Process: 645/2017-T

Date: May 10, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 645/2017-T) addresses the tax treatment of SGPS companies following the 2014 revocation of the capital gains exemption under Article 32(2) of the Tax Benefits Statute (EBF). The claimant, an SGPS holding company, challenged the disallowance of financial cost deductions related to equity interests acquired between 2003-2013. Under the previous regime, SGPS companies could not deduct financial expenses incurred for acquiring shareholdings but benefited from capital gains exemption upon disposal. The 2014 Budget Law revoked this benefit and introduced Article 51-C of the IRC Code, extending capital gains exemption to regular commercial companies without the previous cost deduction restrictions. The claimant argued this created discriminatory treatment, as SGPS companies had added back financial expenses for years without realizing any tax benefit, while commercial companies could now enjoy exemptions without historical cost adjustments. The dispute centered on whether the Tax Authority violated legitimate expectations by not allowing retrospective deduction of previously non-deductible costs, and whether Circular 7/2004 guidance remained binding. The case involves €4,064.92 in allegedly overpaid IRC and requests recognition of €452,769.70 in additional tax loss carryforward to 2015. This decision is significant for SGPS companies holding pre-2014 investments and establishes important precedents regarding transitional treatment when tax benefits are revoked without explicit grandfathering provisions.

Full Decision

ARBITRAL DECISION (consult full version in PDF)

The arbitrators Counsellor Jorge Lopes de Sousa (arbitrator-president), Professor Doctor Fernando Borges de Araújo and Professor Doctor Paulo Jorge Nogueira da Costa (arbitrators members), appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 21-02-2018, agree as follows:

1. Report

A..., SGPS, S.A., legal entity no. ..., with registered office at ..., ..., no. ..., ...-... ... (hereinafter "Claimant"), came, pursuant to article 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters or "RJAT"), to submit a request for arbitral pronouncement seeking the declaration of illegality of the Dispatch of the Director of the Tax Office of Braga, dated 13 September 2017, which dismissed the Administrative Review submitted, concerning the self-assessment of Corporate Income Tax (IRC) for 2014.

The Claimant further requests the condemnation of the Tax and Customs Authority to correct the self-assessment of IRC for 2014, to reimburse the amount it considers to have been unduly paid (in the amount of €4,064.92), and to recognize the additional carryforward to 2015 of the tax loss determined in 2014 of €452,769.70.

The respondent is the TAX AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 12-12-2017.

Pursuant to the provisions of paragraph a) of article 6, no. 2 and paragraph b) of article 11, no. 1 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated their acceptance of the task within the applicable period.

On 01-02-2018 the parties were duly notified of this appointment, and did not manifest the intention to refuse the appointment of the arbitrators, pursuant to the combined provisions of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provision of paragraph c) of article 11, no. 1 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 21-02-2018.

On 05-04-2018, the Tax and Customs Authority submitted its response in which it argued that the request should be ruled unfounded.

By dispatch of 05-04-2018, a meeting was dispensed with and it was decided that the proceedings would continue with written submissions.

The parties submitted their arguments.

The arbitral tribunal was duly constituted, in accordance with the provisions of articles 2, no. 1, paragraph a), and 10, no. 1, of Decree-Law no. 10/2011, of 20 January.

The parties are duly represented, enjoy legal personality and capacity and have standing (articles 4 and 10, no. 2, of the same diploma and article 1 of Ordinance no. 112-A/2011, of 22 March) and the tribunal is competent.

The proceedings are not affected by any nullities.

2. Statement of Facts

2.1. Proven Facts

On 29 May 2015, the Claimant submitted its IRC income declaration Form 22, relating to the taxation period of 2014;

From the submission of the declaration resulted an amount to be paid of Corporate Income Tax ("IRC") of €34,953.57 (document no. 1 attached with the request for arbitral pronouncement, whose content is taken as reproduced);

On 30-05-2017, the Claimant submitted an administrative review of the self-assessment relating to the financial year 2014 (document no. 2 attached with the request for arbitral pronouncement, whose content is taken as reproduced);

The Administrative Review was dismissed by Dispatch of the Director of the Tax Office of Braga (Dismissal Dispatch) dated 13 September 2017 (document no. 3 attached with the request for arbitral pronouncement, whose content is taken as reproduced), in which the following is stated, among other things:

II - Arguments

i. Violation of the Principle of Protection of Legitimate Expectations

6.

