CAAD 653/2015-T: SGPS Financial Costs Deductibility Under EBF Article 32(2) and Circular 7/2004

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (President Arbitrator), Maria Forte Vaz and Sérgio Pontes, appointed by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby agree:

I – REPORT

On 27 October 2015, A..., S.A., legal entity no. ..., with registered office at Av. do..., no. ... -..., Floor..., ...-..., Carnaxide, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking a declaration of illegality of the implied refusal of the request for Official Review of the self-assessment act for Corporate Income Tax (IRC) of 2010, in the amount of €171,105.29.

To support its request, the Claimant alleges, in summary, that:

"The Claimant, in the context of the RAT request, whose implied refusal prompted the present Request for Arbitral Pronouncement, requested acceptance, as a fiscally deductible expense, of the financial charges (expenses) that accrued in the fiscal year 2010, since by oversight, as previously stated, it did not apply the formula resulting from Point 7 of Circular no. 7/2004, of 30 March, alternatively promoting the increase, in the context of the formation of its taxable profit, of all such expenses";

"Having formed the presumption of implied refusal of the aforementioned file, and having become aware of the recent position of case law regarding the applicability of the said Circular, the now Claimant chose to impugn the refusal in question, supporting, alternatively, its understanding in the inapplicability of that Circular defended, namely by that case law";

"In this context, the Claimant requested that all financial charges (expenses) incurred in that fiscal year be recognized as a fiscal expense in the fiscal year 2010";

"Notably because, in its view, if there were a possible correction to the taxable profit of a SGPS (in the terms previously illustrated), this could only occur at the moment of any onerous transfer of the equity interests to which those expenses would relate, since only in that way would it be materially possible to ensure that the objective sought with the introduction of said benefit (increased competitiveness of holding companies) was not compromised";

"Having thus, from its point of view, the right to be reimbursed in the amount of Euro 171,105.29, and not in the value previously requested, in the context of the RAT request";

"Nevertheless, in the eventuality of the arbitral tribunal ruling in the sense of defending the legality of Circular no. 7/2004, of 30 March, and consequently validating its applicability, which is only invoked out of mere duty of representation, the now Claimant requests that it be at least reimbursed, in the terms requested in the RAT request whose implied refusal is now being impugned, of the amount which, even through the application of said Circular, should not have increased in the context of the determination of its taxable profit (in respect of the fiscal year 2010), namely Euro 164,222.15".

On 29-10-2015, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

The Claimant did not proceed to appoint an arbitrator, therefore, pursuant to the provisions of subparagraph a) of no. 2 of article 6 and subparagraph a) of no. 1 of article 11 of the RJAT, the President of the Deontological Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable timeframe.

On 22-12-2015, the parties were notified of these appointments, and did not manifest any intention to refuse any of them.

In accordance with what is prescribed in subparagraph c) of no. 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 01-02-2016.

On 08-03-2016, the Respondent, duly notified for such purpose, submitted its response, defending itself by exception and by impugnation.

Notified to pronounce itself, within the prescribed timeframe and in writing, on the matter of exception contained in the Respondent's response, the Claimant remained inert.

On 15-04-2015, an order was issued pursuant to the provisions of art.s 16/c), 19 of the RJAT and 29/2 of the RJAT, as well as the principles of procedural economy and prohibition of useless acts, dispensing with the holding of the meeting referred to in art. 18 of the RJAT, as well as the submission of pleadings by the parties and setting a period of 30 days for delivery of the final decision.

A period of 30 days was set for the rendering of a final decision.

On 02-05-2016 the Claimant submitted a petition with pronouncement on the matter of exception contained in the Respondent's defence.

By Petition of 04-05-2016, the Respondent opposed the intervention of the Claimant, referred to in the previous item.

By order of 09-05-2016, the petition submitted by the Claimant on 02-05-2016 was not admitted, determining its removal from the present proceeding, and extending the timeframe initially set for the rendering of the final decision, for a further 20 days.

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

The parties have legal personality and capacity, are legitimate 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 is free from nullities.

