IRC Tax Deductibility of Expenses and SGPS Capital Holdings Regime – CAAD Decision 631/2015-T

ARBITRAL AWARD

The Arbitrators Councillor Fernanda Maçãs, President, Professor Fernando Borges Araújo and Dr. Rui Manuel Correia de Pinho, Members, designated by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, hereby decide as follows:

I – REPORT

1. The taxpayer A…, SGPS, S.A., with Tax Identification Number … (hereinafter "Claimant"), filed on 8 October 2015 a request for establishment of a Collective Arbitral Tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of 20 January (Legal Framework for Tax Arbitration, hereinafter "LFTA"), in which the Tax and Customs Authority (hereinafter "TCA" or "Respondent") is named, against the additional corporate income tax (CIT) assessment notice No. 2014…, relating to the fiscal year 2012, the compensatory interest assessment No. 2014… and the account settlement statement No. 2014…, from which results a total amount payable of €585,773.32. The Claimant requests the annulment of such tax acts and, consequently, the annulment of the decision of 19 August 2015 of the Deputy Director of the Large Taxpayers Unit (acting in substitution), which dismissed the administrative claim subsequently filed against such tax acts (Act No. …2015…). The Claimant further requests, at the end of the Request for Arbitral Decision, recognition of the right to compensation for undue provision of bank guarantee.

2. The request for establishment of the Arbitral Tribunal was accepted by the esteemed President of the Administrative Arbitration Centre and automatically notified to the TCA on 19 October 2015.

3. Pursuant to the provisions of section a) of paragraph 2 of Article 6 and section b) of paragraph 1 of Article 11 of the LFTA, as amended by Article 228 of Law No. 66-B/2012 of 31 December, the Deontological Council designated the arbitrators of the Collective Arbitral Tribunal, who communicated acceptance of the assignment within the applicable period, and notified the parties of this designation on 1 December 2015.

4. The Collective Arbitral Tribunal was constituted on 18 December 2015; it was properly constituted and is materially competent, in accordance with the provisions of Articles 2, paragraph 1, section a), 5, 6, paragraph 1, and 11, paragraph 1, of the LFTA (as amended by Article 228 of Law No. 66-B/2012 of 31 December).

5. The Arbitral Decision of 28 February 2016 set 8 April as the date for holding the hearing pursuant to Article 18 of the LFTA, which took place in accordance with the minutes to be incorporated herein, with 27 April 2016 being scheduled for possible witness examination. At that same meeting, in compliance with Article 18, paragraph 2 of the LFTA, 18 June was set as the date for delivery of the arbitral decision.

6. As a result of what was decided at the aforementioned hearing, the Claimant requested the production of witness testimony and proceeded to delimit its scope, with the Respondent, exercising its right to respond, filing opposition to the request for production of evidence.

7. Having analysed the content of the articles that the Claimant indicated as the subject of witness testimony and verifying that these concerned either matters of law or factuality to be proved through documentary evidence, the request for production of evidence was dismissed by decision of 26 April 2016.

8. The parties filed successive written submissions in which they reiterated the positions adopted in their initial pleadings.

9. The Claimant bases its request, in summary, as follows:

a) That the TCA did not properly motivate or justify the assessment notices in question in terms understandable to a normal recipient, in particular omitting express reference to the applicable legal provisions, which in itself would constitute a violation of Article 77, paragraph 2 of the General Tax Law; being further such acts practically lacking in factual and legal justification, and should consequently be annulled, pursuant to Article 135 of the Administrative Procedure Code, for violation of Articles 103, paragraph 2 and 268, paragraph 3 of the Constitution and Article 77 of the General Tax Law.

b) On the other hand, the fact that the taxpayer did not request justification does not exempt the TCA from the duty to justify, whereby the absence of justification cannot be remedied by imposing on the Claimant the burden of resorting to the mechanism provided in Article 37 of the Tax Procedure and Process Code.

c) The Claimant therefore considers that it was not properly notified in accordance with Article 60, paragraph 1, section a) of the General Tax Law – which constitutes omission of an essential legal formality, implying annulment of the assessment acts.

d) Regarding the accessory payments that follow the regime of supplementary payments, made by B…, SGPS, the Claimant disagrees with their subsumption to the regime of Article 32, paragraph 2 of the Tax Benefits Statute through their assimilation to the concept of "capital parts", and the consequent disregard thereof for purposes of determining the taxable profit of SGPS.

e) The Claimant particularly disagrees with the position adopted by the TCA that Circular 7/2004 establishes the said assimilation of concepts, and that the provisions of Articles 45, paragraph 3 and 81 of the Corporate Income Tax Code are overridden by Article 32, paragraph 2 of the Tax Benefits Statute.

f) The Claimant further disagrees with the TCA's argument that, within the group, the charges incurred with accessory payments that follow the regime of supplementary payments demonstrate, by their non-remunerated nature, that they do not contribute to the profits of the entity making them (and at most only to the entities that benefit therefrom).

g) The Claimant emphasises that, although B…, SGPS has as its primary object the acquisition and holding of equity interests, its activity is not limited to this, being able in particular to provide financial resources to its subsidiaries through accessory payments (whether or not in the form of supplementary payments), loans and other treasury reinforcements.

h) The Claimant contends that the distinction between "supplementary payments" and "capital parts" is widely supported in the field of Commercial and Corporate Law, as well as in accounting practice.

i) The Claimant emphasises that from the accounting approach it follows that if the law had intended to refer to "own capital" it would have done so, but it did not because, in good harmony, there are no "parts of own capital" (but rather there are capital parts, on the one hand, and on the other, receivables from the realisation of supplementary payments and equivalent).

j) The Claimant contends, further, that the distinction between "supplementary payments" and "capital parts" corresponds to the legal hermeneutics of the applicable regime, which precludes the "economic interpretation" that the TCA alleges to have adopted in its approach to the regime of Article 32, paragraph 2 of the Tax Benefits Statute in effect at the date of the facts. In its view, the TCA's interpretative option deviates illegitimately from the express letter of the rule, seeing distinctions therein that it does not establish; violates its teleological element by disregarding the ratio legis of Article 32 of the Tax Benefits Statute, which in its view supports the restrictive understanding of the concept of "capital parts"; violates the systematic element, by disregarding the counterpoint of Article 45, paragraph 3 of the Corporate Income Tax Code, which from 1 January 2006 onwards came to encompass "supplementary payments", thereby making it transparent that this concept was not inherent in that of "capital parts", which already had their own treatment; violates the historical element by disregarding the fact that, in the succession of tax regimes for SGPS, the opportunity was not taken to alter the wording of Article 32, paragraph 2 of the Tax Benefits Statute in the sense adopted by the TCA – which, in its view, denotes the harmony and certainty in the distinction of the said concepts.

k) The Claimant further contests the TCA's understanding as to the "indispensability" of the charges presented by B…, SGPS, in the light of the provisions of Article 23 of the Corporate Income Tax Code in its wording at the date of the facts in analysis – as a second line of defence in the event that supplementary payments are not considered "capital parts". According to the Claimant, such "indispensability" must be interpreted broadly (in accordance with the principle of taxation by actual profit enshrined in Article 104, paragraph 2 of the Constitution), in terms of functionality to the corporate purposes, whether they are the obtaining of income or merely the maintenance of the source of income production.

l) According to the Claimant, the tax loss declared resulted from losses determined by C… and D…, in the amounts of €7,903.06 and €47,712.76, respectively, for the period 2011, and as such declared in that period (2011), which it voluntarily regularised since it agreed therewith.

m) However, the Claimant alleges that the arguments supporting the illegality of the contested assessments should equally apply to the annulment of the disregard of tax losses determined in 2011 by the Group, in the amount of €55,615.82.

n) Finally, for the Claimant, the annulment of the assessment should correspondingly entail the annulment of the assessment of compensatory interest, and, pursuant to Articles 53, paragraphs 1 and 2 of the General Tax Law and 171, paragraphs 1 and 2 of the Tax Procedure and Process Code, it requests compensation for undue guarantee, namely the bank guarantee that it had to provide to suspend the tax enforcement procedure.

