CAAD 630/2017-T: Autonomous Taxation Rate Increase Under Article 88(14) CIRC for Tax Groups Without Fiscal Losses

ARBITRAL DECISION

The arbitrators Judge Dr. José Poças Falcão (arbitrator-president), Professor Doctor Manuel Pires and Professor Doctor Jónatas Machado (arbitrator-members), appointed by the Deontological Council of the Centre for Administrative Arbitration to form the present Arbitral Tribunal, constituted on 14.2.2018, agree as follows:

REPORT

1. A... SGPS S.A., legal entity number..., with registered office in..., number..., ...-... Lisbon, with share capital of €17,000,000, hereinafter abbreviated as "A..." or "Applicant", in 2014 the dominant company of a group, the B... group hereinafter, subject to the special taxation regime for groups of companies provided since 2010 to date in articles 69 et seq. of the Corporate Income Tax Code (Fiscal Group B...), integrating, in addition to the applicant itself in the capacity of dominant company, the companies a) C... S.A. – Tax Identification Number ... –, previously called D... S.A., and which in 2014 incorporated by merger E..., S.A. (Tax Identification Number...), which in that same year 2014 had changed its name to C..., S.A., b) F..., S.A. (whose corporate designation at that date was G..., S.A., and which was previously also called H..., S.A.), c) I..., S.A. ("I..."), d) J...– SGPS, S.A. ("J..."), e) K..., S.A. ("K..."), f) L..., S.A. (whose corporate designation at that date was M..., S.A.), g) N..., S.A. ("N..."), h) O..., S.A. ("O..."), i) P..., S.A., j) Q..., S.A. ("Q..."), k) R..., S.A., l) S..., S.A., having proceeded, in its capacity as dominant company of Fiscal Group B..., to the submission of its aggregate Corporate Income Tax return Model 22 for the financial year 2014, to the self-assessment of autonomous taxation for that same year, understood it appropriate to raise the partial illegality of that same autonomous taxation self-assessment act for the financial year 2014, for which purpose it submitted an administrative review against the autonomous taxation self-assessment for the said financial year 2014, being notified on 11 September 2017 of its rejection, by order of 6 September 2017 issued by the Esteemed Head of the Tax Management and Assistance Division ("DGAT") of the Large Taxpayers Unit ("UGC"), wherefore on 30.11.2017, it requested, under articles 2, number 1, paragraph a), and 10, numbers 1 and 2, of Decree-Law number 10/2011 of 20 January, and articles 1 and 2 of Ordinance number 112-A/2011 of 22 March, the Constitution of an Arbitral Tribunal.

2. The request for constitution of the arbitral tribunal was accepted by the President of the Centre for Administrative Arbitration and automatically notified to the Tax and Customs Authority on 30.11.2017.

3. In accordance with articles 5, number 2, paragraph a), 6, number 1 and 11, number 1 of the Rules of Arbitral Procedure in Tax Matters [RJAT], the Deontological Council of this Centre for Administrative Arbitration (Centre for Administrative Arbitration) designated as arbitral tribunal Judge Dr. José Poças Falcão, Professor Doctor Manuel Pires and Professor Doctor Jónatas Machado, with their acceptance confirmed on 22.1.2018.

4. The parties were duly notified of this designation, to which they did not object in accordance with the combined provisions of articles 11, number 1, paragraphs b) and c) and 8 of the Rules of Arbitral Procedure in Tax Matters and 6 and 7 of the Code of Ethics of the Centre for Administrative Arbitration.

5. By virtue of the provisions in paragraph c) of number 1 and number 8 of article 11 of the Rules of Arbitral Procedure in Tax Matters, as communicated by the President of the Deontological Council of the Centre for Administrative Arbitration, the Arbitral Tribunal was constituted on 14.02.2018.

Description of procedurally relevant facts

1. The object of the request for the Arbitral Tribunal's ruling is the rejection of the administrative review which concerned the increase in autonomous taxation rates by 10 percentage points and, consequently (and in final or ultimate terms), the autonomous taxation self-assessment act relating to the financial year 2014 to the extent corresponding to the application of the rate increase by 10 percentage points with respect to companies forming part of Fiscal Group B... that, in the financial year in question, did not incur tax losses.

2. In the Corporate Income Tax self-assessment for the financial year 2014, A... (Fiscal Group B...) also proceeded to the self-assessment of autonomous taxation provided for in article 88 of the Corporate Income Tax Code, in a total, in final terms, of €1,848,603.30.

3. The amount of Corporate Income Tax, including state surcharge and autonomous taxation, is paid.

4. The electronic data transmission system through which the periodic Corporate Income Tax return is filed is parameterized to the effect that the increase in autonomous taxation rates should reference the fiscal result determined by the group of companies subject to the special regime for taxation of groups of companies to the detriment of the fiscal result determined individually by each of the companies that comprise it.

5. In view of the parameterization of the electronic data transmission system and being unable to apply what appears to it (clearly) to result from number 14 of article 88 of the Corporate Income Tax Code, the applicant had no alternative but to proceed with the self-assessment of autonomous taxation in accordance with the Tax Authority's directives.

6. The autonomous taxation relating to these companies was determined by applying to the expenses and charges that constitute their taxable bases the respective legally provided rates, to which was added the increase of ten percentage points provided for in article 88, number 14, of the Corporate Income Tax Code, notwithstanding that none of these companies incurred tax losses in 2014.

7. The application of this increase in autonomous taxation rates for companies that did not incur tax losses reflected the Tax Authority's understanding regarding the application of the provision in number 14 of article 88 of the Corporate Income Tax Code in cases where taxpayers are part of a group of companies subject to the special regime for taxation of groups of companies.

8. Without this increase in rates of 10 percentage points, the autonomous taxation in question would have been only €340,247.63, and not €573,732.35, therefore the difference, for more, which is contested here with respect to the financial year 2014, is €233,484.71.

