Deductible Financial Charges and Amortizations in IRC: SGPS Holding Company Tax Dispute (CAAD 653/2014-T)

ARBITRAL DECISION

I – REPORT

1. On 1 September 2014, A… – Sociedade Gestora de Participações Sociais, S.A. ("A… SGPS"), a company with registered office at Avenida …., no. … – floor ……., …-… Lisbon, legal person with tax identification number …, with share capital of € 5,000,000 and B… , LDA. ("B…"), a company with registered office at …, …, parish of …, municipality of Guarda, legal person with number …, with share capital of € 50,000, having been notified of the decision dismissing the administrative objection presented jointly against the corporate income tax (IRC) assessment schedule No. 2013 … and the account adjustment schedule No. 2013 …, relating to the tax year 2009, requested, pursuant to the terms and for the purposes of the provisions of subparagraph a) of no. 1 of article 2 and article 10, both of Decree-Law no. 10/2011, of 20 January, the constitution of an arbitral tribunal with the appointment of arbitrators by the Ethics Council of the Administrative Arbitration Center, in accordance with the provisions of subparagraph a) of no. 2 of article 6 of the aforementioned enactment, with the grounds set out in the initial petition hereby attached.

2. The Claimant requested the annulment of the corporate income tax assessment schedule No. 2013 … and the respective account adjustment schedule No. 2013 …, relating to the tax year 2009.

3. The request for constitution of the arbitral tribunal was accepted by the Esteemed President of CAAD on 3 September 2014, and was notified to the Tax and Customs Authority (hereinafter referred to as "TA" or the "Respondent") on 04-09-2014.

4. In the request for arbitral pronouncement, the Claimant chose not to appoint an arbitrator. Pursuant to the terms of subparagraph a) of no. 2 of article 6 and subparagraph b) of no. 1 of article 11 of the RJAT, with the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council of CAAD appointed as arbitrators of the collective arbitral tribunal Counselor Jorge Lino Alves de Sousa (arbitrator-president), Dr. Nuno Maldonado Sousa and Dr. Luís Janeiro (arbitrators-members), all of whom accepted their appointment in accordance with the legally established terms.

5. The parties were notified on 17 October 2014 of the appointment of the arbitrators, in accordance with article 11, no. 1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

6. On 3 November 2014, following the arbitrator-president Counselor Lino Alves de Sousa being temporarily unable, due to illness, to properly perform his respective functions, by Order of the President of the Ethics Council of the Administrative Arbitration Center, Counselor Jorge Lopes de Sousa was appointed, following his availability, to temporarily replace, for the duration of the impediment, Counselor Jorge Lino Alves de Sousa, arbitrator-president of this proceeding.

7. In accordance with the provisions of subparagraph c) of no. 1 of article 11 of the RJAT, with the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 4 November 2014.

8. On 3 December 2014, as he was no longer unable to perform his functions, by Order of the President of the Ethics Council of the Administrative Arbitration Center, Counselor Jorge Lino Alves de Sousa resumed his function as arbitrator-president of this proceeding.

9. On 4 February 2015, following the arbitrator-president Counselor Jorge Lino Alves de Sousa being unable, due to illness, to properly perform his respective functions, by Order of the President of the Ethics Council of the Administrative Arbitration Center, Counselor Jorge Lopes de Sousa was appointed as arbitrator-president of this proceeding.

10. The Respondent, duly notified for this purpose, submitted its Response and attached to the present proceedings the Tax Administrative Process.

11. The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with articles 2, no. 1, subparagraph a), 5 and 6, no. 1 of the RJAT.

The parties have legal standing and capacity, are entitled to bring proceedings, and are legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March.

The proceeding does not suffer from any nullities.

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

Given the foregoing, it is appropriate to render

II. DECISION

Material Facts

1.1. Facts Deemed Proven

A. A… SGPS[1] commenced its activity on 1999-12-14 and has as its corporate purpose the management of equity interests in other companies as an indirect form of exercising economic activities, being classified under CAE 64202 (22nd RI[2]; 9th RAT[3]; PA[4], p. 108).

B. A… SGPS, in its capacity as parent company, exercised the option for application of the special tax regime for groups of companies and this commenced on 01-01-2006 (10th RI; 10th RAT; PA, p. 108).

C. In 2009, the tax scope of the group was composed of the following companies (11th RI; 12th RAT; PA, p. 108):

(i) A… – Sociedade Gestora de Participações Sociais, S.A. (Claimant in this proceeding);

(ii) C… , Lda.

(iii) D…, Lda.

(iv) E…, Lda.

(v) F..., Lda.

(vi) G…, Lda.

(vii) H…, Lda.

(viii) I…, Lda.

(ix) J…, Lda.