All things considered, it is incumbent to render

II. DECISION

A. MATTERS OF FACT

A.1. Facts established as proven

1. On 31 December 2010, the now Claimant was the dominant company of a group of companies of Group B... ("Group B..."), taxed under the Special Tax Regime for Groups of Companies (hereinafter referred to as "RETGS"), for purposes of Corporate Income Tax ("IRC").

2. The said group was constituted, in addition to the Claimant as the dominant company, in accordance with the terms and for the purposes of the current Article 69 of the IRC Code, by the following companies (subsidiaries):

a. C..., S.A, legal entity no. ...;

b. D..., S.A, legal entity no. ...;

c. E..., S.A, legal entity no. ...;

d. F..., S.A, legal entity no. ...;

e. G..., S.A, legal entity no. ...;

f. H..., S.A, legal entity no. ...;

g. I..., S.A, legal entity no. ...;

h. J..., SGPS, S.A, legal entity no. ... .

1. On 24-05-2011 the Claimant submitted, via internet, its Form 22 Declaration of IRC, by reference to the fiscal year 2010.

2. The Claimant, in its capacity as dominant company and with reference to the fiscal year 2010, submitted the Income Declaration Form 22 of IRC ("Form 22"), relating to the aforementioned fiscal consolidated group, on 30 May 2011, and proceeded accordingly to the payment of IRC, in accordance with and for the purposes of article 115 of the IRC Code.

3. The Form 22 of that fiscal group presented an aggregate taxable matter in the amount of Euro 4,451,385.02 (four million, four hundred and fifty-one thousand, three hundred and eighty-five euros and two cents), determining an amount payable of Euro 185,076.98 (one hundred and eighty-five thousand and seventy-six euros and ninety-eight cents).

4. In the individual Form 22 of B..., in respect to the same fiscal year, at the time with the corporate profile of a Managing Company of Equity Interests ("SGPS"), there was added financial charges (expenses) in the amount of Euro 568,587.98 (five hundred and sixty-eight thousand, five hundred and eighty-seven euros and ninety-eight cents), in Field 752 of Table 07, in the context of the provision then contained in article 32, no. 2 of the Tax Benefits Statute ("EBF").

5. B... presented, in respect to that fiscal year, tax losses in the amount of Euro 1,277,095.92 (one million, two hundred and seventy-seven thousand, ninety-five euros and ninety-two cents).

6. Subsequently, in the context of an internal procedure review, the now Claimant understood that, notwithstanding what is provided in Circular no. 7/2004, of 30 March - an administrative instruction that defined a method of allocation of financial charges (expenses) to loans especially contracted for the acquisition of equity interests, in light of the absence of a legally established model - it was increasing, in the context of the determination of its taxable profit, the entirety of the financial charges (expenses) incurred.

7. In the context of B...'s individual financial statements, for the year 2010, the following is stated, among other things:

8. With regard to the value of equity interests, notwithstanding the Financial Report & Accounts presenting the amount of Euro 75,295,770 (seventy-five million, two hundred and ninety-five thousand, seven hundred and seventy euros), the now Claimant, for purposes of application of Circular no. 7/2004, of 30 March, purged the impact of the equity method, considering, alternatively, the amount of Euro 80,494,549.92 (eighty million, four hundred and ninety-four thousand, five hundred and forty-nine euros and ninety-two cents), which relates exclusively to the historical acquisition cost of the said equity interests.

9. The financial charges (expenses) incurred by the now Claimant in that year amounted to Euro 568,587.98 (five hundred and sixty-eight thousand, five hundred and eighty-seven euros and ninety-eight cents), in accordance with the aforementioned Financial Report & Accounts.

10. This amount is higher than the item interest and similar expenses incurred accounted for in the individual Financial Report & Accounts of B..., in respect to the fiscal year 2010, since it also includes expenses related to Stamp Duty associated with said financial charges.