9. The Applicant wishes to submit to the Arbitral Tribunal's consideration (i) the legality of this rejection of the administrative review, insofar as it disregards the recognition of illegality of that part of the autonomous taxation self-assessment relating to the financial year 2014 of Fiscal Group B... and, likewise, (ii) the legality of this part of the autonomous taxation self-assessment relating to the financial year 2014.

10. More specifically, it requests the declaration of illegality of the rejection of the administrative review which concerned the assessment of the increase in autonomous taxation rates by 10 percentage points, and the consequent partial illegality of the above-identified self-assessment act – and that it be consequently annulled in that part – pursuant to article 2, number 1, paragraph a), of Decree-Law number 10/2011, more specifically as regards that part of the said autonomous taxation self-assessment act that reflects the application of the rate increase by 10 percentage points with respect to companies forming part of Fiscal Group B... that in the financial year in question did not incur tax losses, to which (part) corresponds an amount of tax unduly assessed and paid relating to the financial year 2014, in the amount of €233,484.71.

11. Together with the reimbursement of tax paid in an amount exceeding that due, the Applicant also claims, under article 43 of the General Tax Law, its right to compensatory interest.

Arguments of the parties

1. The arguments and counter-arguments put forward by the parties concern, fundamentally, the legitimacy of the application of the rate increase by 10 percentage points with respect to companies forming part of Fiscal Group B... that in the financial year in question did not incur tax losses.

2. To support its position, the Applicant alleges, with respect to the rejection of the administrative review and the contested self-assessment, the arguments summarized here:

• Autonomous taxation is not taxation of income, that is, it is not Corporate Income Tax on profit;

• Autonomous taxation does not enter the base of incidence of payments on account of Corporate Income Tax;

• Autonomous taxation, as its very name indicates, has autonomy in relation to tax on profits;

• The tax facts in autonomous taxation are mostly expenses and charges and, in any case, never income or profit;

• The tax fact of instantaneous production of autonomous taxation has nothing to do with the complex tax fact, of continuous and successive formation that is profit;

• Autonomous taxation differs from Corporate Income Tax proper as to the tax fact, the respective modes of measurement, the consideration of the company individually considered and of a group of companies for purposes of measuring the taxable base (individual profit or loss versus profit or loss of a group of companies) and the applicable rates;

• It is solely at the level of administration of the two taxes, and for reasons of administrative simplicity, that Corporate Income Tax and autonomous taxation find the point of contact that led to their removal from an autonomous statute (in which they were provided for until 2000) and their insertion into the Corporate Income Tax Code: this point of contact is situated at the level of the timing of assessment and the declarative model where this assessment occurs, which is common (although always with distinct fields for each tax) regardless of whether Corporate Income Tax taxation occurs with or without application of the special regime for taxation of groups of companies;

• Nothing specifically applicable in the context of Corporate Income Tax that taxes profit applies or must apply to autonomous taxation;

• Autonomous taxation is conceptually different from Corporate Income Tax that taxes profit, possessing specific features of its respective regime, therefore no express provision is needed to conclude that provisions do not apply to it, nor does it draw from regimes, such as the special regime for taxation of groups of companies, conceived for the functioning of Corporate Income Tax;

• The tax loss relevant for purposes of autonomous taxation rate increase is that of the company subject to such autonomous taxation;

• The pioneering arbitral judgment in the analysis of this matter, handed down in case number 239/2014-T, sanctioned the understanding that the tax loss determined in the context of a fiscal group (special regime for taxation of groups of companies) is irrelevant for Corporate Income Tax (on profit) purposes, instead being relevant in the context of autonomous taxation (and for purposes of number 14 of article 88, in question here) to know whether each company individually subject to autonomous taxation incurred, or not, tax loss;

• The interpretative law subsequently enacted (See the new number 20 of article 88 of the Corporate Income Tax Code, introduced by article 133 of Law number 7-A/2016 of 30 March, and article 135 of this same law), aimed at retroactively altering such understanding of tax law, was judged unconstitutional by the Constitutional Court (Constitutional Court Decision number 395/2017);

• For purposes of autonomous taxation it is completely irrelevant the eventual taxation of profit or income on an aggregated basis (profit of a group of companies), under the special regime for taxation of groups of companies (special regime for taxation of groups of companies) provided in article 69 et seq. of the Corporate Income Tax Code, for the simple reason that this special regime, the special regime for taxation of groups of companies, applies exclusively to the reality "tax fact profit";

• The logic of autonomous taxation is purely individual (taxation of expenses or charges in which the company incurs), turned away from the tax capacity (profit or income) that the Corporate Income Tax that taxes profit intends to capture and, consequently, unrelated to the measurement of this tax capacity in the logic of a group of companies (special regime for taxation of groups of companies);

• According to the provision in number 14 of article 88 of the Corporate Income Tax Code, in the context of autonomous taxation account must be taken of the result of the entity whose expenses are burdened, there being no taxation of "expenses and charges of the group";

• Taxpayers of autonomous taxation provided for in article 88 of the Corporate Income Tax Code are companies or other subjects among those provided for in article 2 of the same code, that have incurred the expenses or charges subject to autonomous taxation and never a group of companies;

• There is no legal basis – and suffers from unconstitutionality by violation of articles 2, 103, numbers 2 and 3, and 165, number 1, paragraph i), of the Constitution – the understanding according to which the (possible) relevant tax loss would not be that of the taxpayer of autonomous taxation (which is always the company that concretely incurred the expenses) but, rather, the (possible) tax loss determined by reference to the sum (see article 69, number 1, and 70, of the Corporate Income Tax Code) of the results of various companies forming part of the group;

• A rate increase based on an element external to the company whose expense subject to autonomous taxation is in question, represents an arbitrary solution, irreconcilable with the objective, which the Tax Authority has been attributing to autonomous taxation, of discouraging certain types of expenses, and of doing so with increased intensity (increase in the rate of autonomous taxation) whenever the company incurring the expenses has suffered losses;

