CAAD 648/2015-T: IRC RETGS Group Tax Deduction and SCR Tax Benefits – Arbitral Decision

ARBITRAL DECISION

The arbitrators Councillor Fernanda Maçãs (Presiding Arbitrator), Master Ricardo da Palma Borges and Professor Doctor João Ricardo Catarino, Adjunct Arbitrators, designated by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 19 January 2016, agree as follows:

I. REPORT

1. The Claimant A…, S.A., with the single registration number and legal entity number…, with registered office at Avenue…, no.…, …-… …, hereby requests, pursuant to the provisions of articles 2, no. 1, paragraph a), 5, no. 3, paragraph b), 6, no. 2, paragraph b), 10, no. 1, paragraph a), and no. 2, all of Decree-Law no. 10/2011, of 20 January (hereinafter abbreviated as "RJAT" – Legal Regime for Tax Arbitration), the constitution of an Arbitral Tribunal, for which purpose it filed a request to that effect on 22-10-2015.

2. The claim subject to the request for arbitral pronouncement consists of the annulment of (i) the decision on the Gracious Appeal filed by the Claimant regarding the self-assessment act for Corporate Income Tax ("IRC") for the tax year 2012 and (ii) the self-assessment act for IRC itself to which the said decision relates, with respect to the deduction from the collection of tax benefits, as well as the correction and refund of the amounts that the Claimant wrongfully paid as a consequence of that act, plus compensatory interest.

3. 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 26-10-2015.

3.1. In exercise of the option for appointment of an arbitrator provided in paragraph b) of no. 2 of article 6 of RJAT and in compliance with the provisions of paragraph g) of no. 2 of article 10 and no. 2 of article 11 of the same decree-law, the Claimant appointed Dr. Ricardo da Palma Borges as Arbitrator.

3.2. Pursuant to the provisions of paragraph b) of no. 2 of article 6 and no. 3 of article 11 of RJAT, and within the time limit provided in no. 1 of article 13 of RJAT, the highest-ranking official of the Tax and Customs Authority ("AT") appointed Professor Doctor João Ricardo Catarino as Arbitrator.

3.3. In accordance with the provisions of nos. 5 and 6 of article 11 of RJAT, the President of CAAD notified the Claimant of the appointment of the Arbitrator by the highest-ranking official of the Tax Administration on 16-12-2015, and notified the arbitrators appointed by the parties to appoint the third arbitrator who assumes the role of Presiding Arbitrator, and the Honourable Arbitrators appointed by the parties agreed, on 21-12-2015, on the appointment of Councillor Maria Fernanda dos Santos Maçãs as Presiding Arbitrator.

3.4. On 04-01-2016, the President of CAAD informed the Parties of this appointment, pursuant to and for the purposes of the provisions of no. 7 of article 11 of RJAT.

3.5. In compliance with the provisions of paragraph c) of no. 11 of RJAT, the Collective Arbitral Tribunal was constituted on 19-01-2016.

3.6. In these terms, the Arbitral Tribunal is duly constituted to examine and decide the subject matter of the proceedings.

1. To support the request for arbitral pronouncement, the Claimant alleges, in summary, the following:

a) The Claimant is the parent company of Group B…, which is taxed under the Special Regime for Taxation of Groups of Companies ("RETGS"), provided for in articles 69 et seq. of the IRC Code ("CIRC"). On 01.01.2012, the company C…, S.A. ("C…") became part of the scope of Group B….

b) C… was entitled to the tax benefit provided for in article 32-A, no. 3, of the Tax Benefits Statute ("EBF"), under which Venture Capital Companies ("SCR") may deduct from the taxable income determined in each tax year, "and up to such amount, a sum corresponding to the limit of the sum of the IRC collections of the five tax years preceding that to which the benefit relates, provided that it is used in the realization of investments in companies with growth and appreciation potential."

c) C… calculated a tax benefit in the amount of € 2,948,730.99 in the 2007 tax year and € 2,346,751.00 in the 2008 tax year, and did not deduct the said amounts in the 2007 to 2011 tax years due to insufficient collection. In the 2012 tax year – the year in which it became part of Group B… – C… deducted the amount of € 1,800,494.28, considering this to be the limit on the deduction, taking as reference its hypothetical individual collection.

d) In the Claimant's view, the limit of the said deduction would be the collection determined for Group B…, in the total amount of € 85,250,758.82, so the value of the tax benefit in the 2007 and 2008 tax years should be fully deducted (in a total of € 5,295,481.99, resulting from the sum of € 2,948,730.99 with € 2,346,751.00, and not 5,443,718.70, as the Claimant erroneously quantifies in its initial petition and submissions, certainly due to a calculation and/or clerical error). As such, it filed a Gracious Appeal in May 2015 of the self-assessment of IRC for the 2012 tax year with the intention of effectuating the deduction of the remaining value of the tax benefit not yet deducted, in the total amount of € 3,494,987.71, and that gracious appeal was dismissed.

e) It disagrees with AT's understanding, by considering that the EBF does not provide for a specific regime regarding the calculation of the tax benefit provided for in its article 32-A, no. 3, nor regarding the deduction thereof in cases where the SCR is taxed under the RETGS, so the deduction from the collection of the said tax benefit should be carried out in accordance with the general rules for the determination of IRC in the RETGS, provided for in the respective article 90. Pursuant to that norm, the deductions relating to each of the companies that make up the scope of the group are carried out in the determination of the group's IRC, based on the collection determined by the group, in accordance with the RETGS, and up to the extent of such collection.

f) It appeals to the legal development of the regime for taxation of groups of companies to demonstrate that despite the various legislative amendments it underwent, no general limitation on the deduction of tax benefits of companies that are part of the group was ever established, establishing that such deduction should always be carried out against the collection determined by the group. Likewise, the legislator also never took into account the moment of acquisition of the right to the tax benefit – whether before or after the option for RETGS – unlike what was expressly established with respect to tax losses.

g) It maintains that despite the legal requirement that companies covered by RETGS must submit an individual Form 22 tax return, there is no relevance of individual collection, since the IRC collection of the Group is determined based on the Form 22 tax return submitted by the parent company. As a consequence, the deduction of tax benefits from the collection of the group is not limited by the individual collection of the company holding that benefit, because that collection does not exist.

h) It asserts that attributing relevance to the hypothetical individual collection of the companies that make up the group constitutes a subversion of the RETGS, which has underlying it the taxation of the group of companies in the IRC as a unit.

i) It emphasizes that tax benefits are not subject to transfer in the RETGS, remaining in the legal sphere of the company that is part of the Group, and therefore the provisions of article 15 of the EBF are not applicable.

j) Finding that the letter of the law only establishes as a limit to the deduction of tax benefits attributed to companies that make up the scope of the group the IRC collection thereof, pursuant to article 90, no. 6, of the CIRC, it considers that the interpretation supported by AT, by establishing that the benefit of the deduction must also be contained within the hypothetical individual collection of the company holding the tax benefit when it was acquired prior to the option for RETGS, is unconstitutional by violation of the principle of fiscal legality, in its formal and material aspects.

k) Similarly, the interpretation of AT conflicts with the constitutional principle of legal certainty, due to the fact that it is not possible to derive from the RETGS the conclusion that the deduction of tax benefits from the IRC collection of the group, whose right was acquired by the company prior to the option for RETGS, is limited to the hypothetical individual collection of that company.

1. AT submitted a response, agreeing with the factual aspects and defending itself by exception and by challenge of law, invoking in summary:

5.1. By exception:

a) Lack of material competence of the Arbitral Tribunal, pursuant to the provisions of article 2, no. 1, of RJAT, because the central issue in the proceedings is the recognition of the Claimant's right to the tax benefit and the respective right to its deduction.

b) Lack of material competence of the Arbitral Tribunal, pursuant to the provisions of article 2, no. 1, of RJAT, because the Claimant, with respect to the self-assessment act for tax, requests its declaration of illegality and its correction, which implies the quantification, by the Arbitral Tribunal, of tax and interest to be annulled.