1. The Respondent presented a response defending itself.

11.1. By way of objection:

a) The case concerns mere arithmetic corrections at the end of a tax inspection procedure in which all information was made available and the Claimant exercised its right to be heard, without it being considered necessary to add much to what appeared in the final reports of the tax inspection for it to be certain that the Claimant had and has all relevant information, including that concerning the justification of the assessment act.

b) The TCA refers, in this matter, to Articles 77 of the General Tax Law and 63, paragraph 1 of the Tax Inspection Procedures Regulations, understanding that these were respected.

c) What the Claimant invokes is the lack of communication of justification and not the absence of justification, and the former has only effects on efficacy, and specifically on deadlines, having particular regard to the provisions of Article 37 of the Tax Procedure and Process Code, which allows such notification deficiencies to be remedied.

d) In no case would the validity of the assessment be at issue.

e) As regards the alleged lack of prior hearing, the TCA recalls that the Claimant was heard in tax inspection procedures, whereby as to subsequent moments paragraph 3 of Article 60 of the General Tax Law applies.

f) Moving to substantive matters, the TCA begins by considering that the charges presented by B…, SGPS are not such as to satisfy the criterion of "indispensability" in Article 23 of the Corporate Income Tax Code, and therefore are not even candidates for consideration under Article 32 of the Tax Benefits Statute (which further restricts the deductibility of charges presented by SGPS), given that this first regime has logical precedence over the second.

g) The TCA contends that indispensability has to do with the capacity to generate income, and that this generation is excluded from supplementary payments which do not even accrue interest, and whose alienation is incapable of generating a capital gain or taxable profit. It even excludes, in principle, payments in favour of subsidiaries which, by enriching them, generate an income that indirectly benefits the parent company, by arguing that only costs directly related to the activity of the taxpayer itself are deductible – while maintaining nonetheless the caveat that, in the case of SGPS, some indirect gain thereof would not be taxed, and therefore the payments enabling this would correspondingly be disregarded, in accordance with the specific regime of Article 32 of the Tax Benefits Statute.

h) Next, the TCA opposes the idea that supplementary payments were excluded from the regime of disregard of charges that was in Article 32, paragraph 2 of the Tax Benefits Statute, arguing that they, in the case of SGPS, are equivalent to the concept of operations on "capital parts" – an equivalence whose recognition is justified by the rule of Article 11, paragraph 3 of the General Tax Law.

i) The TCA rejects the idea that pure concepts of commercial/corporate law would apply here, especially since if they were to apply then it would have to be recognised that the concept being invoked is that of "equity interest", when the fiscally relevant concept is that of "capital part", a concept that strictly speaking does not exist in corporate law except for general partnerships. This proves that the fiscal concept was not sought in corporate law, and certainly did not result from error or ignorance in adapting the concepts and terms of that branch of law, thereby preventing the invocation of this.

j) To the contrary, the TCA argues, the concept of "capital parts" used in the Corporate Income Tax Code and the Tax Benefits Statute has its origin in accounting law, and from this in turn results the integration of supplementary payments into the broad concept of "own capital", being "parts" of that capital.

k) Furthermore, the TCA emphasises, the ratio legis that brought about the symmetric disregard of gains and losses of SGPS in Article 32 of the Tax Benefits Statute makes clear the intention to encompass in that regime supplementary payments, insofar as these are, by their nature, enduring financial investments in the beneficiary company, gaining relevance insofar as they are held for a period exceeding one year by the company making that supplementary payment (thereby moving away from the regime of Article 45, paragraph 3 of the Corporate Income Tax Code).

l) The TCA further alleges that the Claimant's position would imply a violation of the principle of equality constitutionally enshrined, insofar as it would lead to confusing and bringing about indiscriminate treatment of two distinct situations: 1) that of the company wishing to deduct charges arising from a loan financing its own activity, an activity that will generate taxable income; 2) that of the company wishing to deduct charges arising from a loan obtained from its shareholder to finance the activity of a subsidiary, without this having directly resulted in any taxable income, not even in the form of remuneration of that financing.

11.2. By way of exception:

a) As to the Claimant's claim that the annulment of the additional assessment should equally entail the annulment of the disregard of tax losses determined in 2011 by the Group, in the amount of €55,615.82, the TCA understands that it is doubly absurd: 1) because it wishes to associate the annulment of an assessment based on non-acceptance of financial charges incurred with the acquisition of capital parts, on the one hand, with the annulment of a correction relating to mere tax losses improperly deducted; 2) because it is unassailable a situation that was already accepted, and even regularised, by the claimant itself - through payment of CIT in the amount of €13,903.96 and the acknowledgement that there had been an error committed in 2011 by companies D… and C….

b) The Respondent draws attention to the fact that the Claimant has already accepted and regularised the following situations: 1) the correction of €1,016,551.43 corresponding to the effect associated with the goodwill of B…, SGPS; 2) the correction of €55,615.82 for disregard of tax losses determined in 2011 by C… and D….

c) Following from this circumstance that these acts are now unassailable, pursuant to Article 56 of the Administrative Procedure and Process Code, applicable ex vi Article 29, paragraph 1, section c), of the LFTA.

II. PROCEDURAL MATTERS

12.1. The Exception of Unassailability

As stated, the Respondent, in its Response, invoked that "the adjustment to taxable matter, in the amount of €1,016,551.43, as well as the adjustment in the amount of €55,615.82, relating to tax losses deducted in the tax return filed by the Group, were both accepted by the taxpayer, (…) and even subject to voluntary regularisation" (Article 16). "As such", continues the Respondent, "within the scope of the present action tax acts consequent upon such corrections could never be included, by force of the general principle of non-assailability of acts by those who have accepted them, underlying Article 56 of the Administrative Procedure and Process Code, applicable ex vi Article 29, section c) of the LFTA."

In response to the exceptions, the Claimant, by request presented on 15 February 2016, argued that it cannot proceed with an exception of unassailability resulting from its acceptance of the corrections corresponding to the effect associated with the goodwill of B…, SGPS, on the one hand, and the disregard of tax losses determined in 2011 by C… and D…, on the other hand – but declares that it maintains the full scope of its request for arbitral decision insofar as the defects invoked therein may also have an impact within the scope of tax losses; whereby the annulment of the additional assessment being contested, and its respective assumptions, should also entail the annulment of the corrections relating to tax losses deducted, "even though they were accepted by the Claimant".

Let us examine this.

Article 96, paragraph 1 of the General Tax Law provides that "The right to contest or appeal is not waivable, save where provided by law."

In turn, paragraph 2 provides that "Waiver of the exercise of the right to contest or appeal is only valid if contained in a declaration or other formal instrument."

In the annotation to this provision, JORGE LOPES DE SOUSA AND OTHERS state that "In view of the provisions of paragraph 2 of Article 96 of the General Tax Law, the principle of admissibility of tacit acceptance of the tax act that in administrative procedure is enshrined in paragraph 4 of Article 53 of the Administrative Procedure Code does not apply, save where expressly and specifically provided by law" (see General Tax Law, 4th edition, Encontro da Escrita publisher, 2012, p. 843).

The legislator's objective is to prevent loss of the right of appeal in cases where acceptance of the contested act is made implicitly, in particular as a result of payment of the tax in question. More stringently, the law requires that, after the tax act is made, acceptance result from an express declaration of the taxpayer.

Let us examine the case at hand.

In Article 45 of the Request the Claimant states, at one point, that, "as far as the correction relating to tax losses deducted by the Group is concerned, (…) it proceeded with voluntary regularisation, through payment of CIT – Form P1, in the amount of €13,903.96, because it agreed with the content thereof" (emphasis ours).

And, in response to the exception raised by the TCA, the Claimant refers, expressly, in point 8 of the request, that "(…) the tax loss declared resulted from losses determined by C… and D…, in the amounts of €7,903.06 and €47,712.76, respectively, for the period 2011, and as such declared in that period (2011), which the Claimant voluntarily regularised, since it agreed therewith" (emphasis ours).