• Such an increase would imply ignoring the economic substance of the tax facts of autonomous taxation, contrary to the provision in article 11, number 3, of the General Tax Law) – taxation of expenses and charges) – distinct from the economic substance of the tax fact "income or profit" and foreign to the deepening of the logic of taxation embodied in the special regime for taxation of groups of companies;

• The interpreter must presume that the legislator enshrined the most correct solutions [see article 9, number 3, of the Civil Code, applicable by virtue of article 11, number 1, of the General Tax Law ("LGT")];

• The normative solution introduced in 2016 by article 133 of Law number 7-A/2016 of 30 March, in the form of a new number 20 of article 88 of the Corporate Income Tax Code, cannot be applied retroactively, under penalty of unconstitutionality, as was understood by the Constitutional Court, in Constitutional Court Decision number 395/2017 of 12 July 2017;

• This unconstitutionality is grounded in the violation of the principles of prohibition of retroactivity of tax laws (article 103, number 3 of the Constitution), of the rule of law (article 2 of the Constitution), of separation and interdependence of sovereign bodies (article 111, number 1, of the Constitution) and of independence of the courts (article 203 of the Constitution) in the exercise of their function of interpretation and application of the law;

• The special regime for taxation of groups of companies is exceptional in the Portuguese context, limiting itself to Corporate Income Tax, and adds nothing, removes nothing or alters nothing to other taxation that operates exclusively on an individual basis, equally determined in declaration model 22, together with Corporate Income Tax on profit (i.e. state surcharge, municipal surcharge) and that ignores the group of companies, that is, are not covered by the special regime for taxation of groups of companies;

• Enjoying autonomy in relation to taxation on profits, autonomous taxation is foreign to the special regime for taxation of groups of companies, there being no need for any specific provision to remove the special regime for taxation of groups of companies from autonomous taxation, since, by the legislator's definitive choice, they remain foreign to the object of the special regime for taxation of groups of companies, namely, the taxation of the group's profits, differently from what occurs with surcharges;

• The assessment of autonomous taxation when there is a fiscal group, taking advantage of the existence of a fiscal group, is also carried (the sum of individual autonomous taxation is carried) to the group declaration submitted by the dominant company, for reasons of administrative simplification immediately appreciable: the sum is concentrated in that declaration, and likewise the sums of state and municipal surcharges, which will be the amount to be paid at once by the head of the group to the Treasury;

• There is no autonomous taxation of the group of companies, but only a value corresponding to the sum of autonomous taxation of the various companies of the group, determined on the basis of expenses in which each individually incurred.

1. In the opposite sense, the argument developed by the Tax Authority, in its capacity as respondent, is based on the points summarized here:

• Integrating the subsidiary company a group of companies, under the aegis of the special regime for taxation of groups of companies, the Applicant cannot claim to individualize in its own legal sphere the increase of ten percentage points of the application of autonomous taxation rates in the event of determination of tax loss by that same company;

• Having a set of companies given their consent to be taxed as if they were a single entity - with the manifest possibility of diluting taxable profits (determined in the sphere of some companies of the group) in tax losses (determined by others of the group) – they cannot claim that only subsidiary companies that determine tax losses are "sanctioned" with the increase in autonomous taxation rates by 10%;

• The special regime for taxation of groups of companies has the objective of joining one or more entities that legally are independent, but which, voluntarily, present themselves to taxation as if they were a simple economic entity, under the control of a parent company, in which control gains the meaning of "power to manage the financial and operational policies of an entity or an economic activity in order to obtain benefits therefrom";

• The special regime for taxation of groups of companies enables a group of companies to be taxed according to its economic reality and as an entity with unique tax capacity;

• The special regime for taxation of groups of companies is based on the algebraic sum of taxable profits and individual tax losses of companies within the perimeter, where, in a group of companies, those that have tax credits (losses) may cede them to companies in the group that show gains (and that determine taxable profit), so as to reduce the tax to be paid by these;

• Everything that increases the initial net assets of each company, belonging to the group, is taxable income of that company, contributing to the determination of the fiscal result of the group, and, conversely, the decreases recorded in the value of capital invested in a company, at the end of the fiscal period, are embodied in the individual tax loss of a company which, also, will contribute to the determination of the fiscal result of the group of companies to which it belongs.

• Regardless of the possible complexity of corporate structures, the analysis of management, financial, accounting, fiscal and even legal is conducted with a global vision of the group of companies in which they are inserted;

• Although composed of companies with legal personality, the group assumes itself as a "homogeneous mass" for purposes, among others, of taxation in the context of Corporate Income Tax, starting to matter such economic reality, alongside the revelation of unique tax capacity, thus meeting that the fiscal result of the group result from the algebraic sum of taxable profits and tax losses of the companies that comprise it;

• Given the optional character of the special regime for taxation of groups of companies, it is necessary to conclude that what the companies that comprise T... SGPS, SA intended was that their tax situation (in the context of Corporate Income Tax) be dealt with globally, having as taxable base the fiscal result of the algebraic sum of their profits and losses;

• The special regime for taxation of groups of companies has underlying the principle of neutrality, in accordance with the provision in article 70 of the Corporate Income Tax Code, being the object of taxation the global unitary situation of the group, diluting in taxable profits determined in some companies, the tax losses generated in the sphere of others, all forming part of the group;

• The special regime for taxation of groups of companies implements the principle of tax capacity and real income, in accordance with the provision in article 104, number 2 of the Constitution, taking into account that in groups of companies taxation with respect to the tax capacity of the group should prevail over individual tax capacity;

• Autonomous taxation is neither now nor ever was an autonomous special tax, nor is it a "tax on consumption" or a "general tax on consumption", but rather a component forming part of Corporate Income Tax that configures an element of single obligation;

• Autonomous taxation is interwoven with Corporate Income Tax:

