Unit Linked Insurance & Economic Double Taxation in IRC: CAAD Arbitral Decision 65/2014-T

ARBITRAL DECISION

I – REPORT

A (hereinafter designated as A or Claimant, legal entity no. ..., with registered office in ..., filed a request for the constitution of an arbitral tribunal for the purpose of obtaining an arbitral ruling, pursuant to the provisions of paragraph a) of article 2, no. 1 of Decree-Law no. 10/2011, of 20 January, Legal Framework for Arbitration in Tax Matters (hereinafter designated as LFATM) in which the Tax and Customs Authority is named as respondent (hereinafter AT or Respondent), with a view to annulling the corporate income tax (IRC) assessment for the year 2008 identified under no. 2011 ....

The request for the constitution of the Arbitral Tribunal was accepted by the Honourable President of CAAD, and was immediately notified to the Respondent in accordance with legal procedures.

Pursuant to and for the purposes of paragraph a) of article 6, no. 2 of the LFATM, by decision of the Honourable President of the Deontological Council, duly communicated to the parties within legally prescribed time limits, the undersigned arbitrators were appointed, and they communicated acceptance of their appointment to the Deontological Council and to the Centre for Administrative Arbitration within the time period established in article 4 of the Deontological Code of the Centre for Administrative Arbitration.

The Tribunal was constituted on 28 March 2014, in accordance with the requirements of paragraph c) of article 11, no. 1 of the LFATM.

The parties were notified of the arbitral order issued on 20 May 2014, and agreed to waive the holding of the meeting referred to in article 18 of the LFATM, as well as the presentation of their respective pleadings.

To support its claim, the Claimant alleged, in summary and with relevance:

i. It is a public limited company engaged in insurance and reinsurance activity in the Life Branch (see article 7 of the request for arbitral ruling);

ii. In compliance with service orders numbers ..., of 30 September 2010, it was subject to an external general scope tax inspection with reference to the 2008 fiscal year (see article 8 of the request for arbitral ruling);

iii. As a result of which the AT proceeded to make the following additional adjustments:

• "€65,083.17 Adjustment arising from investment income related to insurance contracts where the investment risk is borne by the policyholder (Unit Linked), which did not affect the net results of the fiscal year, thus failing to meet the requirements stipulated in article 46 of the CIRC (see article 9 of the request for arbitral ruling and point III.1.2 of the Inspection Report);

• "€190,546.83 Adjustment, in favour of the Taxpayer, corresponding to withholdings at source effected on income from securities held in portfolios of the Funds "..." and "..." which are held under life insurance contracts where the investment risk is borne by the policyholder (Unit Linked), recorded in account 79114 – Withholding of IRC on income from investment units in Investment Funds" (see article 9 of the request for arbitral ruling and point III.1.3 of the Inspection Report);

• "€190,546.83, Amount relating to the withholding at source on income from securities held in the portfolio of the Funds "..." and "...", of life insurance contracts where the investment risk is borne by the policyholder (Unit Linked), which the taxpayer deducted from the assessed IRC, entering it in Q10 C359 of the Income Statement Form 22, being unable to benefit from the deduction provided for in paragraph f) of no. ... of article 83 of the CIRC" (see article 9 of the request for arbitral ruling and point III.2 of the Inspection Report).

iv. Against the adjustments which were unfavourable to it, it filed an administrative review which was rejected, following which it filed a hierarchical appeal (see articles 10, 11 and 12 of the request for arbitral ruling and documents numbers 2, 4 and 5 attached hereto);

v. The hierarchical appeal filed was rejected by decision issued on 18-07-2013, by the Director of Services for IRC, and notified to the Claimant on 29-10-2013 (see article 13 of the request for arbitral ruling and document no. 2 attached hereto);

vi. The Claimant further makes various considerations regarding the genesis of "Unit Linked" insurance products and their relationship and framework with the discipline of provisions and double economic taxation and their effects in determining taxable income;

vii. Concluding that the adjustments made by the AT are illegal for violating the provisions of paragraph f) of no. 2 of article 83 of the CIRC (as worded at that time);

viii. Further culminating with the formulation of a request for compensatory interest, covered by the provisions of articles 43, no. 1 of the General Tax Code and article 61 of the Tax Procedural Code.

The AT, in its response and forthwith, raises the exception of lack of timeliness of the claim formulated by the Claimant concerning the "IRC assessment act, relating to the year 2008, identified by no. 2011 ...".