(x) B…, Lda. (Claimant in this proceeding)

(xi) K..., SGPS, S.A.

(xii) L…, Lda.

(xiii) M…, Lda.

D. The Claimant B…, Lda.[5] commenced activity on 26-04-2004 and began production during the tax year 2007, has as its corporate purpose the production and sale of electricity using the kinetic energy of wind, as well as the performance of any activity related to renewable energies and CAE 35113 and is classified by the TA under the general tax regime (59th RI; 11th RAT; PA p. 123).

E. The Claimants filed non-taxable corporate income tax Model 22 declarations, insofar as they relate to the individual results of A… SGPS, S.A., in which tax losses of € 2,829,793.27 and € 634,856.64 were calculated for the tax years 2008 and 2009, respectively. (26th RI; PA, p. 109).

F. The taxable profit declared by the group for the tax year 2009 was € 20,423,560.48, which resulted from the sum of the tax results calculated for each of the companies composing it (13th RI, doc. 1, p. 10; 13th RAT), namely:

(i) D…, Lda.: € 283,951.74;

(ii) E…, Lda.: € 705,811.89;

(iii) F… Monte, Lda.: € 379,205.20;

(iv) H…, Lda.: € 660,228.63;

(v) G… Grela, Lda.: € 44,990.89;

(vi) C…, Lda.: € 287,449.98;

(vii) A…, S.A.: (€ 634,856.64);

(viii) J…, Lda.: € 382,967.31;

(ix) L…, Lda: € 7,137,679.30;

(x) I… – Energias Renováveis, Lda.: € 11,543,062.76;

(xi) M…, Lda. (€ 104.50);

(xii) B…, Lda.: (€ 355,970.29);

(xiii) K..., SGPS, S.A.: (€ 10,855.79).

G. In compliance with Service Order no. OI2012 … of 26-10-2012, an internal inspection action was carried out with respect to the Claimant GA… SGPS, S.A. (4th RAT; PA, p. 108).

H. Through internal analyses of the non-taxable individual declarations, corporate income tax Model 22, relating to companies A… SGPS and B…, under Service Orders no. OI2012 … and no. OI2012 …, respectively, relating to the tax year 2009, the TA considered that there were inaccuracies with an impact on the determination of the taxable matter of each of the Claimants. (6th RI; doc. 1, p. 6; 8th RAT).

I. A… SGPS recorded the following financial expenses and losses as costs in the POC accounts (17th RAT; PA, p. 110):

J. A…SGPS included, in field 225 of Schedule 07 of the Corporate Income Tax Model 22 Declaration relating to the tax year 2009, among other values, the amount of € 11,149.22 to be added to the net result of the tax year (26th RI; PA, p. 42v).

K. A… SGPS presented to the TA new schedules for the tax years 2008 and 2009 and in them calculated the amounts of € 14,287.14 and € 11,687.62, respectively, as financial expenses incurred with the acquisition of equity interests and in the schedule prepared for the tax year 2009, A… SGPS included in the "Other Assets" line item the amount of supplementary/additional contributions recorded in the POC sub-accounts "4131 - Loans for Financing Group Companies," in the total amount of € 238,601,750.00, having clarified that these records related to supplementary contributions made to subsidiary companies (RAT, 20th, 21st, 22nd and 62nd; PA, p. 111).

L. A… SGPS was notified to exercise the right to be heard regarding the draft corrections of the tax inspection report through office no. … of 2013/04/18 (40th RAT; PA, pp. 113-114).

M. As a result of the inspection action with respect to A… SGPS relating to the tax year 2009, an arithmetical correction was made by the TA in the total amount of € 2,074,040.02 (14th RI, doc. 1, p. 12; 5th, 6th, 7th, 14th and 47th RAT), with the following breakdown (amounts in euros):

N. Despite the algebraic sum of the corrected tax results being € 22,497,600.50, the taxable matter calculated for the tax year 2009 was € 20,504,559.38, since the group presents reportable losses whose amount totals € 1,550,260.92 and the subsidiary companies present reportable losses generated in their individual sphere, in the total amount of € 442,780.20 (48th RAT; PA, p. 48).

O. The corrections made, with respect to the treatment of the financial expenses of A… SGPS, were based on the TA's understanding that "gains and losses on equity interests, which include supplementary contributions and ancillary contributions under the regime of supplementary contributions, as well as financial expenses incurred with the acquisition of such equity interests, do not contribute to the formation of the taxable profit of SGPS." (15th and 29th RI, 16th RAT; PA, pp. 112-113).

P. As a result of the corrections made by the TA, the total financial expenses that do not contribute to the formation of the taxable profit of A… SGPS for the tax year 2009 became € 1,812,543.01 (33rd RAT; PA, p. 47).