At the same time it argues that, "following the annulment of the assessment acts subject to the present Request for Arbitral Decision, the adjustment made by the tax authority to tax losses deducted should be annulled, in the event of the defects invoked succeeding, in particular those of a formal character."

According to the Claimant's thesis, "considering the defects invoked as valid against the contested assessment acts of lack of justification or omission of essential legal formality through lack of notification for exercise of the right to be heard (…) the corrections relating to tax losses deducted must also be annulled even though they were accepted by the Claimant."

In light of the above, it is apparent that we are not dealing with mere tacit acceptance of the contested correction. Rather to the contrary, it is clear that the Claimant does not even question the corrections made, accepting them expressly. An acceptance reiterated on various occasions by the Claimant, when it refers, it is repeated, that "it proceeded with voluntary regularisation of the correction (…) because it agreed with the content thereof" (emphasis ours).

In such terms, the exception invoked by the TCA is well-founded, and the adjustment to taxable matter accepted by the Claimant cannot be considered.

It should be noted that the success of the exception invoked by the Respondent has no impact on the substance of the proceedings, because the additional corporate income tax assessment notified to the Claimant on 30 December 2014, and which was the subject of an administrative claim and is the subject of the present request for arbitral decision, already incorporates the voluntary regularisations to which the Claimant had proceeded within the Tax Inspection.

12.2. The Proceedings Do Not Suffer From Procedural Defects

12.3. The TCA appointed its representatives in the proceedings and the Claimant filed power of attorney (and subsequently substitution of authority), with the Parties thus properly represented.

12.4. The Parties have legal personality and capacity and have standing, pursuant to Articles 4 and 10, paragraph 2 of the LFTA and Article 1 of Order No. 112-A/2011 of 22 March.

12.5. No other circumstances exist that would prevent determination of the merits of the case.

III – MERITS

III.1. Factual Matters

III.1.1. Facts Considered Proven and Relevant to the Decision

1. The Claimant has as its object the management of equity interests, acting as an SGPS.

2. In the fiscal year 2012 the Claimant was the parent company of a group of companies subject to the Special Regime for Group Taxation ("SRGT"), being fully part of the group's perimeter the following companies:

• B…, SGPS, S.A.
• D…, Lda.
• C…, Lda.

1. In compliance with Service Order OI2014…, of 20 February 2014, an internal and partial tax inspection action was conducted on fiscal year 2012 of B…, SGPS, from which resulted an adjustment of €3,179,014.85, with immediate reflection in the SRGT of the Group.

2. In compliance with Service Order OI2014…, of 8 August 2014, a tax inspection action was conducted on the Claimant, in its capacity as parent company of the Group, with a view to reflecting the adjustments made in the subsidiary companies.

3. On 19 November 2014 the Claimant was notified of the Draft Tax Inspection Report drawn up following a tax inspection action relating to the application of the SRGT in 2012, in which adjustments to CIT taxable matter were proposed:

a. For non-acceptance as tax deductible expense of charges incurred by B…, SGPS, D… and C… with the acquisition of capital parts, pursuant to Articles 32, paragraph 2 of the Tax Benefits Statute and 23 of the Corporate Income Tax Code, in the amount of €3,179,014.88, decomposable as follows:

• Charges incurred with the acquisition of capital parts by B…, SGPS, pursuant to Articles 32, paragraph 2 of the Tax Benefits Statute and 23 of the Corporate Income Tax Code, in the amount of €1,466,554.17;

• Use by B…, SGPS of a monthly criterion instead of an annual criterion for determining financial charges, resulting in an adjustment of €553,372.73;

• Elimination of goodwill duplication in the calculation of assets, in the amount of €1,159,087.98.

b. For disregard of tax losses determined in 2011 by the Group, in the amount of €55,615.82 (losses determined by C… and D…, in the amounts of €7,903.06 and €47,712.76, respectively, and declared in 2011).

1. From the Draft Tax Inspection Report it also follows that, from the proposed adjustment of €3,179,014.88, B…, SGPS voluntarily regularised the amount of €1,016,551.43 corresponding to the correction of the effect associated with goodwill, through the filing of an amended return and corresponding assessment in the amount of €254,137.85.

2. Likewise, voluntary regularisation was made of the correction relating to tax losses deducted by the Group, through payment of CIT in the amount of €13,903.96 (acknowledging that there had been an error committed by companies D… and C…).

3. In exchange, the Claimant did not accept the correction relating to the amount of financial charges incurred by B…, SGPS with the acquisition of capital parts, exercising its right to be heard in this respect.

4. On 22 December 2014 the Claimant was notified of the Tax Inspection Report ("TIR") in which the corrections already contained in the Draft Tax Inspection Report were maintained and the individual Tax Inspection Report of B…, SGPS was incorporated.

5. On 30 December 2014 the Claimant was notified of the additional CIT assessment and corresponding account settlement which, accrued with interest, reached the amount of €585,773.32 (with €44,554.00 corresponding to compensatory interest).

6. The Claimant filed, on 29 April 2015, an administrative claim against such tax acts, petitioning their annulment, essentially because it did not accept the application of Article 32, paragraph 2 Tax Benefits Statute through assimilation to the concept of "capital parts" of the figure of accessory payments that follow the regime of supplementary payments.

7. On 22 July 2015 the Claimant was notified of the draft decision dismissing the administrative claim, so that it could exercise its right to be heard, pursuant to Article 60 of the General Tax Law.

8. The Claimant exercised its right to be heard.

9. The Claimant was informed of the content of the decision of 19 August 2015 of the Deputy Director of the Large Taxpayers Unit (acting in substitution), which dismissed the said administrative claim, through Office No. …, of 19 August 2015, of the Tax Management and Assistance Division (TMAD) of the Large Taxpayers Unit (LPU), received on 20 August 2015.

10. For coercive collection of the assessment acts which are the subject of the present arbitral proceedings, a tax enforcement procedure was instituted with No. …2015…, for the suspension of which the Claimant provided bank guarantee in the amount of €741,890.50.

III.1.2. Justification of Factual Matters

The facts proven were based on the position assumed by the Parties and not contested, the critical analysis of documents attached to the proceedings that were not challenged, as well as the content of the Tax Inspection Report.

III.2. Matters of Law

III.2.1. Issues to be Decided

The following are the issues to be decided:

1. Whether the assessment is illegal due to lack of justification and omission of essential formalities;

2. Whether Article 32, paragraph 2 of the Tax Benefits Statute and Article 23 of the Corporate Income Tax Code should not be applied;

3. Whether the compensatory interest is illegal;

4. Whether the decision dismissing the administrative claim is illegal;

5. Whether compensation for undue guarantee is due.

As the Claimant has not established any priority, other than of an argumentative nature, among the issues submitted for judgment, it is appropriate to first consider the defect whose success would determine, according to the judge's criterion, more stable or effective protection of the offended interests, as prescribed in Article 124, paragraph 2 of the Tax Procedure and Process Code, applicable ex vi Article 29, paragraph 1, section c), of the LFTA.

Pursuant to Article 124, paragraph 2 of the Tax Procedure and Process Code, the tribunal must consider as a priority the defects leading to a declaration of non-existence or voidness of the contested act and, subsequently, the defects leading to its annulment (paragraph 1). Regarding the defects constituting non-existence or voidness, the judge must consider as a priority the defects whose success would determine, in his prudent judgment, more stable or effective protection of the offended interests. As to defects constituting annullability, the same criterion is established, which shall not apply only if the contesting party has established a relationship of subsidiarity among the defects imputed to the act – which is permitted by Article 101 of the Tax Procedure and Process Code – in which case priority is given to its intention (provided the Public Prosecutor has not raised other defects) (paragraph 2).

The rules emanating from this legal provision on the order of consideration of defects are intended to protect the interest of the contesting party with maximum procedural efficiency, omitting pronouncement on defects raised when the defect or defects already recognised prevent the renewal of the act with the same result. Effectively, the establishment of this order of consideration of defects presupposes that, upon considering a defect leading to the legal elimination of the contested act, the tribunal will refrain from considering the remainder, because, if the judge had to consider all defects imputed to the act, the order of consideration would be immaterial.