11. Applying the formula contained in the Circular to the aforementioned data, the Claimant concluded that the amount of financial charges (expenses) to be added would amount to Euro 25,974.12 (twenty-five thousand, nine hundred and seventy-four euros and twelve cents), instead of the amount previously mentioned and actually added for purposes of determination of Taxable Profit, of Euro 568,587.98 (five hundred and sixty-eight thousand, five hundred and eighty-seven euros and ninety-eight cents).

12. Thus, on 30-03-2015, the now Claimant submitted a request for official review of the IRC assessment act of 2015, requesting that, through application of Circular no. 7/2004, of 30 March, "the individual Form 22 of B... previously submitted, referring to the fiscal year 2010, be corrected, for a tax loss of Euro 1,819,709.78 (one million, eight hundred and nineteen thousand, seven hundred and nine euros and seventy-eight cents), also leading to the correction of Form 22 of Group B..., in respect to the same fiscal year, for a taxable matter of Euro 3,908,771.16 (three million, nine hundred and eight thousand, seven hundred and seventy-one euros and sixteen cents), and finally, to the reimbursement of the amount of Euro 164,222.15 (one hundred and sixty-four thousand, two hundred and twenty-two euros and fifteen cents), corresponding to tax paid in excess in that same period.", a request which, to date, has not been subject to any decision.

A.2. Facts established as not proven

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

A.3. Reasoning of the established and not proven matters of fact

With regard to matters of fact, the Tribunal need not pronounce itself on everything alleged by the parties; rather, it is its duty to select the facts that matter for the decision and distinguish the proven facts from those not proven (cfr. art. 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable by virtue of article 29, no. 1, subparagraphs a) and e), of the RJAT).

In this manner, the pertinent facts for the judgment of the case are selected and defined according to their legal relevance, which is established in consideration of the various plausible solutions to the question(s) of Law (cfr. previous article 511, no. 1, of the CPC, corresponding to current article 596, applicable by virtue of article 29, no. 1, subparagraph e), of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of article 110/7 of the CPPT, the documentary evidence and the administrative procedure joined to the file, the facts enumerated above were considered proven, with relevance to the decision.

B. ON THE LAW

a. On matters of exception

i.

The Respondent begins by raising "the material incompetence of the Arbitral Tribunal for the appreciation of the request for correction of the individual fiscal result of the Claimant and, consequently, of the consolidated fiscal result of the group, formulated in subparagraph a) of the prayer for relief".

Indeed, as the Respondent points out, the Claimant asks, in subparagraph a) of the petition, to "Correct the individual fiscal result of the Claimant, in respect to the fiscal year 2010, for a tax loss of Euro 1,845,683.90 (one million, eight hundred and forty-five thousand, six hundred and eighty-three thousand and ninety cents), altering the taxable matter of the respective fiscal consolidated group to Euro 3,882,797.04 (three million, eight hundred and eighty-two thousand, seven hundred and ninety-seven euros and four cents) and, consequently, reimburse the Claimant in the amount of Euro 171,105.29 (one hundred and seventy-one thousand, one hundred and five euros and twenty-nine cents)".

Now, as is evident from the established matters of fact, the Claimant submitted the official review request that constitutes the immediate subject of the present arbitral proceeding, requesting that, through application of Circular no. 7/2004, of 30 March, "the individual Form 22 of B... previously submitted, referring to the fiscal year 2010, be corrected, for a tax loss of Euro 1,819,709.78 (one million, eight hundred and nineteen thousand, seven hundred and nine euros and seventy-eight cents), also leading to the correction of Form 22 of Group B..., in respect to the same fiscal year, for a taxable matter of Euro 3,908,771.16 (three million, nine hundred and eight thousand, seven hundred and seventy-one euros and sixteen cents), and finally, to the reimbursement of the amount of Euro 164,222.15 (one hundred and sixty-four thousand, two hundred and twenty-two euros and fifteen cents), corresponding to tax paid in excess in that same period.".

Whereas, as the Respondent also points out, "the request that forms the subject of the main petition in these proceedings was not submitted, through a means of voluntary action, before the Respondent so that it could pronounce itself upon it, and accordingly correct the hypothetical error in self-assessment."