Q. With respect to the tax year 2009, the TA did not accept as a tax deduction the amount of € 1,812,543.01, to the detriment of the amount added by A… SGPS of € 11,149.22, resulting in a correction unfavorable to the taxpayer in the amount of € 1,801,393.79 (34th RAT; PA, p. 47).

R. On 26-11-2008 K…, SGPS, S.A. was indebted to A… SGPS in the amount of € 233,847,400.00, and on that date declared to extinguish this obligation by offsetting it against a credit for supplementary contributions of equal value that it held against A… SGPS, which approved the transaction (37th and 39th RI and document no. 5 attached to that instrument).

S. A… SGPS never transferred to its subsidiary K…, SGPS, S.A. the amount of the supplementary contributions (43rd RI and document no. 5 attached to that instrument).

T. A… SGPS has recorded in its 2009 accounting remunerated liabilities in the accounts "231 – Bank Loans" and "255 – Shareholders" (23rd RI; PA, p. 116v).

U. In 2008 the value of "remunerated loans obtained" (accounts 231 and 255) presented by A… SGPS was € 237,999,999.84 and in 2009 it was € 203,555,618.51 (48th RI; PA, p. 45).

V. In 2008 the "remunerated loans granted" by A… SGPS was € 207,304,642.28 and in 2009 it was € 159,900,336.11 (50th RI; PA, p. 45).

W. The corrections made to B… are justified by the TA (16th RI; PA, pp. 124-125):

(i) By its understanding that "the costs of construction of the connection lines cannot be classified as research and development expenses and are therefore not subject to depreciation";

(ii) In the specific case, "the costs incurred with the construction of the lines do not deplete entirely at the end of their construction and transfer to N… SA, nor in the 5-year period as the taxpayer intends to carry out (depreciation rate of 20%), and therefore should be charged over the expected period of energy production, since N… SA is obliged to purchase all the electricity produced as long as it is produced, without any time limit, and it is also responsible for the costs of maintenance, replacement or conservation that may need to be carried out on the lines of the connections.";

(iii) It also observes that "The company established surface rights with the owners of the properties for their use (…), for a period of 29 years, this being, presumably the minimum time period during which the company will produce electricity.";

(iv) Consequently it concludes that "the cost recorded by the taxpayer based on accounting depreciation cannot be accepted for tax purposes (…)" and, notwithstanding, "(…) must be constituted as a cost of the tax year and distributed equitably over the 29 years in which the company will produce electricity, the expenses with the construction of the connection lines (…)".

X. On 30-12-2005 the Ministry of Economy and Innovation granted to B..., a license for establishment of Park X… and the commencement of establishment works of the installation (60th RI and doc. 9 attached to that instrument).

Y. On 04-04-2008 the installation of Park X… was inspected and on 07-04-2008 it was authorized to commence operation by the Ministry of Economy and Innovation (60th RI and doc. 9 attached to that instrument).

Z. In Park X… B… exercises the activity of production and sale of electrical energy using wind force (61st RI and doc. 9 attached to that instrument).

AA. This park X… has a power capacity of 8,000 KW (62nd RI and doc. 9 attached to that instrument).

BB. On 22 November 2007 B… transferred to N… S.A. the installations it had constructed, with the following designation and characteristics (65th RI and document no. 7 attached to that instrument):

(i) "Mixed line at 60 kV from the AT/MT substation of … to the AT/MT substation of … (EDIS), equipped with ACSR conductors of 160mm2 section and ACSR ground cable of 130mm2 from the … substation to support 51 and equipped with ACSR conductors of 325mm2 section from support 51 to support 56, with a total length of 11,677.98m and equipped in the underground section with LXHIOLE cable with 630 mm2 section and a total length of 95 m.";

(ii) "Overhead section at 60 kV of the Seia line – …, between support 103 and support 107 equipped with ACSR conductors of 325mm2 section and a total length of 1,010.32m."

CC. In terms of accounting and tax treatment, the expenses incurred by B… with the construction of the said connection line to the public receiving network were initially recorded in accounting in its intangible fixed assets as "research and development expenses" although the company acknowledges that such expenses should be qualified in accounting, still within the scope of intangible fixed assets, as "installation expenses" (66th, 67th, 167th, 168th, 222nd and 223rd RI).

DD. On 22-09-2008, O… established a surface right over a strip situated on the line of sight of …, of its property known as and located in …, parish of …, in favor of the Claimant B… which "consists of the right to construct thereon wind turbine towers and/or center for the production of wind energy, with the respective devices, accesses and parking and/or the means of connection to the electrical distribution network relating to the wind development of …", commencing on that day, for a period of 29 years and for the price of an annual contribution of € 1,465.23, plus € 1,247.00 per supplementary hectare of land used (43rd, 272nd, 273rd and 274th RAT and authentic document no. 1 attached hereto, which precisely identifies the property and the scope of the right established; PA, p. 124).