Thus, it is necessary to begin with consideration of the alleged non-application of Article 32, paragraph 2 of the Tax Benefits Statute and Article 23 of the Corporate Income Tax Code, as invoked by the Claimant, since if verified, it will definitely prevent the possibility of imposing on the Claimant a new tax assessment act, thereby achieving the most stable and effective protection of its interests.

III.2.1.b). On the Non-Application of Article 32, Paragraph 2 of the Tax Benefits Statute and Article 23 of the Corporate Income Tax Code

Some general contextual notes will clarify the disputed issue, following for this purpose the doctrine contained in Award No. 258/2015-T and perfectly applicable here.

1. Article 32, Paragraph 2 of the Tax Benefits Statute

The tax regime for SGPS, since its creation by Decree-Law No. 495/88 and until 31 December 2000, was regulated in Article 7 of that statute, which determined that the positive difference between capital gains and losses did not contribute to taxable profit, provided that the realisation value was reinvested by the end of the second fiscal year following that of its realisation.

Only from 2001 onwards was this regime regulated in Article 31 of the Tax Benefits Statute, by transposition of the solution provided in Article 45 of the Corporate Income Tax Code, relating to "non-deductible charges for tax purposes": SGPS began to benefit from a regime of deferral of taxation of capital gains obtained through the sale or exchange of equity interests held by them, having to reinvest the realisation value by the end of the third fiscal year following that of realisation. That is, the new provision stipulated that, if the interest had been held for one year at the date of alienation, and if in the fiscal year prior to realisation, in the fiscal year itself or by the end of the second fiscal year following, the realisation value was reinvested, 50% of the net capital gain would be taxed (as per paragraph 1 of Article 45 of the Corporate Income Tax Code).

With the publication of Law No. 32-B/2002 of 20 December, which approved the State Budget for 2003, the regime for taxation of capital gains and losses for SGPS was again modified, through amendments introduced in paragraphs 2 and 3 of Article 31 of the Tax Benefits Statute, this being the regime that came into force, although with subsequent renumbering of the article (which changed from 31 to 32): under the new regime capital gains and losses realised in the onerous transfer of capital parts, and financial charges incurred with their acquisition, would not contribute to the formation of taxable profit, provided that such capital parts were held for a period of not less than one year. This solution excepted the general regime provided in Articles 23, 42 and 45 of the Corporate Income Tax Code, which would apply again to losses determined in the transfer of capital parts if the transfer constituted paragraphs 5, 6 and 7 of Article 23 of the Corporate Income Tax Code but the assumptions for application of the provision of the Tax Benefits Statute were not met.

As a general rule resulting from the application of Article 31 (later 32) of the Tax Benefits Statute, losses and financial charges incurred with the financing of capital parts do not contribute to the formation of taxable profit (a disregard that would only not occur if one of the exceptions provided in paragraph 3 of that same Article 31 were met).

In 2012 and 2013 Article 32, paragraph 2 of the Tax Benefits Statute had the following wording:

"Capital gains and losses realised by SGPS of capital parts of which they are holders, provided that held for a period of not less than one year, and likewise the financial charges incurred with their acquisition do not contribute to the formation of the taxable profit of these companies."

And this wording remained until December 2013, when it was revoked by Law No. 83-C/2013 of 31 December.

Even if the purpose of this regime introduced by Law No. 32-B/2002 were understood, doubts soon arose concerning its possible negative impact. That is, while the regime applicable until 2003 provided for deferral or exclusion of taxation of the positive balance between capital gains and losses – thus taking losses into account in the formation of taxable profit, the regime instituted in 2003 and in force until 2013 provided that losses ceased to contribute to the formation of taxable profit, except when the interests had been held for a period less than one year, in which case the general regime provided in the Corporate Income Tax Code was applied. Thus, when a company determined a negative balance between capital gains and losses, it could not include that balance in the determination of taxable profit.

On the surface, the rule of non-deductibility of financial charges was a penalising aspect of the SGPS regime; in reality, the regime became critically dependent on the definition of the concept of financial charges, the form of distribution and calculation of such financial charges, and even the definition of application of the regime in time.

In truth, the said non-deductibility of charges and losses was intended to operate symmetrically with the fact that capital gains realised by SGPS had ceased to be subject to contributing to the formation of taxable profit in CIT – which results from the State Budget Report for 2003, in which, under the heading "Principal amendments in relation to CIT," and with the epigraph "Broadening of the taxable base and measures of morality and neutrality", the exemption from CIT of capital gains realised by SGPS through alienation of capital parts held for more than one year is identified as a measure associated with the establishment of a regime of disregard of deductibility, for purposes of determining taxable profit of such companies, of charges of a financial nature directly associated with the acquisition of the corresponding equity interests – aimed generally at adopting measures conducive to preventing abusive tax planning, bringing the national regime closer to the Dutch model, conferring greater competitiveness on the national tax regime and promoting the broadening of the taxable base.

In other words, the objective of the regime instituted in 2003 was to counterbalance the granting of a benefit – the total exclusion of taxation of capital gains – with the non-contribution of certain financial charges incurred, creating an environment of neutrality between the possible gains from certain assets (certain financial investments) and the liabilities necessary to create the conditions for obtaining such gains, that is, the liabilities related to the acquisition of such interests. What the legislator did not wish was for two benefits to be cumulative: SGPS already saw their capital gains from capital parts become exempt from tax; therefore, when this occurred, they could not cumulate with the benefit of tax acceptance of interest incurred with financing for the acquisition of these capital parts.

In this respect, the legislator sought to bring the regime applicable to SGPS closer to the participation exemption discipline in force in various European countries. Referring to the favourable treatment that SGPS received regarding capital gains registered in their capital parts, José Engrácia Antunes summarised: "this tax advantage, moreover, is largely mitigated or annulled by the fact that financial charges incurred with the acquisition of the interests are not deemed as eligible costs, not thus contributing to the calculation of taxable profit of the SGPS."

Complicating the understanding of the situation, however, was the fact that, as we have seen, several regimes for the same reality succeeded in rapid succession from the beginning of 2001: from an exemption from taxation of the positive difference between capital gains and losses realised with the alienation of capital parts (regime in force until 31 December 2000), one moved to the application of a deferral of taxation of the positive difference between capital gains and losses, for a period of five years, conditional on reinvestment (regime in force in 2001), followed by the solution of a partial exclusion equivalent to 50% of the positive difference between capital gains and losses, this also being conditional on reinvestment (regime in force in 2002); culminating, in the period from 2003 to 2013, in an exclusion, in certain circumstances, of the deductibility of losses and charges incurred with the alienation of capital parts (regardless of any reinvestment).

In a certain sense, this succession "in bursts" of tax regimes created the impression of a true "puzzle", and generated opportunity and incentive for the exploitation of this informational/normative "entropy".

2. Article 23 of the Corporate Income Tax Code

Crossed with this problem of interpretation of Article 32, paragraph 2 of the Tax Benefits Statute arose another, with special relevance within group relations and taxation of SGPS: that of the indispensability of certain expenses for the purposes of application of the regime of Article 23 of the Corporate Income Tax Code, in particular the indispensability of "supplementary payments", insofar as it might be understood that such payments were integrated into the concept of "capital part" that was prominent in the wording of Article 23 until the end of 2013.

In general terms, it may be said that for the application of Article 23 of the Corporate Income Tax Code (in any of its wordings) "indispensability" is a relationship between costs and benefits that is assessed in an economic sense, such that an expense incurred in order to obtain benefits, or at least to ensure the validity and maintenance of the company and its activity, should be deemed necessary, and therefore "indispensable" is the tax cost incurred in the proper and selfish interest of the company registering such cost. Such concept of "indispensability" thus refers to functionality to the corporate object, seeking to prevent, as far as possible, free assessments based on any subjective judgment of the law applier, founded on calculations of opportunity or technical discretion.

In a more restrictive sense, indispensability will necessarily result from the direct and reciprocal link between a benefit and a cost that supported it.