As stated in the procedural document initially submitted, the principle of protection of legitimate expectations requires that the claimant does not see its legitimate expectations frustrated, which may only occur if it can deduct the entirety of the expenses.

(. . .)

8.

The neutral effect invoked by Your Excellencies in fact continues to exist, with respect to the equity interests acquired in the period from 2003 to 2013 and which were not disposed of before the entry into force of the Budget Law of 2014, but only for SGPS, since only these were obliged not to deduct for tax purposes the financial expenses in order to benefit from the regime provided for in former article 32, no. 2 of the Tax Benefits Statute (EBF).

9.

Now, with the entry into force of article 51-C of the IRC Code, the new regime introduced a discriminatory treatment between SGPS and other commercial companies, which, until then, would never have increased for tax purposes the financial expenses related to the acquisition of equity interests between the period from 2003 to 2013 and which now benefit from the expansion of the non-taxation of capital gains realized with the transfer of equity interests, including capital interests acquired prior to the entry into force of the new wording.

10.

Additionally Your Excellencies emphasize that this regime creates a more equitable framework, encompassing not only SGPS but also other commercial companies.

11.

Although we agree that it will be possible to enjoy an exemption from taxation of any capital gains in the future disposal of financial investments, we cannot disregard that, at the outset, SGPS had to bear a negative tax impact, i.e. the non-deductibility of financial expenses incurred in the acquisition of equity interests.

12.

Thus, we cannot accept the framework according to which this does not constitute a violation of the confidence of economic operators.

13.

Now, in face of an exceptional regime aimed at the management of equity interests, the operators made a rational decision to adhere to this regime, since it was the most favorable for the pursuit of this type of activity.

14.

With the revocation of article 32, no. 2 of the EBF and the creation of article 51-C of the IRC Code, in cases where there has been no disposal of the equity interests before said revocation, there is a difference in treatment that places SGPS companies at a disadvantage compared to other commercial companies.

15.

This is indeed the case of the complainant since, between 2003 and 2013, it did not dispose of any equity interests, but added all the financial expenses incurred on the basis of applicable rules and respective circulars. Having thus not enjoyed any advantage compared to a commercial company but subjected to a more burdensome regime.

16.

Had the complainant been aware of this future revocation and given that it did not intend to dispose of the equity interests in the short term, it would have opted for the general regime and deducted all financial expenses over the 11 financial years between 2003 and 2013, as is now requested.

(...)

18.

We do not consider relevant, as Your Excellencies present them, the amendments to article 32 of the EBF and the revocations of some of its paragraphs, since these are independent of each other and the situation in question does not depend on any other paragraph of the article other than no. 2 practically unchanged since its creation.

19.

We could not therefore presume that elements of an article that in no way interfered with the exemption from taxation of capital gains or the non-deductibility of financial expenses could have relevance or be indicators of a potential revocation or loss of relevance of this specific paragraph.

II. The Non-existence of a Transitional Rule

(...)

21.

Without repeating the arguments already presented in the Administrative Review, but again referring to the same, we do not consider that it makes sense for the Tax Administration to pass off this situation as a "double benefit" when, in truth, what is being discussed is the existence of an exceptional regime that intended to encourage the creation of strong economic groups and which, instead, harmed those who opted for it, by comparison with the general regime to which commercial companies were subject.

22.

The fact that there is no transitional rule regarding this Law does not exempt the Tax Authority from the application of the principle of protection of legitimate expectations (whose requirements are fulfilled, cf. Points 51 to 59 of the Administrative Review presented), which requires that the claimant does not see its legitimate expectations frustrated.

23.

From this it follows that, unless the creation of the SGPS regime had a conjunctural character, which does not appear to be true given the motivations presented for its existence (with which we agree), they cannot frustrate the expectations of the taxpayer, who made long-term and structural decisions for its Group and who, knowing of this revocation, would not have opted for a similar corporate and financing structure for the Group.

IV- The Request

In these terms, the present complainant does not agree with the draft decision and requests that you consider the value of deductible financial expenses of €619,685.22, proceeding with the reimbursement of IRC unduly paid, in the amount of €4,064.92 and the recognition of the additional carryforward to 2015 of the tax loss determined in 2014 of €452,769.70."

In analyzing the arguments raised by the claimant in the right to be heard, the following is verified:

On the Principle of Protection of Legitimate Expectations

1 - In points 6 to 19 of the Right to be Heard, the claimant contests that there has been no criterion and consideration in the analysis of the arguments presented in the initial petition, in the administrative review proceedings, of the interpretation given to the principle of protection of legitimate expectations in the draft dismissal reproduced here in full.