• Are charges of Corporate Income Tax for purposes of article 45/1/c) of the Corporate Income Tax Code;

• Are not, together with Corporate Income Tax, deductible charges in the determination of taxable profit, in accordance with article 23-A/1/a) of the Corporate Income Tax Code;

• Are a contrario sensu considered Corporate Income Tax in the regime of fiscal transparency of article 12 of the Corporate Income Tax Code;

• Are self-assessed and paid in accordance with the terms and deadlines of Corporate Income Tax, according to articles 88 and 104 et seq. of the Corporate Income Tax Code;

• Their "autonomy" is limited to the facts on which they impact and the specificities in their determination;

• Their product enjoys the credit privileges provided for in article 116 of the Corporate Income Tax Code;

• The same means of reaction contemplated in article 137 of the Corporate Income Tax Code apply to them;

• They integrate the Corporate Income Tax Code, presenting themselves as a component thereof, a complement thereof;

• They have, in article 88 of the Corporate Income Tax Code, a true provision of objective incidence;

• They also pursue the aim that underlies the purposes of income taxation;

• They are functionally interwoven in Corporate Income Tax, with article 88, number 14 of the Corporate Income Tax Code making the respective rate depend on the circumstance of the taxpayer presenting or not tax loss;

• They assume a clear anti-abuse nature, preventing the abusive use of certain expenses and dividend distribution and in fraud of the provisions aimed at achieving the real income of taxpayers.

• The legislator intends to penalize this type of expense, imposing on them a tax, regardless of the existence or not of taxable matter for purposes of Corporate Income Tax, thus ensuring that the taxpayer who did not determine taxable matter does not pass unscathed, determination of taxable matter which precisely contributed to this type of expense.

• In accordance with article 9, number 3, of the Civil Code, the interpreter shall presume that the legislator "knew how to express its thinking in adequate terms" and also "that enshrined the most correct solutions";

• By way of taxation of instantaneous facts (which almost in their entirety of the items contained in article 88 of the Corporate Income Tax Code contribute to the determination of taxable profit and/or tax loss), eventual income of third parties is taxed, knowing that, if this were not so, there would be no way to tax the increase in the sphere of these third parties;

• There is a relationship of interweaving, of cause and effect, between autonomous taxation and tax on income, which justifies that within the scope of a group of companies that determines tax loss, the rates applicable to the realities subject to autonomous taxation be increased by 10%, since it is the group (parent company), as an entity gathering the various legal entities that compose it, that presents itself to taxation, in what can be considered as a convergence of corporate interests from the economic, commercial and, of course, fiscal point of view;

• It is the parent company that submits the periodic return of the group's income, the only return that is assessable, this despite all those within the group's perimeter (including the dominant) having the duty to submit an individual periodic income return, which does not produce assessment effects, in accordance with the provision in article 120, number 6 of the Corporate Income Tax Code;

• The concept of taxable profit attributable to the group is different from the concept of taxable profit present in article 17 of the Corporate Income Tax Code, and, after the determination of this aggregated taxable profit, the taxable matter and the tax are calculated, concepts only reportable to the dominant company.

• Taking into account that in the period 2013 the said group determined tax loss, it is evident that the 10% increase applied to all expenses/charges that, at one time, fell within both the rule of incidence of article 88 of the Corporate Income Tax Code and the concept of necessity of expenses, inherent in article 23 of the Corporate Income Tax Code.

• In this group logic, in accordance with the provision in article 115 of the Corporate Income Tax Code, the legislator also determined the existence of a regime of quite strong passive joint and several liability, in which it falls to the dominant company to pay the full Corporate Income Tax in the first place, being able, however, the fulfillment of the obligation to be required in full from any of the remaining subsidiary companies, this without prejudice to the right of recourse.

• Even if it calls the other subsidiary companies to the dispute, it is not thereby released from the obligation to effect the missing payment in full, in accordance with the provisions in articles 512 and 518 of the Commercial Companies Code.

• It belongs to the category of evidence that the tax referred to in article 115 of the Corporate Income Tax Code refers to that which falls on income, as well as on the fruit of the application of autonomous taxation rates, to be self-assessed and paid by the taxpayers.

• The taxable base of autonomous taxation will be (almost in their entirety) - and even in the logic of a fiscal group -, the expenses/charges that contribute to the determination of the taxable profit or tax loss of subsidiary companies, and which, equally, are subject to autonomous taxation rates.

• It makes no sense that the said expenses/charges (composed of instantaneous facts) be, 1) on the one hand, for purposes of their inclusion within the scope of the special regime for taxation of groups of companies, considered for the respective determination of taxable profit/tax loss of subsidiaries - and, consequently, of the group -, and be 2), on the other hand, disregarded, within that same scope of the special regime for taxation of groups of companies, when applying autonomous taxation rates.

• The legislative amendments occurring in article 87-A, number 3 of the Corporate Income Tax Code (see Law number 64-B/2011 of 30 December - article 113) and in article 88, number 15 of the Corporate Income Tax Code (see Law 2/2014 of 16 January) came, respectively, to remove surcharges from the regime of groups of companies and to remove autonomous taxation from the simplified regime for determining taxable matter, there being no similar provision that expressly removes autonomous taxation from the regime of groups of companies.

• All signals emanating from the Corporate Income Tax Code, with respect to the special regime for taxation of groups of companies, are to the effect that groups of companies, with respect to taxation, to self-assessment and payment of tax in the context of Corporate Income Tax, be realized as if they were a single legal entity, headed by the dominant company (parent company), which, in accordance with article 70, read together with articles 104, 115 and 120, number 6, all of the Corporate Income Tax Code, is the one which, by means of a voluntary act (article 69, number 1 of the Corporate Income Tax Code) presents itself to taxation, attributable to the tax due by the companies forming part of the group's perimeter.