5.2. By Challenge:

c) No. 6 of article 90 of the CIRC merely indicates that the deductions from the collection of each of the companies in the group must be carried out from the collection determined based on the taxable income of the group, not prescribing what is the method for determining the limit of deductions relating to each company.

d) The difficulties in interpreting that norm led the legislator to clarify in certain legislative acts the manner of operation of the respective deductions of tax benefits in the context of RETGS, as was the case with Law no. 49/2013, of 16 July, which created the Extraordinary Fiscal Credit for Investment, and no. 4 of article 29 of the Fiscal Code for Investment, approved by Decree-Law no. 162/2014, of 31 October, in which it is explicit that the limit of the deduction is determined based on the collection of the company holding the benefit if RETGS did not apply.

e) Notwithstanding the absence of express provision in no. 3 of article 32-A of the EBF regarding the method of calculating the amount of the deduction in the case where the beneficiary company is covered by RETGS, the deduction of the tax benefit for purposes of determination of IRC should be carried out in accordance with the provisions of nos. 2 and 6 of article 90 of the CIRC, while simultaneously taking into account the special rules concerning tax benefits and RETGS itself.

f) The enjoyment of the tax benefit provided for in no. 3 of article 32-A depends on the verification of assumptions of (i) a subjective nature, being exclusively directed to SCRs, and (ii) an objective nature, depending on the realization by those companies of investments in companies with growth and appreciation potential whose amount corresponds to the sum of the IRC collections of the five tax years preceding that to which the benefit relates.

g) The subjective component of this tax benefit is also manifested by its intensity, since the value of the deductible investments is limited by the individual tax situation of the SCR. As such, even during the period of application of RETGS, the limit of the tax benefit is assessed based on the values of the IRC collections determined in the individual sphere of the beneficiary company.

h) It maintains that the possibility of deduction from the collection of the Group of the benefit acquired by C… before its entry into the scope of the Group would entail the transfer of that benefit to the Group, which, given the subjective character of the benefit, does not find support in article 15, nos. 1 and 2, of the EBF.

i) Admitting that the right to the tax benefit, not yet fully used and acquired in tax years prior to the beginning of the application of RETGS, could be transferred automatically to the remaining companies would lead to the recognition that RETGS would enable the acquisition and inclusion in the scope of the group of companies with tax benefits but without capacity, in the individual sphere, for their enjoyment.

j) The legislator sought to prevent the abusive use of RETGS, not having established any derogation to the principle of legal identity between the entity that acquires the right to the deduction (of losses or tax benefits) and the one that exercises that right, so having the tax benefit arisen in the legal sphere of C…, it is in its sphere that it should be exercised.

k) RETGS does not alter or define any new situation or passive position on the part of the group, so the companies that make up the group remain in the legal position of taxpayers, and the verification of full transfer of ownership of the tax benefit from the SCR to the group cannot be sustained.

l) The argument raised by the Claimant regarding the non-existence of individual collection, taken to its logical conclusion, could imply the prevention of access to the tax benefit in question on the part of SCRs included in a group covered by RETGS and the loss of that benefit by SCRs that became part of it.

m) There is no violation of the constitutional principles of fiscal legality and legal certainty because the solution advocated by AT falls within the general principles established in article 15 of the EBF on the transferability of tax benefits, with the limitation on deductibility of the tax benefit deriving from the law.

1. By order of 16 March, the Tribunal, having already exercised the right to be heard with respect to the exceptions invoked by the parties and with no request for the production of evidence, dispensed with the holding of the meeting provided for in article 18 of RJAT, by virtue of the principles of celerity, simplification and informality. It further designated 19 July as the deadline for delivery of the arbitral decision.

2. The parties submitted successive written submissions, maintaining, in essence, the arguments set forth in the initial pleadings.

II. PRELIMINARY ISSUES

1. On the exceptions – Issue of lack of material competence of the Arbitral Tribunal to examine the request for arbitral pronouncement

8.1. Lack of material competence of the Arbitral Tribunal for the recognition of the right to a tax benefit

AT raises the issue of the (lack of) material competence of the Arbitral Tribunal, arguing that the present request for arbitral pronouncement aims at the recognition of the right to the tax benefit provided for in article 32-A, no. 3, of the EBF and the respective right to its deduction.

However, the subject matter of the proceedings is not the recognition of a tax benefit, contrary to what is argued by AT. The tax benefit provided for in article 32-A, no. 3, of the EBF does not presuppose any act declaring recognition, being an automatic tax benefit, in accordance with the classification established in article 5 of the EBF.

Consequently, the Claimant's claim is not the recognition of the right to the said tax benefit, but rather the examination of the legality of the self-assessment act, regarding the deductibility of said benefit. Therefore, this Arbitral Tribunal, constituted within the scope of CAAD, is competent to examine and decide the dispute under consideration.

In these terms, the alleged exception of lack of material competence is without merit.

8.2. Lack of material competence of the Arbitral Tribunal to determine the correction of the self-assessment

On the other hand, according to AT, the Claimant requests the declaration of illegality of a self-assessment act and its correction, which would imply the quantification of tax and interest to be annulled by the Arbitral Tribunal, which is outside its competence.

Notwithstanding the fact that article 2, no. 1, paragraphs a) and b), of RJAT use the expression "declaration of illegality" to define the competence of Arbitral Tribunals, it should be understood that the competences of these include the powers attributed to Tax Tribunals in judicial review proceedings, being this the interpretation that best accords with the meaning of the legislative authorization for the introduction of arbitration in tax matters, according to which "the tax arbitral procedure should constitute an alternative procedural means to judicial review proceedings and to the action for recognition of a right or legitimate interest in tax matters" – cf. article 124, no. 2, of Law no. 3-B/2010, of 28 April.

Judicial review proceedings, despite being essentially a process of annulment of tax acts, allows for the condemnation of AT in the payment of compensatory interest (cf. article 43, no. 1, of the LGT and 61, no. 4, of CPPT). Therefore, by establishing that "payment of interest, regardless of its nature, is due, in accordance with the provisions of the General Tax Law and the Tax Procedure and Process Code," article 24, no. 5, of RJAT should be interpreted as permitting the recognition of compensatory interest in arbitral proceedings, when it is a consequence of the annulment of self-assessment acts.

It should be noted, however, that the fact that certain acts of condemnation are admitted by the Tribunal within the framework of annulment of the assessment does not authorize the inclusion of the request for condemnation sought by the Claimant within that framework.

Pursuant to article 24, no. 1, of RJAT, the arbitral decision on the merits of the claim, regarding which no appeal or challenge is possible, binds AT from the end of the deadline provided for appeal or challenge, and AT should, in the exact terms of the success of the arbitral decision in favor of the taxpayer and up to the end of the deadline provided for voluntary execution of sentences of Tax Courts, "restore the situation that would have existed if the tax act that is the subject of the arbitral decision had not been carried out, adopting the acts and operations necessary to that effect" [cf. paragraph b) of no. 1 of article 24 of RJAT].

Thus, AT is correct in holding that the request for correction of the self-assessment, by implying the quantification of tax and interest to be annulled by the Arbitral Tribunal, must be effectuated in the context of execution of judgment.

In these terms, the alleged exception of lack of material competence has merit.

1. The Parties possess legal personality and capacity, are legitimate (articles 4 and 10, no. 2, of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March) and are duly represented.

2. The Arbitral Tribunal is duly constituted and is materially competent to know and decide the claim, cf. article 2, no. 1, paragraph a), of RJAT.