EE. B… proceeded in the tax year 2009 to record the annual depreciation of the amount of € 329,447.52 relating to the expenses of construction of the connection line …, at a percentage corresponding to 20% on the value of € 1,647,237.34 recorded in account 4.3.3.2.1.2.4. (71st RI; 37th and 224th RAT; PA, p. 124).

FF. The TA considered that the costs incurred with the construction of connection lines do not deplete entirely at the end of their construction and therefore should be constituted as a cost of the tax year distributed equitably over the 29 years in which B… will produce electricity (288th RAT; PA, pp. 124-124v).

GG. On 24.05.2013 the Inspection Conclusion Report and the corrections resulting from this internal analysis was sent to A… SGPS and received by it (7th RI; doc. 1, p. 1).

HH. At a date after 24.05.2013 A… SGPS received the corporate income tax assessment schedule No. 2013 … and the account adjustment schedule No. 2013 …, relating to the tax year 2009, from which resulted the amount to be paid in the sum of € 747,181.57 (7th and 18th RI and respective doc. 2, pp. 1-2; 50th RAT).

II. In a document dated 25-10-2013 and filed with the TA on 28-10-2013, A… SGPS and B… filed an administrative objection against the corporate income tax assessment schedule No. 2013 … relating to the tax year 2009, which was dismissed by order of 30-04-2014, communicated to A… SGPS on 08-05-2014 (18th RI; 51st RAT; PA, pp. 4-97 and pp. 142-150).

1.2. Facts Deemed Not Proven

1. That the debt of € 233,847,400.00 resulted from the purchase, by K…, SGPS, S.A., of equity interests held by A… SGPS (38th RI). The document presented – the minutes of the general assembly of the debtor – is not suitable evidence to prove the origin of the debt, which resulted from formal acts, namely contracts for assignment of quotas and purchase and sale of shares, many of which are typically subject to registration (e.g., articles 80-1 and 102-1 CMVM, 3-1 and 32-1 CRC) and declaration to the TA (article 138-1 CIRS, ex vi 129 CIRC).

2. That A… SGPS never incurred any financial expense to make supplementary contributions to K…, SGPS, S.A. (42nd and 45th RI). No reference is made nor was any proof located in the proceedings.

3. That the "remunerated loans obtained" (accounts 231 and 255) served only for A... SGPS to make remunerated loans to its other subsidiaries (49th). The Claimant indicates as proof the reference that would appear on "p. 9/129" of the inspection report which it attached to the RI as document no. 1. No reference to this matter is found at the location mentioned nor was it identified elsewhere. In any case, by referring that the loans also served "to make other remunerated financial applications", without specifying or identifying amounts, the Claimant ultimately renders proof of the purpose for which the loans were destined impossible.

4. That B… commenced the construction of the infrastructure of Park X… in June 2007 and for that purpose invested a total amount of approximately € 13.5 million. (60th RI); No reference is made nor was any proof located in the proceedings.

5. That the wind farm allows for average annual production of clean energy on the order of 22 gigawatts through a natural and renewable resource. (62nd RI); No reference is made nor was any proof located in the proceedings.

6. That this undertaking, in addition to projecting direct benefits for the municipality (Guarda) where it is located, contributes at its scale to the fulfillment of the targets imposed by the Kyoto Protocol, making it possible to avoid the emission of 13 thousand tons/year of CO2, as well as the reduction of fuel imports on the order of 7.5 thousand tons/year. (63rd RI); No reference is made nor was any proof located in the proceedings.

7. That B… constructed the connection line between its center for the production of renewable energy – namely, the said Park X… – and the national electrical distribution network at medium and high voltage (64th RI); No reference is made nor was any proof located in the proceedings, although it was deemed proven in BB, related matter.

8. That in terms of accounting and tax treatment, the expenses incurred by B… with the construction of the said connection line to the public receiving network, in the total amount of € 1,647,237.34, were initially recorded in accounting in its intangible fixed assets as "Research and Development Expenses" (66th RI); No reference is made nor was any proof located in the proceedings.

9. That the connection of Park X… to the RND [National Distribution Network], effectuated through the respective connection line, constitutes a necessary and indispensable condition for the functioning of the energy-producing infrastructure (157th RI); No reference is made nor was any proof located in the proceedings.

10. That the expenses with the construction of the connection line constitute a necessary investment for the operability of Park X… (158th RI); No reference is made nor was any proof located in the proceedings.

11. During the period that elapsed between the construction and delivery of the connection line to N…, B… [claim regarding asset status]. No reference is made nor was any proof located in the proceedings.