In this case, the Claimant appears in the contentious phase, following a request for official review of a tax act, directed to the Tax Authority, in accordance with article 78/1 of the General Tax Law (LGT).

This voluntary means, as is commonly recognized, is a means of self-control by the Tax Authority that allows it, within the timeframes stated therein, to correct an error of its own, or presumably its own, whether of fact or of law.

Through a hermeneutical effort gradually developed, taking into account the duty of objectivity and legality that binds the Administration in general, and the Tax Administration in particular, and supported by certain normative segments of our tax legal system, it came to be understood, today incontestably, that the exercise of the power-duty of the Tax Authority to review unlawful acts may be triggered by the taxpayer, and that the subsequent decision, or violation of the duty to decide, of the Tax Authority, are contentiously reviewable.

However, it was equally understood that the opening of the contentious path thus operated is neither total nor unconditional, but is limited to the very conditions legally imposed on the power to review tax acts by the Administration. Thus, and for example, taking into account the use of the expression "error attributable to the services", it has been understood that the Tax Authority may proceed to official review, in accordance with article 78/1 of the LGT, in cases of error regarding the factual and legal assumptions, but not formal or procedural defects[1].

Consequently, in the contentious phase subsequent to a request for official review, one may only know of errors regarding the factual and legal assumptions of the tax act under review, but not formal or procedural defects. That is, since it is not admissible for the Tax Authority, following a request for official review pursuant to article 78/1 of the LGT, to know of formal or procedural defects, it is equally not legitimate for the Court to know of such defects.

Thus, as it is, one should understand that, in such context, the Court will be reviewing not the legality tout court of the tax act under review, but solely the legality that the Tax Authority was obligated to appreciate.

In summary, and as was written in the Judgment rendered in case 188/2013T of CAAD[2]:

"when, after the deadline for impugning a tax act has elapsed, the taxpayer makes use of a voluntary means of action, the decision that falls on that means of action is directly impugnable. But the primary tax act does not become directly impugnable again merely because a voluntary means of action was used.".

That is, the illegality that may be recognized in the primary act (mediate object of the impugnation) must necessarily be an illegality reflectable in the secondary act (immediate object of the impugnation). In the contentious phase, the Court will be verifying whether, faced with the taxpayer's request for official review, the Tax Authority had, or did not have, the duty to review the act.

One cannot lose sight of the fact that a request for official review of a tax act, in accordance with article 78/1 of the LGT, does not correspond to a right of the taxpayer, but rather constitutes a mere impulse for a procedure that the Administration may/should undertake ex officio.

The Full Court of the Tax Contentious Section of the Supreme Administrative Court (STA), in the context of case 0793/14[3], has already expressly pronounced itself on a matter analogous to that of the present case, in the following terms:

"In judicial impugnation subsequent to a decision of the AT that falls on a voluntary appeal or request for official review of a tax act, the judicial organs may, and should, know of all illegalities of substance that affect the tax act in question, whether or not such illegalities were raised in the voluntary phase of the dispute, imposing upon them an increased duty when these are matters of ex officio knowledge.".

In this manner, in view of the prevalence of the higher jurisdiction of the STA over arbitral case law, resulting from the provision of article 25/2 of the RJAT, in accordance with the case law indicated, the exception in question must be judged as unfounded.

ii.

The Respondent next raises the issue of "untimeliness of the request for correction of the individual fiscal result of the Claimant and, consequently, of the consolidated fiscal result of the group, formulated in subparagraph a) of the prayer for relief".

For the Respondent, "The main petition in the present arbitral proceedings is, in fact, a new petition, which, as we have seen, was not submitted for appreciation by the Respondent when the official review request was submitted.", therefore "it must be concluded that this new petition [contained in subparagraph a) of the prayer for relief], by being formulated only now, will be untimely.".

The Respondent will not be correct here either.

Indeed, timeliness is gauged as a function of the date of submission of the petition for constitution of the Arbitral Tribunal (article 10/1 of the RJAT) and the facts provided for in nos. 1 and 2 of article 102 of the Tax Procedure and Process Code (article 10/1/a) of the RJAT), or the notification of the acts provided for in subparagraphs b) and c) of article 2 of the RJAT (article 10/1/b) of the RJAT), and not specific petitions that may be formulated to the Arbitral Tribunal.

