whether the taxpayer "intends an act, transaction or a given structure, only or essentially, by the prevailing tax advantages that it provides";

– the normative element, which "has as its primary function to distinguish cases of tax evasion from cases of legitimate fiscal saving, in consideration of the principles of Tax Law, being that only in cases where an intention contrary to law or not legitimizing the result obtained is demonstrated can one speak thereof";

– and, finally, the sanctioning element, which, presupposing the cumulative verification of the remaining elements, leads to the sanction of ineffectiveness, exclusively within the tax sphere, of the acts or legal transactions deemed abusive, "and then taxation shall be carried out in accordance with the norms applicable in their absence and the aforementioned tax advantages shall not be produced" (final part of article 38, no. 2, of the LGT).

Despite this deconstruction, the analysis of the elements cannot be compartmentalized, as Courinha emphasizes, "the determination of one element can, in practice, depend on another", whereby these "will not infrequently [...] assist each other".

Let us examine, bearing this aspect in mind, the elements of the general anti-abuse clause taking into account the rationale for the decision, the facts proven, and the legal arguments of the parties.

3.2. Analysis of the Situation

In this analysis, one must start from the premise that only the rationale for the act that decided the application of the general anti-abuse clause that is to be examined is what is contained in the act itself and elements to which it refers, as the tax arbitration proceeding, as an alternative means to the judicial challenge proceeding (no. 2 of article 124 of Law No. 3-B/2010, of 28 April), is, like this, a procedural means of mere legality, in which it aims to eliminate the effects produced by illegal acts, annulling them or declaring their nullity or non-existence [articles 2 of the RJAT and 99 and 124 of the CPPT, applicable by virtue of the provisions of article 29, no. 1, paragraph a), thereof]. For this reason, the acts that are the subject matter of the proceeding must be examined as they were practiced, and the tribunal cannot, upon noting that an illegal ground was invoked as support for the administrative decision, examine whether its conduct could be based on other grounds.

In the case in question, briefly, the Applicants contest that the sale to D S.A. of the shares held in companies F, SA, C, SA and E, SA, before the incorporation of these into the first, constitutes abusive tax planning, arguing that they carried out the sales to enable the use of the simplified merger procedure provided for in article 116 of the Commercial Companies Code, although they also considered the fact that the income thus obtained was not, at that time, subject to taxation.

Indeed, article 116 of the Commercial Companies Code provided, in 2008, a simplified regime of "incorporation of a company wholly owned by another" which, as of 15-09-2009, with Decree-Law No. 189/2009, of 12 August, became applicable to the situation of "incorporation of a company owned at least 90% by another", a simplification that consisted, in particular, in the dispensation of the applicability of the provisions relating to the exchange of equity interests, to reports of the bodies and experts and to the liability of those bodies and experts, and could, furthermore, by satisfying certain conditions, the merger be registered without prior deliberation of the general assemblies.

Being this possibility of opting for the simplified merger regime an evident and important advantage that could lead to the sale of the shares to D S.A. before the merger and being easy the fulfillment of the requirement for the use of that regime, as we are dealing with companies of family structure, whose shareholders were the Applicants and their daughters, there is no reason to believe that, as the Applicants allege, this was not the main reason for the choice to carry out that transaction. Less understandable would it be, certainly, that being able to opt for what is easier and simpler to obtain a certain result they would opt for what would be more burdensome and complex.

In situations of this type, where the law establishes two regimes for carrying out company mergers, one of them easier and less burdensome, one cannot understand that it is unlawful for those interested to create the conditions for use of the simpler and less burdensome regime; rather, we would be dealing with the normal means of implementing a merger in a comparable situation.

For this reason, it cannot even be considered proven that the obtaining of the tax advantage was the exclusive or principal motive for carrying out the share sale.

At minimum, in light of the legal reality that is the possibility of opting for the simplified regime in the case of concentration in D S.A. of ownership of the equity interests of the companies to be incorporated and of the witness evidence corroborating the Applicants' statements that they were not motivated exclusively or mainly by fiscal reasons, there would always be a situation of doubt about whether this non-fiscal reason was what motivated the Applicants. Now, by virtue of the provisions of article 100 of the CPPT, subsidiarily applicable by virtue of the provisions of article 29, no. 1, paragraph c), of the RJAT, such hypothetical doubt would always have to be valued procedurally in favor of the Applicants, which is procedurally equivalent to considering it unproven that they were determined by exclusively or mainly fiscal reasons.

For this reason, the carrying out of such transaction that enables the use of the simplified merger regime cannot be considered the use of an artificial or fraudulent means, for purposes of article 38, no. 2, of the General Tax Law, nor can any abuse of legal forms be discerned in implementing the sale necessary for that regime to be used.

The fact that these operations are associated with a tax advantage cannot be considered an obstacle to accepting the option for tax purposes, as taxpayers are not obliged to opt for transactions that are fiscally more burdensome, when the law provides them with more than one means to achieve the ends they seek in the restructuring of companies.

Thus, being cumulative the requirements provided for in article 38, no. 2, of the LGT for application of the general anti-abuse clause, it must be concluded that the conduct of the Applicants cannot even be considered tax planning and much less illegitimate.

1. Conclusion

It is concluded, therefore, that one of the factual prerequisites for the application of the general anti-abuse clause is not met, which is that the act or transaction was essentially or mainly directed to the reduction, elimination or temporal deferral of taxes that would be due as a result of facts, as it was proven that the option to sell the shares to D S.A. before the merger was directed to satisfying a requirement for use of the simplified merger regime and not for fiscal reasons.

In light of article 38, no. 2, of the LGT, when referring to that, for application of the general anti-abuse clause, the transactions must be directed to the reduction, elimination or temporal deferral of taxes that would be due, it is not enough that tax advantages be obtained; rather it is indispensable that the obtaining of these was an objective essential or principal sought by the taxpayer.

Consequently, the acts of assessment whose declaration of illegality is requested are illegal, as they had as their premise the verification of the prerequisites for application of the general anti-abuse clause, by violation of the provision of article 38, no. 2, of the LGT.

For this reason, the request for annulment of the acts of assessment of additional IRS and compensatory interest must be ruled procedurally favorable, as well as the account reconciliation statements based on those, which suffer from the same defect.

1. Compensation for Undue Guarantee

The Applicants make a request for compensation for undue guarantee.

The arbitration proceeding is an adequate means for the recognition of the right to compensation for a guarantee unduly provided, as article 171 of the CPPT is subsidiarily applicable by virtue of the provisions of article 29, no. 1, paragraph c), of the RJAT.

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 enforcement, offers a bank guarantee or equivalent shall be indemnified wholly or partially for the losses resulting from its provision, should he have maintained it for a period exceeding three years in proportion to the satisfaction in administrative appeal, challenge or opposition to enforcement that have as their object the debt guaranteed.

2. The period referred to in the preceding number does not apply when it is found, in amicable claim 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 amount of the rate of indemnificatory interest provided for in this law and may be requested in the enforcement proceeding itself.

[Due to length constraints, the remainder of the decision is truncated in this translation as well]