Regarding the arguments raised by the claimant, we are to inform that since its establishment by Decree-Law no. 215/89, the Tax Benefits Statute (EBF) comprises benefits of a temporary or conditional nature (conventional) and benefits of a permanent nature.

From the outset, this distinction is embodied in article 3 of the said Statute when it provides in article 3, no. 1 of the Tax Benefits Statute (EBF) that "The rules that establish the tax benefits of Parts II and III of this Statute shall apply for a period of five years, unless otherwise provided", that is, the tax benefits included in Parts II and III of the EBF are benefits whose nature is conditional or temporary, whereby taxpayers may only benefit from such benefits during their temporal validity, it being certain that excluded from this temporal scope are the tax benefits established in the other parts/sections of the said Statute.

This differentiation had, since its creation, the objective of guaranteeing the expectations of taxpayers, as can be verified, from the outset, in article 2, no. 2 of the said Decree-Law no. 215/89, which governs the general transitional regime established with the approval of the EBF, which provided, in relation to tax benefits whose right had been acquired by 31 December 1988, that acquired rights are the tax benefits of international and contractual source and temporary and conditional benefits, without prejudice to the provisions of the IRC Codes. With this rule, the legislator intended to assure the maintenance of the tax benefits acquired before the entry into force of the EBF during the period for which they were initially granted, protecting taxpayers from rules that alter or revoke the benefits in question.

Thus, it must be noted the importance of the distinction between permanent and temporary tax benefits, given that the revocation of the law granting temporary tax benefits cannot apply to benefits in progress before the respective period expires. We are thus, in these cases, before the right to the benefit, which cannot be suspended or suppressed, as an acquired right that it is.

Also, article 11, no. 1 of the EBF establishes that rules that alter or revoke conventional, conditional or temporary tax benefits do not apply to taxpayers who already benefit from them, in everything that prejudices them, unless the legislator expressly provides otherwise.

Thus, the tax benefit of a conventional, conditional or temporary nature shall be enjoyed, at a minimum, for the period granted under the old law, and may, if applicable, benefit from a longer period than the previous one if this results from the new law.

The Tax Benefits Statute (EBF) is organized by parts, it being certain that article 32, here at issue, is inserted in Part III of the Statute (Budget Law no. 55-A/2010, of 31/12), therefore, it is a tax benefit of a temporary or conditional nature.

In these terms, the claimant cannot assert that the 2014 Budget Law frustrated its expectations in as much as the said article 32 of the EBF, the tax benefit in question, by its nature, was already imbued with a temporal limit.

As for what is alleged by the claimant, that the former regime from which it benefited, as it states, was more favorable to it (at the time) because of the activity pursued and that had it known of said revocation it would not have adhered to that regime.

Just as it alleges, the exceptional regime of SGPS, which the claimant voluntarily adhered to, was inserted in a tax benefit that, by its nature, was of a temporary character, whereby the existence of a legal expectation which, in light of the principle of confidence, was violated, has no place. Especially because article 32 of the EBF, as we referred to in the draft decision, merely by way of example, underwent several revocations which are indicators of the end of this exceptional regime.

The claimant cannot come to argue that the revocation of the former regime produced discriminatory effects for SGPS, the claimant adhered to it because it was the most convenient for it (and could have disengaged from it if that was its will given the temporal period here attacked), whereby it cannot argue at this stage that the new law is discriminatory since, in order not to defraud the expectations of economic operators, it maintained the same conditions (prohibition of deduction of costs of acquisition of equity interests and exemption of capital gains in their disposal) of article 32, no. 2 of the EBF. As referred to in the draft decision, it is not a prejudice to the claimant, in the new tax regime, but rather an expansion of benefits to other taxpayers.

And as to the fact that the claimant has not disposed of the equity interests it had acquired and consequently has not benefited from the tax exemption, the Tax Authority bears no responsibility since, if it obliged it to do so, it would be violating the basic principle of the law of Freedom of Will.

Thus, and now paying attention to the presuppositions or requirements of protection of confidence, it is necessary to conclude the non-fulfillment of, at least, two of these presuppositions. First, it cannot be asserted that the State (especially the legislator) engaged in conduct capable of generating in private parties "expectations" of continuity (since from the moment that benefit was approved the claimant knew it to be an exceptional and conditional situation). Then, neither can it be considered that the private expectations for maintenance of that regime were well-founded: The revocation of the rule that provided for the benefit could not appear to the claimant as something improbable or implausible. Given the special nature of this tax benefit - which, it is repeated, since the beginning of its establishment assumed a conditional nature (because it depended on the maintenance of a situation in the form of SGPS, for a minimum period of five years).