On the other hand, it is also a consequence of the case law of the aforementioned Judgment of the Full Court of the STA of 03-06-2015, rendered in case 0793/14, that, given that "the judicial organs may, and should, know of all illegalities of substance that affect the tax act in question, whether or not such illegalities were raised in the voluntary phase of the dispute", the appreciation of the latter will not – obviously – be precluded by questions of timeliness.

iii.

The Respondent finally raises the issue of "incompetence of the Arbitral Tribunal to order the Respondent to perform acts of correction of fiscal results petitioned by the Claimant", understanding that "such petitions exceed the competence of this Tribunal.".

The Respondent recognizing that "arbitral tribunals operating in CAAD may appreciate acts" provided for in no. 1 of article 2 of the RJAT, as well as of Ordinance no. 112-A/2011, of 22 March, as well as other acts "of second or third degree that have as their object the appreciation of the legality of acts of those types", the petitions formulated by the Claimant "exceed the competence of this Tribunal", since "it does not fall within the scope of these competences the appreciation of petitions for recognition of rights formulated in the prayer for relief of the present arbitral proceedings (specifically, of correction of fiscal results for values requested by the Claimant).", resulting "very clearly from the jurisprudence mentioned that the ordering of the AT to correct fiscal results for values requested by the Claimant is excluded from the scope of the competence of arbitral tribunals operating in CAAD.", therefore the "material incompetence of the Tribunal for the appreciation of the petitions identified above constitutes a dilatory exception that prevents the continuation of the proceeding, leading to the acquittal of the instance with respect to the claim in question, in accordance with the provision of articles 576, no. 2, 577, subparagraph a) of the CPC, applicable by virtue of article 29, no. 1, subparagraph e) of the RJAT.".

In the matter in question, the AT will be correct. Indeed, it can now be taken as settled that arbitral jurisdiction is configured as an alternative to the process of judicial impugnation of tax acts, with the competence of arbitral tribunals encompassing solely annulment petitions of the acts provided for in law, in addition to the accessories to those proper to the said process of judicial impugnation, such as petitions for conviction in compensatory interest, and petitions for compensation for provision of undue guarantee.

Thus, the petitions explicitly formulated by the Claimant fall outside the material competence of this Arbitral Tribunal, therefore the Tax Authority must be acquitted of the instance with respect to the same.

Nevertheless, from the analysis of the content of the initial petition it is possible to extract a claim of the Claimant that can be reduced to the annulment of the IRC self-assessment of 2010, on the grounds of error in the determination of the Claimant's individual taxable matter and the consolidated result of the group of companies, a petition that flows from the presumed refusal of the official review request, opportunely filed by the Claimant.

Indeed, the STA has been arguing that there should be some flexibility in the interpretation of petitions filed by taxpayers, and it is precisely this flexibility that justifies the conversion of, for example, judicial oppositions into judicial impugnations. An example of what has just been stated is the recent judgment of 07/01/2016, rendered in case no. 01265/13, in which said Supreme Court concluded that "In the interpretation of the petition formulated, some flexibility should be used, not excluding resort to the figure of the implicit petition in order thus to better safeguard respect for the principles of effective judicial protection of pro actione."[4].

In that respect, notwithstanding the lack of clarity of the petition, which however did not prevent the defendant entity from understanding the annulment petition formulated by the Claimant, and from pronouncing itself on its merits, it is possible to conclude that the Claimant seeks the annulment of the IRC self-assessment of 2010, and that the present petition for arbitral pronouncement has as its object such tax act together with the presumed refusal of the official review request filed, with the present decision proceeding to the appreciation of the corresponding merits.

b. On the merits of the case

Interpreting the petitions formulated by the Claimant, it is concluded, then, that it seeks, primarily, the annulment of the self-assessment of IRC for the year 2010, on the ground that "the Claimant understands that it is its right to request, in the context of the present Petition for Arbitral Pronouncement, the inapplicability" of Circular no. 7/2004, of 30 March.