1. The proceedings do not suffer from any nullities.

III. ON THE MERITS

III.1. Facts

1. Established facts

12.1. With relevance to the examination and decision of the issues raised, the following facts are taken as settled and proven:

a) The Claimant is the parent company of group B…, which is taxed by the Special Regime for Taxation of Groups of Companies (hereinafter RETGS), pursuant to articles 69 et seq. of the CIRC.

b) The company C..., SA (hereinafter C…), became part of the tax group B… on 2012-01-01.

c) C… is entitled to the tax benefit provided for in article 32-A, no. 3, of the EBF.

d) In the 2007 tax year, C… made investments in companies with growth and appreciation potential, in the total amount of € 15,662,379.00.

e) Based on the sum of the IRC collections of the five preceding tax years, C… calculated in the said 2007 tax year a tax benefit in the amount of € 2,948,730.99.

f) In the 2008 tax year, C… made investments in companies with growth and appreciation potential and, as a result of such investments, calculated a tax benefit in the total amount of € 2,346,751.00.

g) C… totaled a tax benefit used, on an individual basis, not used, in the total amount of € 3,494,987.71 (cf. the table in point 46 of the Answer).

h) Due to insufficient collection, C… did not deduct the amounts to which it was entitled in the 2007 to 2011 tax years.

i) In the individual Form 22 tax return relating to 2012, it calculated a collection in the amount of € 1,800,494.28, having filled in field 355 of table 10 of the individual Form 22 tax return with the said amount.

j) C… considered a deduction from the collection only up to the limit of the hypothetical individual collection, that is, € 1,800,494.28, leaving a remainder of € 1,148,236.71, with respect to the amount of the tax benefit acquired in 2007.

k) Likewise, the tax benefit calculated in 2008, in the amount of € 2,346,751.00, was not deducted.

l) The Claimant filed, on 2015-05-29, a Gracious Appeal against the self-assessment of IRC for 2012, on the ground that C… was part, in 2012, of the tax scope of Group B…– taxed by RETGS – so, for purposes of determining the maximum amount of the tax benefit, the IRC collection of the Group would be relevant and not merely the hypothetical individual collection of C….

m) Group B… determined, in the 2012 tax year, a collection of € 85,250,758.82 (cf. doc. 8 attached to the gracious appeal that is part of the record).

n) The appeal was dismissed by decision, by order of the Director of the Unit for Large Taxpayers, of 2015-07-21, on the ground that, having the right to the tax benefit in question arisen in "(...) years prior [2007 and 2008] to the entry of the Venture Capital Company into the group subject to the special regime for taxation (2012), the deduction from the collection of the group shall have as its limit the collection that that company would have calculated if it were not part of it, in agreement, moreover, with the procedure undertaken by it."

o) Such position was based on a Doctrinal Note of AT that conveys the understanding sanctioned by Order of 2010-10-27, of the Director-General, relating to a Request for Binding Information no. …, Proc. 2010….

p) By letter no. … of the Unit for Large Taxpayers, dated 2015-06-16, the Claimant was notified of the draft decision dismissing the gracious appeal filed.

q) The Claimant did not exercise the right to prior hearing.

r) The Claimant was notified of the content of the Information on which the dismissal order was based, by letter no. … of 2015-07-21.

12.2. Substantiation of the facts

The proven factual basis was based on the position assumed by the Parties and not disputed, the analysis of the documents filed with the proceedings by the Claimant, which were not challenged, as well as the record.

12.3. There are no other facts with relevance to the examination of the merits of the case that have not been proven.

III.2. Points of Law

1. On the illegality of the Self-Assessment

A – Characterization of the fiscal incentive granted to SCRs – Venture Capital Companies (article 32, no. 2, of the EBF)

In the case at hand, the elucidation of the issue that is raised requires that, first and foremost, there be carried out a characterization of the substantive reality at the level of the SCR, and only then should one proceed to the analysis of RETGS. And this issue concerns a specific tax benefit, regarding which the question arises as to how it can be deducted from the collection, once the company that brings it (the beneficiary SCR) becomes part of a RETGS.

As is well known, article 32-A of the EBF, at the time of the relevant facts and insofar as the case is concerned, in its nos. 3 and 4, established an automatic tax benefit. These are, in the dogmatics proper emerging from article 2 of the EBF itself, "measures of an exceptional character instituted for the protection of relevant extra-fiscal public interests that are superior to those of taxation itself."

Thus, by consequence, no. 2 of the same provision considers as tax benefits "exemptions, tax rate reductions, deductions from taxable income and collection, accelerated depreciation and reinstatement, and other fiscal measures that comply with the characteristics set out in the preceding number."

It is important to note, for purposes of this analysis, that the law considers tax benefits as fiscal expenditures, that is, expenses that are, to that extent, subject to the principles and other requirements of public expenditure.

Now, from the perspective of the underlying reality, prior to the integration of the SCR in RETGS, what it is relevant to know, on the one hand, is that the latter, because it made the investments referred to in no. 3 of article 32-A of the EBF, as a consequence of engaging in an activity that the law was encouraging – investment in venture capital as a (more risky) form of wealth creation – "acquired" the right to a certain tax benefit, materialized in the right to make a given deduction from the collection.

The issue that arises is how this should be done.

It seems clear that the SCR "obtained" that right by engaging in the conduct desired by the law, and within the framework of the limits fixed in no. 3 of article 32-A of the EBF itself. That is, given that it was interested in pursuing a certain high-risk activity, fiscal law, through this provision, encouraged it (as well as all other economic agents with the nature of SCR, but only these) to realize such risky investments in companies with growth and appreciation potential. As a counterpart, fiscal law fixed the terms or limits of the incentive / tax benefit it was willing to grant to those economic agents in particular, as a result of that particularly risky investment.

The limits of that fiscal incentive are those arising from the provisions of nos. 3 and 4 of article 32-A of the EBF – the collection generated or to be generated by the SCR. Thus, once the conduct that article 32-A, no. 2, of the EBF intended to encourage has been adopted, the exact terms of the benefit to which it "acquired" the right and the exact manner of its reflection in the collection are also fixed in the legal sphere of the SCR. We could say that things happen as if the law said the following: "if you do this, I give you that," that is, I allow you to deduct from your collection, in accordance with the Latin maxim "ut des," that is, I give so that you give.

In the case at hand, "that" is the right to deduct from (its) collection relating to the tax year in which the investments were made, a sum corresponding to the limit of the sum of the IRC collections [of the SCR] of the five tax years preceding that to which the benefit relates, or, if such deduction is not possible, in the assessment for the five following tax years. This requires that the SCR has generated or will generate collection.

We have, thus, that the regime of this benefit has underlying it a precise commutation. Indeed, the tax benefit is a metric expression, exact, synallagmatic, corresponding to a certain type of risk investment objectified in the person of the entity that realizes it. It is therefore a benefit whose regulating law: (1) fixes in full the conduct that it desires economic operators to realize, (2) fixes the manner in which the fiscal incentive operates, namely through a deduction from the collection of the company that adopts such risky conduct and (3) further fixes the exact measure of the benefit that is recognized to it as compensation for the assumption of that risky conduct, encouraged by law, including the terms and forms of calculating that deduction, (4) which operates through the deduction from the collection that has been or will be generated by the SCR itself. That is, it is necessary that the SCR has generated or will generate IRC collection.

Thus, as could not be otherwise, in respect of what is required in no. 2 of article 103 of the Constitution of the Portuguese Republic ("CRP"), it is fiscal law that identifies completely and with precision the conducts that it wishes to encourage (objective, material or substantive assumptions), the economic agents covered by them (subjective assumptions), and the terms in which those conducts are fiscally rewarded by law.

First and foremost, because, in the eschatology of Nuno Sá Gomes, General Theory of Tax Benefits, Cahiers of Science and Fiscal Technique, no. 165, Lisbon, 1991, we are dealing with not merely a tax benefit but a true fiscal incentive that requires dynamic conduct by the economic agent targeted (in the case, only SCRs), directed to certain ends or effects, considered beneficial (investment in companies with appreciation potential) for society in general. Because incentives, according to this author, op. cit., p. 36, more than protecting public interests, encourage the targeted economic agents (and only these) to adopt conduct that is of interest to society and that, for this reason, pursues ends of general or collective interest.

Hence, tax benefits, by contrast with tax, are measures of an exceptional nature in relation to taxation-as-a-rule. This exceptional nature of tax benefits is relevant because it marks the extra-fiscal foundations on which they are based, by contrast to the merely fiscal ends of tax.

In the case at hand, and in accordance with article 11 of the EBF, the SCR acquired the right to the tax benefit with the realization, in the precise terms required, of the conduct that the law was encouraging, that is, with the historical verification of the objective and subjective assumptions of the respective legal provision, even if its efficacy is deferred in time.