It follows, therefore, that the claimant has, here, only an expectation of maintenance of the said regime, an expectation which continues to be verified, given that the "compensation" between the non-deduction of financial charges inherent to acquisition of equity interests with the exemption from taxation of capital gains in future disposals of financial equity interests continues to be in force.

II The Non-existence of a Transitional Rule

2.- In points 21 to 23, the claimant comes to put into question the draft decision alleging, succinctly, that the fact that, in the IRC reform of 2014, there is no transitional rule does not exempt the Tax Authority (AT) from the application of the principle of protection of legitimate expectations.

Pursuant to the provisions of article 103, no. 2 of the Constitution of the Portuguese Republic (CRP) "Taxes are created by law, which determines the incidence, the rate, the tax benefits and the guarantees of taxpayers," and pursuant to the provisions of paragraph i) of article 165, no. 1, of the same diploma, the exclusive competence of the Assembly of the Republic is to legislate on the creation of taxes and the tax system and general regime of rates and other financial contributions in favor of public entities. This is the so-called principle of fiscal legality, of which article 103, no. 3 of the CRP is a corollary, which provides that no one can be obliged to pay taxes that have not been created in accordance with the Constitution, that have a retroactive nature or whose collection is not made in accordance with the law".

It results from the foregoing that the power to legislate in fiscal matters is a power that falls within the so-called relative reservation of the Assembly of the Republic, namely, as regards its incidence.

Administrative orientations conveyed in the form of circulars of the Tax Administration do not constitute rules and may be subject to a declaration of formal unconstitutionality, whereby, being the Tax and Customs Authority a state organism, it is governed, in its activity, by the principles that are instituted for it in administrative procedure, namely, its subjection to the strict compliance with the principle of legality.

In this sense, the administrative power cannot complete the tax rule by adding requirements or benefits that the law did not impose in as much as this act of completing goes beyond the exercise of legislative power which is forbidden to it and, despite the right instituted in the AT to be able to issue circulars or generic orientations, these cannot be incompatible with tax rules.

Thus, contrary to what is alleged by the claimant, it is not the responsibility of the Tax Authority to go against the provisions of the tax legislator which, if it wished to apply another benefit to situations inserted in the regime of article 32, no. 2, of the EBF, would have created a rule that so provided.

The Claimant, initially designated as B..., SGPS, SA., was established on 29 November 2001, its activity being framed as "management of equity interests in other companies, as an indirect form of exercise of economic activities";

The Claimant, as an SGPS, has fulfilled, since its establishment, the function of a holding company;

Between 2003 and 2013, the Claimant acquired and maintained a wide set of equity interests representative of the capital of operational companies;

Being the Claimant an SGPS, it did not deduct from taxable profit, by mandate of article 32, no. 2, of the Tax Benefits Statute (EBF) the financial expenses associated with the acquisition of the said equity interests;

The Claimant added the amounts calculated in the Form 22 declarations the amounts indicated in the following table: (documents nos. 4, 5, 6 and 7 attached with the request for arbitral pronouncement, whose contents are taken as reproduced)

The amounts presented above are described in the respective Annexes to the financial statements of each year (Documents nos. 8, 9, 10 and 11 attached with the request for arbitral pronouncement, whose contents are taken as reproduced);

The Claimant did not benefit from the exemption from taxation of capital gains under article 32 of the EBF with respect to the set of equity interests held by it, because the same were never disposed of before the revocation of the regime provided for in article 32, no. 2, of the EBF;

On 21-12-2017, the Claimant submitted the request for arbitral pronouncement that gave rise to the present proceedings.

2.2. Unproven Facts and Justification of the Factual Determination

It was not proven that the Claimant paid the liquidated amount. Document no. 1 which the Claimant attaches to prove payment has no reference to the payment having been made.

There are no facts relevant to the decision of the case that have not been proven.

The proven facts are based on the documents attached by the Claimant with the request for arbitral pronouncement and on the administrative file.

3. Legal Matters

Article 32, no. 2 of the Tax Benefits Statute was revoked by Law no. 83-C/2013, of 31 December.