Arbitral meeting of article 18 of the Rules of Arbitral Procedure in Tax Matters

1. As it was considered unnecessary, the meeting provided for in article 18 of the Rules of Arbitral Procedure in Tax Matters was dispensed with by order issued on 08.04.2018.

Final arguments

1. In its arguments, the Applicant retakes and insists on some of the arguments set forth in the Initial Petition, such as:

• Article 88, number 14 made the application of a 10% surcharge dependent on the presentation of tax loss in the period, in this case 2014, by the taxpayer of autonomous taxation, this being the company that incurs the expense or charge, there being no provision in the Corporate Income Tax Code that the taxpayer of autonomous taxation can be a grouping;

• There was not, at the date of the facts, a legal basis that would allow one to look at the possible tax loss of an aggregate of taxpayers of autonomous taxation, and apply to all of them, even to those that presented fiscal profit, the 10% surcharge in the event that, taken together, tax loss was determined, the Tax Authority's understanding to the contrary being devoid of legal basis;

• The special regime for taxation of groups of companies aggregates fiscal profits and tax losses of various companies/taxpayers, for purposes of taxation on profit, not aggregating the taxable matters (highly varied, and that do not be reduced to profits/tax losses) of autonomous taxation;

• Article 135 of Law number 7A/2016 of 30 March (2016 State Budget Law), of an interpretative nature, in attempting to give retroactive effect to new number 20 of article 88 of the Corporate Income Tax Code, is unconstitutional by violation of article 103, number 3 of the Constitution, with implications for the principles of legal certainty and separation of powers.

CLARIFICATION

1. No dilatory exceptions were invoked.

2. The Arbitral Tribunal is regularly constituted (articles 5, numbers 1 and 3, paragraph a), 6, number 2, paragraph a) and 11 of the Rules of Arbitral Procedure in Tax Matters), and is materially competent (articles 2, number 1, paragraph a) of the Rules of Arbitral Procedure in Tax Matters).

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

REASONING

Facts deemed proved

1. Based on documents 1 to 15 brought before the tribunal and without prejudice to other ancillary facts related thereto contained in the file, the following relevant facts are deemed proved for the decision of the case sub judice:

• A... or "Applicant" was in 2014 dominant company of group B....

• Group B... was subject to the special regime for taxation of groups of companies provided since 2010 to date in articles 69 et seq. of the Corporate Income Tax Code (Fiscal Group B...).

• Group B... integrated, in addition to the applicant itself in its capacity as dominant company, the companies a) C... S.A. – Tax Identification Number ... –, previously called D... S.A., and which in 2014 incorporated by merger E..., S.A. (Tax Identification Number...), which in that same year 2014 had changed its name to C..., S.A., b) F..., S.A. (whose corporate designation at that date was G..., S.A., and which was previously also called H..., S.A.), c) I..., S.A. ("I..."), d) J... SGPS, S.A. ("J..."), e) K..., S.A. ("K..."), f) L..., S.A. (whose corporate designation at that date was M..., S.A.), g) N..., S.A. ("N..."), h) O..., S.A. ("O..."), i) P..., S.A., j) Q..., S.A. ("Q..."), k) R..., S.A., l) S..., S.A.

• A... proceeded, in its capacity as dominant company of Fiscal Group B..., to the submission of its aggregate Corporate Income Tax return Model 22 for the financial year 2014, to the self-assessment of autonomous taxation for that same year.

• A... understood it appropriate to raise the partial illegality of that same autonomous taxation self-assessment act for the financial year 2014, for which purpose it submitted an administrative review against the autonomous taxation self-assessment for the said financial year 2014.

• A... was notified on 11 September 2017 of its rejection, by order of 6 September 2017 issued by the Esteemed Head of the Tax Management and Assistance Division ("DGAT") of the Large Taxpayers Unit ("UGC").

Facts not proved

1. With relevance for the decision on the merits there are no facts alleged that should be considered as not proved.

Reasoning

1. With respect to the facts, the Tribunal does not have to rule on everything that was alleged by the parties, being incumbent on it to select the facts that matter for the decision and to discriminate the proven matter from the not proven (see article 123, number 2, of the Code of Procedure and Process in Tax Matters and article 607, number 3 of the Code of Civil Procedure, applicable by virtue of article 29, number 1, paragraphs a) and e), of the Rules of Arbitral Procedure in Tax Matters).

2. The facts pertinent to the judgment of the case are chosen and defined according to their legal relevance, which is established in view of the various plausible solutions of the questions object of the dispute (v. 596, number 1, of the Code of Civil Procedure, by virtue of article 29, number 1, paragraph e), of the Rules of Arbitral Procedure in Tax Matters).

3. Thus, having regard to the positions assumed by the parties and the documentary evidence brought before the tribunal, the following facts were considered proved, with relevance for the decision:

Question to be decided

1. The question to be decided concerns essentially whether, in light of number 14 of article 88 of the Corporate Income Tax Code in force at the date of the financial year to which the facts relate, namely 2014, and before number 20 of that same article – introduced by article 135 of Law number 7A/2016 of 30 March (2016 State Budget Law) – the 10% increase in autonomous taxation rates provided therein can be applied to groups of companies or must be applied individually to the subsidiary company of the group that incurred the expenses taxed with the autonomous taxation rate and in tax losses.

Autonomous taxation in the context of Corporate Income Tax

1. For the decision of the question it is important to begin by bearing in mind the evolution of the regime of autonomous taxation enshrined in article 88 of the Corporate Income Tax Code. These have their remote cause in Decree-Law number 375/74 of 20 which carried out the "Reform of the Tax System, intended at its rationalization and the mitigation of the tax burden on disadvantaged classes, with a view to an equitable distribution of income". Among others, this statute came to penalize confidential expenses with a fine equivalent to the value of the expenses thus recorded. Later, the proximate cause of autonomous taxation can be found in article 4 of Decree-Law number 192/90 of 9 June, statute to which its introduction into the Portuguese legal order should be attributed. These would come to be included in the Corporate Income Tax Code, through Law number 30-G/2000 of 29 December.