Now, just as no. 3 is shaped, whether from the perspective of its letter or its spirit, it seems clear to us that the scope and limit of the benefit obtained is that of the individual economic forces of the SCRs themselves, since only this type of company is covered by the tax benefit.

The deduction has, thus, as its limit a sum corresponding to the limit of the sum of the IRC collections of the SCR of the five tax years preceding that to which the right to the incentive / tax benefit relates (without prejudice to knowing that fiscal law adopts, for other situations, different solutions, as is the case with the RFAI, DLRR or SIFIDE). What is important to note is that, in the situation of the proceedings, there is a legal discipline of its own that results from the combination of the provision of article 32-A of the EBF with articles 120, no. 6, and 90, no. 6, of the CIRC, from which all the regulation necessary for the elucidation of the issue raised is derived.

Now, given that the benefit is directed exclusively to venture capital companies (SCRs), it is clear that only these can benefit from it and in the exact terms in which the law prescribes it, to the extent that a perfectly linked activity of subsumption of the conduct of the SCR in all its relevant details to the norm that attributes the tax benefit to it is realized here.

As a consequence and, in the case, the limit of the tax benefit established in no. 3 of article 32-A exists because, although it is true that the law is interested in SCRs making investments in the companies specified therein, founded on reasons of general interest, it does not lose sight of another more basic interest, rooted in the same relevant public motivations, which is the interest in tax (and collection) that the SCR itself individually generates, in the context of the regular exercise of its own economic activity.

On the other hand, given that tax benefits are measures that are supported by public interest reasons superior to those that determine taxation-as-a-rule, in the words of Nuno Sá Gomes, General Theory of Tax Benefits..., p. 35, such public interest must be clear in terms such that it must be perceptible to all. That is, it must be possible to understand with relative clarity what public interest underlies the grant of the tax benefit to SCRs themselves. In the case, that public interest lies in the risky investment realized by this type of company in particular as a means of increasing the growth and appreciation potential of the companies where the investment occurs.

With this in mind, it is clear that the benefit in question involves precise, compartmentalized objective and subjective assumptions or requirements, which cannot be decharacterized within the framework of a RETGS.

Namely:

On one hand, it is directed exclusively to SCRs. That is, it benefits only those SCRs that concretely and precisely adopt the conducts encouraged by the regulating norm without need for prior recognition since it is an automatic benefit. Finally, it is materialized if the SCR has had or will have its own collection in which the benefit can be deducted, in the terms legally established.

By consequence, the SCR acquires a subjective position, a (subjective) right to the tax benefit, which crystallizes in its legal sphere, in the exact terms prescribed by law but which it itself can only effectuate if it has generated or will generate its own collection. And these are the ones that arise from no. 3 of the provision under consideration, namely: the right to deduct from the amount determined in accordance with paragraph a) of no. 1 of article 90 of the IRC Code, and up to such amount, a sum corresponding to the limit of the sum of the IRC collections [of the SCR] of the five tax years preceding that to which the benefit relates, provided that it is used in the realization of investments in companies with growth and appreciation potential.

That collection is the individual collection of the incentivized taxpayer, generated by the SCR itself in the relevant period. For it was the SCR and only it that adopted the conduct desired by the regulating norm of the tax benefit. This is what results from article 32-A of the EBF. Nor could it be otherwise, since, given that the tax benefit is directed to SCRs, it has also only for its object the collection generated by the companies covered, and individually quantified in the relevant period.

And, to the extent that SCRs are the only companies incentivized and those in whose specific collection the benefit can be deducted, it is understood that only this collection can be relevant for the delimitation of the concrete subjective substantive right created in its legal sphere.

Thus, in summary, and as a direct result of the regime under consideration, the right that the SCR brings to the group (RETGS), is the (subjective) right that it itself holds to (1) deduct a certain tax benefit (2) from its own collection, and in the exact terms in which that right was formed in its own legal sphere.

Namely, the right to deduct from its collection, conceived as a right actively and consciously restricted to the limit of the sums of its (SCR) own individual collections, in the relevant period of time, based on an active conduct that is individual to it, namely that of risky investment in companies with appreciation potential.

And it brings nothing more, because the SCR has nothing more to bring to the group in which it came later to be integrated. Nothing is lacking from the regime regarding any of its core aspects, since the provision that regulates it contains all the elements that enshrine and materialize it.

Note that no. 3 of article 32-A of the EBF textually refers to collection, which can only be the collection generated by the SCR itself, given that here the law has as its object nothing more than SCRs, because these are the only type of company covered by the fiscal regime under consideration. Providing therein that SCRs can deduct the value of the investment made, having as a limit that of the concurrence of their own collection.

Now, this being the material limit of the tax benefit as such established in the provision, it is clear that, when the SCR becomes part of the consolidation scope, it brings with it all the passive and active positions that it itself possesses. And among these is counted the right to deduct from its collection the amount of the relevant investments made by it, with the limit that the SCR, company, the law fixed for it, namely the limit of the collections (individual) that it itself generates, by itself (since only it is the incentivized company), to the exclusion of the collections of any other company part of that scope.

Moreover, there is here a temporal argument that reinforces this position: in the case, the situation is even more clear since the right to the tax benefit was crystallized in the legal sphere of the SCR at a moment prior to its own integration into the consolidation scope. This does not mean that if the right to the tax benefit had been constituted after the integration of the company into the group, the opposite thesis would be sustained, but it reinforces the idea that the SCR transports to RETGS what it itself possesses, not what it does not have to bring. Thus, when called to integrate that scope, the SCR brings with it all its active and passive positions, just as they were constituted in its own legal sphere, thereby contributing to the commercial and fiscal strengthening of this group logic. And, in this perspective, it should be these active and passive positions that must be reflected, in the exact terms in which they were held, in the collection of the group.

In reinforcement of this line of argument, we could ask: would it make sense to permit the enlargement of the tax benefit merely by virtue of the fact that the SCR becomes part of RETGS? The answer must be negative. Indeed, if the SCR did not become part of RETGS, it would have no other benefit than that which it saw established directly in its legal sphere and in the forces of its own collection. Thus, it would only benefit from it in the exact terms that no. 3 of article 32-A of the EBF permits.

Becoming part of RETGS, the Claimant argues, the limit of the benefit should automatically expand to the collection of the entire group. We do not believe it is correct. Indeed, as has been seen, we are dealing with a fiscal incentive that is intended precisely to encourage certain conducts by the subject that practices them. Now, not only is such incentive directed exclusively to SCRs, but the other companies in RETGS are not SCRs nor have they adopted the conducts (investments in venture capital) desired by the law, nor have they generated collection resulting from an activity of venture capital where the law expressly wants the benefit to be deducted.

Thus, we do not see reasons to consider that such companies should be rewarded with the possibility of accessing a tax benefit when they did not make risky investments and did not calculate collection in the context of the exercise of that risky activity, since, perhaps, they are not even SCRs.

Now, as has already been said, tax benefits are, dogmatically, a fiscal public expenditure, as results from no. 3 of article 2 of the EBF. This, as is known, is subject to the principles of economy, efficiency and effectiveness, that is, it must provide a greater return than the burden it itself represents. And it is subject to a clear finalistic criterion, namely: the purpose of public expenditure is the deliberate, programmed, authorized and rationalized application of public funds in the satisfaction of financial needs, maximizing collective interest. But also to the principles of legality, resulting from the Budget Framework Law – the binding legal framework for other financial laws and the pursuit of public interest, not only because the Public Administration is subject to it, but also because the norm that grants tax benefits must clearly specify the encouraged conducts.

Tax benefits are qualified as fiscal expenditure (see also Report on Fiscal Expenditure, 2013) (accessible at http://www.portugal.gov.pt/media/856397/Relatorio_Despesa_Fiscal_2012.pdf) to the extent that they represent masses of public revenue from which the law refrains with foundation in reasons of relevant public interest (no. 1 of article 2 of the EBF). Thus, they are subject to the criterion of public interest in the satisfaction of the needs of the collectivity, which is assumed as a specific duty of financial subjects and a diffuse right of the community.