In its last wording, it established that "the capital gains and losses realized by SGPS from equity interests of which they are holders, provided that held for a period of not less than one year, and likewise, the financial expenses incurred in their acquisition do not contribute to the formation of taxable profit of these companies" (wording of Law no. 64-B/2011, of 30 December).

In 2003 (the year invoked by the Claimant as the beginning of the holding of the equity interests) this regime was provided for in article 31, no. 2, of the EBF (wording of Law no. 32-B/2002, of 30 December), moving to no. 2 of article 32 following the renumbering carried out by Decree-Law no. 108/2008, of 26 June.

In the wording in effect in 2003, article 31, no. 2, of the EBF established that "the capital gains and losses realized by SGPS and by risk capital companies (SCR) by means of onerous transfer, whatever the title by which it is operated, of equity interests of which they are holders, provided that held for a period of not less than one year, and likewise the financial expenses incurred in their acquisition, do not contribute to the formation of taxable profit of these companies".

With regard to SGPS this regime was maintained, despite changes having occurred with regard to risk capital companies (SCR) and risk capital investors (ICR) (wording of Law no. 67-A/2007, of 31 December).

The Claimant argues, in summary, that in the period from 2003 to 2013 it was a holder of equity interests covered by the said regime, having in the IRC Form 22 declarations for the years 2006, 2007, 2008 and 2009 considered for the formation of taxable profit the amounts of financial expenses incurred in their acquisition, applying the said regime, in the total amount of €619,685.22.

Not having disposed of equity interests until the revocation of this regime carried out by Law no. 83-C/2013, the Claimant did not benefit from the exemption from taxation of capital gains under article 32 of the EBF with respect to the set of equity interests held by it, the Claimant submitted an administrative review of the self-assessment made with the Form 22 declaration for the financial year 2014, in which it requested from the Tax and Customs Authority:

i. to record, in field 775 of the individual Form 22 of the CLAIMANT, the value of €619,685.22 (six hundred and nineteen thousand, six hundred and eighty-five euros and twenty-two cents), as deductible financial expenses;

ii. to proceed with the other corrections - above better explained - to the Claimant's Form 22; and

iii. to reimburse to the CLAIMANT the IRC 2014 unduly paid, in the amount of €4,064.92 (four thousand, sixty-four euros and ninety-two cents); and

iv. to recognize the additional carryforward to 2015 of the tax loss determined in 2014 of €452,769.70 (four hundred and fifty-two thousand, seven hundred and sixty-nine euros and seventy cents).

The Tax and Customs Authority dismissed the administrative review.

The essential question that arises is whether, in the financial year 2014, the financial expenses in the amount of €619,685.22, which were not deducted in the financial years 2006, 2007, 2008 and 2009, should be considered for the formation of taxable profit.

The Claimant argues, in summary, that the decision on the administrative review violates the constitutional principles of protection of legitimate expectations and equality, in addition to the positions taken by the Tax and Customs Authority in Circular no. 7/4002 and in Dispatch P 39/2011.

In its Response, the Tax and Customs Authority pronounces itself in the sense that these principles are not violated.

It further states that the Tax and Customs Authority that "in the former regime - the SP counted on having IRC tax exemption for capital gains that it would obtain in the disposal of equity interests", "in the new regime - the said exemption continues to be applicable to it (became applicable to a wider universe of taxpayers)" and "the fact that other taxpayers obtained benefits from the IRC reform does not mean that the Claimant has been harmed by it".

It further states that the Tax and Customs Authority that no transitional regime was provided for the situation in which the Claimant finds itself and that the tax benefit in question was temporary, whereby there were no justified expectations that it would be maintained beyond the minimum period provided for in the law.

However, the Tax and Customs Authority issued a Circular no. 7/2004, in which it made public its interpretation of the regime of article 32, no. 2, of the EBF, which binds it, by force of article 68-A, no. 1, of the General Tax Law (LGT).

The Taxpayer intends that the regime provided for in point 6 of the said Circular be applied to it, whereby, as the taxpayer has the right to have this regime applied to it, independently of the correctness of the interpretation of the law made therein by the Tax and Customs Authority, it is possible to begin by analyzing this defect, since its merit will make the examination of the remaining ones unnecessary.

3.1. Question of Application of the Regime of Circular no. 7/2004

The Claimant invokes the application of the regime provided for in Circular no. 7/2004, arguing that "according to the guidelines of the AT, the financial expenses not deducted by SGPS under article 32 of the EBF should be deducted, in their entirety, in the financial year in which it is verified that the exemption from taxation of capital gains - the counterpart of the non-deductibility of financial expenses - can no longer occur".