2. The historical evolution of autonomous taxation is indissociable from the way in which the tax legislator has been approaching undocumented expenses. Long considered as economically indispensable for the carrying out of business activity and as compatible with generally accepted social practices, they began gradually to be viewed by their anti-legal and anti-social potential, being able easily to give cover to bribery, trafficking in influence and corruption.

3. The insertion of autonomous taxation in the Corporate Income Tax Code, as set out above, is symptomatic of the regulatory function indisputably associated with Corporate Income Tax. The State frequently uses the tax system to regulate the activity of the private sector, either encouraging activities considered desirable (e.g. through exemptions, deductions or credits), or discouraging activities that are considered undesirable (e.g. by way of increased taxation). A large part of the provisions contained in tax codes can only be understood as fulfilling this regulatory function.

4. Corporate Income Tax may be used by the authorities to direct business activity toward the pursuit of different purposes considered socially and economically desirable. The modern conception of the regulatory function of Corporate Income Tax (regulatory function of corporate taxation) suggests that this tax can serve to condition the decision-making power of company administrators and direct it toward the efficient use of the assets of the corporation for more socially desirable purposes.

5. Autonomous taxation imposing on certain expenses (e.g. undocumented expenses; charges relating to vehicles; representation expenses; offshore payments), expenditure with bonuses) are inserted in the regulatory function of Corporate Income Tax, integrating a structure of incentives that seeks to increase the formalization, transparency and rationalization of business economic activity. These regulatory objectives favor economic growth and allow to preserve and expand the tax base, discouraging informal expenses or expenses devoid of strict economic and business justification.

6. It is this regulatory function of autonomous taxation that the jurisprudence of the Centre for Administrative Arbitration has in mind when it refers to its functions of general ordering, specific preservation and systemic pacification, expressions that are condensed and precipitated in the recognition of the presence of a general disciplinary function that is not foreign to systemic purposes. The same occurs with constitutional jurisprudence, when it refers that "with this type of taxation was intended, on the one hand, to encourage the taxpayers subject to it to reduce as much as possible the expenses that negatively affect the tax revenue and, on the other hand, to prevent that, through these expenses, companies proceed to the disguised distribution of profits, particularly dividends which, thus, would only be subject to Corporate Income Tax as profits of the company, as well as to combat the fraud and tax evasion occasioned by such expenses not only in relation to Personal Income Tax or Corporate Income Tax, but also in relation to the corresponding contributions, both of employing entities and of workers, for social security."

7. The regulatory function of Corporate Income Tax presents itself as indissociable from its properly taxation function, immediately directed at identifying and reaching the tax capacity revealed by real income. Both functions intend, in particular, to combat the hidden payment of income and profits and thus to ensure the integrity and coherence of Corporate Income Tax itself and of the tax system globally considered, in accordance with the principles, of constitutional relevance, of universality, material equality, tax capacity and distributive justice.

8. Autonomous taxation prevents the contamination of the economic rationality of companies by parallel logics and foreign to them, adverse to competitiveness and efficiency and contrary to the principle of separation between the company and its various stakeholders (e.g. partners; shareholders; administrators; workers) or propiciating tax evasion. As the Judgment in Case number 659/2014-T properly states, "they are, therefore, strongly linked to the taxpayers of the respective income tax, and, more specifically, to the economic and business activity carried out by them. What is in question, in autonomous taxation is, indeed, taxing certain expenses or charges (expenditure), viewed in their relationship with the general idea of real and effective profit and the taxation of income."

9. It is represented as indisputable, in this light, the anti-abuse nature and function inherent in autonomous taxation, dissuasive and quasi-sanctionary with respect to certain expenses devoid of economic rationality and enabling the reduction of artificial taxable profits normally expected, being thus liable to enhance the reduction of the artificial tax capacity of companies and generate significant distortions in the application of the constitutional principles of tax equity of horizontal and vertical equality before public charges.

The increase of autonomous taxation of article 88, number 14 of the Corporate Income Tax Code

1. It is in this context that article 88, number 14 of the Corporate Income Tax Code should be understood, where it is provided that "The autonomous taxation rates provided for in this article are increased by 10 percentage points as regards taxpayers that present tax loss in the period to which relate any of the tax facts referred to in the preceding numbers related to the exercise of an activity of a commercial, industrial or agricultural nature not exempt from Corporate Income Tax." This provision determines that autonomous taxation rates must take into account the fact of whether or not the taxpayer presents tax loss. It fits within the function of autonomous taxation of discouraging and repressing the carrying out, by companies, of expenses that the legislator considers as economically, socially and fiscally anomalous and undesirable, in light of the values, principles and rules of the tax system.

2. From the reading of article 88, number 14 of the Corporate Income Tax Code results, in an unequivocal manner, the greater ethical-juridical blameworthiness of the carrying out of expenses subject to autonomous taxation when taxpayers present tax losses, thus justifying the respective increase by 10 percentage points. This concept refers the legal operator to the principle of net profit taxation (Nettoprinzip), understood as the net result of the financial year after the additions or deductions of the patrimonial variations and the tax corrections of Corporate Income Tax referred to in articles 15 to 17 of the Corporate Income Tax Code, in the framework of the principle of partial dependence between accounting and taxation.

3. The increase by 10 percentage points of autonomous taxation rates for companies that present tax losses has as regulatory objective to discourage the carrying out of expenses devoid of economic rationality, that is, of questionable essentiality or business indispensability, in the case of companies that, at least apparently, are going through clear economic, financial or management difficulties. It thus assumes a quasi-sanctionary nature of autonomous taxation rates, requiring the establishment of a stricter nexus between the tax fact that is intended to be repressed (i.e. undesirable expenses cumulated with the presentation of tax losses) and the rate increase through which it is intended to proceed to this repression.