Now, with due respect to other opinions, it is understood, from the outset, that the Claimant's position on this matter is not well-founded.

Indeed, as stated by the Constitutional Court, in its Judgment 42/2014[5]:

"we find no basis for asserting the parametric relevance of the normative sense adopted by the Tax Authority and set forth in the said circular, in terms of supporting the formation of binding effects on private parties – which is not confused with its irrelevance in the formation of the will of taxpayers, nor with reinforced persuasive force, by virtue of the executive privileges conferred on the Administration – and, above all, that constitute a criterion or normative standard shaping the jurisdictional action of the Courts, when called upon to appreciate disputes in its field of regulation (cfr. Jorge Miranda, Manual of Constitutional Law, Volume V, 4th edition, 2010, p. 226). This has also been the understanding adopted by the Supreme Administrative Court, of which examples are the Judgments of 16/01/2002, rendered in case no. 26638, and of 7/07/2004, rendered in case no. 1784/03 (both available at www.dgsi.pt), similarly marked by other legal systems, such as the German and Italian (thus, João Taborda da Gama, op. cit., p. 161, note 8, and Ana Paula Dourado, op. cit., pp. 726, note 2178, and 727)."

Also in Judgment 583/2009 of the same Court[6], it was written that:

"Since judgment no. 26/85 (published in the Official Journal, II Series, of 26 April 1985) that the Constitutional Court, with a view to proceeding with the identification of the appropriate object of processes of constitutional review, has been adopting a concept of norm functionally suited to the system of control that the Constitution entrusts to it. This concept of norm encompasses acts of public authority that contain a 'rule of conduct' for private parties or for the Administration, a 'criterion of decision' for the latter or for the judge or, in general, a 'standard of valuation of behaviors'. But, as it is a concept of control finalistically ordered to assure the system of legal protection typical of the democratic constitutional state based on the rule of law that is in question, it is not sufficient that the instrument in question binds the Administration to adopt, in the practice of individual and concrete acts of application and for so long as it does not change it, a determined criterion that it has established. It is necessary that such criterion be endowed with binding force also for the other subject of the relationship (heteronomous normativity) and constitute a parameter that the judge cannot fail to consider unless he makes an instrumental judgment of invalidity upon it. If the 'criterion of decision' is of administrative origin and only binds within the administrative service from which it emanates, there is no need for the type of legal protection and affirmation of the supremacy of the Constitution that justifies the intervention of the Constitutional Court.

Now, a problem frequently raised in tax law is the relevance of so-called administrative guidelines. It is, as Casalta Nabais states, Tax Law, 5th ed., page 201 (although affirming that this does not deprive them of the quality of legal norms):

"[...] internal regulations which, as they have as their recipient only the tax administration, only it should obey them, being therefore obligatory only for the bodies situated hierarchically below the body from which they emanate.

For this reason they are not binding neither for private parties nor for the courts. And this whether they are organizational regulations, defining rules applicable to the internal functioning of the tax administration, creating working methods or modes of action, or whether they are interpretive regulations, which proceed to the interpretation of legal (or regulatory) precepts.

It is true that they densify, make explicit or develop the legal precepts, previously defining the content of acts to be practiced by the tax administration when applying them. But this does not convert them into a standard of validity of the acts that support them. In fact, the appraisal of the legality of acts of the tax administration should be carried out through direct confrontation with the corresponding legal norm and not with the internal regulation, which has interposed itself between the norm and the act".

These acts, in which "circulars" stand out, emanate from the power of self-organization and the hierarchical power of the Administration. They contain generic service orders and it is for this reason and only within its respective subjective scope (of the hierarchical relationship) that their observance is assured. They incorporate directives of future action, transmitted in writing to all subordinates of the administrative authority that issued them. They are modes of standardized decision-making, undertaken to rationalize and simplify the functioning of the services. Although they may indirectly protect the legal certainty of taxpayers and ensure equal treatment through uniform application of law, they do not regulate the matter they address in confrontation with these, nor do they constitute a rule of decision for the courts.