With regard to such exception, it alleges, in brief summary that:

"Article 10 of the LFATM establishes, as regards assessment/self-assessment acts, that the time limit for presenting the request for arbitral ruling is 90 (ninety days), referring, as to the moment the counting begins, to what is provided in article 102, nos. 1 and 2 of the Tax Procedural Code (CPPT)". (see article 4 of the response);

(...) the payment deadline for the tax at issue in these proceedings occurred on 14.02.2011, thus (...) "it is untimely and the tribunal cannot hear it. (see articles 6, 7 and 8 of the response);

Adding further that as the Claimant administratively contested the assessment act, which was rejected, "it did not formulate any request to this Arbitral Tribunal seeking the annulment of such rejection";

"Having not done so, (...) there is no support that could establish the timeliness of the claim and, consequently, the possibility of the Tribunal considering the claim formulated with respect to the assessment act" so that this is "prevented from considering and declaring (anything whatsoever) with respect to the claim formulated – "declaration of illegality of the self-assessment act"." (see articles 13, 14, 15 and 16 of the response);

The Respondent further contends, as a consequence, for its discharge from the proceedings.

In the context of its RESPONSE, and by way of impugning, the AT sustained a position contrary to that presented by the Claimant, regarding the adjustments made, reducing its point of view, in very brief summary, to the non-fulfilment of the legal requirements provided under the then applicable article 46, nos. 1 and 2 and paragraph f) of no. 2 of article 83 of the CIRC, in order for the Claimant to be able to benefit from the regime of elimination of double economic taxation, this with regard to the adjustment of €65,083.17 and, with respect to the adjustment of €190,564.83, it contends for its maintenance, considering its deduction from the tax assessment to be improper, in accordance with the provision of paragraph f) of no. 2 of article 83 of the CIRC (as worded at that time).

Proceeding for this purpose with an analysis of the tax regime for the elimination of double economic taxation and the determination of taxable profit of legal entities, taking as backdrop products of the Life Branch, commercialised by the Claimant, commonly referred to as "Unit Linked insurance contracts" and their economic and legal framework.

The Claimant further proceeded to respond to the exception raised by the AT, covered by article 16 a) of the LFATM, having therein contended for the timeliness of the presentation of the request for constitution of the Arbitral Tribunal.

The arbitral tribunal was regularly constituted and is materially competent, in light of the provisions of articles 2, no. 1, paragraph a), and 30, no. 1, of Decree-Law no. 10/2011, of 20 January.

The parties have legal personality and capacity, are legitimate and are represented (articles 4 and 10, no. 2, of the same legislation and article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullities and no exceptions have been raised.

Thus, there is no obstacle to the examination of the merits of the case.

All considered, it is incumbent to deliver

II. DECISION

A. FACTUAL MATTER

A.1. Facts found to be established

1. The Claimant is a public limited company engaged in insurance and reinsurance activity in the Life Branch, having commenced its commercial activity in ....

2. The Claimant, in the year 2008, had its registered office in Portuguese territory and was not covered by the transparent company regime.

3. In compliance with service orders numbers ... of 30 September 2010, the Claimant was subjected to an external tax inspection of general scope, which covered the 2008 fiscal year.

4. The Claimant had, at that time, accounting organized in accordance with the Chart of Accounts for Insurance Companies (hereinafter CAIC07), contained in Regulatory Standard no. 4/2007-R, of 27 April, amended by Regulatory Standard no. 20/2007-R, of 31 December, both of the Institute of Insurance of Portugal.

5. During the inspection procedure, the Claimant voluntarily regularised various amounts relating to situations challenged by the Inspection.

6. The Inspection, in the context of the right to a hearing, disregarded the adjustment it had proposed in the draft report concerning the depreciation of the insurance portfolio of ..., in the amount of €50,000.00.

7. The Inspection did not accept what the Claimant alleged at that same stage regarding the other adjustments, namely:

a. Adjustment of €65,083.17, "arising from investment income related to insurance contracts where the investment risk is borne by the policyholder" (Unit Linked), on the grounds that it did not meet the requirements then established in article 46 of the CIRC;

b. Adjustment of €190,546.83, concerning withholdings at source on income from securities held in portfolios of Funds "..." and "..." held under life insurance contracts where the investment risk is borne by the policyholder (Unit Linked), as well as the consequent adjustment to taxable income, in favour of the taxpayer, removing the same amount from the value of income distributed by those funds.