In a broader sense, the indispensability that makes costs fiscally deductible will correspond to a broad integration of the expenses presented in operations relating to the corporate scope, regardless of whether such operations contribute or not to the immediate obtaining of benefits.

There are still intermediate meanings, considering as "indispensable" costs those that are necessarily incurred by virtue of the company's activity, regardless of consideration of the results.

None of the preceding considerations prevented that, in practice, the concept of indispensability, being indeterminate, came to be filled case by case by jurisprudence, which had the corollary that each of the disputed situations had to be analysed individually. It was always accepted that the principle, under penalty of violation of the principle of contributive capacity, the Administration could only exclude expenses not directly removed by law under a justification that would convince that they were incurred beyond the social objective, or, at least, with "deviant" excess relative to the objective needs and capacities of the company, that is, that these were costs which, although thus accounted for by the company, are not in reality business costs (serving instead, for example, to camouflage administrators' personal expenses).

In turn, from the start the need was perceived to emphasise the adverb "comprovedly" which, at the date, appeared in paragraph 1 of Article 23 of the Corporate Income Tax Code: "Are considered as expenses those that are comprovedly indispensable for the realisation of income subject to tax or for the maintenance of the income-producing source" – signifying, very simply, that expenses incurred cannot be accepted as costs merely by being the type of expenses that a company might incur within its corporate object, being necessary that it be proved, at a minimum, some relationship of the expenses with the activity generating the benefits, which permits considering such expenses as acts of company management – pointing decisively towards the more restrictive meaning of "indispensability" which we enunciated above.

Article 23 thus permitted, in summary, the tax relevance of all expenses effectively incurred that were potentially appropriate to provide benefits or gains, regardless of success or failure that they may in concrete have provided, regardless even of whether they generated, or not, a taxable benefit, it being sufficient that, at the moment they were incurred and in the face of the rules of common experience, comprovedly, they could appear as potentially capable of generating benefits, such that only what could not be considered as an act of management with such proven potential should be excluded, as it could not be expected, with acceptable probability, that from the expense incurred a benefit would result.

In other words, the control of the Tax Authority, even if based on the more restrictive concept of "indispensability", would have to be a control by the negative, eliminating as costs only those which clearly did not have the capacity to generate an increase in gains.

3. "Supplementary Payments" and "Capital Parts"

In the combination of the provisions in question, the specific problem of the indispensability of supplementary payments arose.

The question was not only whether these "supplementary payments" were deductible as "capital parts", for the purposes of Article 23 of the Corporate Income Tax Code, but also whether, as "capital parts", they were deductible for the purposes of Article 32, paragraph 2 of the Tax Benefits Statute, possibly by entailing financial costs indispensable to the realisation of such supplementary payments, interfering in the generation of profit in a way that should be considered for the determination of taxable profit.

To this claim was opposed the understanding that within the relations of SGPS with their subsidiaries such supplementary payments, even if they passed the scrutiny of the indispensability of Article 23 of the Corporate Income Tax Code, would be encompassed in the expression "acquisition of capital parts" and should therefore be disregarded pursuant to paragraph 2 of Article 32 of the Tax Benefits Statute, for the peculiar reasons that dictated this Tax Benefits Statute provision, the reasons of "counterbalance" or "tax neutrality" between capital gains and losses, which we enunciated before.

The penalising aspect of this Article 32 of the Tax Benefits Statute resurfaced, or could resurface, with the finding that, in truth, the regime of paragraph 2 of Article 32 of the Tax Benefits Statute, even if restricting itself to operations on "capital parts" of SGPS, could, by the ambiguity of criteria on which it rested, lead to non-deduction for tax purposes of financial charges that did not really integrate into such operations.

For example, it could happen that the cost incurred, say a debt, was not contracted with the specific objective of acquiring equity interests, but for the general business activity, namely for the granting of loans by the SGPS to its subsidiaries – in which case there would no longer be a direct correspondence of the debt with the acquisition of equity interests. Effectively, it is normal for SGPS to resort to bank financing from a treasury management perspective, to subsequently lend to their subsidiaries, which constitutes a normal and legitimate procedure. Thus, beyond the financial charges actually incurred with the acquisition of equity interests, and insofar as SGPS normally incur financial charges from financing loans obtained from credit institutions for other purposes, these charges should escape the scope of paragraph 2 of Article 32 of the Tax Benefits Statute and be accepted fiscally as a cost.

But it is the ambiguity of criteria on what constitute financial charges, on the form as they should be imputed and on the temporal regime to which they are subject that actually generates a risk of over-extension of the regime of paragraph 2 of Article 32 of the Tax Benefits Statute. There, the first party interested in the reasons for non-application of paragraph 2 of Article 32 of the Tax Benefits Statute being made transparent, because otherwise it would also be the first one burdened, was the SGPS itself, which should proceed to an analytical and discriminated application of its resources (own capital and borrowed capital), with each application properly defined, documented and justified. If this did not occur it is because fundamentally the margin of indefinition generated a possibility of manipulation of values, whether on the side of the SGPS, or on the side of the TCA itself.

In the absence of consensus, paragraph 2 of Article 32 of the Tax Benefits Statute could be interpreted to permit interest to be effectively deducted as long as the assumptions for exclusion of the capital gain for purposes of determining taxable profit were not verified. In this context, a possible solution for interest would be the following: in the acquisition of an equity interest from a related entity or subject to privileged taxation, the interest incurred would be deductible from the start, being fully added to taxable profit in the fiscal year in which alienation took place, if this occurred after a minimum period of three years of holding. This solution of "tax credit", which in practice would correspond to an externalisation of risks by the taxpayer, was never adopted; but we shall return to consider it.

4. Circular 7/2004 of 30 March

The prevailing indefinition could not be eternal, whereby it was felt necessary to establish clear criteria, endowed with some objectivity, which would permit progress in the assessment of CIT inciding on SGPS – criteria for imputation, for example, which would permit the determination of the percentage of remunerated liabilities not allocated to remunerated assets either, or the determination of the percentage of equity interests in assets not yet subject to specific allocation to remunerated liabilities, including financial interests at cost price; criteria which, combined, would permit the imputation of interest associated with acquisitions of capital parts that were, or possibly were not, fiscally allowable for the calculation of taxable profit.

It is in response to such a need that Circular 7/2004 of 30 March, from the IRC Management Services Department, arose, which, recognising (in its point 7) "the extreme difficulty of use, in this matter, of a method of direct or specific allocation and [the] possibility of manipulation that it would allow", presented a formula for calculating the value of financial charges of the SGPS not considered as a cost and effectively added to taxable profit – a metric to quantify the financial charges incurred with the acquisition of capital parts and which, therefore, would not be deductible.

The "direct allocation" for secure determination of the value of financial charges supposedly incurred with the acquisition of capital parts would always be particularly difficult, given the fungibility of money and the non-necessity of consignment of borrowed funds; and hence, without losing sight of the need to maintain recourse to case-by-case analysis (as was recognised in point 9 of the Circular), in its point 7 it was established that "such imputation should be effected on the basis of a formula that takes into account the following: the remunerated liabilities of SGPS and CRP should be imputed, in the first place, to remunerated loans granted by these to the subsidiary companies and to other investments generating interest, allocating the remainder to the other assets, in particular equity interests, proportionally to their acquisition cost".

Circular 7/2004 in turn raised two questions: 1) could a simple Circular resolve the ambiguities raised by the interpretation of a legal provision? 2) could the TCA arrogate to itself, through the Circular or independently of it, the power to examine companies' economic management decisions beyond what was the strict fulfilment of the assumptions for application of the pertinent norms?

4.1. Scope of Application of Circular 7/2004 – Restrictive Arguments

The first question raised by Circular 7/2004 was whether a simple Circular could resolve the ambiguities raised by the interpretation of a legal provision – a problem of particular delicacy insofar as paragraph 2 of Article 32 of the Tax Benefits Statute was a rule of incidence, whereby the calculation provided in the Circular would have direct impact on the direct incidence of taxes.