Thus, by consequence, tax benefits are based on relevant extra-fiscal public interests, which must be clear, objective and understandable even to a median observer. Now, in the case, the extra-fiscal objective pursued with the benefit in question is the potentiating effect in wealth creation that is understood to be assumed by investment in venture capital in companies "with growth and appreciation potential."

Thus, properly viewed, it is not clear in what way the extra-fiscal public interest regulated by article 32-A of the EBF is strengthened by the mere fiscal integration of the SCR in RETGS, since from it does not result the strengthening of venture capital investment for the purpose specifically prescribed therein. Therefore, if in no way is the public interest strengthened, one should, in the same manner, conclude that in no way is the satisfaction of collective needs or purposes improved, and therefore in this measure such enlargement is deprived of that foundation or public interest. And, being so, it cannot be admitted.

There being nothing, in reinforcement, to encourage the extension of the benefit by way of the integration of the SCR in RETGS, by itself, does not operate any reinforcement of the desired public purpose, and in that measure, the synallagma is lacking for an enlargement of the tax benefit in question to occur, which violates the principle of proportionality according to which public expenditure should provide proportional levels of satisfaction of public needs.

Now, that return is not strengthened, from the point of view of public interest, with the integration of the SCR in RETGS, especially since we are talking about past facts, risk decisions taken before that integration, on the assumption of a given deduction from the collection of the SCR itself, limited to its economic forces, nothing more than that.

On the other hand, the SCR itself, investor in those companies with appreciation potential, realizes the investment knowing that the tax benefit has a given precise character and limit, determined in accordance with nos. 3 and 4 of article 32-A of the EBF and conditioned to the existence of its own collection. Thus, if within that legal framework, it decides to invest and deems itself duly compensated by receiving that benefit, and if, on the other hand, the State deems it compensatory to grant a given tax benefit if certain investments are made, it is not clear what the public interest is in seeing a right to a certain benefit, previously constituted, enlarged by virtue of the mere integration of that investing company into a group subject to RETGS and where that risky investment is not strengthened nor is the public interest benefited.

Besides what has been stated, it is also worth noting that no. 4 of article 32-A of the EBF reinforces this point of view, since the limit of the deduction continues to be, only, that of the future collections of the entity itself that realized the risky activity (the SCR).

Another point of view that seems to us worth considering is based on the fact that, if one were to deem the Claimant's claim to be well-founded, in practice one would be permitting the transfer – not in law – but in fact of the right to a tax benefit already definitely constituted at an earlier date to the legal sphere of another, in conditions different from those provided for in article 15 of the EBF.

This does not mean that we defend the thesis that the transfer de jure of the right to the benefit in the ownership of the SCR occurs, as AT does. There is nothing in the proceedings that demonstrates it nor can this be understood from the mere integration of the SCR in RETGS. Especially because tax benefits are, generically, non-transferable. This results from their synallagmatic nature, that is, the fact that they require conduct directed to a certain purpose specified by law, subject to specified legal conditions.

In situations where the law permits transfer, it is based on the nature of the goods or rights. In other cases, that transferability requires prior scrutiny (no. 3 of article 15 of the EBF). The reason for this regime is based on the fact that it is necessary to ascertain whether all the assumptions for the grant of the benefit continue to be verified. Now, although there is no evidence in the proceedings of any legal fact transferring the right to the tax benefit held by the SCR, the truth is that, from an economic or material point of view, the Claimant's thesis leads us in that direction. And this is because, according to its point of view, the benefit held by the SCR would come to have as its limit not that which imperatively arises from article 32-A of the EBF, but that of the collection of the group, calculated in accordance with RETGS, whatever its amount may be.

We also do not see, in this perspective, that it is acceptable to consider this benefit economically transferred and enlarged to the group of companies integrated in RETGS without such scrutiny being carried out, especially given all the compartmentalizations of RETGS regarding other components that influence taxable profit and the collection ultimately due.

B – The logic of RETGS and the obligation to determine the tax individually due

The Claimant's thesis is that the right to the tax benefit comes to have as its limit not that which is contained in nos. 3 and 4 of article 32-A of the EBF, but the general limit of the collection of the group, especially because only this collection exists.

As is known, RETGS does not eliminate the individual nature of each company that integrates it – quite the opposite – since it continues to require that a distinction be made between the tax situation of the group and the tax situation of each of the companies that make it up.

These therefore maintain their legal and fiscal autonomy. Jurisprudence has held, and rightly so (v. g. case 05376/12 of the North Administrative Court, citing the Supreme Administrative Court's decision regarding the transferability of losses – case no. 0909/10, of 02-02-2011), that RETGS is dominated by a logic of joint taxation, with taxation under IRC being done by its aggregate result, as if it were a single company, corresponding to the economic unity of the group that behaves in the market as if it actually were a single enterprise.

However, it is nonetheless clear that each company of the group does not lose its legal personality and legal-organizational and patrimonial individuality, nor does it cease to be a subject of its own tax relationships by virtue of becoming part of the group of companies.

This is manifested in several ways:

· Taxation under RETGS is based on the algebraic sum of the taxable profits and tax losses of the individual companies in the scope of the group of companies;

· Each of the companies included in the scope must also submit a periodic tax return, which, however, is not subject to assessment (cf. art. 120, no. 6, of the CIRC);

· The integration of a company that has recorded losses in the three preceding tax years is limited;

· Only losses generated after the constitution of RETGS belong to the group, not those prior;

Doctrine has held that RETGS (article 69 et seq. of the CIRC) is a special regime for determining taxable profit that is based on the algebraic sum of the taxable profits and tax losses of the individual companies in the scope. It moved away from the German concept of "Organschaft," expressed in consolidation, and approached the British system of "tax relief," where in a group of companies, those that have tax credits (losses) can cede them to companies in the group that have gains, so as to reduce the taxes paid by the latter" (Saldanha Sanches, Manual of Tax Law, 2nd ed., Coimbra, Coimbra Publisher, 2002, p. 362). Gonçalo Avelãs Nunes considers that RETGS approximates the Group Relief regime (in Taxation of Groups of Companies by Consolidated Profit in the Context of IRC – Contribution to a New Dogmatic and Legal Framework of its Regime, Coimbra, Almedina, 2001, p. 187). It is a system that aggregates the accounts of the companies, obtaining a taxable profit of the group. In this line, it is clear that RETGS does not modify or eliminate the individual positions of each company that integrates it, merely permitting the compensation of positive and negative results (Nuno Sá, The taxation of groups of companies in the most recent IRC reform, 2014, p. 9, Master's thesis, Portuguese Catholic University, Porto, online: http://repositorio.ucp.pt/handle/10400.14/16044).

It is also what results from article 70 of the CIRC when it provides that the taxable profit of the group is calculated by the parent company through the algebraic sum of the taxable profits and tax losses determined in the individual periodic tax returns of each of the companies belonging to the group. This norm confirms the thesis that each company does not lose its legal and tax personality nor cease to be a subject of its own tax relationships by virtue of becoming part of a group of companies, because if "on one hand [there is] the legal independence of the grouped companies, which remain formally as entities endowed with their own legal-organizational and patrimonial individuality; on the other hand, [there is] the economic unity of the group, which actually behaves in the market as [if] it were a single enterprise" (José Engrácia Antunes, Structure and responsibility of the enterprise: the modern regulatory paradox, Revista Direito GV2, June-Dec 2005, p. 47, available online: http://direitogv.fgv.br/sites/direitogv.fgv.br/files/rdgv_02_p029_068.pdf).