1. The income referred to in paragraph a. of the preceding number was distributed by a company that had its registered office in Portuguese territory, subject to and not exempt from IRC.

2. The tax inspection report contained, among other matters, the following:

a. I.4.1.2 – Income in accordance with article 46 of the CIRC

€65,083.17 Adjustment arising from investment income related to insurance contracts where the investment risk is borne by the policyholder (Unit Linked), which did not affect the net results of the fiscal year, thus failing to meet the requirements stipulated in article 46 of the CIRC.

b. I.4.1.3 - Income from Units of Participation in Investment Funds "Unit Linked"

(€190,546.83) Adjustment, in favour of the Taxpayer, corresponding to withholdings at source effected on income from securities held in portfolios of the Funds "..." and "..." which are held under life insurance contracts where the investment risk is borne by the policyholder (Unit Linked), recorded in account 79114 - Withholding of IRC on income from investment units in Investment Funds.

c. I.4.2.1 - Withholding at source, paragraph f) of no. 2 - of article 83 of the CIRC

€190,546.83 Amount relating to the withholding at source on income from securities held in portfolios of Funds "..." and "..." of life insurance contracts where the investment risk is borne by the policyholder (Unit Linked), which the taxpayer deducted from the assessed IRC, entering it in Q10 C359 of the Income Statement Form 22, being unable to benefit from the deduction provided for in paragraph f) of no. 2 of article 83 of the CIRC.

1. In accordance with these adjustments, an additional IRC assessment no. 2011..., of 03-01-2011, was issued for the 2008 tax year, which is the subject of these proceedings, resulting in a tax liability of €167,264.13 (in accordance with statement of account reconciliation no. ... and statement of assessment/compensation no. ...).

2. The tax referred to in the preceding paragraph was paid on 14-02-2011.

3. The Claimant, in a timely manner, filed an administrative review of that assessment, which was rejected by decision of the Director of the Large Taxpayers Unit on 27-11-2012.

4. The Claimant, also in a timely manner, appealed the hierarchical level against the decision rejecting the administrative review it filed.

5. That appeal was rejected by decision of 18-7-2013, issued by the Director of Services for IRC in the exercise of delegated authority, and notified to the Claimant on 29-10-2013.

6. On 27-01-2014, the taxpayer submitted its request for arbitral ruling.

7. In the course of its activity, the Claimant commercialises a product presented as insurance linked to "investment funds", also referred to as "Unit Linked insurance".

8. "Unit Linked insurance" contracts are contracts under which the insurer undertakes to pay a benefit on the date of the event (expiry of the term, moment of redemption or date of death of the policyholder), which is indexed to the value of a determined set of assets (the "investment fund").

9. When someone subscribes to this type of product they pay a premium, and the insurer assigns to this premium a certain number of account units.

10. After receiving the amounts paid by the counterparty under the contract, the insurer acquires the financial assets to which the value of the account units is indexed.

11. Under the contracts in question, the insurer is the owner of the assets that comprise the investment portfolio linked to the contract, and all assets are acquired by the insurer in its own name and for its own account, being entered on the insurer's assets and registered in its name without reservation when dealing with assets subject to registration.

12. The value of the account units is obtained by dividing the value of the set of assets at a given moment by the number of account units contractually assigned, deducting the charges provided for in favour of the insurer.

13. The value of the insurer's liability towards the counterparty varies throughout the contract, depending on the variation in the value of the assets indexed to the account units.

A.2. Facts found to be not established

With relevance to the decision, there are no facts that should be considered as not established.

A.3. Reasoning regarding the factual matter established and not established

With respect to the factual matter, the Tribunal does not need to pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that are relevant to the decision and to distinguish established facts from unestablished ones (see article 123, no. 2 of the CPPT and article 607, no. 3 of the Civil Procedure Code, applicable by virtue of article 29, no. 1, paragraphs a) and e), of the LFATM).

Thus, the facts pertinent to the judgment of the case are chosen and selected based on their legal relevance, which is established in view of the various plausible solutions to the legal question(s) (see former article 511, no. 1 of the Civil Procedure Code, corresponding to the current article 596, applicable by virtue of article 29, no. 1, paragraph e), of the LFATM).

Thus, taking into account the positions assumed by the parties, the documentary evidence and the administrative file attached to the proceedings, the facts listed above were considered established, with relevance to the decision, moreover being consensually recognized and accepted by the parties.