It is unsurprising therefore that the first reactions to Circular 7/2004 adopted a restrictive view: it would be an administrative guidance of a generic character, whereby the instructions contained in a Circular could not purport to be more than that, mere instructions that bind only the Administration, whereas nowhere in the General Tax Law is it established that the Circulars of the TCA apply to both sides of the relations that this entity establishes with taxpayers.

An issue of illegality would thus arise, notably in the face of the provisions in the General Tax Law, if in the interpretation and application of the Circular one glimpsed the attempt to create a new rule of tax incidence.

The general principle is that the assessment of the legality of acts of the Administration must be effected through direct confrontation with the corresponding legal provision and not with the internal regulation or with the Circular that intervened between the provision and the act, whereby the circumstance that the TCA is bound by the general guidance in Circulars in force at the moment of the tax fact (Article 68-A, paragraph 1 of the General Tax Law), and has the duty to proceed with the conversion of binding information, or other type of understanding provided to taxpayers in administrative Circulars, in certain circumstances (Article 68, paragraph 3 of the General Tax Law), does not alter this perspective – simply because it does not transform this content into a provision with external efficacy, being only under the principle of good faith and legal certainty, and not by virtue of any normative value, that the content of the Circulars prevails.

Thus, generic administrative guidance – contained or not in a Circular – can only contain commands or densifying statements that are operative in relation to those who, in a strict legal point of view, are its exclusive addressees, the services integrated in the tax administration that issued the guidance. Passing these generic administrative orientations to be illegal if they purport to have taxpayers as addressees themselves, whether because they explicitly manifest this intention, whether because they densify norms in a manner that binds individuals – a densification that, if necessary, should be operated through a legal provision, and not at a lower level –, whether further still because, more subtly, they refer to a densification of the provision that can only operate through acts of individuals and not already through simple acts of the Administration.

Understanding it in this manner, Circular 7/2004, in seeking to fix, in a general and abstract form, a method for determining the charges incurred by SGPS, within the scope of the acquisition of the capital parts held, namely when the charges are not allocated in a direct manner, and by having clear consequences at the level of the incidence of the tax, was a candidate for declaration of illegality, specifically for violation of the formal reserve of law of the National Assembly: hence some interpretations sustained that Circular 7/2004, insofar as it had sought to establish an extensive interpretation of the regime provided in Article 32 of the Tax Benefits Statute, had distorted, materially and formally, that article, creating a new rule of tax incidence – in violation of Articles 103, paragraphs 2 and 3 and 165, paragraph 1, section i) of the Constitution.

As we referred, the method provided in Circular 7/2004 allowed determination of which amounts of SGPS financial charges were not deductible, establishing a method that allowed for the allocation of liabilities to the different assets of the SGPS. The calculation formula adopted in such Circular is apparently simple, but its application is complex from the point of view of the assumptions used in the classification of the items to be considered, as it rests only on the distinction between remunerated and non-remunerated assets and liabilities. Now, the classification of active and passive elements, between "remunerated" and "non-remunerated", finds no foundation in the legal-accounting order existing at the date of the facts (Official Chart of Accounts, OCA), nor in the later one in force (System of Accounting Normalisation, SAN). Therefore, it arises in an innovative manner in Circular 7/2004, whereby the Circular itself should have defined what it understands by each of these concepts – which it did not, limiting itself to enumerating examples of remunerated and non-remunerated active and passive elements. More specifically still as concerns the case of SGPS, the definition of concepts underlying the bipartition between "remunerated assets" and "other assets" was imperative, and its absence was critical, given that there is not, or hardly can be, a direct factual relationship between the total funds obtained (those which entailed the payment of interest) and the funds invested in the acquisition of equity interests.

It is thus understood that the opinion was reached that the TCA, in issuing Circular 7/2004, did not limit itself to applying tax provisions and facilitating their application, going beyond its function as regulator of incidence to assume the function of creator of new tax incidence, insofar as, substituting itself for the provision and the interpreter of the provision, it conditioned erga omnes the application of the regime of Article 32, paragraph 2 of the Tax Benefits Statute through the interposition of criteria not authorised by Article 11, paragraph 4 of the General Tax Law. The opinion was not limited to sustaining that with the Circular the constitutional principles framing tax incidence would have been confronted; but went further, suggesting that with the Circular distortions to the principle of taxation of companies by actual profit would have been introduced – although, as to this necessary consequence of the application of any indirect method, it should be observed that the Constitution imposes, as to the taxation of companies, not that incidence occur "exclusively", but only that it fundamentally occur, in its actual profit (Article 104, paragraph 2 of the Constitution).

4.2. Scope of Application of Circular 7/2004 – Expansive Arguments

On the other hand, a Circular, such as Circular 7/2004, can and should be interpretative of tax law, and will not be illegal if, helping to dispel doubts and overcome difficulties, it limits itself to providing methods of "densification" and application of legal provisions without falling into extensive interpretation or analogy – here prohibited – and without contributing to the creation of new provisions, in violation of Articles 103, paragraph 2 and 3 and 165, paragraph 1, section i) of the Constitution.

What the law permits, and what the Constitution imposes on the TCA, is that, in the interpretation it makes of tax provisions, it limit itself to issuing generic guidance that fills concepts, when this is found to be necessary. It cannot therefore be presumed – at least in good faith – that all and any filling of such concepts, any densification, even in areas of greater uncertainty and complexity and therefore most in need of this "regulation of incidence", is ipso facto an illegality, and specifically consists in the exercise of the legislative function under the "diaphanous cloak" of an extensive interpretation of the law. It thus appears legitimate to use the formula contained in Circular 7/2004, although this may have to be "corrected" to the extent necessary for the ratio legis of paragraph 2 of Article 32 of the Tax Benefits Statute to be fully respected. The same is to say that, obviously, adoption of the formula recommended by the Circular does not bind the taxpayer to the consequences derived therefrom when these result against the law.

The truth is that nothing, in the letter of paragraph 2 of Article 32 of the Tax Benefits Statute, removed any legitimacy from any method, direct or indirect, of allocation of financial charges of SGPS to achieve the objectives pursued with that provision. The pro rata allocation provided in point 7 of Circular No. 7/2004, an indirect method of allocation, was therefore as legitimate and as compatible with the ratio legis of the provision as any other method – whereas, in return, it cannot be sustained that the objectives of that provision (of any provision) could be achieved in the absence, pure and simple, of any method.

The objective of that provision, as we have seen, was to – on the assumption that SGPS could come to benefit from the exclusion of taxation applicable to income from capital gains realised with the alienation of equity interests – prevent that the relevant costs that were related to the obtaining of such income could have relevance in terms of determining the taxable profit of the taxpayer that had obtained them. From this it logically follows that it was not Circular 7/2004 that created, with its interpretatio juris authorised by the letter of the law, irrefutable presumptions of non-deductible costs, but rather it was the law itself, interpreted in the terms just set out, that excluded the deductibility of financial charges incurred with financings linked to the acquisition of equity interests whose alienation realised the capital gains excluded from taxation.

Recapitulating: if paragraph 2 of Article 32 of the Tax Benefits Statute required a method of application and any method was legitimate, it is not understood in what manner Circular 7/2004, choosing a method and making it explicit, consisted ipso facto in new provisions of incidence, in violation of principles of tax legality. If it was fact that the disregard of financial charges resulted in increased tax, this resulted from the normative framework in force and not from the application of Circular 7/2004.

It therefore seems that what was the object of criticism was not Circular 7/2004, it was rather, through this, the rule itself contained in paragraph 2 of Article 32 of the Tax Benefits Statute, playing with the fact that in this there is a disregard of expenses that is not of the common regime of taxation of companies – obscuring the fact that this exceptionality of regime for SGPS is bivalent and results from a counterpart, which is here recalled: being an SGPS in the position of being able to benefit from the exclusion of taxation once it realised capital gains with the alienation of equity interests, it was no longer in an equivalent position to those of other companies, which, realising gains from capital gains with the alienation of equity interests, did not benefit from the said exclusion of taxation – whereby it was understood that it was only within that exceptional regime that the fairness of the disregard of charges in counterpart to the disregard of gains would be considered.