The application of article 88, number 14 of the Corporate Income Tax Code to groups of companies

1. It is now important to discuss the question of the applicability of the 10 percentage point penalty, provided for in article 88, number 14 of the Corporate Income Tax Code with respect to companies that opted for taxation under the special regime for taxation of groups of companies, in accordance with article 69 of the Corporate Income Tax Code. Notwithstanding that this is not yet a regime of fiscal consolidation – which would imply the elimination of intra-group operations – the special regime for taxation of groups of companies has the objective of joining one or more entities that legally are independent, but which, voluntarily, present themselves to taxation as if they were a single economic entity, under the control of a parent company, in which control gains the meaning of "power to manage the financial and operational policies of an entity or an economic activity in order to obtain benefits therefrom". Thus, it embodies an approximation of tax law to the economic logic of the group, an aspect which cannot fail to have systemic and practical implications from the hermeneutic (interpretation) and methodological (application) point of view.

2. In the scope of the special regime for taxation of groups of companies, the juridical-formal separation existing between the companies of the group moves to the background relative to the unitary economic substance represented by the business activity of the group itself as a whole. From this results an unavoidable mismatch between an interpretation and application of tax provisions in accordance with exclusively juridical criteria, on the one hand, and a hermeneutics and methodology supported in a more economic approach (more economic approach) of tax provisions, on the other.

3. An exclusively juridical-formal and conceptualist approach could justify the individualization of tax losses in the subsidiary company and the corresponding increase of autonomous taxation by 10%. However, this type of approach, restricted to the literal content of juridical-private concepts, proves manifestly inadequate, and should be complemented by an analysis of the economic substance of the corporate relationships in question.

4. The special regime for taxation of groups of companies implies, in accordance with legal provisions, the assessment of tax losses by declaration of the Fiscal Group, having as a reference framework the computation of the algebraic sum of taxable profits and tax losses determined in the individual periodic declarations so that, in the end, there is only a single taxpayer for Corporate Income Tax purposes. This regime seeks to reduce the transaction costs of companies. However, the same can lead, here or there, in taxation ultimately more burdensome than that which could result from individual final taxation, and such consequence can only be imputed to the taxpayer.

5. In fact, the question of imputation appears to be of great relevance in the concrete case. The group of companies presupposes that each participating company maintains its juridical and patrimonial autonomy, submitting itself to the control or direction of another company, with a view to achieving the common economic objectives defined at the central level. If the management of all subsidiary companies of the group depends on a centralized administration and direct control by the dominant company, then there is juridical and substantial economic foundation for the application of the 10% increase to this group of companies when one or more companies of the group present tax losses, since these can be legitimately imputed to the dominant company, without any violation of the general principles of equitable process (due process).

6. The legal order establishes a connection between the power of direction held by the parent company, in group relationships, and responsibility. The relationship between parent company and subsidiary company is marked by the existence of the right of the parent company to give binding instructions to the subsidiary company, relating to the management of this latter, with the performance of the subsidiary company subordinated to the interest of the first. As a counterpart, the legal order imposes on the parent company responsibility for all obligations of the subsidiary company, by the fulfillment of certain prerequisites.

7. In this group logic, in accordance with the provision in article 115 of the Corporate Income Tax Code, the legislator also determined the existence of a regime of quite strong passive joint and several liability, in which it falls to the dominant company to pay the full Corporate Income Tax in the first place, being able, however, the fulfillment of the obligation to be required in full from any of the remaining subsidiary companies, this without prejudice to the right of recourse. Even if it calls the other subsidiary companies to the dispute, it is not thereby released from the obligation to effect the missing payment in full, in accordance with the provisions in articles 501 and 502 of the Commercial Companies Code.

8. Existing control over the management by the parent or dominant company, this would allow one to consider valid the solution recommended by the Tax Authority on the basis of article 88/14 of the Corporate Income Tax Code, even before and independently of the entry into force of number 20 introduced by the interpretative law. Indeed, existing control over the management of subsidiary companies by the parent company, it is not seen why tax losses should only be imputed to the subsidiary company that presented them. In this case, the fiscal responsibility of the parent company would find its juridical-economic foundation in the subordination of the management of the subsidiary company to the power of direction and interest of the parent company.

9. The preceding considerations corroborate that the literal content of number 14 of article 88 of the Corporate Income Tax Code allows, by mere declaratory interpretation, that the concept of expanded taxpayer resulting from articles 18, number 3, of the General Tax Law and 115 of the Corporate Income Tax Code, corroborated by article 31, number 1 of that Law, be borne in mind, and that the qualification of taxpayer be attributed to the dominant companies of the groups covered by the special regime for taxation of groups of companies and consideration be given to the losses of the group as the determining fact of the increase in autonomous taxation.

The interpretative nature of number 20 of article 88 of the Corporate Income Tax Code

1. Article 133 of Law number 7-A/2016 of 30 March (2016 State Budget Law) proceeded to the introduction of a number 20 of article 88 of the Corporate Income Tax Code, aiming to establish such understanding of tax law. There it came to provide that "For purposes of the provision in number 14, when the special regime for taxation of groups of companies established in article 69 is applicable, the tax loss determined in accordance with article 70 is considered." To this provision was conferred the force of interpretative law by article 135 of the 2016 State Budget Law, with inevitable consequences in the field of application of law in time, by force of article 13, number 1 of the Civil Code, which determines that "The interpretative law integrates itself in the law interpreted, the effects already produced by the fulfillment of the obligation, by judgment passed in law, by transaction, even if not homologated, or by acts of analogous nature being excepted."