1.3. Reasoning for the Proven Material Facts

The conviction to determine the facts deemed proven is based on documentary evidence, specifically referenced for each case, principally that which appears in the administrative process (PA) and also in documents attached with the initial request of the Claimants and in the document attached by the TA to its Response. The concordance of the Claimants and the TA regarding certain facts was also taken into consideration (referenced with simultaneous cross-reference to the appropriate places in the respective procedural instruments) as well as the admission of fact unfavorable to the Claimants (CC).

2. Matters of Law

2.1. Correction (Accrual to Net Result) by the TA in the amount of € 1,801,393.79 relating to the calculation effected for the tax year 2009 of financial expenses attributable to equity interests considered, for tax purposes, by A… SGPS

With respect to this matter, consideration must be given to article 32 of the Special Tax Status, Circular 7/2004 of DSIRC and article 42 of CIRC as it provided regarding 2009. The following are presented the parts of those legal provisions which we deem essential to substantiate our decision, with underlines and bold type being ours.

Article 32 of the Special Tax Status

Portfolio management companies (SGPS), venture capital companies (SCR) and venture capital investors (ICR)

1 - SGPS, SCR and ICR are subject to the provisions of nos. 1 and 5 of article 46 of the Corporate Income Tax Code, without dependence on the requirements therein regarding percentage or value of the equity interest.

2 - Gains and losses realized by SGPS, SCR and ICR on equity interests of which they are holders, provided they are held for a period of not less than one year, and likewise financial expenses incurred with their acquisition do not contribute to the formation of the taxable profit of such companies.

Circular 7/2004

Special Tax Regime for Portfolio Management Companies and Venture Capital Companies

…

6. With respect to the tax year in which financial expenses should be disregarded as costs, for tax purposes, such disregard should take place, in the tax year to which they relate, to the correction for tax purposes of those incurred with the acquisition of equity interests that are susceptible to benefiting from the special regime established in no. 2 of article 31 of the Special Tax Status, regardless of whether all conditions for application of the special tax regime for gains and losses have already been met. Should it be concluded, at the moment of disposal of the equity interests, that not all requirements for application of that regime are met, the consideration as tax cost in that tax year of the financial expenses that were not considered as cost in prior tax years shall be made.

7. As regards the method to be used for purposes of allocation of financial expenses incurred with the acquisition of social equity interests, given the extreme difficulty of using, in this matter, a direct or specific allocation method and the possibility of manipulation that it would allow, such allocation should be effected on the basis of a formula that takes into account the following: remunerated liabilities of SGPS and SCR should be allocated, first and foremost, to remunerated loans granted by these to subsidiary companies and to other investments generating interest, with the remainder being allocated to other assets, namely social equity interests, proportionally to their respective acquisition cost.

Article 42 of CIRC

Expenses Non-Deductible for Tax Purposes

1 - The following expenses are not deductible for purposes of determining taxable profit, even when recorded as costs or losses of the tax year:

…

3 - The negative difference between gains and losses realized through the onerous transfer of equity interests, including their redemption and amortization with reduction of capital, as well as other losses or negative patrimonial variations relating to equity interests or other components of equity capital, namely supplementary contributions, contribute to the formation of taxable profit in only half their value.

The core issue with respect to this correction is whether supplementary contributions should or should not be considered equity interests. The Respondent understands that they should, based in particular on Opinion …/2010 of the CEF and on the understandings propounded by DSIRC. To the contrary, the Claimant understands that, in light of accounting, legal and tax legislation they are components of equity capital but not equity interests.

Let us begin from the accounting perspective: the account corresponding to equity capital was designated under the POC (which was the accounting regulation enactment in force in 2009) as "Capital" (Account 5.1.). Note that it is not designated as "Equity capital" but no one will doubt that this is what is referenced in this account. Supplementary contributions, however, had this same designation and corresponded to account 5.3. (it is noted, more informally, that today, in accordance with the SNC, the distinction is maintained, with account 5.1. maintaining the designation of "Capital" and account 5.3. becoming known as "Other Equity Capital Instruments").

It is concluded, therefore, that they are different.

Legally, it is not even worthwhile to delve into the differences given that these are more than evident in the respective legislation, namely in articles 209 and 210 of the Commercial Companies Code.