And why is it that the reason for the rule contained in paragraph 2 of Article 32 of the Tax Benefits Statute is deliberately obscured? Frequently it is because it is alleged that the expenses subject to tax disregard are antecedent to the benefits with which those expenses are connected – emphasising that those capital gains are purely contingent and may not occur, leaving subtly understood, either that the "counterbalance" that presided over the normative solution (the non-contribution of certain financial charges incurred, creating an environment of neutrality based on the assumption that such charges represented, in potency, elements capable of placing the SGPS in the position to realise the capital gains already excluded from taxation) is in reality a synallagm; or that, being all financial charges, by nature, surrounded by risks and uncertainties, all should be tax-relevant.

In this peculiar understanding, to which we alluded earlier referring to a proposal for "tax credit" (an externalisation of part of the risks of the taxpayer, which would imply payment of tax only at the end), the tax disregard operated by paragraph 2 of Article 32 of the Tax Benefits Statute would violate the principle of proportionality, beyond principles of equality, neutrality, contributive capacity and the tendency to taxation of actual profit: either because it would discriminate unjustifiably between SGPS and other companies (insofar as others could equally be holders of "capital parts" – omitting here that other companies would not equally benefit from the exemption of taxation for capital gains, equally provided in paragraph 2 of Article 32 of the Tax Benefits Statute), or because there would proceed an equally unjustified temporal dissociation between present negative effect and possible future positive effect, in violation of the "discount rate" of money (a variant of the "tax credit" proposal).

Let us acknowledge that, although it appears to us convoluted to associate with Circular 7/2004 the establishment of "presumptions", and still more of "irrefutable presumptions", on the other hand it is not unreasonable for us to discern the danger of such Circulars attempting to interfere in the distribution of the burden of proof, or injure the principle enshrined in Article 75 of the General Tax Law, pursuant to which "are presumed to be true and in good faith the declarations of taxpayers presented in accordance with the provisions of the law, as well as the data and determinations entered in their accounting or books, when these are organised in accordance with commercial and tax legislation" – particularly when the TCA feels tempted to alleviate its burden of proof through simple invocation of a Circular, as if it, more than providing a probative procedure, constituted already the proof itself. Let us return then to the admission that the Circulars of the Tax Authority have external efficacy, binding on taxpayers and also on Tribunals – an admission that should be accompanied by the caveat, already formulated, that it is under the principle of good faith and legal certainty, and not by any normative value that could represent usurpation of constitutionally assigned competencies, that the content of the Circulars prevails. The administered only complies with them if, and while, it suits them, for the same reasons that justify that they can invoke binding individual information that favour them.

But none of this interferes with the regime established in paragraph 2 of Article 32 of the Tax Benefits Statute, with the necessity of interpretation of that regime and with the legitimacy of Circular 7/2004 to establish (and stabilise) that interpretation. The respect for the normality of the relations that are protected by Tax Law imposes that it be recognised that, within the exercise of the powers of administration of the tax system that incumbent on the TCA, this has full legitimacy to issue generic guidance containing prescriptions that appropriate spaces of normativity outside the reserve of law and that do not conflict with the space of normativity already occupied by the law. That is: if it is a question of generic guidance, issued under authority provided by law and with respect for those frontiers, it is not seen what legitimacy the judge or the taxpayer will have to ignore it and, in its place, or in place of the administrator of the tax system – who is the TCA by legal assignment –, determine a different normativity for the concrete case under examination.

It was on these premises that Constitutional Court Award No. 42/2014 based its decision of "not judging unconstitutional the provision contained in Article 31, paragraph 2 of the Tax Benefits Statute, in the wording given by Law No. 32-B/2002 of 30 December, insofar as it imposes the tax non-deductibility of financial charges incurred with the acquisition of capital parts as soon as these are incurred, independent of the realisation of capital gains exempt from taxation with the alienation of such capital parts".

5. "Minimalist" and "Maximalist" Understandings of "Capital Parts"

The second question raised by Circular 7/2004 was this: could the TCA arrogate to itself, through the Circular or independent of it, the power to examine companies' economic management decisions beyond what was the strict fulfilment of the assumptions for application of the pertinent provisions?

Without having to entangle ourselves in the endless subtleties of the theme of discretion in Public Law, and without having to retread the long path travelled by the concept of "discretion", let us concentrate instead on the specific scope of the problem: this second question rests on the possibility of there being costs, and in particular supplementary payments that, inserting themselves unequivocally into the capacity of the company, its lucrative scope, nevertheless, by not having the specific objective of the acquisition of equity interests, escaped the prediction and regime of paragraph 2 of Article 32 of the Tax Benefits Statute.

As to that, it appears settled that the financial charges incurred with the realisation of supplementary payments can be indispensable to the maintenance of the productive source, specifically insofar as the endowment of a subsidiary with own capital is an act suited to the maintenance and valorisation of the productive source of the SGPS itself, and in particular in situations in which the managing company, in function of its position in the market as to credit, is susceptible to obtaining credit in more advantageous conditions than the subsidiary, cases in which the use of credit obtained by the former for the benefit of the latter will be, manifestly, an economically founded decision.

Even if to such payments does not correspond the accrual of interest, the SGPS will be acting objectively within its capacity, insofar as the valorisation of its subsidiaries is compatible with its lucrative scope, if it cannot even be said that this valorisation of the subsidiaries is its primary scope. These are economic management decisions of an SGPS that do not have the specific objective of the acquisition of equity interests, and which, insofar as they are costs of financing of an income-producing asset, should be deductible under the general terms of Article 23 of the Corporate Income Tax Code; and the tax law contains equally no specific rule (anti-abuse provision or other) that prevents or restricts this freedom of management.

What is defended is that such expenses should be subject to the general regime of Article 23, paragraph 1 of the Corporate Income Tax Code, circumventing the "blockade" imposed by paragraph 2 of Article 32 of the Tax Benefits Statute. In the wording in force at the date, Article 23, paragraph 1 of the Corporate Income Tax Code imposed a relationship of expenses with the realisation of income subject to tax – but there it was subscribed to the understanding that all capital gains obtained by SGPS are subject to tax, only the case arising that on them later fell an exemption, with various requirements, that prevented in the second line the taxation –. Now the fact is that, perhaps for fear that the tax creditor would ignore this duality of situations (perhaps as a result of an "interpretative bias" induced by the design to increase tax revenues), there was those who contested the possibility of the TCA examining economic management decisions of companies, in order to separate, with some margin of discretion, those that fell under the scope, and those that fell outside the scope, of paragraph 2 of Article 32 of the Tax Benefits Statute.

More specifically, and insofar as Article 32, paragraph 2 of the Tax Benefits Statute did not define what it understood by "financial charges", a part of the doctrinal and jurisprudential discussion concentrated on the definition of what could be understood by "capital part", since from this definition – largely sought irrespectively of what already followed from Circular 7/2004 – would result an object more broad or more narrow of incidence of the regime of paragraph 2 of Article 32 of the Tax Benefits Statute.

Within that argumentative scope two understandings formed:

A "minimalist" understanding, pursuant to which, if it were understood that the allusion to "capital part" referred to the notion of "share capital" (equity interests, shares or quotas), privileging the "commercial" perspective from which the figure of "supplementary payment" is excluded, the scope of paragraph 2 of Article 32 of the Tax Benefits Statute would be restricted – and concomitantly increased the possibilities of consideration of financial charges as fiscally deductible costs;

A "maximalist" understanding, pursuant to which, if it were understood that the allusion to "capital part" referred to the notion of "own capital", privileging the "accounting" sense and integrating in it the figure of "supplementary payment", the scope of paragraph 2 of Article 32 of the Tax Benefits Statute would be broadened – and concomitantly reduced the possibilities of consideration of financial charges as fiscally deductible costs.

This difference in consequences profoundly conditioned the discussion, even the doctrinal, the opinion prevailing that the reference to "capital part" in Article 32, paragraph 2 of the Tax Benefits Statute refers to parts of the share capital, excluding therefore from the incidence of that provision the "supplementary payments" (which, being "components" of "own capital", would not be "capital parts") – subscribing, in sum, a "minimalist" understanding as to the incidence of Article 32, paragraph 2 of the Tax Benefits Statute.