2. However, article 135 of Law number 7-A/2016 was judged unconstitutional by the Constitutional Court. There it was sustained that "interpretative laws must be considered as included in the constitutional prohibition of retroactivity in tax matters. Only will it not be so in those cases in which, having the courts been called to pronounce themselves on the interpretation to be given to ambiguous and controversial laws, there has been established concerning them a controversy in jurisprudence. If the courts, to which it falls to say what the law is ─ through juridically founded decisions and at the end of proceedings of parties with equality of arms ─, reflect and feed the controversy propitiated by the ambiguity of the law, it is inevitable to conclude that the juridical question is, at the present moment, uncertain or unsanctionable; the addressees thereof have not, in these circumstances, any reason to form expectations in the prevalence of one of the positions comprised in the "frameworks of controversy", and cannot, for that same reason, invoke the frustration of their legitimate expectations against the decision of the legislator to interpret the law in one of the senses already adopted in judicial decisions."

3. In this decision, the Constitutional Court reaffirmed the understanding that the attribution of interpretative nature to tax provisions that aggravate the charges of taxpayers is, prima facie, unconstitutional, being admissible, in light of the constitutional prohibition of retroactivity of taxes, solely in the circumstance of the existence, concerning the law interpreted, of an unsanctionable controversy with a supporting set of decisions "statistically significant" in the scope of a given judicial order.

4. Now, with respect to the question of the application of article 88, number 14 of the Corporate Income Tax Code to groups of companies subject to the special regime for taxation of groups of companies, the Constitutional Court understood that the scant supporting set of the controversy in arbitral jurisprudence generated around it justified in no way the attribution of retroactive interpretative effects to number 20 of the same article, considering, instead, that because it is in truth an innovative and constitutive provision, thus limiting the interpretative power of the courts, the same should have prospective reach and never retroactive, under penalty of violating the prohibition of retroactivity of tax laws, enshrined in article 103, number 3 of the Constitution and inherent in the principle of legal certainty and protection of confidence, which is one of the principles of the rule of law.

5. Note, however, that the Constitutional Court only refused a retroactive interpretative effect to number 20 of article 88 of the Corporate Income Tax Code, imposing for the future the application of article 88, number 14 of the Corporate Income Tax Code to groups of companies that opted for taxation under the special regime for taxation of groups of companies, ex vi number 20. With this decision, the Constitutional Court did not consider unconstitutional the solution of number 20 – of application of the increase of autonomous taxation in the scope of the special regime for taxation of groups of companies – nor did it consider that the same was incompatible with the literal content and the systematic insertion of article 88, number 14 of the Corporate Income Tax Code. Moreover, the Constitutional Court made very clear its position on the "topos" of retroactivity of interpretative laws in another judgment, Constitutional Court Decision number 107/2018, relating to the retroactive interpretative reach of number 21 of article 88 of the Corporate Income Tax Code, relating to the prohibition of deductions.

6. With its pronouncements, the Constitutional Court wished to safeguard the interpretative freedom of the judge and his authority to say what the law is in a definitive manner in the concrete case, fully respecting his hermeneutic and methodological autonomy. With respect specifically to the application of article 88, number 14 to groups of companies, the Constitutional Court had the opportunity to pronounce itself specifically on the question of its conformity with the Constitution, having sustained that "if a company that presents profits normally taxable in the context of Corporate Income Tax, derives fiscal advantages through the special regime for taxation of groups of companies, from the fact that the fiscal group it forms part of presents loss, it is natural that it see the autonomous taxation rates incident on expenses that the legislator presumes to be, in many situations, dispensable or fraudulent, aggravated. It is so not only because, by incurring in these expenses, the company reduces its contribution to mitigate the losses of the group it forms part of and whose negative results it benefits on the fiscal plane, but also because the relationships of interdependence and domination proper to corporate groups can easily dictate that the expenses taxed be carried out, not by the company to which they substantially destine themselves, but by that company or companies of the group which, by not presenting losses, is in a position to minimize the charges of the whole group with autonomous taxation. The solution enshrined in article 88, number 14, in the interpretation impugned by the claimant, corresponds, in this way, to the necessity of articulation between the regime of taxation of profit and the regulation of tax incentives through autonomous taxation."

7. Thus, nothing prevents that the present arbitral tribunal consider that the provision of article 88, number 14 of the Corporate Income Tax Code applicable to groups of companies covered by the special regime for taxation of groups of companies, in the fiscal period 2014, to understand that this interpretation is entirely compatible with the concept of taxpayer enshrined therein and with a juridical-economic interpretation of autonomous taxation and the legal regime of groups of companies and that this interpretation does not contend with the principles of tax legality, material equality, prohibition of excess and legal certainty and protection of the confidence of citizens.

DECISION

In these terms, this Arbitral Tribunal decides:

• To maintain in the legal order the act of rejection of the administrative review examined;

• To judge totally unfounded the request for declaration of partial illegality of the autonomous taxation self-assessment in "Fiscal Group B..." relating to the financial year 2014 in the amount of €233,484.71;

• To judge moot, given the above decision, the request for compensatory interest formulated; and

• To condemn the Applicant to the payment of the costs of this proceeding.

Value of the proceeding

The value of the proceeding is fixed at €233,484.71 in accordance with article 306, number 1 of the Code of Civil Procedure and article 97-A, number 1, paragraph a), of the Code of Procedure and Process in Tax Matters, applicable by force of paragraphs a) and b) of number 1 of article 29 of the Rules of Arbitral Procedure in Tax Matters and number 2 of article 3 of the Rules of Costs in Tax Arbitration Proceedings.

Costs

The value of the arbitration fee (to be borne by the Applicant as decided above) is fixed at €4,284.00 (four thousand two hundred and eighty-four euros), in accordance with articles 12, number 2, and 22, number 4, both of the Rules of Arbitral Procedure in Tax Matters, and article 4, number 4, of the Rules of Costs in Tax Arbitration Proceedings and Table I attached thereto.

Let notice be given.

Lisbon, 28 June 2018

The Collective Arbitral Tribunal

Judge José Poças Falcão
(President)

Professor Doctor Jónatas Machado
(Member)

Professor Doctor Manuel Pires
(Member)