We arrive at the perspective that most interests us: the tax perspective. For this purpose, we reproduce previously excerpts from the articles of CIRC and Special Tax Status that seem most relevant to us and, furthermore, part of Circular 7/2004. No one can (or should...) consider that there should not be an articulation between CIRC and the provisions of the Special Tax Status relating to Corporate Income Tax — such would constitute an attestation of incompetence to the tax legislator. Accordingly, the simple reading of article 42 of CIRC and article 32 of the Special Tax Status permits the conclusion that the tax legislator (as much as the legislator in accounting matters and the legislator in corporate law matters) also did not treat, for purposes of Corporate Income Tax, supplementary contributions as equity interests. No. 3 of article 42 is unequivocal on this question. In light of this, we cannot accept the learned doctrine of the TA on this question for it conflicts with what is contained in the tax law. Indeed, anything else would not make sense for what is at issue in this set of normative provisions is not to accept financial costs relating to gains/losses with the transfer of equity interests that will also be disregarded as gains or losses for tax purposes. However, supplementary contributions cannot directly originate gains for the most that can happen to entities that have made them (in accordance with what is provided in the Corporate Pact) is their reimbursement by nominal value, which is neutral in terms of profit determination. One could argue that they will augment the equity capital of the company that benefits from them and, consequently, promote potential gains on the possible sale of its equity interests. However, such a potential gain would be disregarded for tax purposes in the company that sold that equity interest just as the financial expenses allocated in accordance with the rules of Circular 7/2004. However, this would occur with the disposal of the equity interest in the equity capital and not, it bears repeating, with the supplementary contributions per se.

Furthermore, the concept of "equity interests" is utilized in the Commercial Companies Code and Official Accounting Plan (in effect in 2009) but in no. 2 of article 11 of the General Tax Law it is established that "whenever, in tax standards, terms specific to other branches of law are employed, these same should be interpreted in the same sense that they have there, except if otherwise directly derives from law."

From this standard results that, although, as a rule, terms utilized in tax standards should be interpreted with the same scope that they have in other branches of law (as derives from no. 1 of the same article 11), there is an exception, which is directly deriving from tax law that the sense of the term utilized in tax law is different from what it has in other branches of law.

Indeed, it is an exception that is in harmony with another general interpretive rule, which is that special law prevails over general law in its specific domain of application. That is, if it directly derives from a tax norm, special for the situation it regulates, the sense of a given term, it will not be of interest to know whether that sense corresponds or not to what is utilized in general law, for that sense directly deriving from the law for a specific situation will necessarily have to be the one that must be adopted and not the sense with which it is utilized in any norm that does not have the nature of special law for the referred situation.

In any case, from no. 2 of article 11 of the General Tax Law results that the first task of the interpreter of tax law to ascertain the scope of a term utilized therein is to ascertain whether from tax law directly derives the sense of that term. Only if one is not facing such a situation, can one appeal to the sense of terms utilized in other branches of law.

Now, in the case at hand, for clarification of the question of whether supplementary contributions are encompassed in the concept of "equity interests" there is a standard from which it directly derives that those are not encompassed in this concept, which is no. 2 of article 42 of CIRC, as introduced by Law no. 60-A/2005, of 30 December.

It is established in this article 42, no. 2, the following:

The negative difference between gains and losses realized through the onerous transfer of equity interests, including their redemption and amortization with reduction of capital, as well as other losses or negative patrimonial variations relating to equity interests or other components of equity capital, namely supplementary contributions, contribute to the formation of taxable profit in only half their value.

Two concepts are used in this standard: that of "equity interests" and that of "other components of equity capital."

"Equity interests" are also "components of equity capital," as can be inferred from the word "other," but the scope of "equity interests" is necessarily more restricted than that of "equity capital," which will also encompass "the other components."

As the standard is worded, supplementary contributions will be encompassed in the concept of "other components of equity capital" and not in "equity interests," for the reference to those appears following this latter concept and not to the first.

If it were understood, for this purpose, that supplementary contributions were integrated in the concept of "equity interests," it is obvious that the reference to them would be included following this concept and not following the concept of "equity capital": that is, it would read "(…) losses or negative patrimonial variations relating to equity interests, namely supplementary contributions, or other components of equity capital contribute to the formation of taxable profit in only half their value."

Indeed, that reference to supplementary contributions did not exist before the wording of that article 45 of CIRC introduced by Law no. 60-A/2005 ( [6] ), such that, that reference being introduced with evident clarifying intent, it is to be presumed forcefully that the legislator knew to specify in appropriate terms that objective and intended to clarify that supplementary contributions are classified among the "other components of equity capital."

This delimitation of the concept of "equity interests" extracted from the referred no. 2 of article 42, definition is made for purposes of determination of losses, which is included in the matter addressed by article 32, no. 2, of the Special Tax Status (it is a standard that removes, with respect to SGPS, the general tax relevance provided in CIRC for gains and losses) such that, it having to be presumed that the legislator expressed its thinking in appropriate terms (pursuant to the referred article 9, no. 3, of the Civil Code), justification exists for the conclusion that the same concept of "equity interests" was utilized in the special standard as was utilized in the standard providing for the general tax relevance.