By force of the provision in article 68-A, no. 1 of the LGT, "the tax administration is bound by the generic guidelines contained in circulars, regulations or instruments of similar nature, regardless of their form of communication, aiming at the standardization of the interpretation and application of tax rules". [1]

For this reason, even if the interpretation of the law made in the said Circular is wrong, the failure to observe the interpretation to which the Tax and Customs Authority publicly bound itself will constitute a vice of violation of law (of this rule of the LGT).

Circular 7/2004 was issued by the General Director of Taxes on 30-03-2004 and is published at

https://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/legislacao/instrucoes_administrativas/Documents/circular_7-2004_de_30_de_marco_da_dsirc.pdf.

In its point 6 the following is stated:

Financial year in which the fiscal corrections of financial expenses should be made

6. With regard to the financial year in which the financial expenses should be disregarded as costs, for tax purposes, the fiscal correction should be made in the financial year to which the same relate of the financial expenses that have been incurred in the acquisition of equity interests that are capable of benefiting from the special regime established in article 31, no. 2 of the EBF, regardless of whether all the conditions for the application of the special regime of taxation of capital gains are already met. Should it be concluded, at the moment of disposal of the equity interests, that all the requirements for the application of that regime are not met, it shall proceed, in that financial year, to the consideration as fiscal cost of the financial expenses that were not considered as cost in previous financial years.

By this point 6, it is established that the Tax and Customs Authority interpreted the regime of article 32, no. 2, of the EBF as constituting a globally applicable regime, the application of the rule of non-deductibility of financial expenses being dependent on the application of the non-deductibility of capital gains (in that point of Circular no. 7/2004, the Tax and Customs Authority does not make reference to losses).

This interpretation, regardless of its correctness, binds the Tax and Customs Authority, whereby it is obliged to adopt it.

For the Tax and Customs Authority, although, in light of the said regime provided for in the EBF, capital gains were only disregarded for the purpose of forming taxable profit in the financial year in which they were realized, the financial expenses incurred in the acquisition of equity interests should be disregarded as expenses (costs, in the terminology of the 2009 IRC Code wording) in the financial year in which they were incurred, adding to the taxable profit of each of those financial years, regardless of whether all the conditions for the application of the special regime of taxation of capital gains were already met, which could only be determined at the moment of realization.

But, as the application of this special regime depended on the verification of conditions to be determined later, the Tax Administration adopted in that point 6 of Circular no. 7/2004 the understanding that "should it be concluded, at the moment of disposal of the equity interests, that all the requirements for the application of that regime are not met, it shall proceed, in that financial year, to the consideration as fiscal cost of the financial expenses that were not considered as cost in previous financial years".

This understanding was deemed constitutionally admissible by the judgment of the Constitutional Court no. 42/2014, of 09-01-2014, decided in case no. 564/12, which decided "not to declare unconstitutional the rule contained in article 31, no. 2, of the Tax Benefits Statute, as worded by Law no. 32-B/2002, of 30 December, insofar as it imposes the fiscal non-deductibility of financial expenses incurred with the acquisition of equity interests as soon as they are incurred, regardless of the realization of capital gains exempt from taxation with the disposal of such equity interests".

The Claimant adopted the interpretation provided for in this point 6 of Circular no. 7/2004, having disregarded in the financial years 2006 to 2009 the financial expenses incurred in the acquisition of equity interests.

Thus, in light of this understanding made public in point 6 of the said Circular, binding on the Tax and Customs Authority, the disregard of the financial expenses incurred by the Claimant in the acquisition of equity interests was conditioned to the verification of the requirements for the application of this regime of non-concurrence of the realized capital gains for the formation of taxable profit: if it was to be established, "at the moment of disposal of the equity interests, that all the requirements for the application of that regime are not met, it shall proceed, in that financial year, to the consideration as fiscal cost of the financial expenses that were not considered as cost in previous financial years".

On the assumption, adopted in the said Circular, the fiscal disadvantage that constitutes the disregard of financial expenses is conditioned to the obtaining of the subsequent fiscal benefit that constitutes the non-taxation of capital gains. This fiscal advantage will be a counterpart to the disadvantage that constitutes the non-consideration of financial expenses, whereby it must be concluded that, in the perspective of the said Circular, the impossibility of being able to apply a privileged regime at the level of disposal will be justification for the elimination of the said disadvantage.