The fact that the Tax Authority becomes bound (no. 1 of article 68-A of the General Tax Law) to the generic guidelines contained in circulars that are in force at the moment of the tax fact and has the duty to proceed with the conversion of binding or other type of information provided to taxpayers into administrative circulars, in certain circumstances (no. 3 of article 68 of the LGT), does not alter this perspective because it does not transform this content into a norm with external effect. It is true that the administered can invoke, in confrontation with the administration, the content of the publicized administrative guideline and, if applicable, assert it before the courts, even at the expense of the principle of legality (cfr. Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, General Tax Law, commented and annotated, 3rd ed., p. 344). But it is under the principle of good faith and legal certainty, not by its normative value, that the content of circulars prevails. The administered only complies with them if and insofar as it suits him, for the same reasons that justify that he may invoke individual binding information that favors him (article 59, no. 3, subparagraph e) and article 68 of the LGT).

Consequently, lacking heteronomous binding force for private parties and not imposing on the judge except by the doctrinal value that they may possess, the provisions contained in the "circulars" of the Tax Authority do not constitute norms for purposes of the system of control of constitutionality of the competence of the Constitutional Court.".

That is, and in summary, "lacking heteronomous binding force for private parties and not imposing on the judge except by the doctrinal value that they may possess", the legality or illegality in the abstract of the circulars will not be able to repercuss, without more, on the acts (tax acts, in this case) practiced on the basis thereof.

Rather, it will be the acts themselves that will be legal or illegal, in accordance with whether the Law has, or has not, been correctly applied in its specific case, and this independently of whether such application results – or does not result – from a circular, and of whether this makes, or does not make, a correct (abstract) interpretation of the Law.

Hence, for the Claimant's considerations on the legality of Circular no. 7/2004, of 30 March, to be relevant, there would have to be, in the first place, a tax act in which such circular had been applied, and, second, demonstrate that – in its specific case – the interpretation flowing from the circular and applied in the tax act in question, was, concretely, illegal.

Now, neither one nor the other situation occurs. Indeed, neither the tax act that forms the mediate object of the present arbitral action proceeded to apply the doctrine of Circular no. 7/2004, of 30 March, nor does the Claimant demonstrate that, in its specific case, the application of the Law made in accordance with the said Circular is illegal.

Indeed, the Claimant limits itself, in conclusion, to alleging that "In this sense, and being unable, in any other way (i.e., through a method of direct allocation), to make that correspondence, the now Claimant considers that, out of respect for the principle of tax legality, the financial charges (expenses) it added in the past which should, in the context of the aforesaid RAT request, be partially accepted as an expense, should, alternatively, be fiscally accepted, in their entirety, in the context of the determination of the taxable profit of B... (in respect to the fiscal year 2010).".

Yet the Claimant's reasoning cannot, always with due respect to other opinions, be accepted, particularly, in light of the rules of burden of proof.

Indeed, as the Claimant seeks that "financial charges (expenses) (...) should, alternatively, be fiscally accepted, in their entirety", it would be incumbent on it to demonstrate – even if in accordance with article 75/1 of the LGT – the assumptions, positive and negative, of such acceptance, especially, and in this case, that such charges were not incurred for the acquisition of equity interests held for a period of less than one year.

However, not only does the Claimant fail to make such demonstration – by any legally provided means – but it actually confesses the contrary, assuming, in its pleading, that "the diligence to make that correspondence proved to be fruitless" and that "it found itself unable, with respect to this regime, to establish a direct connection, and with the rigor that the principle of tax legality demands, between the loans specifically contracted by B... for the acquisition of equity interests and the equity interests specifically acquired by it only with recourse to outside financing.".

Furthermore, not only does the principle of legality not impose, contrary to what the Claimant appears to seek, that an expense be accepted, by virtue of the difficulty or subjective impossibility of demonstration of the assumptions on which law makes its deductibility depend, but, in this case, such difficulty will – exclusively and first and foremost – be attributable to the Claimant which, by being the one who incurs the expenses with financial charges and who determines their use, is the one who could demonstrate, better than anyone, whether, and which, of such charges were aimed at the acquisition of equity interests held for a period of less than one year, and if it had made its perspective on such question apparent in its tax return, it would have benefited from the aforementioned presumption of article 75/1 of the LGT, thus not existing any difficulty of proof burdening it.