B. ON THE LAW

As a preliminary matter to the examination of the merits of the claim formulated by the Claimant, the AT questions the timeliness of the request for arbitral ruling regarding the additional IRC assessment relating to the 2008 fiscal year.

Let us see.

The AT understands that the Claimant identifies as the tax act object of the request for arbitral ruling the "IRC assessment act, relating to the year 2008, identified by document number 2011 ...", and that, since "the payment deadline for the tax at issue in these proceedings occurred on 14.02.2011", the extratemporal character of the proceedings will be verified.

Underlying the AT's position is the understanding that the Claimant should have identified as the object of the arbitral ruling the act of rejection of the hierarchical appeal filed by it.

With all due respect, it is considered that the AT is not right in this matter. In fact, and forthwith, necessarily, a request for a declaration of illegality of the (self-)assessment act has, at least tacitly, underlying it, a request for a declaration of illegality of all subsequent acts whose validity is affected by that declaration, which obviously includes the act of rejection of the administrative review and the hierarchical appeal.

Moreover, insofar as the rejection is concerned, and to the extent that no defects are raised in the administrative review/hierarchical appeal decision itself, or in its respective procedure, that act will be merely confirmatory, and, as such, not separately appealable.

On the other hand, and as has been recognized by national case law, if, in cases such as the present one, the immediate object of the proceedings is the act of decision on the administrative review/hierarchical appeal, its mediate object will be the primary (self-)assessment act itself[1].

This situation, moreover, is perfectly clear in the administrative law proceedings, which form the basis of tax proceedings, as follows from article 50, paragraph 1 of the Administrative Courts Procedure Code, duly combined with article 59, paragraph 4 of the same code.

The regime governing tax arbitral proceedings also corroborates this understanding, since article 2 of the LFATM takes as the reference point of the jurisdiction of arbitral tribunals the primary acts[2], with secondary acts being only relevant as reference points for the timeliness of the impugnatory claim, as follows from article 10, paragraph 1, a) of that Regime, which requires that requests for constitution of arbitral tribunals be presented within 90 days, counted from the facts provided in nos. 1 and 2 of article 102 of the Tax Procedural Code.

That is, in summary and in strict terms, the Claimant's claim was irreproachably formulated, as it relates to paragraph a) of article 2, no. 1 of the LFATM (assessment act), and was presented within the time limit fixed by paragraph a) of article 10, no. 1 of the same legislation (90 days counted from the administrative review decision, the act referred to in no. 2 of article 102 of the CPPT).

Accordingly, the exception of extratemporal character of the claim, invoked by the AT, must fail.

Entering into the substantive question at issue in these proceedings, it is found that it is simple to formulate, and is essentially rooted in understanding and drawing the proper conclusions from the modus operandi of products within the scope of Life Branch insurance, denominated unit linked.

As both parties well explain, the said products operate in accordance with the terms better described in paragraphs 14 to 19 of the factual matter found to be established.

In particular, the gordian knot of the problem, as configured by the AT, resides in the circumstance that income derived from holdings of shareholdings and investment fund units, within the framework of that type of contracts, have, by force of the prudential rules governing insurance activity, a corresponding obligation in the establishment of provisions of equal amount, relating to the liabilities assumed with the counterparty in those contracts, which, in practice, would translate into the circumstance that, in themselves, such income would not increase the taxable base of the insurance entity.

From this framework, accepted peacefully by both parties in these proceedings, it follows, in the AT's view, the non-applicability of the rule of article 46, nos. 1 and 2 of the CIRC in force at the date of the tax fact (current article 51, nos. 1 and 2), as well as of the rule of paragraph f) of no. 2 of article 83 of the IRC Code (current paragraph d) of no. 2 of article 90 of the CIRC).

The Claimant, for its part, understands that there is no legal or factual obstacle to the applicability of the stated rules.

Let us see.

The matter in question in these proceedings was the subject of a detailed and pertinent study authored by Saldanha Sanches and João Taborda da Gama, published in the journal Fiscalidade, in the year 2008[3], which will be followed closely here.

After examining the economic and legal framework of this type of contracts ("unit linked insurance") in terms generally coinciding with those already briefly outlined, those authors conclude, pointing to a characteristic of such contracts, essential for understanding the matter in question, which is the circumstance that the insurer "does not deliver the account units, which have no existence nor value outside this relationship. It delivers what it is obliged to deliver and what the insured is entitled to - the value of the account units, which is the object of this legal relationship, that is, the amount constituting its obligation to perform."[4]

That is: the primary/principal obligation of the insurer under "unit linked" contracts is a single, monetary obligation to deliver an amount calculated based on the value that, at the moment of the event that terminates the contract, the account unit has.