Using the terminology of the said Circular, it may be said that, having the said regime been revoked before the "moment of disposal of the equity interests", it must be concluded, definitively, that the regime of article 32, no. 2, cannot be applied.

And, acquired in a given financial year, by virtue of the revocation of the legal regime, the certainty that "all the requirements for the application of that regime" will not be met, the Tax and Customs Authority is bound to apply the enactment it announced in the final part of that point 6: "it shall proceed, in that financial year, to the consideration as fiscal cost of the financial expenses that were not considered as cost in previous financial years".

It appears, thus, that the Claimant is correct in invoking the non-observance of the interpretation that the Tax and Customs Authority adopted in the said point 6 of Circular no. 7/2004 and that, therefore, the Claimant has the right to have considered as fiscal cost of the financial year 2014 the financial expenses that were not considered as cost in previous financial years and whose disregard, in the perspective of the Tax and Customs Authority, was conditioned to the Claimant being granted a regime of tax benefit at the level of non-taxation of capital gains.

By the foregoing, the decision on the administrative review is illegal, which justifies its annulment, as well as the self-assessment of 2014, in the part in which the financial expenses incurred by the Claimant in the financial years 2006 to 2009 in the acquisition of equity interests were not considered as expenses.

3.2. Questions of Prejudiced Cognizance

As the request for arbitral pronouncement is to be ruled on as well-founded on the basis of the violation of the regime provided for in point 6 of Circular no. 7/2004, the cognizance of the remaining questions of violation of law raised by the taxpayer is prejudiced, as being unnecessary [article 130 of the Code of Civil Procedure subsidiarily applicable by force of the provision of article 29, no. 1, paragraph e), of the RJAT].

3.3. Requests Formulated by the Claimant

Thus, the request for annulment of the decision on the administrative review is well-founded, as well as the self-assessment of IRC for 2014, in the part in which the Claimant requested its correction.

The arbitral process, as an alternative procedural means to the judicial challenge proceedings (article 124, no. 2, of Law no. 3-B/2010, of 28 April), is essentially one of mere annulment, whereby, beyond the annulment of acts, it is an adequate means only to evaluate requests for reimbursement, for compensatory interest and for compensation for improper guarantees, as has been understood by the Supreme Administrative Court.

In the case in question, a request for reimbursement of the sum of €4,064.92 is formulated but no proof of payment of the liquidated sum was presented.

The other requests formulated by the Claimant (registration in declarations, corrections and carryforward of losses) should be evaluated in execution of this judgment, pursuant to article 24, no. 1, of the RJAT, whereby no cognizance is taken of them.

4. Decision

In these terms, the members of this Arbitral Tribunal agree to:

Rule the request for arbitral pronouncement as well-founded, and annul the dispatch dismissing the administrative review issued by the Director of the Tax Office of Braga, dated 13 September 2017, which dismissed the Administrative Review submitted, concerning the self-assessment of IRC for 2014, as well as this self-assessment, in the part that relates to the non-consideration of the financial expenses incurred by the Claimant in the financial years 2006 to 2009, in the overall amount of €619,685.22.

Rule as unfounded the request for restitution of the sum of €4,064.92, without prejudice to it being recognized in execution of this judgment;

Take no cognizance of the remaining requests formulated.

5. Value of the Proceedings

In accordance with the provision of article 305, no. 2, of the Code of Civil Procedure and 97-A, no. 1, paragraph a), of the Code of Tax and Customs Procedure and article 3, no. 2, of the Regulation: €456,834.62.

6. Costs

Pursuant to article 22, no. 4, of the RJAT, the costs are fixed at €7,344.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 10-05-2018

The Arbitrators

(Jorge Lopes de Sousa)

(Fernando Borges de Araújo)

(Paulo Jorge Nogueira da Costa)

[1] This rule was introduced in the LGT by Law no. 64-A/2008, of 31 December. However, previously an identical binding provision was provided for in paragraph b) of article 68, no. 4 of the LGT.