Doctrine also considers that one of the basilar principles of the taxation of groups of companies is the principle of neutrality, according to which the income tax should be uniform and not influence business decisions (constitutional principle of freedom of economic initiative, enshrined in article 61 of the CRP), and which results from the freedom of business organization (on this subject cf. José A. Engrácia Antunes, Groups of Companies – Structure and legal organization of the plurisocietal enterprise, 2nd ed., Coimbra, Almedina, 2002), regardless of which model of corporate structure is used for the exercise of economic activities. And the author argues that this principle has been put into question by the legislator, who, aware of the fiscal savings that this regime represents, seeks, as emphasized by Casalta Nabais (Introduction to Business Tax Law, Coimbra, Almedina, 2013), to circumvent the negative effects it causes on fiscal revenue through diffuse interference in business choices and strategies.

The North Administrative Court, in its decision in case 00138/2004, 25.5.2008, held that "the main foundation justifying the option for joint taxation of the group of companies under IRC results from the principle of neutrality in the taxation of income from business activity. According to it, the fiscal system should tax income in the same manner, regardless of the organizational form of the enterprise."

Be that as it may, if it is beyond doubt that RETGS is dominated by a logic of joint taxation, that is, if the group of companies is taxed under IRC by its aggregate result, as if it were a single company, it is also true that it is not, however, a logic of unitary taxation, as if it were a single company (see the numerous restrictions to RETGS provided for in articles 69 and 71 of the CIRC). The companies that make up RETGS maintain their individuality and fiscal autonomy, which is manifested in various ways, as demonstrated above.

In this precise sense, the Supreme Administrative Court clearly supported, with respect to the deduction of losses: "foreseeing the CIRC, in its [current] articles 69 to 71, a special regime for taxation of groups of companies, (...) the determination of taxable profit, for purposes of IRC, is calculated through the algebraic sum of the taxable profits and tax losses determined in the individual declarations of the companies that belong to the group" (cf. Supreme Administrative Court Decision, case no. 0909/10, of 02-02-2011; in the same sense, also cf. Decision of the same Court, rendered in case no. 0309/11, of 22-06-2011).

This results, for example, from article 71 of the CIRC already referred to, which, saying nothing about deduction (from collection) of tax benefits, establishes a special regime for deduction of tax losses, distinguishing and conferring a different fiscal treatment between losses prior and subsequent to the inclusion of the company in RETGS. The regime reinforces the thesis supported by doctrine and jurisprudence that we are dealing with a regime of joint taxation, but not of unitary taxation, which would be the case if the component parts would lose all their characteristics and the active and passive positions that they bring to the group within the context of RETGS would be totally diluted.

For the former losses, verified in periods of taxation prior to the beginning of application of the regime, the provision establishes the rule that they can only be deducted from the taxable profit of the group "up to the limit of the taxable profit of the company to which they relate." Thus, it is necessary to calculate this limit annually. From this, it is clear that losses generated before RETGS continue to belong to the company where they were generated and which brought them (cf. no. 6 of art. 120 of the CIRC), being deductible in accordance with articles 70 and 71, as provided therein.

Paragraph a) of no. 1 of article 71 of the CIRC is configured as an anti-abuse norm by limiting the deduction to the taxable profit of individual losses generated before the integration of the company that holds them, and to prevent abusive use of RETGS.

By consequence, the Superior Courts have made the distinction that, with respect to tax losses, these only belong to the group if they are calculated within the scope of validity of RETGS. Jurisprudence has held that tax losses generated by the group follow the same rule of subjective identity, reflecting this in the following legislative assertion: "the tax losses of the group calculated in each tax year of the period of application of the regime can only be deducted from the taxable profits of the group" (cf. article 65, no. 1, paragraph b), of the CIRC).

Thus concludes (the Supreme Administrative Court), in concreto, with respect to tax losses generated in the context of the application of RETGS, that: (i) the holder of the respective right to deduction is, similarly to what occurs with respect to all entities capable of generating tax losses, the fiscal entity that generated them, that is, the group of companies subject to RETGS and materialized in the respective parent company (cf. article 64, no. 1, of the CIRC); (ii) given that these are tax losses calculated in the context of the application of RETGS, the respective – and sole – holder of the corresponding deductive right (the group of companies) may only exercise it through the subtraction of those losses of the group from the subsequent taxable profits of that same group (cf. article 65, no. 1, paragraph b), of the CIRC).

Now,

Although there is room, in RETGS, for the differentiation of the legal situation of tax losses generated before and after integration in the group of the company that brings them, it seems to us essential to note that the (neutral) solution of the law should be, mutatis mutandis, the same for tax benefits, considering the material and subjective limits of the regime contained in article 32-A of the EBF. A foundation that, in our view, is strengthened by the fact that tax benefits constitute, as noted above, a reality endowed with its own dogmatics, subject to the principle of formal law reserve and to the principle of fiscal legality, as per no. 2 of article 103 of the CRP.

Thus, the Claimant is not correct in asserting that only one IRC collection exists (article 113, repeated in various points of its arguments), an argument that is contradicted by the obligation to determine "the tax as if that regime were not applicable" (article 120, no. 6 of the CIRC). Indeed, there are as many collections as there are companies integrated in RETGS and the law requires, for all and each of them, the individual calculation of the tax (IRC) annually due, as if RETGS were not applicable. The point lies in how to reconcile the existence of individual collections with the rule of RETGS that imposes the calculation of the collection of the group, in accordance with what is referred to in no. 6 of article 90 of the CIRC.

Here we would say that one thing is the legal imposition according to which, in RETGS, deductions relating to tax benefits are carried out in the amount calculated with respect to the group (cf. no. 6 of article 90 of the CIRC), quite another and to which that provision does not answer is to know what the limit of that deduction is. Now, that limit is what results from the specific regime of the benefit in question and brought, in concreto, by the concrete beneficiary company to the group.

Thus, it is for that reason that no. 6 of article 90 of the CIRC mandates that "the deductions referred to in no. 2 (which include those relating to tax benefits), relating to each of the companies, are carried out in the amount calculated with respect to the group, in accordance with no. 1."

Now, this no. 6 confirms what has been being said. Indeed, the tax benefits that it permits to deduct from the collection, by force of no. 2 of article 90 CIRC, are the tax benefits that were constituted in the legal sphere of each company integrated in RETGS, and with the precise configuration that in the legal sphere of these those tax benefits can be reflected therein, in light of the obligation that individually falls on each of them to individually calculate all fiscally relevant aggregates up to the determination of the tax due as if RETGS were not applicable. This very thing is corroborated by the aforementioned no. 6 of article 120 of the CIRC, as above-referred, where it is concretely provided that:

"6 — When the special regime for taxation of groups of companies is applicable:

a) The parent company must submit the periodic tax return relating to the taxable profit of the group calculated in accordance with article 70;

b) Each of the companies in the group, including the parent company, must submit its periodic tax return in which the tax is determined as if that regime were not applicable." (underlined by us)

This means that each of the companies integrated in RETGS continues obligated to individually calculate its tax situation, to calculate, in an individualized manner, all relevant fiscal aggregates, including, in the case, the tax benefits of which it disposes and the tax that would be individually due, and to maintain all records and other supports relating to them. And they are, therefore, obligated to individually calculate their Net Result of the year, their Taxable Profit, their Taxable Income, their Collection, and their Tax, due or to be recovered.

Now, if each company integrated in RETGS is obligated to the individual calculation of its collection, the amount of its own tax benefits (deductible from its collection) and its individual IRC, as required by the provision (no. 6 of art. 120), it is clear that the amount of the tax benefit susceptible to calculation by the Claimant cannot be other than what results from the individual procedure for calculation of its own tax, in respect of the combined application of article 32-A of the EBF with no. 6 of article 120 of the CIRC. An amount that should be reflected in the group in accordance with article 90, no. 6, of the CIRC, deducting the amounts "relating to each of the companies."

The Claimant's thesis according to which, in RETGS, there are no individual collections, but only that of the group, apart from having no legal support in the IRC, as demonstrated, is further contradicted by the regime established for other tax benefits.

By way of example, note that Law no. 49/2013, of 16 July, which approves the extraordinary fiscal credit for investment, in article 3, no. 5, when regulating the deduction of the benefit, when the special regime for taxation of groups of companies is applicable, establishes the limits of deduction of the benefit in question, having precisely as reference the determination of the individual collection of the beneficiary company.

Namely, having in mind the tenor of the said provision:

"(...)