Thus, only at that moment, at the end of the contract, is there an income of the beneficiary, paid by the insurer. Until then, let it be emphasized, the assets of the counterparty to the insurer remain unchanged, untouched. The variations in the value of the account unit, which corresponded to the compulsory provisioning carried out by the insurer, have no influence on the assets of the insurer's counterparty. They do not cause, in short, any income of the holder of the "unit linked" product.

In the words of the same authors, "Insurers are not financial intermediaries, nor do they act on behalf of the insured (they are not agents, brokers, representatives or commission agents). They act on their own account in the markets. Account units are not units of participation in funds, shares or any other securities belonging to customers. They are mere national calculation units"[5].

To understand that this is so, one need only note, forthwith, that in the event of insolvency of the insurer, without the respective contracts having matured, the counterparties in unit linked contracts will have no proprietary right either over the assets acquired by the insurer as a function of "their" contract, or over the income generated by those assets and distributed to the insurer. In such a case (insurer insolvency), the counterparties in unit linked contracts will have to present themselves as creditors of the insurer, being paid in accordance with the applicable bankruptcy rules, by the totality of the insurer's assets, to the extent that falls to them, and not in function of the contract they concluded or their supposed "participation" in the assets accounting allocated to that contract.

Continuing their analysis, the cited authors point to several other characteristics of the contractual regime in question, worthy of special note from the perspective that concerns us.

Thus, it is mentioned in the work that follows that "from a practical standpoint, it is not to be excluded, also, that, if not prohibited by contracts, insurers may not even hold the indexing assets or may not sell them at the moment the contract with customers ceases", adding that "The insurer's obligation on the event is always to deliver determined values, even if it does not acquire any assets, acquires fewer or different ones, or does not sell them", making evident that "unit-linked products entail two types of legal relationship, different in almost all their elements."[6]

It thus becomes clear, it is thought, that in both legal and economic terms, there is no relationship, within the scope of the so-called "unit linked insurance", between the subjects generating the income owed by the financial investments made by the insurer, and the insurer's customer holding that product.

Within this framework, the authors have no doubts that the insured "Do not buy, do not sell, do not participate in losses, do not receive dividends. The subject, here, is the insurer. The commercial obligations and the rights are hers. Consequently, the active and passive tax obligations are hers"[7], whereby "income that may be obtained from holding shares and investment units are gains subject to tax. Specifically, to IRC", with those authors further stating that "When we affirm that they are gains subject to tax, we wish, of course, to affirm that they are gains included in the tax base, that is, subject to the tax regime globally considered and not only part of the regime. Thus, the entire regime of article 22 of the Basic Tax Code and the entire IRC regime - including the mechanisms for elimination of double economic taxation of article 46 of the respective Code - are applicable to it."[8]

As the authors recall, "For the IRC Code, at the moment of defining the tax base, there is no doubt that a profit distributed to the taxpayer is included in its tax base, just as income arising from the sale of goods, provision of a service or rental of real estate."[9]

Thus, not only will article 46 of the CIRC applicable at the date of the tax fact at issue in these proceedings have full application in these situations, (current article 51)[10], since "Article 46 is not a tax benefit - it is a mechanism of elementary tax justice that restores tax neutrality, preventing the same reality from being taxed twice. It makes no sense to deny its application to insurance companies in the context of unit-linked products they commercialise, claiming, for example, that the income resulting from the assets at their disposal does not belong to them or that the accounting result is nil, by virtue of provisions"[11], particularly since "It cannot be said", nor does the AT do so, "that the mechanism of article 46 requires that income be taxed twice"[12], as well as the rule of paragraph f) of no. 2 of article 83 of the IRC Code (current paragraph d) of no. 2 of article 90 of the CIRC), given that "If the insurance company could not free itself from the tax burdens that the fund or the commercial entities bore, it would have to pass that burden on to the compensation payable to the insured, who would thus suffer double taxation: first, in the investment fund or in the legal entity and, then, at the moment it was taxed on income tax by the compensation it would receive", which "would annul the tax benefit that the legislator sought to grant to savings"[13].

In no part of the extensive set of considerations on this matter, elaborated by the AT, either in these proceedings or in the administrative file that preceded it, are arguments found that call into question the conclusions formulated in the work being followed in this decision and which have just been cited.