Frequently Asked Questions

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How are capital gains from SGPS holdings taxed under Portuguese IRC after the revocation of the tax benefit?
After the 2014 revocation of Article 32(2) of the Tax Benefits Statute, capital gains from SGPS holdings are taxed under Article 51-C of the IRC Code. This regime generally exempts capital gains from taxation but applies to both SGPS and regular commercial companies. However, SGPS companies that acquired shareholdings before 2014 face a transitional issue: they were required to add back financial expenses during acquisition years (2003-2013) under the old regime but may not benefit from the exemption if holdings were not disposed of before the revocation. The new framework eliminates the special SGPS regime but creates potential discrimination against SGPS companies that complied with previous non-deductibility requirements without realizing corresponding benefits. The taxation depends on acquisition timing, disposal date, and whether transitional relief applies for costs previously made non-deductible under the former regime.
What was the role of Circular 7/2004 in determining deductible costs for SGPS companies and is the Tax Authority bound by it?
Circular 7/2004 provided administrative guidance on the application of Article 32(2) of the EBF, specifically addressing how SGPS companies should treat financial costs related to equity interest acquisitions. The circular instructed taxpayers to add back (make non-deductible) financial expenses incurred for acquiring shareholdings eligible for the capital gains exemption regime. The binding nature of this circular on the Tax Authority is central to this dispute. Under Portuguese administrative law principles, tax circulars generally bind the Tax Authority in its relationship with taxpayers who relied on published guidance. The claimant argues that having followed Circular 7/2004 for years (2003-2013), the Tax Authority cannot now deny retrospective cost deductions when the corresponding benefit was revoked. This raises questions about legitimate expectations and whether administrative guidance creates enforceable rights, particularly when legal regimes change without explicit transitional provisions addressing situations where taxpayers complied with circular instructions.
Can an SGPS company deduct financial costs related to shareholdings when calculating capital gains for IRC purposes?
Under current Portuguese IRC law, the deductibility of financial costs related to SGPS shareholdings depends on the applicable regime and timing. Prior to 2014, under Article 32(2) of the EBF and Circular 7/2004, SGPS companies were prohibited from deducting financial expenses incurred to acquire equity interests if they intended to benefit from capital gains exemption upon disposal. These costs had to be added back for tax purposes. After the 2014 revocation and introduction of Article 51-C IRC Code, the specific SGPS regime disappeared, and general corporate taxation rules apply. The central dispute in this case is whether SGPS companies can retroactively deduct previously non-deductible financial costs when the corresponding tax benefit (capital gains exemption) was revoked before realization. The claimant argues that denying such deduction violates legitimate expectations and creates unequal treatment compared to commercial companies that never faced cost deductibility restrictions. The resolution depends on whether transitional relief applies and how the principle of tax neutrality operates when beneficial regimes are abolished.
What is the process for challenging an IRC self-assessment through a CAAD arbitration tribunal in Portugal?
Challenging an IRC self-assessment through CAAD (Centro de Arbitragem Administrativa) follows a specific procedure under the RJAT (Legal Regime of Arbitration in Tax Matters - Decree-Law 10/2011). First, taxpayers must exhaust administrative remedies by filing an administrative review (reclamação graciosa) with the competent tax office, as occurred here when the claimant filed on May 30, 2017. After dismissal of the administrative review, taxpayers can submit a request for arbitration to CAAD under Article 10 RJAT. The request must identify the contested act, legal grounds, and relief sought. CAAD's President accepts the request and notifies the Tax Authority, which triggers the tribunal formation process. The Deontological Council appoints arbitrators (here, a three-member panel), and parties have the right to challenge appointments. Once constituted (here, February 21, 2018), the tribunal follows procedural rules similar to court proceedings, with the Tax Authority submitting a response, parties presenting arguments, and the tribunal issuing a binding decision. This arbitration provides an alternative to judicial tax courts with typically faster resolution.
How does the revocation of the SGPS capital gains tax exemption affect the reporting of tax losses for subsequent years?
The revocation of the SGPS capital gains tax exemption significantly impacts tax loss reporting for subsequent years through several mechanisms. When Article 32(2) EBF was revoked and replaced by Article 51-C IRC Code in 2014, SGPS companies faced uncertainty about treatment of previously non-deductible costs. If financial expenses that were added back under the old regime cannot be retrospectively deducted, this increases taxable income for the transition year and reduces reportable tax losses. In this case, the claimant seeks recognition of an additional €452,769.70 in tax loss carryforward to 2015, representing financial costs that would have been deductible had the company known the exemption regime would be revoked. Tax losses under Portuguese IRC can generally be carried forward for up to five years (now twelve years under recent reforms), so proper determination of the 2014 tax loss base directly affects tax liability through 2019-2026. The absence of explicit transitional provisions in the 2014 Budget Law creates ambiguity about whether previously non-deductible costs should be recognized when the corresponding benefit disappears, affecting multi-year tax planning and loss utilization strategies.