Furthermore, the standard of article 32, no. 2, of the Special Tax Status was reformulated by Law no. 64-B/2011, of 30 December, already after the amendment introduced by Law no. 60-A/2005 to article 42 of CIRC and the new wording of that standard maintains the reference only to "equity interests" without any allusion to the "other components of equity capital" to which article 42, no. 2 alludes.

This conclusion, extracted from the literal meaning of article 32, no. 2, of the Special Tax Status, combined with article 42, no. 2, is confirmed by the reason for the special regime for gains and losses realized by SGPS, which does not apply to supplementary contributions, as is proficiently explained in the arbitral decision rendered by CAAD in proceeding no. 12/2013-T, in these terms:

"in general, the regime for gains and losses aims to grant a special favorable regime to tangible and financial assets (shares and quotas) of companies, as a way to combat the lock-in effect – a phenomenon in the tax system of realization that constrains the rational flow of economic assets (purchase and sale) for reasons relating to tax constraints (payment of the tax). Essentially, avoiding the scenario of a subject that does not sell an asset (share or quota) of which he is a holder – and all economic reasons would advise him to – only because at that moment he will pay a high tax (because taxation is only discharged with the sale of the asset and not in the cadence of its annual valorization). It is this reason that justifies the under-taxation of tangible and financial assets (shares and quotas), embodied in a special tax regime for gains and losses.

And none of that is found in supplementary contributions. They are returned at par, in accordance with the rules of commercial law. There does not exist, nor is there an attempt to create, a secondary market of voluminous transactions of supplementary contributions. And it is not credible that the few holders of supplementary contributions below par do not wish to receive their nominal value, with fear or apprehension of the payment of tax associated; or that this be an economic obstacle such that it justifies creating or inserting them into the special regime for gains and losses."

Combined with all the provisions, it is to be concluded that the provisions regarding gains/losses and respective allocated financial expenses of SGPS do not apply to supplementary contributions. This understanding comports, notably, with arbitral decisions rendered within the scope of Proceeding no. 69/2012-T, Proceeding no. 12/2013-T and Proceeding no. 24/2013-T and with the doctrine on the matter — on this point, the teachings of Rogério Fernandes Ferreira and José Vieira dos Reis can be read ("Supplementary Contributions and Equity Interests," in Journal of Public Finances and Tax Law no. 4, Year III, pp. 35) and of Raul Ventura ("Joint Liability Companies. Commentary to the Commercial Companies Code, vol. I, 2nd edition, Coimbra, Almedina, 1989, pp. 238).

Therefore, in applying the regime of article 32, no. 2, of the Special Tax Status to financial expenses incurred by the Claimant with supplementary contributions, the correction made to taxable profit in the amount of € 1,801,393.79 suffers from a defect of violation of law.

2.2 Correction (Accrual to Net Result) by the TA in the amount of € 272,646.23 relating to the depreciation of the connection line …/… constructed by B… considered for tax purposes by such company for the tax year 2009

It has already been noted that the Respondent and the Claimant agree that the expenses incurred with the construction of this connection line are an intangible fixed asset subject to depreciation. The bone of contention lies in the period over which such asset should be depreciated.

The key to a decision on this matter must be found in Regulatory Decree no. 2/90 through the combination of the provisions appearing in article 1, no. 2, b), article 2, no. 1, a), no. 2 and no. 3, article 3, no. 1, no. 2 and no. 3, article 17, no. 1 and no. 2 and article 18, no. 2 given that this was the regulatory decree that, as of 2009, developed matters related to depreciations and reintegrations.

B… presented in its accounting the construction of the connection line as research and development expenses, whose maximum useful life period was, in 2009, five years (article 3, no. 3 of regulatory decree 2/90), although any taxpayer could choose to consider such expenses as costs in the tax year in which they were incurred (article 18, no. 1). Here we arrive and inquire why this company would not have considered the entirety of such expenses as a tax cost under that legal provision if it qualified them in accounting as research and development expenses. It would have been fiscally more favorable for it regarding Corporate Income Tax.

Subsequently (following the additional assessment resulting from the inspection action), B… argued that such expenses had been, by oversight, classified as "research and development expenses" when, in reality, they were "installation expenses" — as such, subject to depreciation over a maximum period of five years, as provided in article 3, no. 3 of regulatory decree 2/90.

In this case, the question upon which we must pronounce ourselves is whether the expenses with the construction of the connection line referred to above should or should not be considered "installation expenses" (to which expansion expenses are added) and, if not, what should be the most adequate tax treatment regarding profit determination for tax purposes in terms of Corporate Income Tax. From the exemplification of establishment costs (in explanatory note to the POC, expenses for "studies and projects relating to the establishment and organization of the company"), we are led to consider that these are costs of essentially legal nature essential to the general functioning of a company and not with respect to a particular aspect.