This is because, contrary to what is contended by the AT, the interpretation proposed by that Authority is not "the only interpretation compatible with the objective pursued by the legislator with the regime in question, which is translated, as mentioned above, in seeking to prevent that "determined income" (the same wealth, in the specific case, profits) could be taxed twice."[14] On the contrary: the AT's interpretation leads to actual double taxation of the income in question, in the sphere of the insurer, in IRC proceedings, and then in the sphere of its counterparty, in income tax proceedings, since "when one contracts unit-linked insurance, the individual will always pay income tax on the appreciation, even if with a tax benefit."[15]

As the work followed here states, "the law structures a system whose main support is the tax neutrality of the insurance company that creates and manages the unit-linked products, providing that this company, like any legal entity, shall relieve itself of a series of tax burdens collected in advance (withholdings at source and taxation of distributed profits), for the reason that downstream all this income will be taxed in the sphere of the insured individual."[16]

Neither is it considered correct another angular idea of the AT's argument, according to which "the income generated by the investments that constitute the autonomous funds allocated to this type of products – which are the income at issue in the situation sub judice, and which, incorrectly, the Claimant deducted "on the basis of" article 46 of the IRC Code – are imputed to the policyholders"[17], at least in the implicit sense and, for this case, relevant sense, that such income would immediately be income of the policyholders, which is, forthwith, and moreover, manifest, to the extent that, at the time of its distribution by the fund or affiliate, it does not contribute (nor should it, nor does the AT contend that it should) to the tax base of the policyholders.

The "provisions that the insurer makes (rightly, is legally required to make) for the purpose of covering" its liabilities, and from which the "imputation" noted by the AT results, is, as the authors who have guided us note, "an independent matter whose functioning cannot be used to prevent the above effects"[18]

Effectively, "Provisions, by setting aside profits that would otherwise be distributed, will result in the freeing of funds that will be invested in determined assets, with greater or lesser risk, with greater or lesser profitability. The question of greater or lesser insurance risk is a distinct question from the more or less secure way in which the investment can be made that will permit the future payment of the benefits of that insurance, which are always due independently of the insurer's concrete investment policy"[19], since "If the insurance company makes a provision of 100, it can at the same time invest those 100 in a time deposit, bonds, shares or any other assets."[20]

And if, as the AT states in the response presented in these proceedings, "The accounting of dividends (as income) and the corresponding provision (as expense) cannot, therefore, taking into account the economic substance of the product and the operation, be viewed in a completely independent way, and separated from the functioning of the unit linked product, its essence, and its effects on the accounting of the insurer."[21], it is equally true that "The accounting of dividends (as income) and the corresponding provision (as expense)" shall not, equally, be viewed in a completely dependent and connected way, and much less – as the AT does – in a completely monolithic way, it not being correct, therefore, to affirm that "the profits distributed by the shareholdings, in the investments allocated to unit linked products (...) are "passed on" to the policyholder."[22]

This is because, as has been seen already, only at the moment of maturity of the "policy" (redemption, expiry, death) does the right to payment of the insurer's counterparty arise, and, consequently, does the income of this counterparty arise, whereby, before this moment, nothing is legally or economically "passed on to the policyholder".

It being a fact that, as the AT notes, "the profits distributed, the appreciations, and the depreciations relating to investments to which products are indexed where the investment risk is borne by the policyholder, although they may be accounting recorded in accounts of Income and Gains or Expenses and Losses (in this case, in accounts "74 Investment income"; "75 Gains on investments" and "65 Losses on investments"), are entirely offset by an entry recorded in accounts of Expenses and Losses or Income and Gains (in this case, in accounts "67 Losses and expenses on financial liabilities" and "77 Income and gains on financial liabilities")"[23], it does not follow, as that Authority contends, in what will be the cornerstone of the thesis underlying its sustained position, that "the impact of dividends on the insurer's accounting is completely nil, either at the level of results, or at the level of cash flow"[24], at least in the sense that the distribution of those dividends to the insurer has not, in fact and effectively, occurred, and not to the "policyholder", and that, consequently, the tax base of the former, and not that of the latter, is affected by that real occurrence – distribution of the dividend.