5- With the application of the special regime for taxation of groups of companies, the deduction provided for in no. 1:

a) Is carried out in the amount calculated in accordance with paragraph a) of no. 1 of article 90 of the CIRC, based on the taxable income of the group;

b) Is made up to 70% of the amount mentioned in the preceding paragraph and cannot exceed, in relation to each company and for each tax year, the limit of 70% of the collection that would be calculated by the company that made the eligible expenses, if the special regime for taxation of groups of companies were not applied.

6- (...)".

There is no doubt that the legislator establishes the limit of deduction of the benefit having as reference the "collection that would be calculated by the company that made the eligible expenses, if the special regime for taxation of groups of companies were not applied," which presupposes the calculation of the individual collection of the beneficiary company within the group.

And it should not be argued that this is an express option of the legislator for this type of benefit, an option that fails in the regime of Venture Capital Companies, where the legislator makes no reference to the procedure in the case of application of RETGS. The fact is that, in the case at hand, as has been demonstrated, the limits on the amount deductible of the benefit, having as reference the collection of the Venture Capital Company, already result from its own regime, making any further regulation unnecessary.

We can, in this way, conclude that, in the case of tax benefits to SCRs, emerging from the combination of the norms referred to, the regime for the reflection in IRC of previously existing tax benefits, capable of being reflected within the group, does not suffer from any incompleteness. On the other hand, it is possible to conclude that, in the case and contrary to what has occurred in other cases, the legislator did not feel the need here to create specific rules for their reflection in the context of the group of companies, since the discipline of this question is already entirely regulated, as above set out, not requiring, as can be seen, additional rules for the establishment of the limits to its reflection.

Because these companies bring with them, within the perimeter, only the legal positions that they themselves individually possessed. And, in the case, the position that the SCR possessed was and is that which results from the individual application of the regime of art. 32-A of the EBF.

Finally, it can be argued that for tax benefits RETGS and CIRC do not establish a parallel regime to that which is established in article 71 of the CIRC for tax losses. The truth is that, in the strictness of things, that provision in CIRC would be tautological, in view of what has been said above, as has been demonstrated above. And this is because this tax benefit is constituted, lives, and dies marked within a normative framework that contains all the elements necessary for its full effectuation, as results from article 32-A of the EBF. It does not seem to us that any norm is lacking in RETGS or CIRC that disciplines a reality that is already integrally regulated in article 32-A of the EBF and that, being pre-existing, can only be reflected in the terms in which it itself came into existence at the moment in which its substantive assumptions were verified, as such required by the provision (cf. article 12 of the EBF). In this perspective, articles 32-A of the EBF, 90, no. 6, and 120, no. 6, of the CIRC contain all the legal discipline necessary to enable the deduction by SCRs (the only companies that can access the tax benefit) from their own collections of the values that the law mandates to be deducted whenever: (1) they have realized the risky investment; and (2) they have collection with the characteristics provided therein that permit such deduction.

Thus, the SCR, when it becomes part of RETGS, brings with it the subjective right to the tax benefit just as it was constituted in its legal sphere and, moreover, the power / duty to reflect it in the exact terms of article 120, no. 6, of the CIRC, and being so, such right may be effectuated in the collection of the group but only in the terms and limits in which such right, thus transported, is individually materializable. Nothing more.

Consequently, it is clear that the "free" potentiating effect of tax benefits merely by virtue of the constitution of a RETGS, desired by the Claimant, is contradicted by both the letter and spirit of the law, especially because RETGS already establishes its own advantages and would represent, in practice, "free" fiscal expenditure.

All the more so given that it is certain that tax benefits are an instrument of autonomous fiscal policy, endowed with specific rationality, a reality different from tax itself, whereas tax losses are an aggregate emerging from the process of assessment lato sensu of tax. Tax benefits clearly present an increased sensitivity, with the amount of those specifically reflectable not being able to depend on the configuration or the manner in which profits are calculated (individual or aggregated).

C – The arguments raised by the Claimant

The material operation of deduction of a certain tax benefit and the subjective right to deduct a certain tax benefit, adhered to the legal sphere of its holder (SCR), and substantively fixed in the norm that establishes it, are different things. One thing is the material operation of employment or imputation of the aggregates referred to in no. 2 of article 90 of the CIRC, another, quite different, is the substantive delimitation of the (subjective) right to a certain benefit. That is, one thing is the substantive benefit, subjectively fixed in the legal sphere of someone who demonstrated having the right to it, and another is the manner in which the law mandates that benefit to operate.

The Claimant, with due respect, confuses the right to deduct from the collection (embodied in the material operation to that effect, which is not at issue here) with the amount (subjective right) that there is to deduct.

Moreover, the Claimant also confuses two distinct moments.

Because one thing is the moment of constitution of the right to the tax benefit, when its materialization occurred in the legal sphere of the SCR, which occurred at a precise moment in time through the verification of its assumptions and its substantive limits – provided for in article 32-A of the EBF – and long before its integration in RETGS.

Another thing is the moment of deduction from its collection of the realities provided for in no. 2 of article 90 of the CIRC. Not only is this temporally posterior and instrumental to the first, but it depends on the existence of collection generated by the SCR itself, to the exclusion of any other collections of companies that do not develop the venture capital activity and that, for that reason, cannot be incentivized – cf. article 120, no. 6, of the CIRC.

The Claimant alleges, in article 92 of its initial petition, that "if the legislator's intention had been to establish limits to the deduction from the collection of the group of tax benefits of companies, depending on whether the right to deduction thereof had been acquired before the option for RETGS, it would have provided for it expressly, as it did, for example, with respect to tax losses."

Indeed, the legislator said nothing, contrary to what it did with respect to tax losses (article 71). But this merely means that in the absence of a norm that permits the deduction of those benefits to a reality different from that which already results from nos. 3 and 4 of art. 32-A of the EBF, that deduction cannot be enlarged beyond the limits fixed imperatively in the substantive regime from which the right to deduct derives (cf. article 2, no. 1, of the EBF, "tax benefits are measures of an exceptional character...").

The Claimant well reveals itself to know such principles, but does not draw from them the correct conclusions with respect to tax benefits. For that, in this matter, containing, it is repeated, article 32-A of the EBF, articulated with the provisions of articles 120, no. 6, and 90, no. 6, of the CIRC, all the discipline necessary for individual calculation of the amount of the tax benefit in question, there is nothing more to deduct than what results from this regime.

It is important to recall that we are here in the domain of substantive determination of the right to tax benefits, which, being subject as it is to the principle of fiscal legality and the absolute reserve of formal law, cannot be done except in the strict terms provided for in the law. And what this law provides is what is written in the aforementioned nos. 3 and 4 of article 32 of the EBF: SCRs can deduct up to the concurrence of their own collections past and future.

And not up to the concurrence of the collections of other companies (integrated in RETGS) which, not developing the venture capital activity, do not produce the collection referred to in no. 3 of article 32-A of the EBF. Because this would introduce such subjectivity into the benefit that it would cease to have as its limit the economic forces of an SCR and would pass to have as its horizon a variable limit, depending on the size of RETGS, of companies that not only do not develop the activity that the law specifically encourages, but other various commercial activities, not encouraged by law.

The interpretation of the Claimant, that the greater the group, the greater the tax benefit, thus has no legal support given the nature and limits of the tax benefit in question, the substantive regime of IRC applicable, and the specific obligations of individual calculation of collection, tax benefit, and tax of the companies integrated, as if that regime were not applicable, which limit the amount of the benefit in accordance with article 32-A of the EBF.

For all of the above, anchoring itself in the legal norms mentioned as demonstrated, the Claimant is not correct regarding the alleged unconstitutionality of the interpretation supported by AT in the assessment in question by violation of the principle of fiscal legality, including in the aspects of determinability and legal certainty.

On the contrary, were the Claimant's thesis to prevail, it is that which would lead to an unconstitutional interpretive result of article 32-A of the EBF, in particular its no. 4, given the circumstances of the case, by violation of article 103, no. 2, of the CRP.