One could argue that only installation expenses (where these would fit given that the company's activity could not even commence without their performance), research and development expenses and some elements of industrial property were envisaged for purposes of fiscal depreciation of intangible fixed assets, which would be equivalent to considering that article 17 of regulatory decree 2/90 was very restrictive, despite this same article, in its no. 1, beginning by referring to the fact that elements of fixed assets subject to depreciation are amortizable, namely because they have a limited temporal validity. For example, what should be done in a case of surface right relating to an immovable property? By process of elimination — given that it is not qualified as tangible fixed assets — it has to be (or be treated as) an intangible one. And there we revisit no. 1 of article 17 whose emphasis is on limited temporal validity. Also in article 13 of regulatory decree 2/90, which addresses reversible assets, once again arises the question of a life limited until reversion of the concession.

For its part, article 2 clarifies on the line items that should be added to acquisition value to arrive at a basis for purposes of depreciation or reintegration, mentioning ancillary expenses.

Being certain that one cannot conclude from the reading of a specific article of regulatory decree 2/90 what should be the depreciation rate of an intangible fixed asset of the type of a connection line, it remains for us an interpretation (extensive) based on the entirety in which this question is inserted. And the principal factors that bring us closer to the position of the Respondent in this matter are:

— the connection line is intimately linked to the functioning of the wind farm, its economic benefits coinciding precisely with the period in which that will be in activity. We are therefore faced with a limited life which, in this specific case, is measured by the "weakest link" which is the duration of the surface right of immovable property utilized in this process of electricity transmission;

— accordingly, it should remain indelibly linked to the wind farm, namely in terms of accounting for its depreciation. A case — although relating to tangible fixed assets — clearly similar is the inclusion of transfer tax in the acquisition value of an immovable property (it is also a legal charge that "accompanies" the immovable property throughout its entire useful life);

— it will not be because there are not more explicit references relating to procedures in situations of this nature that we should force to fit a new fact into a "compartment" that does not suit it (understand "expenses specific to a connection line without which it is impossible to meet the objective for which the company was created" in "general legal expenses relating to the implementation of any activity");

— the principle of substance over form, ultimately, potentiates similar treatment between the surface right of an immovable property and between the expenses relating to a connection line which also constitute an intangible asset with a use limited in time (or in which it should certainly be in operation, it not being clear that it will be in operation longer);

— considering a shorter fiscal life would disconnect the connection line from the whole in which it is situated, that is, the wind farm.

It is concluded, accordingly, that the request for arbitral pronouncement is not well-founded regarding this correction.

3. Decision

For these reasons this Arbitral Tribunal decides:

a) To hold well-founded the request for arbitral pronouncement regarding the correction in the amount of € 1,801,393.79 relating to the calculation effected for the tax year 2009 of financial expenses attributable to equity interests considered, for tax purposes, by A… SGPS and, in consequence, annul the contested tax act, to the extent it was based on that correction;

b) To hold not well-founded the request for arbitral pronouncement regarding the correction in the amount of € 272,646.23 relating to the depreciation for the tax year 2009 of the connection line …/… constructed by B… and, consequently, maintain the additional assessment by the TA in the respective part.

4. Value of the Proceeding

The value of the proceeding is fixed at € 747,181.57 in accordance with article 97-A, no. 1, a), of the Tax Procedure and Process Code, applicable by virtue of subparagraphs a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulation on Costs in Tax Arbitration Proceedings.

5. Costs

The arbitration fee is fixed at € 10,710.00 in accordance with Table I of the Regulation on Costs in Tax Arbitration Proceedings, to be paid by both parties in proportion to their success, being 13.14% charged to the Claimant and 86.86% charged to the Tax and Customs Authority (in accordance with articles 527, nos. 1 and 2, of the Code of Civil Procedure, articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the cited Regulation).

Let it be notified.

Lisbon

6 February 2015

The Arbitrator-President

(Jorge Lopes de Sousa)

The Arbitrator-Member

(Nuno Maldonado Sousa)

The Arbitrator-Member

(Luís Janeiro)

[1] For ease of expression, the company A… – Sociedade Gestora de Participações Sociais, S.A. is designated in this instrument by the abbreviated form "A… SGPS".

[2] Initial Request submitted by the Claimants.

[3] Response of the Tax and Customs Authority.

[4] Administrative Process incorporated in the proceedings.

[5] For ease of expression, the company B…, Lda. is designated in this instrument by the abbreviated form "B…".

[6] The prior wording of the corresponding standard, introduced by Law no. 32-B/2002, of 30 December, was as follows:

3 - The negative difference between gains and losses realized through the onerous transfer of equity interests, including their redemption and amortization with reduction of capital, contributes to the formation of taxable profit in only half their value.