Indeed, it is precisely because the distribution of the dividend concretely contributes to the insurer's tax base that the establishment of the provision is necessary! It is, in effect, because that tax base has been increased by way of the distribution of the dividend that the need/obligation arises for the accounting of the provision. If, as the AT fundamentally contends, there would not occur, economically, legally and really, a change in the insurer's tax base by way of the distribution of the dividend[25], there would be no need or justification for the creation of any provision! It is thus that, contrary to what that authority understands, the functioning of the mechanism of provisioning of the liabilities of insurers within the scope of unit linked products commercialised by it, not only does not demonstrate the irrelevance, for their tax base, of the dividends resulting from the shareholdings acquired as a function of such contractual relationships, but rather corroborates the relevance of such dividends to that base, which is precisely what justifies and explains the existence of the said mechanism.

Thus, as Saldanha Sanches and João Taborda da Gama state, "For the IRC Code, at the moment of defining the tax base, there is no doubt that a profit distributed to the taxpayer is included in its tax base, just as income arising from the sale of goods, provision of a service or rental of real estate. (...) The legislator is not concerned, in none of the cases in which it orders the addition or subtraction of realities from the tax base, with the taxation that may eventually fall upon those realities"[26].

Thus, although it is subscribed that, tendentially, "the "profit" of the Insurer with the existence of unit linked products was (under the CAIC94) and – more relevant for the case sub judice – continues to be (with the CAIC07), solely, constituted by the commission for the service provided with the management of the said product (unit linked)."[27], it is not considered that the conclusion is founded that "the income generated by the investments that constitute the autonomous funds allocated to this type of products were (under the CAIC94) and continue to be (with the CAIC07) imputed to the policyholders, the entity that makes the investment and bears the investment risk and its gains and losses"[28].

Moreover – and complementarily to what has already been expounded regarding the circumstance that any gains or losses of the "policyholders" only occur at the moment of maturity of the product – it should be said, with the authors we have followed, that "there would be no risk (nor future profit) only if the insurance company were a kind of custodian of the client's investments, limiting itself to charging a fee for safekeeping of securities"[29], which is manifestly not the case.

Finally, it is necessary to address the relevance of the entry into force of the so-called CAIC07[30], in the year 2008, to which the tax act in question in these proceedings refers.

The AT alleges in its response that under the CAIC07, in "CLASS 3 – TECHNICAL PROVISIONS", are gathered "all technical provisions constituted, in accordance with the regulations in force, to meet the obligations arising from insurance contracts".", while in the ""CLASS 4 - OTHER ASSETS AND LIABILITIES", in a third-party account, account "45 - other financial liabilities", is found the sub-account "45.0 Financial liabilities of the deposit component of insurance contracts and insurance contracts and operations considered for accounting purposes as investment contracts".", and that "In "operations where the investment risk is borne by the policyholder" (unit linked), being an investment/deposit contract, the amounts received from policyholders are recorded in the liability, in this account «45.0»."

With all due respect, the allegation by the AT changes nothing in the understanding resulting from all that has been expounded above.

In fact, and forthwith, no. 2 of article 46 of the CIRC, in the wording in force at the date of the tax fact, does not refer to "technical provisions", but to "technical reserves", not equating in any way – as the AT does in its response – both expressions.

Thus, the legal expression should be understood as having a broader scope than the strict concept on which the AT bases itself, encompassing, beyond this, all those situations in which, prudentially, the insurer is required to, in some way, reserve earnings.

This understanding, moreover, is, in this case, corroborated by the proper reading of the rule in question, which in its paragraphs includes, in particular, investment companies (paragraph d)). Now, if the product in question, as the AT repeatedly and very properly points out, is not an insurance contract stricto sensu, but an investment contract, even if it were understood that the case sub-judice did not fit within the body of no. 2 of article 46 of the CIRC, in the wording applicable, it would always have to be understood that it falls within that referred paragraph of the same rule, equating, for these purposes, the Claimant to an investment company, not least because it commercialises, in a lawful, authorized and supervised manner, investment contracts.

This provision of paragraph d) of no. 2 of article 46 of the CIRC, in the applicable wording, demonstrates, moreover, the lack of substantial grounds for the position sustained by the AT in these proceedings. This is because the manner of functioning of that type of company (investment company) will be, precisely, that which the AT sustains as being incapable of founding the application of the rule in question. Indeed, such companies will carry out investments on behalf of their clients, receiving the corresponding returns, which, in accordance with the investment contract, will be redirected to those clients, the economic income of the companies in question being correspondent to the commissions they charge. Just as happens with insurers, in unit linked contracts!