In concrete terms, the "minimalist" understanding was embodied in the following regime: only interest linked to the acquisition of capital parts (specifically: shares or quotas) would be disregarded for tax purposes; being that all other charges connected with capital (borrowed) used in supplementary payments, or in accessory payments that followed the regime of supplementary payments (including loss coverage), by not being included, nor being able to be included, in the concept of "share capital", would have the nature of fiscally deductible costs. It would be, in sum, to harmonise Article 32, paragraph 2 of the Tax Benefits Statute with Article 45, paragraph 3 of the Corporate Income Tax Code as to the understanding of what are "capital parts" for tax purposes, and to remove these supplementary payments (and their equivalents) from the regime of Article 32, paragraph 2 of the Tax Benefits Statute, subjecting them exclusively to the indispensability requirements of Article 23 of the Corporate Income Tax Code (reserving the special cases of paragraphs 3 to 5 of Article 23 of the Corporate Income Tax Code, in the then current version).

In truth, discounting the conventions that preside over many of the choices in this area, some of these distinctions disregard the principles of contributive capacity and approach to actual profit, marking out realities that are equivalent, or at least converge, economically: that supplementary payments can be returned certainly distinguishes them from share capital – even for purposes of combating "lock-in" –, but no one ignores that, especially in business groups, such payments can, entering into "own capital", have the same permanence that characterises "share capital" (and hence recourse, alternatively, to loans and advances).

Being there economic equivalence, one returns to the point at which the legitimacy of the TCA is questioned to, in the strict interpretation and application of the principles on which the autonomy of Tax Law itself is based, examine economic decisions that may indicate elusive or abusive purposes – because the question is, more specifically, whether the criteria of Article 32, paragraph 2 of the Tax Benefits Statute, and the formula of Circular 7/2004, can be set aside to induly elevate the deductible financial charges of an SGPS by mere qualification undertaken by the taxpayer itself, and whether this will not in itself constitute an indicia of the "dispensability" of the expenses – a foundation of the reaction of Article 23 of the Corporate Income Tax Code itself in the sense, again, of their disregard for tax purposes.

The "minimalist" position, although majority, is nonetheless not free from equivocations, notably that according to which the legislator sought, with Article 32, paragraph 2 of the Tax Benefits Statute, to reproduce sectorially the rule that already appeared in Article 23, paragraph 1, section c) of the Corporate Income Tax Code – in the wording in force at the date –, that is, the simple rule of non-deductibility for tax purposes of financial charges associated with benefits not subject to CIT, when the truth is that the two provisions have a distinct genesis and different, if not even divergent, reasons. It is an equivocation: because, contrary to what is repeatedly implied in the "minimalist" perspective, the rule of paragraph 2 of Article 32 of the Tax Benefits Statute did not intend to call into question the general principle of deductibility of financial charges indispensable (under general rules of experience) to the realisation of income and benefits. The question was another, and quite different: that of the exclusion of deductibility of certain charges of that type relative to SGPS – regardless of their indispensability or not, but peacefully coexisting with that indispensability –, whereby paragraph 2 of Article 32 of the Tax Benefits Statute could not be understood in the context of the general orientation contained in Article 23 of the Corporate Income Tax Code, since it is special law, exclusively applicable to SGPS – and not even to all operations of SGPS – for reasons not generalisable, therefore, and not resulting from more general principles.

Furthermore, let us not forget the incidences, in all these topics, of the rules of burden of proof: the proof of deductibility of costs will obviously burden the taxpayer, whether because it is in its interest the invocation of the factors from which such deductibility will result, whether because, specifically in the case of SGPS, no one better than the taxpayer is in a position to concretise the financial charges incurred with the acquisition of equity interests; and, if it does not, it legitimates the TCA to effect corrections to the assessment for purposes of disregarding the costs incurred with the acquisition of the said interests.

Also here, therefore, it is necessary not to lose sight of the fact that public interest determines formal requirements as to proof of costs – whether as to their existence, or in relation to factors of relevance such as "indispensability" which aim to afford the TCA an effective control of economic relations, and compliance with the law. Therefore we insist on the affirmative answer to the question of the legitimacy of an examination, by the TCA, of companies' economic management decisions beyond what is the strict fulfilment of the assumptions for application of the pertinent provisions – especially when we are in the presence of legal regimes designed for a specific sector and that are confronted with resistances to the precise compliance with the legal solutions and the legitimate interpretations of such solutions.

6. The Disputed Issue in the Present Proceedings

Let us recall that, in its Request and in the Submissions it presents, the Claimant in the present proceedings argues that it is illegal the understanding of the TCA as to the concept of "capital parts" inherent in Article 32, paragraph 2 of the Tax Benefits Statute, namely as to the inclusion of financial charges incurred with the realisation of supplementary payments, and that it is equally illegal the understanding of the TCA as to the concept of "deductible costs" for the purposes of Article 23 of the Corporate Income Tax Code. The essence of its argumentation rests, on the one hand, on the rejection of the analogy that, in its view, presides over the attempt to equate the regime of supplementary payments to the regime of capital parts – two proximate but well-distinct figures, whether in the plan of corporate law, or from the perspective of accounting, whether in the plan of tax law, insisting the Claimant in rejecting the "economic interpretation" on which the position of the TCA would be based as to the application of Article 32, paragraph 2 of the Tax Benefits Statute; and it rests, on the other hand, on the opposition to the overly restrictive interpretation that, in its view, the TCA adopts as to the "indispensability of expenses" for purposes of application of Article 23 of the Corporate Income Tax Code, contending that this restriction collides with the constitutional purpose of taxation by actual profit.

Let us also recall that, for its part, the Respondent, in its Response and in its Submissions, insists that the financial charges incurred by the Claimant to realise accessory payments in the form of supplementary payments do not pass the scrutiny of the indispensability of Article 23 of the Corporate Income Tax Code, and this for a set of reasons, among which the following is relevant: that, not having lucrative scope (Article 210, paragraph 5 of the Corporate Code), the financial charges incurred with the realisation of supplementary payments do not satisfy the criterion of indispensability of Article 23 of the Corporate Income Tax Code – and still less because it would be charges not directly related to the activity of the taxpayer itself (rather charges resulting from relations of dependency or domination).

Notwithstanding the reservations we formulated before as to the "minimalist" position in the interpretation and application of Articles 23 of the Corporate Income Tax Code and 32, paragraph 2 of the Tax Benefits Statute, we believe that in the case it is the most appropriate and just.

The wording in force of Article 32, paragraph 2 of the Tax Benefits Statute, at the date of the facts, does not remove the relevance, for the formation of taxable profit, of financial charges incurred with supplementary payments – payments that would be framed in the "other components of own capital" to which Article 45 of the Corporate Income Tax Code referred (and refers), and not in the "capital parts" to which the wording of Article 32, paragraph 2 of the Tax Benefits Statute was restricted.

It follows from the facts given as proven that the Claimant incurred financial charges for realisation of supplementary payments that do not integrate the notion of financing of capital parts from which the symmetry of capital gains and losses from which Article 32, paragraph 2 of the Tax Benefits Statute seeks to give the specific tax treatment of disregard for the calculation of taxable profit emerges. Whereby the charges presented by the Claimant thus pass the scrutiny of Article 32, paragraph 2 of the Tax Benefits Statute.

On the other hand, we also accompany the dominant understanding as to the interpretation of the criterion of "indispensability" for the application of Article 23 of the Corporate Income Tax Code within the scope of SGPS.

The non-consideration by the TCA of the financial charges with supplementary payments to subsidiary companies for the formation of the taxable profit of the Claimant was based on the understanding that such expenses cannot be considered indispensable for the formation of its taxable profit as a parent company.

But the activity of a corporate entity consists in the operations resulting from the use and management of its resources, and a subsidiary company is not any entity foreign to the activity and interests of a parent company, whereby the cost of interest incurred with capital obtained by the latter, and subsequently contributed to the subsidiary, is incurred in the interest of the parent, as a direct consequence of its activity of management of...

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