Thus, and in light of the foregoing, the primary arbitral petition is judged to be unfounded.

Interpreting, in the terms previously stated, the arbitral petition formulated by the Claimant, it is concluded that it seeks, subsidiarily, the annulment of the self-assessment of IRC for the year 2010, on the grounds that the same should have proceeded to apply the criteria of Circular no. 7/2004, of 30 March.

First of all, and with regard to this matter, it is noted that this Arbitral Tribunal, as results from the foregoing reasoning, does not validate (nor invalidate) Circular no. 7/2004, of 30 March, because:

è in the path of the jurisprudence of the Constitutional Court cited above, it lacks "heteronomous binding force for private parties and does not impose on the judge except by the doctrinal value that they may possess, the provisions contained in the "circulars" of the Tax Authority do not constitute norms for purposes of the system of legality control" operated by the Courts (arbitral tax courts, in this case), on the one hand; and

è in the tax act object of the present arbitral proceeding the interpretation of the Law conveyed by the Circular in question was not applied.

Nevertheless, and although the Claimant reserves the subsidiary petition for the "eventuality of the arbitral tribunal ruling in the sense of defending the legality of Circular no. 7/2004, of 30 March", which, it repeats, is not the case, such petition will be dealt with as subsidiary to the main petition.

In that view, the Claimant should have demonstrated – here contrary to what occurs as to the main petition – that the interpretive criterion crystallized in the Circular in question corresponded, in its case, to a correct application of the Law.

That is, the Claimant should have demonstrated that the application of the criteria of Circular no. 7/2004, of 30 March, allow, in its case, to properly discern "between the loans specifically contracted by B... for the acquisition of equity interests and the equity interests specifically acquired by it only with recourse to outside financing.".

Now, the Claimant neither does this, but quite the contrary. Indeed, throughout its entire pleading, the Claimant demonstrates the inadequacy and unacceptability of the interpretive criterion in question, it being of no avail that it demonstrates that, in its specific case, the application of such criterion corresponds to the correct application of the Law.

As the Claimant does not do so, the Tribunal naturally cannot do so, therefore, this claim of the Claimant must also be judged as unfounded.

C. DECISION

In these terms, this Arbitral Tribunal decides to judge unfounded the arbitral petition formulated and, in consequence:

a) Acquit the Respondent of the instance as to the petitions formulated in subparagraphs a) and c) of the Initial Petition;

b) Acquit the Respondent of the implicit petitions of illegality of the self-assessment act for IRC of 2010, for illegality of Circular no. 7/2004, of 30 March, and for non-application of the criteria of that same Circular, as well as of the petition formulated in subparagraph b) of the Initial Petition;

c) Condemn the Claimant in the costs of the proceeding, in the amount of € 1,259.52, taking into account what has already been paid.

D. Value of the case

The value of the case is fixed at € 171,105.29, 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 of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at € 1,259.52, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimant, since the petition was entirely unfounded, in accordance with articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the said Regulation.

Notify the parties.

Lisbon

6 June 2016

The President Arbitrator

(José Pedro Carvalho - Relator)

The Arbitrator Vogal

(Maria Forte Vaz)

The Arbitrator Vogal

(Sérgio Pontes)

[1] In this sense, cfr. for example, the STA Judgment of 27-06-2007, rendered in case 080/07, available at www.dgsi.pt, as with the remaining cited jurisprudence without other mention of source.

[2] Available at www.caad.org.pt.

[3] Judgment of 03-06-2015.

[4] In the same sense, see also the judgments of 16/12/2015, case no. 0338/15, of 17/06/2015, case no. 0343/14, of 05/02/2014, case no. 01803/13.

[5] Available at www.tribunalconstitucional.pt.

[6] Idem.