Finally, it should also be said that article 50 of the CIRC[31], in the wording resulting from Decree-Law no. 159/2009, of 13/07, came to some extent to clarify that, from the legislator's perspective, income resulting from assets "allocated to contracts where the insurance risk is borne by the policyholder" contribute to the taxable profit of the insurer.

Thus, from all that has been expounded, understanding that the additional IRC assessment against which the Claimant objects lacks legal and factual support, it should be annulled.

The Claimant cumulates with the annulment claim of the tax act object of these proceedings, a claim for condemning the AT to payment of compensatory interest.

In the case at hand, it is manifest that the illegality of the assessment act whose amount the Claimant paid is attributable to the Tax Administration, which, on its own initiative, enacted it without legal support.

Consequently, the Claimant is entitled to compensatory interest, in accordance with article 43, no. 1 of the General Tax Code and article 61 of the Tax Procedural Code.

The compensatory interest is due from 14-02-2011 until full payment to the Claimant of the assessed amounts, calculated on the basis of the amount of €167,264.13, at the legal rate, in accordance with articles 43, nos. 1 and 4, and 35, no. 10, of the General Tax Code, 61 of the Tax Procedural Code and 559 of the Civil Code and Ordinance no. 291/2003, of 8 April (without prejudice to any subsequent amendments to the legal rate).

C. DECISION

For these reasons, this Arbitral Tribunal decides:

a) To uphold the arbitral claim formulated and, accordingly, to annul the tax act object of these proceedings and to order the AT to refund to the Claimant the tax paid, plus compensatory interest;

b) To condemn the Respondent in the costs of the proceedings, in the amount of €3,672.00, taking into account the amount already paid.

D. Value of the proceedings

The value of the proceedings is fixed at €167,264.13, pursuant to article 97-A, no. 1, a), of the Tax Procedural Code, applicable by virtue of paragraphs a) and b) of article 29, no. 1 of the LFATM and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is fixed at €3,672.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, given that the claim was entirely upheld, pursuant to articles 12, no. 2, and 22, no. 4, both of the LFATM, and article 4, no. 4, of the cited Regulation.

Let notification be made.

Lisbon

1 September 2014

The Arbitrators

(José Pedro Carvalho – President/Rapporteur)

(João Sérgio Ribeiro)

(José Coutinho Pires)

[1] In this sense, see, for example, the Decision of the Administrative Supreme Court of 16-11-2011, issued in proceedings 0723/11, and available at www.dgsi.pt, in whose summary may be read: "The judicial impugnation of rejection of administrative review has as its immediate object the decision of the review and as its mediate object the defects attributed to the assessment act."

[2] (See article 2, paragraph 1, a)) "acts of assessment of taxes, self-assessment,...".

[3] No. 33, pp. 25 et seq. Work to which, hereinafter, the page number indications refer, without any further reference.

[4] P. 32.

[5] P. 34.

[6] P. 33.

[7] P. 34.

[8] P. 36.

[9] P. 59.

[10] Acknowledging the AT, in the tax inspection report, that "The Taxpayer, in deducting this income, applied no. 2 of article 46 of the CIRC, which provides that income from shares allocated to technical provisions is exempted from the requirements of the percentage of participation and term of holding requirements, provided that the company distributing the profits is established in Portuguese territory and is subject to and not exempt from IRC and that the beneficiary entity is not covered by the transparent company regime. The income was distributed by Portuguese companies that meet the stated conditions."

[11] P. 56.

[12] P. 60.

[13] P. 69.

[14] Article 49 of the Response.

[15] P. 69.

[16] Idem.

[17] Article 74.

[18] P. 36.

[19] P. 50.

[20] P. 52.

[21] Article 90.

[22] Article 106.

[23] Article 151.

[24] Article 164.

[25] Which would be the case, for example, if the insurer acted in the name of the insured, being a representative or representative of this entity.

[26] P. 59.

[27] Article 169.

[28] Article 170.

[29] P. 45.

[30] Regulatory Standard of the Institute of Insurance of Portugal (IIP), no. 4/2007-R, of 27 April (Regulation no. 110/2007, published in the Official Journal, 2nd series, of 8 June 2007), amended by Regulatory Standard no. 20/2007-R, of 31 December (Regulation no. 35/2008, published in the Official Journal, 2nd series, of 18 January 2008).

[31] "There are included in the formation of taxable profit the income or expenses resulting from the application of fair value to assets that represent technical provisions of life insurance with profit participation, or are allocated to contracts where the insurance risk is borne by the policyholder."