In the situation at hand, as we have seen, the tax benefit was constituted between 2007 and 2008, when the SCR was not integrated in any group subject to RETGS, that is, at a time when the benefit could only be deducted from its own collection. As has been stated, the second part of no. 4 of article 32 of the EBF provides that the deduction will be carried out in the assessment relating to the tax year in which the investments were made or, when it cannot be fully so, the amount still not deducted may be so, in the same conditions, in the assessment for the five following tax years.

Following the Claimant's interpretation, the deduction would not be made under the same conditions that existed in 2007/8, that is, the possibility of deduction of the benefit would have "increased" by virtue of the subsequent integration of the company into a group, that is, there would come to exist another collection which, as a rule, will be greater than that of the company individually considered, with the consequent violation of the regime of article 32-A of the EBF and all the logic and reason for being of the same. To which is added the violation of the principle of neutrality of the taxation of groups.

In the absence of legal foundation, it is the Claimant's thesis that would lead to an unconstitutional interpretation of said provision, by violation of the principle of fiscal legality of the regime of tax benefits, in the aspects of determinability and security.

In these terms, the Claimant's request for annulment of the dismissal of the gracious appeal in question is without merit and, as a consequence, of the illegality of the IRC self-assessment act relating to the 2012 tax year.

Remaining, in this sequence, the challenged act, the request for refund increased by compensatory interest, which is presented by the Claimant as a corollary of the alleged illegality, is necessarily without merit.

IV. DECISION

In these terms, this Arbitral Tribunal decides:

a) To declare without merit the exception of lack of material competence regarding the subject matter, because the central issue in the proceedings is the recognition of the Claimant's right;

b) To declare with merit the exception of lack of material competence regarding the matter as to the request for correction of the self-assessment, absolving, in this part, AT of the instance;

c) To declare without merit the request for arbitral pronouncement of declaration of illegality of the IRC self-assessment act relating to the 2012 tax year;

d) To absolve the Tax and Customs Authority from that request;

e) To declare without merit the request for refund increased by compensatory interest, absolving the Tax and Customs Authority from the respective request and, as a consequence,

f) To maintain the decision dismissing the gracious appeal.

V. VALUE OF PROCEEDINGS

In accordance with the provisions of articles 306, no. 2, of the Code of Civil Procedure ("CPC"), 97-A, no. 1, paragraph a), of the Tax Procedure and Process Code (CPPT) and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 3,494,987.71 (Three million, four hundred ninety-four thousand, nine hundred eighty-seven euros and seventy-one cents).

Notify.

Lisbon, 15-7-2016

The Presiding Arbitrator

(Fernanda Maçãs)

The Adjunct Arbitrator

(Ricardo da Palma Borges) – dissenting, in accordance with the attached declaration

The Adjunct Arbitrator

(João Ricardo Catarino)

Text prepared by computer, in accordance with the provisions of article 131, no. 5, of the CPC, applicable by referral of article 29, no. 1, paragraph e), of RJAT.

DISSENTING OPINION

I voted against the Decision, disagreeing with the position that prevailed, for the reasons I set out below.

The ratio decidendi of the Decision

The Decision is based on the analysis of the nature of the tax benefit attributed to SCRs to define its legal regime, in interaction with RETGS.

Indeed, the Decision emphasizes three characterizing aspects of the tax benefit set forth in article 32-A of the EBF: (i) it is an automatic tax benefit, because "it does not presuppose any act of declaration of recognition" (cf. p. 8); (ii) it assumes a subjective character, being granted to "economic agents with the nature of SCR, but only these" (cf. p. 13); and (iii) it embodies "a true fiscal incentive that requires dynamic conduct by the economic agent targeted (in the case, only SCRs)" (cf. p. 14), by encouraging certain conducts, such as the realization of investments in companies with growth and appreciation potential.

In particular, the Decision emphasizes the subjective character of the benefit, which is "directed exclusively to venture capital companies" (cf. p. 15). From this fact, the Decision extracts its scope and limits, marking the applicable legal regime: from the articulation of article 32-A of the EBF with articles 120, no. 6, and 90, no. 6, of the IRC Code, results all the necessary regulation, reading in these norms a limitation on the deduction of the tax benefit from the collection determined within the scope of a group of companies. The right to deduct is, thus, "restricted to the limit of the sums of its (SCR) own individual collections, in the relevant period of time" because it was "based on active conduct that is individual to it, namely that of risky investment in companies with appreciation potential" (cf. p. 17 of the Decision).

The Decision, although invoking the application of articles 32-A of the EBF and 120, no. 6, and 90, no. 6, of the IRC Code, only reaches its conclusion through interpretive means of the regime of the tax benefit itself and its subjective inclination, drawing from it the consequences it considers relevant. This is evidenced by the assertion that "as a direct result of the regime under consideration, the right that the SCR brings to the group (RETGS), is the (subjective) right that it itself holds to (1) deduct a certain tax benefit (2) from its own collection, and in the exact terms in which that right was formed in its own legal sphere" (cf. p. 17).

The nature of the tax benefit of article 32-A of the EBF

In classifying tax benefits, doctrine distinguishes between objective, subjective, and mixed benefits. As Nuno Sá Gomes explains, "In the former, attention is paid to the objective element of the disallowed fact without regard to the nature and quality of the persons benefited; in the latter, consideration is given to the subjective or personal element of the disallowed fact, that is, the nature or quality of the persons to be disallowed." For its part, mixed tax benefits "are granted taking into account, simultaneously, objective or real and subjective or personal elements" (cf. General Theory of Tax Benefits, Cahiers of Science and Fiscal Technique, no. 165, Lisbon, 1991, p. 141).

With respect to subjective tax benefits, Maria Paula dos Reis Vaz Freire notes that "in subjective benefits, the relief norm leaves untouched the objective aspects of the tax incidence plane, with the benefit operating due to a special qualification of the subjective elements of the tax incidence norm. Thus, taxation applies to all other persons who, in equal circumstances, do not enjoy such qualification" – emphasis added (cf. Birth, Modification and Extinction of Tax Benefits, Dissertation of Master's degree in Legal-Economic Sciences, Faculty of Law of the University of Lisbon, 1995, p. 97, available in the respective library). Consequently, subjective tax benefits are not, as a rule, conceived as a fiscal incentive, but rather as a means of protecting certain entities, having "as their foundation a valuing of the purposes pursued by the beneficiary subjects" (Ibid., p. 97).

Given that it is directed to SCRs, the tax benefit enshrined in article 32-A of the EBF undoubtedly acquires a subjective inclination. However, it is not satisfied with merely verifying the personal element (the type of company in question – venture capital companies), requiring that they realize investments in companies with growth and appreciation potential. This is equally recognized in the Decision, which asserts: "it is fiscal law that identifies completely and with precision the conducts that it wishes to encourage (objective, material or substantive assumptions), the economic agents covered by them (subjective assumptions), and the terms in which those conducts are fiscally rewarded by law" (cf. p. 14).

In this way, because "the benefit in question involves precise, compartmentalized objective and subjective assumptions or requirements" (cf. p. 16 of the present Decision), it should be qualified as a mixed tax benefit.

The necessity of consideration of the fiscal treatment of the collection of the group of companies within other legal regimes

It thus becomes relevant to analyze other legal regimes, in particular other tax benefits, so as to determine the existence or otherwise of similarities with those of SCRs, in their interaction with a RETGS, and to know the legislative options on matters that raise issues parallel to that which is addressed in the case sub judice.

In this respect, I highlight, in particular, the legal regimes of (i) Municipal Surcharge and (ii) other tax benefits, such as the Regime for Fiscal Support for Investment ("RFAI"), the regime for Deduction for Retained and Reinvested Profits ("DLRR"), the System of Fiscal Incentives for Research and Development ("SIFIDE II") or Extraordinary Fiscal Credit for Investment, all of which, I believe, are indicative of the legislator's understanding regarding the treatment of deductions in a RETGS context, and which should guide the interpretation of the regime for tax benefits to SCRs.

[The dissenting opinion continues but appears to be truncated in the provided Portuguese text]